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Operator: Thank you for standing by, and welcome to the Fifth Third Bancorp 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 withdraw your question, again, press 1. Thank you. I'd now like to turn the call over to Matt Curoe, Senior Director of Investor Relations. You may begin. Matt Curoe: Good morning, everyone. Welcome to Fifth Third's fourth quarter 2025 earnings call. This morning, our Chairman, CEO, and President, Timothy N. Spence, and CFO, Bryan D. Preston, will provide an overview of our fourth quarter results and outlook. Timothy N. Spence: Please review the cautionary statements in our materials, which can be found in our earnings release and presentation. These materials contain information regarding the use of non-GAAP measures and reconciliations to the GAAP results as well as forward-looking statements about Fifth Third's performance. These statements speak only as of January 20, 2026, and Fifth Third undertakes no obligation to update them. Following prepared remarks by Tim and Bryan, we will open up the call for questions. With that, let me turn it over to Tim. Good morning, everyone, and thank you for joining us today. At Fifth Third, we believe great banks distinguish themselves not by how they perform in benign environments, but rather by how they navigate uncertain ones. Our priorities are stability, profitability, and growth in that order, which we achieve by obsessing over the details in our day-to-day operations while consistently investing for the long term. This disciplined approach has delivered shareholder returns that rank among the best in our peer group over the last three, five, seven, and ten-year time frames. Today, we reported earnings per share of $1.04 or $1.08 excluding certain items outlined on Page two of the release. We achieved an adjusted return on equity of 14.5% and adjusted return on assets of 1.41% and an adjusted efficiency ratio of 54.3%. All among the best of all banks regardless of size who have reported thus far. Adjusted fourth quarter revenues rose 5% year over year driven by 6% growth in net interest income, 8% growth in commercial payments fees, and 13% growth in wealth and asset management fees. Fourth quarter average loans increased 5% year over year, driven by 7% growth in consumer loans and 7% growth in market and business banking C&I loans. Average core deposits grew 1% year over year driven by 5% growth in consumer DDA and 3% growth in commercial DDA. Net charge-offs were 40 basis points for the quarter, the lowest level in the past seven quarters. And nonperforming assets decreased for the third consecutive quarter. Our CET1 ratio increased to 10.8% and tangible book value per share grew 21% year over year, thanks to strong earnings performance and the continued pull to par of our AFS portfolio. The fourth quarter capped a year of milestones for Fifth Third. In the Southeast, we opened 50 new branches, including our 200th branch in Florida and our 100th branch in The Carolinas. To put this in context, if Fifth Third Florida were a standalone bank, it would have the 44th largest branch network in the US. And Fifth Third Carolinas would have the 78th largest. Our De Novo branches continue to deliver deposit growth that is 45% higher than peer De Novo branches. Net new consumer households grew 2.5% year over year, with the Southeast growing households by 7%, highlighted by 10% growth in Georgia and 9% in The Carolinas. Our sustained investments in digital transformation continue to set Fifth Third apart as well. In 2025, our consumer mobile app was recognized by J.D. Power as the top mobile banking app for user satisfaction among regional banks. We shipped over 400 updates to the app during the year, including features such as direct deposit switching, a financial wellness hub with cash flow insights and spending analysis, and free estate planning capabilities through our partnership with Fintech Trust and Will. In small business, a little over a year ago, we asked our Fintech to provide to lead all of small business for Fifth Third. Since then, Fifth Third has become a top 20 national SBA lender for the first time anyone can remember and finished number two in J.D. Power's 2025 national small business banking satisfaction study ahead of all other regional banks. In commercial payments, our software-enabled managed services Big Data Healthcare, Expert AR and AP, and DTS Connect, and our embedded payments platform, NewLine, continued to grow rapidly. One in every three commercial clients we added in 2025 was a payments-only client with no credit extension. Newline revenues more than doubled compared to the fourth quarter of last year, and deposits increased by $1.4 billion. Newline's product team also finished the year strong launching a model context protocol server to enable secure, standardized access to our API and documentation to AI agents. This is a key building block to support future AgenTek commerce applications and a first among US banks. In commercial, we delivered new quality relationships, granular loan growth, and recurring fee revenue in the middle market as we continue to add our own talent in strategic growth markets and to benefit from hiring in prior years. New client acquisition increased 40% across all regions compared to 2024. Our emphasis on the Southeast, Texas, and California markets led to a 12% increase in RMs producing 14% growth in C&I loans. In wealth and asset management, fourth quarter wealth fees increased 13% and assets under management reached $80 billion for the quarter. The strong performance was broad-based. Fifth Third Wealth Advisors' AUM and fees increased 50% from a year ago. Fifth Third Securities generated record fees. And our private bank had its second-highest level of gross AUM flows recorded in history. We continue to deploy technology and apply lean manufacturing to drive savings and enhance scalability. In 2025, our value streams approach $200 million in annualized run rate savings. Cross-functional teams continue to be focused on reducing waste and improving quality, which strengthens our execution and provides funding for continued investment in our growth strategies. We are excited about our momentum as we enter 2026. Or as our partners at Kennesaw State like to say, there's a lot of action at the fraction. As we announced last week, we have received all material regulatory and shareholder approvals to complete our merger with Comerica. 99.7% of Fifth Third votes and 97% of Comerica votes cast were in favor of the merger, an overwhelmingly positive result and a recognition of the value this combination will create. We expect to close on February 1. 2026 will be a busy year as we focus on successful conversion and delivering $850 million in expense synergies. Looking ahead, I'm even more confident in our ability to realize the benefits of the combination, which will support continued peer-leading returns and efficiency in 2027 and beyond. I'm also excited to get to work delivering more than $5 billion in revenue synergies over the next five years, across four areas of focus: First, scaling Comerica's middle market platform and vertical expertise. Second, deepening Comerica's commercial and wealth management client relationships to reach Fifth Third levels of client wallet share. Third, building out Comerica's retail banking business with the Fifth Third playbook and 150 Texas De Novo branches. And fourth, creating a differentiated innovation banking business by combining Comerica's second life sciences vertical and Fifth Third's Newline platform. Before I turn it over to Bryan, I want to say thank you to our team both at Fifth Third and our new Comerica colleagues for the way you support our customers and our communities and for your commitment to getting 1% better every day. I'm grateful to everyone who will work so hard in the coming months to ensure 2026 is a success for the bank and its clients. I also want to say thank you to those individuals from both companies whose hard work brought us to this point who will not be continuing with us on this journey. All of you combined are what has made our company the special place that it is. With that, I'll turn it over to Bryan, who will provide more detail on the quarter and on our outlook for 2026. Bryan D. Preston: Thanks, Tim, and good morning. Our results show what disciplined execution delivers in an uncertain environment. Record full-year NII of $6 billion and $9 billion in total revenue, improving asset quality, and top quartile returns and efficiency. With a resilient balance sheet and an operating model built to deliver repeatable organic growth and scale benefits, we are positioned to generate growth and shareholder value as we integrate Comerica. Diving into our fourth quarter performance, we achieved an adjusted return on assets of 1.41%, our highest level since 2022, and a return on average tangible common equity, excluding AOCI of 16.2%. Disciplined expense management resulted in an adjusted efficiency ratio of 54.3%, a 50 basis point improvement from 2024. Adjusted PPNR for the quarter was over $1 billion, a 6% increase from the prior year. Our strong profitability enabled us to return $1.6 billion of capital to our shareholders in 2025 while also growing our tangible book value per share, including the impact of AOCI, 21% compared to the previous year. Looking at the balance sheet and NII, net interest income was $1.5 billion for the quarter, a 6% increase over last year. As net interest margin expanded 16 basis points finishing the year at 3.13%. Loan growth, proactive liability management, and repricing benefits on fixed-rate assets contributed to the strong NII performance throughout the year. Average loans grew 5% year over year. In commercial, average loans grew 4%, and excluding CRE categories, increased 5% year over year. Improving the granularity of our loan portfolio remains a priority. In middle market, we continue to add relationship managers in high-growth markets, which contributed to the 7% year-over-year increase in average middle market loans. In small business, we have extended the technology of Provide to all of small business lending. This expansion, combined with its core practice finance activities, drove a $1 billion increase in balances over last year. While on a sequential basis, commercial average balances were flat due to a decrease in utilization, commercial production accelerated during the fourth quarter, rising 20% sequentially to a multiyear high. Indiana and The Carolinas led regional growth, and in our verticals, production was strongest in technology, healthcare, and metals material and construction. The utilization decrease coincided with the government shutdown during October and November but stabilized in December at 35%, down from 36.7% in the third quarter. Corporate banking and CRE were the primary drivers of this decrease in utilization. Industry loan growth continues to be lending to non-depository financial institutions, which represented approximately 60% of total industry loan growth and virtually all non-real estate and non-consumer-related loan growth in 2025. We continue to prioritize granular relationship-based middle market and small business lending. Shifting to consumer, loans grew by 6% on an average basis compared to last year. Auto and home equity lending accelerated in 2025, growing 11% and 16%, respectively. In the fourth quarter, we achieved the number two origination market share in HELOC within our footprint, up from number four in the prior year, driven by improved branch performance and digital engagement. We expect home equity production to remain robust due to the strength of home prices, lower front-end interest rates, and low housing turnover. Turning to deposits, average core deposits increased 1% over last year, driven by 4% DDA growth, partially offset by slower growth in interest-bearing products. As we've managed funding costs in 2025, interest-bearing deposit costs were 2.28% in the fourth quarter, down 40 basis points year over year, representing a 50% beta during 2025. As I mentioned on last quarter's call, we are focused on strong deposit growth as we prepare for the close of the Comerica merger. This resulted in a 3% sequential increase in average transaction deposits due to our growth bias and normal seasonality. As Tim highlighted, consumer household growth remained robust at 2.5% and continues to translate into strong consumer DDA performance, which increased 5% in 2025. Our proactive balance sheet management has enabled us to maintain a strong liquidity position and reduce overall funding costs as we prepare to integrate Comerica's balance sheet, which has a lower concentration of retail deposits. Growth in granular insured deposits provided flexibility to reduce wholesale funding, which declined 14% sequentially. This favorable mix shift lowered the cost of interest-bearing liabilities by 17 basis points. Our Southeast De Novo investments continue to deliver high-quality, low-cost retail deposits. Southeast consumer deposits increased by 4% sequentially, accounting for over 50% of the total consumer deposit growth for the quarter. Overall, our total cost of deposits in the Southeast is below 2% and generates a spread of more than 175 basis points relative to the Fed funds rate. We opened 50 Southeast branches in 2025, including 27 branches in the fourth quarter. Additionally, we have now secured all locations for our Southeast De Novo program. We also have 43 locations in Texas with letters of intent either complete or in process as we begin to transition our De Novo program to these new high-growth markets. We ended the quarter with full category one LCR compliance, at 123%, and our loan to core deposit ratio was 72%, down 3% from the prior quarter. Now on to fees. Adjusted noninterest income, excluding security gains, and the other items listed on Page four of our release, grew 3% sequentially and year over year. Wealth fees increased by 13% over last year, driven by $11 billion in AUM growth and strong retail brokerage activity. Capital markets capital market fees increased 5% sequentially, reflecting seasonal strength in M&A advisory. Commercial payment fees increased 8% year over year and 6% sequentially. This fee performance was driven by core treasury management activity and new line-related fees. New line-related deposits reached $4.3 billion, up $1.4 billion from a year ago. The securities losses of $5 million were from the mark-to-market impact of our nonqualified deferred compensation plan, which is offset in compensation expense. Moving to expenses, Page five of our release details certain items that had a larger impact on our noninterest expenses this quarter, including a $50 million contribution to the Fifth Third Foundation, $13 million in merger-related expenses, and a $25 million benefit from the adjustment to the FDIC special assessment during the fourth quarter. The larger contribution to the foundation this year relates to increased community investments we will make as part of the Comerica merger and tax planning in response to tax law changes impacting 2026. Adjusting for these items, noninterest expense increased 4% compared to the year-ago quarter and 2% sequentially, reflecting ongoing strategic investments in technology, branches, marketing, and sales personnel. Savings from our value stream programs, through automation and process redesign, continue to help fund these investments. As Tim mentioned, our value streams reached $200 million in annualized run rate savings. Our normal course daily focus on these operating disciplines has resulted in a 54.3% adjusted efficiency ratio in the fourth quarter and a 55.9% efficiency ratio for the full year while still investing for growth and maintaining strong regulatory standing. Shifting to credit, the net charge-off ratio was 40 basis points for the quarter, in line with our expectations and an improvement of six basis points from the fourth quarter of last year. Portfolio NPAs were down $4 million sequentially, and the NPA ratio remained at 65 basis points. Since the first quarter of last year, portfolio NPAs are down 20% and commercial NPLs are down 30%, consistent with our expectations from early 2025. Commercial charge-offs were 27 basis points, down five basis points from the prior year. Overall, we are seeing stable trends across industries and geography in our commercial portfolio. Consumer charge-offs were 59 basis points, down nine basis points from the prior year with improvements across nearly all asset classes. The overall consumer portfolio remains healthy, with nonaccrual and over 90 delinquency rates stable to improving across all loan ACL was the percentage of portfolio loans and leases, remained at 1.96% and the ACL as a percentage of nonperforming assets was also stable at 302%. Provision expense included a $6 million reduction in our allowance for credit losses primarily reflecting the small decrease in end-of-period loan balances. Our baseline and downside cases assume unemployment reaching 4.78% in 2026. We made no changes to our scenario weightings during the quarter. Moving to capital, CET1 ended at 10.8%, up 20 basis points, reflecting the strength of our capital generation and our decision to pause share repurchases until the Comerica transaction closes. The pro forma CET1 ratio including the AOCI impact of the securities portfolio, stands at 9.1%. Since the first quarter, our unrealized loss on the AFS portfolio has decreased by 20% despite only a four basis point decrease in the ten-year treasury rate. This outcome is the result of our strategy to invest in bullet or locked-out structures which represent 60% of the fixed-rate securities in our AFS portfolios. We expect continued improvement in the unrealized losses given the high degree of certainty to our principal cash flow expectations as a result of our investment portfolio strategy. While 2025 was a more eventful year from a macroeconomic and policy uncertainty perspective than we expected, we are pleased with our disciplined operating performance and our ability to deliver on our financial commitments. Our full-year net interest income of $6 billion is 2.5% above our prior record. And our full-year operating leverage of 230 basis points is above the range we projected entering the year. We open 2026 with strong business momentum and a clear focus on the critical actions necessary to deliver a successful integration of Comerica. Now moving to our current outlook, as we announced last week, we expect to close the Comerica transaction on February 1. With systems conversion anticipated around the end of the third quarter. Additionally, our outlook uses the forward curve at the January, which assumed 25 basis point rate cuts in March and July. We expect full-year NII to range between $8.6 and $8.8 billion. As part of the integration, we expect to take actions to better position the combined balance sheet within our rate risk appetite including investment portfolio and hedge repositioning. We do not expect material one-time charges related to these actions. Based on the current rate outlook, and our planned balance sheet actions, we expect NIM to increase approximately 15 basis points upon the close of the transaction. That increase is driven by four to five basis points of pickup from discount accretion on marked investment securities we will retain, another four to five basis points from repositioning the remaining securities with new positions, and three to four basis points from cash flow hedge repositioning. The remaining two to three basis points of improvement is driven by a combination of funding synergies and balance sheet mix. We also aim to accelerate retail deposit growth, with targeted analytical marketing in the legacy Comerica branches to improve the combined company's funding profile. We expect full-year average total loans to be in the mid $170 billion range. This increase is primarily driven by broad-based improvement in C&I. Our outlook assumes that commercial revolver utilization remains relatively stable throughout 2026. Full-year adjusted non-interest income is expected to be between $4 and $4.4 billion, reflecting continued revenue growth in commercial payments, capital markets, and wealth and asset management. We expect full-year noninterest expense to be between $7 and $7.3 billion, excluding the impact of anticipated CDI amortization and the $1.3 billion in estimated acquisition-related charges. This guidance assumes the realization of 37.5% of the $850 million of annualized run rate expense in 2026. In total, our guide implies full-year adjusted revenue and adjusted PPNR excluding CDI amortization, to be up 40 to 45% over 2025. And another 100 to 200 basis points of positive operating leverage. We expect to exit 2026 at or near the profitability and efficiency levels consistent with the 2027 targets we announced with the acquisition. Moving to credit, we expect 2026 net charge-offs to range between thirty and forty basis points reflecting ongoing normalization of credit trends and the impact of the incorporation of Comerica's loan portfolio. Finally, turning to capital, we currently expect CET1 capital post-close of the Comerica acquisition to remain near our 10.5% target. Subject to final purchase accounting marks, and the timing of one-time merger-related charges. We continue to believe 10.5% is an appropriate target for our CET1 ratio for the combined company. Our capital return priorities remain paying a strong, stable dividend, organic growth, and then share repurchases. We expect to resume regular quarterly share repurchases in 2026, with the amount and timing dependent on balance sheet growth, final purchase accounting marks, and the timing of merger-related charges. Given the magnitude of the impact of the merger on the first quarter, we are not providing first-quarter guidance at this time. We will provide our customary outlook on our first-quarter results in early March. In summary, we are excited about the opportunities to drive growth and profitability in 2026. As we continue our strategic investments and successfully integrate Comerica. These actions position us to deliver best-in-class performance in 2027 and beyond, creating lasting value for our shareholders and our clients. With that, let me turn it over to Matt to open up the call for Q&A. Matt Curoe: Thanks, Bryan. Before we start Q&A, given the time we have this morning, I ask that you limit yourself to one question and one follow-up. And then return to the queue if you have additional questions. Operator, please open the call for Q&A. Operator: Thank you. We will now begin the question and answer session. Your first question today comes from the line of Ebrahim Poonawala from Bank of America. Your line is open. Ebrahim Poonawala: Hey. Good morning. Good morning. I guess, Tim, maybe just going back to Comerica, from the outside in, it feels like there are three or four areas of optionality for Fifth Third, and you can choose to answer whatever you think is most impactful. But when we stack rank, being able to do more with Comerica clients, the Texas expansion, and then leaning into their tech and life science practice. Just give us a sense of where the biggest opportunity is, what's more near term versus longer term. Thank you. Timothy N. Spence: Yeah. Great question, Ebrahim, and thanks for it. I think you have to think about these things in terms of time frames. Right? Because what I would say the most immediate near-term opportunity is gonna come from some of the things we can do tactically in both leaning into Comerica's existing customer base as well as what our deposit marketing-driven deposit marketing and product strategies will allow us to do in Comerica's branch network, followed by this sort of medium-term opportunity here, which is the build-out of the Texas markets from a retail distribution perspective. And then what I'll say is a medium to long-term opportunity, but a very exciting one, which is the ramp-up of the innovation banking business. So I had the opportunity in the fourth quarter to do five different in-person town halls with Kurt Farmer. And at those town halls, we saw probably a quarter of Comerica's total employees. And then Kurt and Peter Sefcik and the other business leaders were kind enough to make certain that I had the opportunity to meet several of the top client coverage people in each of the markets. And I will tell you, in every conversation, there was an example of a place where either funding constraints or competition for investment dollars on the technology front or otherwise had inhibited the ability of Comerica to get the sort of natural growth they're capable of generating. You actually see that when you look back at the period prior to March Madness. They were generating pretty solid top-line growth and C&I balance growth. When they were not in a period where they were making some of these investments to get to be a category four bank. Or in a position where they were making hard trade-offs as it related to balance sheet size and margin and otherwise? So day one, when we get through legal day one, on February 1, we are literally doing a bottoms-up review name by name to say where are their places that the broader balance sheet capacity or the ABL and equipment leasing and product capabilities will allow Comerica to lean more. Where are their places where their investment committee policies at Comerica's clients that were inhibiting the amount of corporate cash could come on the balance sheet. Where there are places where there were technology investments that Fifth Third have been able to make that support commercial payments that we'll be able to get near-term growth. And as we go through that first annual renewal cycle, that sort of natural renewal cycle that happens in C&I, I expect we'll see that a lot. Second thing, the branch distribution's an important part of the strategy. It's the third, obviously, but it's one of three legs of the stool. The other two being the disruptive product offerings that we have and the digital marketing. Digital and direct marketing, excuse me, because mail continues to play a prominent role in what we do. But we're gonna drop a million pieces of mail within the first two weeks of legal day one, to support consumer deposit marketing across Comerica's Western markets. And it'll be the first million of what'll probably be 13 or 14 million pieces of mail that will go out over the course of the year. That'll be the first consumer deposit marketing campaign that the Comerica branches have seen in more than a decade. And we've demonstrated the ability that we have to use rate as a mechanism to drive early connectivity with new households. And then to be able to manage margin over time across the Southeast. And that is gonna happen quickly. I think the third thing I just would highlight here is the point Bryan made in his script, which is we have over 40 of the 150 locations we intend to build already secured. Because the development partners have been such a big part of the Southeast build-out, people who are doing the strip center developments that are anchored by grocers like Publix, as an example, are also doing the new strip centers that are being anchored by high-end grocers like HEB and others across Texas. And because of the success we've had with them in the Southeast, they came to us after the announcement and gave us a lot of early opportunities. So that the brick and mortar will come out of the ground faster in Texas than it did when we started the Southeast expansion. And it's all the same models, the same selection criteria, the same discipline, around what we're willing to pay relative to what we think we can generate over the first five to six years that the branches are open that are driving all of those decisions. So that's gonna be the early stuff. The blue sky opportunity here is innovation banking because that will continue whether it's tech and technology, AI, software, the things that are coming out of the valley, or life sciences and the transformation that's gonna go on and help care over the course of the next decade. Those factors really are the driver of the American economy. We think we have a unique value proposition there because of the payments capabilities and the broader balance sheet's gonna allow us to grow that business without creating a concentration risk issue. So I wouldn't be surprised to see that business become materially larger than it is today. We just have a little bit of work that we've gotta do to ensure that we have the right guardrails around it, the right product offerings, and the right level of coverage. Ebrahim Poonawala: Thank you. That was an in-depth answer. I'll step off. Thank you. Operator: Your next question comes from the line of Gerard Cassidy from RBC. Your line is open. Gerard Cassidy: Hi, Ken. Hi, Bryan. Hey. Timothy N. Spence: Morning. Gerard Cassidy: Tim, following up on your Comerica comments, can you give us an update on the integration? How is it progressing? And when will the customer conversion occur? Now that the legal closing has occurred, I think it was two months ahead of schedule, just what the timeline is. Timothy N. Spence: Yeah. Great question. Thanks, Gerard. We are way ahead of where I think we had hoped to be at this stage. And frankly, way ahead of where we were at the same time, you know, with MB. The big driver here, obviously, is that we received all the critical regulatory approvals less than seventy days after filing our application. So that is what is making it possible for us to get to legal day one at the February. There really haven't been any surprises that have come out, which I think is you would hope that given the thoroughness of the diligence that was done. But we feel really good on that. And then the other thing that I don't know that I appreciated would have the impact that it has had is the First Republic process was a sobering one for us because it came together so quickly. And when First Republic didn't work out for Fifth Third, we decided we were gonna make sure that in the event that another opportunity materialized, that we'd be ready. So we did some work on what we called two x-ing the bank. Which focused on both systems capacity but also manual processes. Right? With the real question being, would anything break if the bank doubled in size? And then also just started the work to close the gap assessment that we had done on category three readiness. And, obviously, Comerica doesn't double us, but it's a big step larger. And the things that we needed to make sure that we got done in order to support that and we're already done. So that's a long way of saying we're gonna get closed earlier. In a good position from the systems and processes perspective. I think we're gonna move the conversion up to Labor Day. From, you know, what would have otherwise been a mid-October time frame. That's gonna be super important because we just wanna be able to get the benefit of all Fifth Third technology and both revenue and expense synergies. But it's also, I think, gonna be really useful for you all because the same way that the fourth quarter at '25 was like the last clean look that you were gonna get at what the old Fifth Third was capable of delivering. The '26 should give you a very clear look at what the new Fifth Third is capable of delivering and, in fact, as Bryan referenced, I think we're confident we can hit the return targets that we laid out in the deal model for full year '27. In the fourth quarter at 26. In terms of the return on tangible common equity of 19% and efficiency ratio that was 53-ish percent or maybe a little better given seasonality. Gerard Cassidy: Very helpful. Thank you. Yeah. Timothy N. Spence: And your artist is giving you any more perspective. I think the only thing that Jamie's marked excited about than my indirect Red Hawk basketball being undefeated in the top 25 is the progress that we've been making on the integration. So things are going really well with me. Gerard Cassidy: That's good. That's good to hear. Good. And then as a follow-up, maybe going back to the existing business, Tim, you guys talked about the success you're having in the middle market commercial area, hiring new managers in growth markets. You know, new technology. You also pointed out, I think you said, one out of three of the payments customers, the commercial customers don't have commercial lines of credit with them. Can you give us a view on the C&I loan growth? I think you said also that the average balances were flat in the quarter due to decreased utilization. What do you see when does the turn more favorable? And what do you see for the C&I loan growth? Timothy N. Spence: Yeah. That's right. There are sort of the puts and the takes in this one. Right? The good news is production's been great. And middle market utilization dipped during the government shutdown, but rebounded nicely through the end of the quarter. I consider the fact that people are actively seeking to take us out of CRE exposure to be a market strength. It's just reflective of the quality of what we've originated there. The big decline in utilization, as Bryan mentioned, came from the corporate banking portfolio. What we're hearing anecdotally which is supported by, you know, the sort of early returns this year, is that a lot of that was cleaning up balance sheets in an effort to get into a position where you could get our corporate banking clients could get borrowing costs down in the anticipation of either making big capital investments this year because of the tax reform or even more prominently to be able to support M&A activity. So, you know, the and it's probably worth mentioning in the first couple of weeks here, we've seen C&I loan balances come up. Call it 8 or $900 million, already since January 1, which really is being driven by utilization and some of the fourth quarter production, you know, funding that up. The wild card here at the end of the day is gonna be what I for lack of a better term, we're calling chronic postponement syndrome internally. Which is the tendency for our clients to postpone really large capital investments. In the face of uncertainty. So they all feel, I think, on balance. I don't they feel the same or better about twenty-six than they did about twenty-five. And I think they're all excited about tax reform. Rates have been helpful, but they really have been sort of a salve to the, you know, accumulated increase in costs. You know, more than anything else in terms of the business. But they wanna believe that they're making multiyear investments into an environment where the rules of the road are gonna be stable. And so the question really is gonna be, do they feel like they have that stability, or do they feel like there's a risk that the window closes to make those investments? Or do we just continue to deal with this chronic postponement syndrome as a, you know, a drag on broader utilization and C&I activity? That's sort of where we are. You didn't ask it, but normally you do. I think the other drag for us was the NDFI balances were actually down $600 to $700 million in the fourth quarter, where they were the principal driver of growth for C&I across the banking sector. So we started with low exposure actually that declined as opposed to getting growth from that category. Gerard Cassidy: I appreciate all those insights. Thank you, Tim. Timothy N. Spence: Yep. Operator: Your next question comes from the line of Scott Siefers from Piper Sandler. Your line is open. Scott Siefers: Hey. Bryan, thank you for all the detail on the actions you're taking with the balance sheet at the close. Maybe could you talk about what the company's rate sensitivity is going to look like after those actions you discussed around the close? And then I guess just as the follow-up, will those immediate post-close actions kinda get you to 100% of where like the balance sheet to be, or would it take a little more time from there just given the need to more fully kinda transform Comerica's deposit base? In other words, how does that all evolve in your mind? Bryan D. Preston: Thanks, Scott. You know, we're always targeting to be relatively rate neutral. Especially in a normal environment. We're just not in a position where we feel like we wanna make big bets. Certainly, the balance sheet becomes the natural balance sheet becomes a lot more asset sensitive. Given the merger. You think about our C&I loans, we're gonna go from about two-thirds of our C&I portfolio floating rate to close to 80% of our commercial portfolio floating rate. So we are gonna take some action through some swaps and some hedges. We'll probably still be a little bit asset sensitive when all is said and done. But we'll be in a good manageable position that will be in line with our rate outlook. The work clearly won't be done at that point. We've talked a lot about the balance sheet mix that we've been striving for over the last couple of years. We talk about a 60/40 commercial to consumer mix from a loan perspective and 60/40 consumer to commercial, mix perspective on the deposit front. Both of those areas are going to continue to take a lot of investment to get us back to those levels. And that will be a multiyear journey for us. And it's part of the reason you hear us talking, in particular, on the deposit front around the investments in marketing and in the build-out of the Texas franchise. Because those will be big drivers for us. Today, the Southeast is contributing to almost half of our consumer deposit growth, and we're confident that Texas is gonna be able to deliver a lot of long-term consumer deposit growth for the franchise. And so we feel good about the positioning. The balance sheet is going to continue to grow. And put us in a stable position that gives us a lot of optionality to manage the rate environment. Timothy N. Spence: Yeah. I just Brian and I were talking before the call. Like, our expectation going in we're gonna grow Texas households at north of 10%. On an annualized basis. It may take a couple of quarters to post conversion to get the ramp, but there is no reason why we can't grow Texas at least the rate that we've grown the Southeast given the starting points are remarkably similar if you look back in time at where Fifth Third started. So there's the power of the DDA growth in our company between the Southeast and Texas and Direct Express. And what we can get done on commercial payments is gonna be huge in terms of managing the balance sheet for that strong profitability. Scott Siefers: Yep. Okay. Perfect. Tim and Bryan, thank you both very much. Timothy N. Spence: Thank you. Operator: Your next question comes from the line of John Pancari from Evercore ISI. Your line is open. John Pancari: Good morning. Timothy N. Spence: Morning. John Pancari: Just on the deal, just wanna see, you know, if there's have you made any changes to your initial assumptions tied to the Comerica transaction outside of timing? But any changes to the assumptions that you provided at the announcement, the cost save expectation, the restructuring charges, or the related marks or P&L impacts? Bryan D. Preston: No, made no material changes to any of the assumptions inherent in the transaction. I'd say the only major items were the timing of close, pulling forward the conversion date. We do think that ultimately, we're going to likely be able to deliver a little bit better than the 37.5% of the 850 in 2026 given some of those timing changes. But we also do intend to invest a little bit more in growth as well. So we might be approaching $400 million of in-year expense saves in 'twenty-six if all goes well, but we're hoping to reinvest maybe $40 million of that. The original expectation was gonna be around $320 million of expense saves in 2026. So we're obviously feeling very good about what we're seeing from a progress perspective on the integration. And beyond that, the loan marks and the balance sheet marks are all very similar to what we would have expected. John Pancari: Got it. Alright. Thank you for that, Bryan. And then separately, on the loan growth side, I appreciate the color you gave on the decline in the line utilization in the quarter. That decline seems more pronounced than more than many of your peers. And I hear you on the shutdown and some of the balance sheet cleanup but anything company-specific that you'd say that exacerbated that? And then just separately, also on the loan growth front, you know, if you could maybe give us a little more color around the greatest drivers of growth that you see in the commercial portfolio after the combination is completed with the commercial? Timothy N. Spence: Yeah. Good question. I mean, John, it's gotta be a little bit idiosyncratic and a little bit compositional. Right? Like, at this time last year, we had a big uptick in line utilization in the fourth quarter. When other people didn't have it, and we tried to talk down enthusiasm on what that meant for '25 and we gave back a little bit of the utilization in the first quarter and other people kinda got it. I think there are two visible things. One, NDFI as a percentage of total commercial loans is way lower here than it is for most of our peers. And the NDFI loans tend to fund and stay funded at a level that's higher than what, you know, standard working capital revolving lines of credit would be secondarily, leverage lending here has continued to decline over time, and that's funded term debt principally. You know, for most of the industry and a smaller share of the overall balance sheet. And then I think lastly, when we've talked about this, but we are clearly believers in the of technology to transform the business. It's transformed the way Fifth Third operated. But we're also very aware of the fact that there's literally never been a tech infrastructure build-out where there was an overbuilding, whether it was cell towers or fiber or e-commerce distribution centers during COVID. And so we've been a little bit more cautious about just how broadly we were willing to play in data center and data center-linked activity. And there again, that's funded up pretty quickly, you know, in places where the loans are being made. So I think there's a possibility there's some of that. But one way or the other, utilization is not a thing we control. What we can control is originating high-quality credit and making sure we have the right team on the field. So that's the thing that we've been focused on. John Pancari: Okay. Great. Thanks. And as we think about the where do we see the growth coming from with the Comerica acquisition? It really is an extension of the middle market play that has been driving success for us for the last couple of years. We've been growing middle market loans consistently, and even this year, middle market 7% as we highlighted in our prepared remarks. And we just see so much opportunity there as well as leaning into the specialty verticals where Comerica has just had so much success historically. There's just some great synergies there between their core business and our core business on the things that we're good at. That's gonna create a lot of opportunity for us as we think about what loan growth could look like going forward from here. John Pancari: Got it. Alright. Thanks, Bryan, and thanks for the color, Tim, as well. Operator: Your next question comes from the line of Mike Mayo from Wells Fargo. Your line is open. Mike Mayo: Hey, Mike. Hi. Bryan D. Preston: Hey. Mike Mayo: So it sounds like you're all pulled up on your merger prospect. Now it's just a matter of executing, I guess. But just to clarify, you said you look to get your 2027 targets in the '26 now? Is that right? Timothy N. Spence: Yes. Mike Mayo: Okay. Okay. So you have earlier closing, earlier targeted conversion, earlier metrics, so is there any change in your targeted EPS accretion this year? I think you just said kind of maybe just a little bit accretive, and then you get the big accretion in 2027. Any changes to those numbers would seem like that would be implied to go higher? Bryan D. Preston: It would be it would basically be achieving the accretion earlier. So we are expecting we talked about 9% EPS accretion in 2027. We would expect to be able to deliver 9% EPS accretion from the deal in 2026. Mike Mayo: Okay. And then I'm just you know, it's maybe your middle name is, you know, Tim Digital Spence. You know, Tim might think of you as, like, the digital banker. Then I hear you talk about 13 million pieces of mail. I mean, that sounds very last century of you. You're gonna you have billboards too, and, like, it sounds very old school. So does that still work? It's just kind of intriguing. Timothy N. Spence: There may be a billboard or two out there, Mike. The benefit of direct mail is that you can literally pick down to the individual household who receives the offer and who doesn't. Right? Whereas in a digital environment, you have a lot more data on that folks, but you are still at the end of the day optimizing around the segments of the population and to some extent some path dependency around traffic. So we actually have a JV that we have been running with one of the leading digital marketing firms to help us think through the way that we deliver a best-in-class digital acquisition funnel. It's a significant share of new household origination. Like, if you look at marketing link, household origination, it's probably fifty-fifty digital and direct mail today. But when it comes to rate offers, you want to basically get in front of the people that you want to communicate with and not necessarily just the rate shoppers. Which is what you tend to find at the affiliate marketing websites when you're leading purely with rate and not a broad value proposition. And we can't frankly go digital until we get through conversion with Comerica because they don't have the ability to open digital accounts online. So there's nothing we can do with the Comerica brand until we get there. But mail still works. It works in credit cards. It works in checking. It's the reason that you see the JPMorgan's of the world continuing to use it in addition to folks like Fifth Third. And there may be a billboard or two somewhere, but I promise you if we have one, it'll be a digital billboard. How about that? Mike Mayo: No. I mean, whatever works. I mean, I guess you're saying it's digital, it's branches. So for those last 110 branches that you need to secure, seems like, you know, you kinda telegraphed that and made the I don't know. How long will that take to get your other 110 or the 150 De Novo branches? Timothy N. Spence: Oh, it's the opposite of the slowly but suddenly. I think in this case, it's suddenly and then slowly because what we the benefit we have here is we have been building for so long in the Southeast with strip center developers who are also doing a lot of building in Texas that we were gonna see a lot of the low-hanging fruit fast because we have these development partners who saw the announcement and picked up the phone and said, hey. I'm doing four of these in Dallas and two in Austin. And one in Houston and otherwise. And do you guys want the outlot? So they know our specifications. They know what we expect from the zoning perspective. They know how well we perform as a strip center tenant. And what we expect in our contracts for ground leases or purchases. And therefore, we were always gonna get more locations earlier. We're not gonna compromise the selectivity. And as we fill in hotspots on the map, by definition, it just takes a little bit longer to get the last handful of these locations. But it's a robust market. It's just stunning to think that an MSA the size of Dallas or Houston could be growing at the rate that they are. And all that new development creates lots of opportunities, like, to build branches where you would wanna have them today versus where they were when they were built thirty years ago. Mike Mayo: I look forward to the Investor Day in Dallas in a year or two. Timothy N. Spence: Yeah. Operator: Your next question comes from the line of Erika Najarian from UBS Financial. Erika Najarian: Hey, Erica. Erika Najarian: Hey. Just one quick follow-up question for me, and I really want to know what Jamie's middle name is if yours is digital Tim. Timothy N. Spence: On the depository hawk. What that's worth. Red Hawk. It's Red Hawk in the middle. Erika Najarian: So, Bryan, I'll make yours liquidity. Then. And speaking of you know, we heard a lot about the longer-term and medium-term deposit plans. But just wondering, you know, what we should how we should think about average deposits that's underpinning your net interest income outlook for the year. And how we should think about, you know, given Tim's comments about targeted rate offers, how we should think about, you know, deposit costs underpinning the 2026 outlook. Bryan D. Preston: Yeah. I would tell you that, 2026 is really gonna be a remixing year for the combined company. I think you're gonna see something that looks very similar to what we've been able to deliver on the Fifth Third franchise, which is targeted growth from a DDA and an iBT perspective in particular consumer iBT. And what we'll be looking to do is some balance sheet optimization, funding cost optimization, from the Comerica balance sheet as it comes on. You know, there's a number of things that they've had to do. Since March 2023 when they had more significant liquidity stress that we would be looking to clean up as it comes on board. For us, on a stand-alone basis, what it's going to mean is a continuation of what we saw in the fourth quarter, which is our betas look a little bit lower for the kind of Fifth Third legacy markets than they would have been in the past as we're more balance-oriented. But what it's going to do is bring down overall funding costs for the combined franchise as we put the things together. So we do think as I touched on in my NIM discussion, that there's a couple of basis points of NIM pickup that's just gonna be attributable to the funding synergies as well as some overall balance sheet mix changes. Erika Najarian: Got it. Thank you. Operator: Your next question comes from the line of Ken Usdin from Autonomous Research. Your line is open. Ken Usdin: Oh, hey, guys. I know this is gonna get cleaned up over the course of time. But just on the overall guidance, you know, you gave the PAA in the revenue side. Can you can you just if you have it, can you give us what the CDI add from the deal is on the Comerica side so we can kinda square the total overall? Thanks. Bryan D. Preston: Yeah. Sure, Ken. It should be about $20 million a month in 2026 when the deal closes. And then it'll be a sum of the year digit approach, so you should expect to see a $20 to $30 million reduction as you roll on the year two of the amortization. Ken Usdin: Perfect. Thank you. And just a step back question also, I know it's all kind of in the total guide, but how would if you step back before you look at pro forma, how would you think just, like, stand-alone Fifth Third momentum is as you just think about, last year's results on the stand-alone side versus kind of the momentum on the stand-alone Fifth Third side. And whatever way you can kind of put it into context, revenue momentum, loan deposit momentum, etcetera. Bryan D. Preston: Yeah. Absolutely. We continue to feel good about what we were seeing from the core Fifth Third franchise. You know, we would have we would have been talking about mid-single-digit loan growth if you would have looked fourth quarter twenty-six to fourth quarter twenty-five. Comparison in terms of what our core business is driving. And that's really a continuation of continued strength in the middle market that would drive mid-single-digit C&I growth as well as continued strength out of the home equity and the auto businesses being big drivers from the loan front. We would have we would have still been talking revenue growth in that mid-single-digit mid-upper single-digit growth rate perspective. And another 100 to 200 basis points of positive operating leverage which would have taken our efficiency ratio down into the low 55s on a full-year basis. So overall, feel very good about what the core trend is for our company, which was already one of the more one of the most profitable, amongst the peers, and as Tim highlighted amongst, you know, basically banks of any size this quarter. So we felt really strongly about that momentum. And then on top of that now, the 200 basis points of pickup that we were expecting from an ROTCE perspective and efficiency ratio perspective, we're going to deliver those amounts even now given the timing, being able to pull forward the close and the conversion. Associated with the Comerica transaction. So a lot of things that are stacking up that are really gonna drive a nice financial outcome for 2026 and beyond. Ken Usdin: Thanks, Bryan. Operator: Your next question comes from the line of Manan Gosalia from Morgan Stanley. Your line is open. Manan Gosalia: Hey, good morning. I wanted to ask about the 19% plus ROTCE target. I mean, it looks like you're already at $19.06 as of April. Are there any areas that you think you're overearning here? I mean, it seems that the core business is delivering nicely. The Comerica acquisition should be accretive in twenty-seven. You're gonna resume buybacks in the 19% plus number in 2027, but just wanted to see if there's any offset that we should be thinking about. Bryan D. Preston: Yeah. The two things that I would point out is just, one, the normal seasonality of our profitability. So one, the first quarter tends to be a seasonally low quarter for us from a profitability perspective. Because of seasonal compensation items. And the fourth quarter tends to be a seasonally high quarter for us from a profitability perspective. So that's just one thing to keep in mind as you're looking at those numbers. And the second component was we did have a small release. This quarter from an ACL perspective. In a normal environment where we would expect to see continued loan growth, we would expect to see a little bit of a build every quarter. So those two items have an impact on that comparison that you're looking at. Manan Gosalia: Alright. Perfect. And then just on Direct Express, can you tell us what's in the numbers for Direct Express in 2026? And does that hit full run rate by the fourth quarter? Or is there more growth you expect as you get out into 2027? Bryan D. Preston: Given the merger, the full run rate is in our numbers and is in the guide then for the fourth quarter, just given that we're assuming that we're maintaining the business as we do the merger. The only thing that's missing right now is one month of activity for the month of January. So Comerica stand-alone activity in the month of January is the only thing that would not be in our 2026 numbers. And that continues to operate in that $3.6 to $3.7 billion deposit range as well as a 100-ish million a year in expenses and fees. That's continuation of that is what's resident in the guide that we've provided other than the month of January activity. Timothy N. Spence: Yeah. The upside there as we get into '27 and beyond, Manan, is I like, in my head, I associate the direct program with Social Security payments because it's the super majority of the funds that are loaded onto those cards. But the Direct Express program is the Bureau of Fiscal Services mechanism to help all government agencies get off paper checks. In places where customers do not have a bank account that they are registering for ACH deposits. So the president signed an executive order directing agencies across the government to eliminate paper check distributions. For the sake of reducing fraud. And we do believe that as we get on to our tech platform, as we broaden the functionality that's available to direct participants. We're gonna be able to play a little bit of offense here and actually work with the Bureau of Fiscal Services to go agency to agency. Help them understand how they can make use of Direct Express as a mechanism to fulfill the executive order. And there, is where we're gonna find more meaningful upside out of that program in terms of growing it. Manan Gosalia: Got it. Is there a time frame in which you can do that, or is that? Timothy N. Spence: Yeah. We gotta get the conversion done and the feature builds. That job one is to take care of existing program participants. So that'll be the majority of that work this year. Because we will be moving on to a different tech platform. And that is being developed with Fifth Third and Fiserv. And once we're there and we've got the existing program converted, we'll focus on how we expand the program. Manan Gosalia: Great. Thank you. Operator: And your final question today comes from the line of Christopher Edward McGratty from KBW. Your line is open. Christopher Edward McGratty: Great. Thank you. Hey, Tim. Going back to capital, I noticed in your prepared remarks, you talked dividend, organic growth, buybacks, didn't hear anything about inorganic growth. I'm wondering if the timing the sooner closed conversion changes at all about your timing about when you would consider another bank acquisition, although I know you've been clear about getting this one first. Timothy N. Spence: Yes. That is the last thing on my mind right now for what that's worth. The upside opportunity here is really and there's a lot of work in front of us. So the focus doesn't change the timing in terms of how we would think about it. The focus really is on making sure that we get the Comerica customers converted and taken care of, that we make the company from an employee perspective feel like one company. And we get the expanded capabilities that both Fifth Third, Legacy Fifth Third customers and Comerica customers are gonna benefit from. To market. We got plenty to work on as it is. Christopher Edward McGratty: Okay. Very clear. Thank you. And then the follow-up would be just on investments. You talked about, I think, $40 million going back into the business with the sooner cost takeout. Can you just help us with tech spend pro forma, you know, rate of growth, what you're spending, you know, how you measure it. I think some of your peers have been walking that number up, but just interested in your thoughts on tech spend. Timothy N. Spence: Yeah. I mean, we've grown for several years now tech spend in the sort of high single-digit to low double-digit range. Right? Call it seven to 10%. On an annualized basis. I anticipate we're gonna continue to do it. What we've been artful about here is we've been able to fund the franchise investments about half of them, right, through other cost reductions. Like, the number itself, you'll see in our disclosures on that is a good example of this. Like, if you look year over year, from December 25 back to '24, that headcount was flat at Fifth Third, but underneath the surface, line of business and engineering resources and tech actually grew 2%. And then the staff roles came down and operations roles came down 3%. As the investments we've made in automation and the value streams and otherwise actually play their way through. So we're we will continue to make those investments. I think it was one of our fellow category three banks who made the comment in their call that you're either on offense or defense. And we are on offense here and tend to continue to be on offense for the foreseeable future. Christopher Edward McGratty: Alright. Perfect. Thank you. Operator: And we have reached the end of our question and answer session. I will now turn the call back over to Matt Curoe for closing remarks. Matt Curoe: Yeah. Just one last thing before I hand it over to Matt to the thanks, Tim. And thank you, Rob. And thanks, everyone, for your interest in Fifth Third. Please contact the investor relations department if you have any follow-up questions. Rob, you may now disconnect the call. Operator: This concludes today's conference call. Thank you for your participation. You may now disconnect.
Gary: Good morning, and welcome to Peoples Bancorp Inc. Conference Call. My name is Gary, and I will be your conference facilitator. Today's call will cover a discussion of the results of operations for the quarter and fiscal year ended December 31, 2025. Please be advised that all lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer period. If you would like to ask a question during this time, simply press star then 1 on your telephone keypad, and questions will be taken in the order they are received. If you would like to withdraw your question, press star then 2. This call is also being recorded. If you object to the recording, please disconnect at this time. Please be advised that the commentary in this call will contain projections or other forward-looking statements regarding Peoples' future financial performance or future events. These statements are based on management's current expectations. The statements in this call, which are not historical in fact, are forward-looking statements and involve a number of risks and uncertainties detailed in Peoples' Securities and Exchange Commission filings. Management believes the forward-looking statements made during this call are based on reasonable assumptions within the bounds of their knowledge of Peoples' Business and operations. However, it is possible actual results may differ materially from these forward-looking statements. Peoples disclaims any responsibility to update these forward-looking statements after this call, except as may be required by applicable legal requirements. Peoples' Fourth Quarter 2025 Earnings Release and Earnings Conference Call Presentation were issued this morning and are available at peoplesbancorp.com under Investor Relations. A reconciliation of the non-generally accepted accounting principles or GAAP financial measures discussed during this call to the most directly comparable GAAP financial measures is included at the end of the earnings release. This call will include about fifteen to twenty minutes of prepared commentary followed by a question and answer period, which I will facilitate. An archived webcast of this call will be available on peoplesbancorp.com in the Investor Relations section for one year. Participants in today's call will be Tyler Wilcox, President and Chief Executive Officer, and Katie Bailey, Chief Financial Officer and Treasurer, and each will be available for questions following opening statements. Mr. Wilcox, you may begin your conference. Tyler Wilcox: Thank you, Gary. Good morning, everyone, and thank you for joining our call today. Earlier this morning, we reported diluted earnings per share of 89¢ for the fourth quarter, which is a 7% increase compared to the linked quarter. During 2025, our diluted EPS was negatively impacted by $0.2 from the sale of another real estate owned property that we had previously acquired through a merger, which resulted in an $850,000 loss. This property comprised most of our OREO balance, and the sale reduced our nonperforming assets meaningfully compared to the linked quarter. We also redeemed a tranche of subordinated debt we had assumed in a prior acquisition, resulting in a loss of nearly $800,000 for the fourth quarter, which also negatively impacted diluted EPS by $0.02 but will result in future savings in our funding cost. For the full year of 2025, we achieved our expected results. We generated positive operating leverage compared to the prior year, including the impact of accretion income. We have loan growth of 6% compared to 2024, and our fee-based income improved 6% over the prior year. For the fourth quarter, when compared to the linked quarter, we have several highlights to note. Our fee-based income improved 5%. Our efficiency ratio was stable at 57.8%. Our tangible equity to tangible assets ratio grew 26 basis points to 8.8%. The vast majority of our regulatory capital ratios improved. Our book value per share grew 2%, while our tangible book value per share improved by 3%, and our diluted earnings per share exceeded consensus analyst estimates for the quarter, which were $0.88. For the fourth quarter, our provision for credit losses totaled $8,100,000 and was largely driven by net charge-offs. At year-end, our allowance for credit losses stood at 1.12% of total loans, an increase from 1% at the prior year-end. Our provision for credit losses for the quarter was driven by net charge-offs, loan growth, and a slight deterioration in economic forecast. These increases were partially offset by reductions in reserves for individually analyzed loans and leases. Our annualized quarterly net charge-off rate was 44 basis points, compared to 41 basis points for the linked quarter. Our small ticket lease charge-offs contributed 31 basis points of our annualized quarterly net charge-off rate. The increase in these charge-offs compared to the linked quarter was largely driven by expected charge-offs that were included in our individually analyzed loan and lease reserves at September 30. Overall, there were no surprises here for the fourth quarter as we had anticipated this rate would remain elevated for several quarters, and we believe it should start to taper off in 2026. We have significantly reduced our position in the balance leases in our small ticket leasing business, which totaled $13,000,000 at year-end compared to $35,000,000 at the end of 2024. As we have mentioned before, we are no longer originating these types of leases in our small ticket business. Excluding the lease net charge-offs, the remainder of our loan portfolio had net charge-offs of $2,100,000 at an annualized net charge-off rate of 13 basis points. For more information on our net charge-offs, please refer to our accompanying slides. Our nonperforming loans grew nearly $4,000,000 compared to the linked quarter and were driven by an increase in nonaccrual loans along with higher loans ninety-plus days past due and accruing. The increase in nonaccrual balances was primarily driven by one acquired commercial industrial relationship. Nonperforming assets declined compared to the linked quarter due to the previously referenced sale of an OREO property. Our criticized loans declined $32,000,000 compared to the linked quarter end, while classified loans were down $11,000,000. These reductions were mostly due to upgrades and payoffs during the fourth quarter, which we had noted last quarter was our expectation. At year-end, our criticized loan balances as a percent of total loans improved to 3.5% compared to 3.99% at September 30. Classified loans as a percent of total loans declined to 2.18% at year-end compared to 2.36% at linked quarter end. At year-end, 98.6% of our loan portfolio was considered current compared to 99% at September 30. Moving on to loan balances, we achieved the top end of our previous guidance with full-year loan growth of 6% compared to 2024. For 2025, we had annualized loan growth of 2% compared to the linked quarter end. Loan balances grew nearly $30,000,000 compared to September 30 and were led by increases of $46,000,000 in commercial and industrial loans and another $40,000,000 in construction loans. This growth was partially offset by declines in premium finance loans, leases, and residential real estate loans. Last quarter, we mentioned our loan growth would be tempered during the fourth quarter and possibly into 2026 due to anticipated payoffs. We had a near-record quarter of commercial loan production, which offset some of the payoffs we experienced, which some of the expected payoffs have shifted into 2026. At quarter-end, our commercial real estate loans comprised 35% of total loans, 33% of which were owner-occupied, while the remainder were investment real estate. At quarter-end, 44% of our total loans were fixed rate, with the remaining 56% at a variable rate. I will now turn the call over to Katie for a discussion of our financial performance. Katie Bailey: Thanks, Tyler. For the fourth quarter, our net interest income was relatively flat when compared to the linked quarter, while our net interest margin declined four basis points. We were able to mostly offset declines in our investment and loan income by closely managing our funding costs. Our net interest margin was negatively impacted by lower loan yields, which declined 17 basis points, while our overall funding costs declined 10 basis points. Our accretion income for the quarter totaled $1,800,000 compared to $1,700,000 for the linked quarter and contributed eight basis points to net interest margin for both periods. For the full year of 2025, our net interest income improved 2% compared to 2024, while our net interest margin declined seven basis points. Our lower net interest margin was driven by declines in our accretion income, which totaled $9,600,000 for 2025 and contributed 11 basis points to margin compared to $25,200,000 and 30 basis points to margin for 2024. Excluding accretion income, our net interest income grew over $22,000,000, while our net interest margin expanded 12 basis points. We made a move in October to pay off subordinated debt we had previously acquired from Limestone, as we could secure financing at half the cost through FHLB advances and brokered CDs. The subordinated debt was being carried at a rate of around eight and a half percent. This should result in annual savings of around $1,000,000, with the tangible book value earn-back period on the transaction coming in at less than one year. From a total balance sheet perspective, we continue to position ourselves in a relatively neutral interest rate risk position and will continue to monitor market interest rates, taking action to reduce our deposit costs if rates move lower. As it relates to our fee-based income, we had a 5% increase compared to the linked quarter. The improvement was due to higher lease income and deposit account service charges, as well as mortgage banking and trust and investment income. Compared to the full year of 2024, our fee-based income grew 6%, largely due to higher lease income and trust and investment income. Our net interest expenses were up 2% compared to the linked quarter. This increase was due to higher operating lease expense, which was more than offset by our higher fee-based lease income, coupled with higher sales and incentive-based compensation related to our production and performance. For the full year, total non-interest expense grew 3% compared to 2024. The increase was due to higher sales salaries and employee benefit costs, coupled with increased data processing and software expenses. Our reported efficiency ratio was 57.8% for the fourth quarter and was 57.1% for the linked quarter. The increase in our ratio was mostly due to higher lease expense and sales-based incentive compensation. For the full year of 2025, our reported efficiency ratio was 58.7% compared to 58% for 2024. The higher efficiency ratio was largely due to the impact of lower accretion income, coupled with higher non-interest expense compared to the prior year. For the full year of 2025, compared to 2024, we generated positive operating leverage excluding accretion income. This measure compares our total revenue growth, excluding gains and losses, to our total expense growth over the same period. Looking at our balance sheet at year-end, our investment portfolio as a percent of total assets was 20.5% at year-end, which was flat compared to September 30. Our loan-to-deposit ratio continued to be around 89%, which was in line with the linked quarter end as well as the prior year-end. Our deposit balances decreased $22,000,000 compared to the linked quarter end. The decline was mostly due to governmental deposits, which were down $30,000,000, while our retail CDs were down $25,000,000. These declines were partially offset by higher interest-bearing demand accounts, which grew $24,000,000, and non-interest-bearing deposits, which were up over $9,000,000. Compared to the prior year, total deposits excluding brokered CDs increased nearly $160,000,000, with non-interest-bearing deposits contributing $38,000,000 of growth. Our demand deposits as a percent of total deposits were 35% at year-end, compared to 34% for the linked quarter end. Our non-interest-bearing deposits to total deposits were flat at 20% at both year-end and the linked quarter end. Our deposit composition was 78% in retail deposits, which includes small businesses, and 22% in commercial deposit balances. Moving on to our capital position, most of our regulatory capital ratios improved compared to the linked quarter end, as improved earnings more than offset dividends paid and risk-weighted asset growth. Our Common Equity Tier one and Tier one capital ratios both grew by 18 basis points. Our total risk-based capital ratio was relatively flat but was directly related to the redemption of our subordinated debt, which qualified as tier two capital. Our tangible equity to tangible asset ratio improved 26 basis points to 8.8% at year-end, compared to 8.5% at September 30. Our book value per share grew to $33.78, while our tangible book value per share improved to $22.77. Finally, I will turn the call over to Tyler for his closing comments. Tyler Wilcox: Thank you, Katie. To recap 2025, our results for the year fell within our guided ranges while we continue to make meaningful investments in our infrastructure. We made it a point in recent years to heavily focus on our technological capabilities and have continued on this path during the last year. We implemented state-of-the-art software programs, most of which integrate with each other and provide a more cohesive environment for our associates between lines of business, closely connecting the frontline with our operational groups. We have automated many manual processes, increasing efficiencies, and oversight of functions. Each year, we strive to be a great employer with a proven culture that has far-reaching impacts. For the fifth year in a row, we received recognition from American Bankers' Best Banks to Work For, which has only been achieved by 1% of the banks in the United States. We have invested our time and resources into our talent, which we continue to develop over the last year. We have made some key hires in certain areas, which will help us grow and expand our business while adding expertise to our existing groups. Earlier this morning, we announced the planned retirement of Doug Wyatt, our Chief Commercial Banking Officer. Doug joined us nearly a decade ago and has been instrumental in our diversified commercial loan growth, putting together a world-class commercial banking team, and has done so while improving our credit profile. Stepping into Doug's role will be Ron Majka, who joined us in September and has over thirty years of experience serving middle-market companies throughout the markets we serve. Ron will perpetuate and expand the proven commercial strategy that Doug helped establish. During the year, we have also focused on solidifying the strategies and targets around our small ticket leasing business, including originating higher quality credit tiers while tightening the credit standards to more closely align with our expectations. This business continues to provide a high return, and we anticipate a reduction in charge-off levels as we get into 2026. Last quarter during the question and answer session, we discussed the timing around when we anticipated exceeding $10,000,000,000 in assets, and I would like to provide more clarity around that discussion. Absent any actions taken by us, we expect we would cross that threshold in 2027. However, we currently have no plans to go over that threshold organically, as we do have several levers we can pull to manage the size of our balance sheet. For example, we typically target our investment portfolio as a percent of assets of between 18-20%. While we are slightly over that now, we can allow principal paydowns on the portfolio to generate meaningful rundown of that portfolio in the near term. We also have the flexibility to absorb smaller restructures as needed to shrink the balance sheet. Therefore, we do not plan to actually cross $10,000,000,000 in assets absent any acquisition activity. As it relates to 2026, here are our expectations, which excludes the impact of non-core expenses. We expect to achieve positive operating leverage for 2026 compared to 2025. We anticipate our net interest margin will be between 4.2% for the full year of 2026, which includes one 25 basis point rate cut. Each 25 basis point reduction in rates from the Federal Reserve is expected to result in a three to four basis point decline in our net interest margin for the full year. We believe our quarterly fee-based income will range between $28,000,000 and $30,000,000. Our first quarter fee-based income is typically elevated as it includes annual performance-based insurance commissions. We expect quarterly total non-interest expense to be between $72,000,000 and $74,000,000 for 2026, with the first quarter being higher due to the annual expenses we typically recognize during the first quarter of each year. We believe our loan growth will be between 3-5% compared to 2025, which is dependent on the timing of paydowns on our portfolio, which could fluctuate given changes in interest rates and the timing of payoffs. We anticipate a slight reduction in our net charge-offs for 2026 compared to 2025, which we expect to positively impact provision for credit losses, excluding any changes in the economic forecast. I am optimistic about our projected results for 2026, and we will continue to look for opportunities to become more efficient and position ourselves to drive increasing shareholder value. This concludes our commentary, and we will open the call for questions. Once again, this is Tyler Wilcox, and joining me for the Q&A session is Katie Bailey, our Chief Financial Officer. I will now turn the call back into the hands of our call facilitator. Gary: We will now begin the question and answer session. To ask a question, you may press star then 1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. Tyler Wilcox: Our first question today is from Jeff Rulis with D.A. Davidson. Please go ahead. Jeff Rulis: Thanks. Good morning. Tyler Wilcox: Good morning, Jeff. Jeff Rulis: Just a question on margin guide. Appreciate that range. I guess, is that safe to assume the accretion benefit within that guide is, call it, six to eight basis points for the full year. Is that fair? Katie Bailey: I think eighth is the highest it would be, I think, because the fourth quarter, that's what it was. I think expect that to come down as we proceed through the year. So I would say closer to five around five for the full year. Jeff Rulis: Got it. And, Katie, while I have you on the tax rate, any expectations kind of step down in the fourth quarter, but I guess looking forward, any range you'd expect? Katie Bailey: Yeah. A couple thoughts just as it relates to the fourth quarter. So as we noted, we did participate in a tax credit of about $650,000 in the fourth quarter. The other component in the fourth quarter is annual true-ups that we do as we finalize our prior year tax return. I think that took us to about a 21% rate for 2025, again, about 50 basis point benefit from the tax credit. So that would get us up to 21.5 on a kind of run rate perspective for '25. And I think you can expect that in the '20 probably in the '22 range for '26 as we move forward. Jeff Rulis: Great. Thanks. And then maybe just a last one on the loan demand. It sounded pretty encouraging. And I guess pretty good year in 'twenty five and I guess expecting something inside of that in '26. And sounded like a little of that's timing on paydowns. Maybe just if you could just flesh out a little bit more expectations on the production side as that sounds like that's increasingly positive, at least from the tone. Tyler Wilcox: Yes, Jeff, thanks for that question. We're very encouraged by the loan growth that we've seen. You know, if there is a downside, it's the expectation of payoffs. A declining rate environment. A very small portion of that maybe due to we're gonna be selling more of our mortgage production, but overall, especially on the commercial side, we have seen incredible demand and incredible execution by our team, particularly led by the commercial team and on the CNI side. And we expect that to continue into this year as we think about favorable tax policy and know, adding new bankers. We've consistently added new talent. I think talked about that on our call over time. The aggregate incremental value of all this talent we continue to add in and are able to attract because of some of those things we talk about in building the culture. I think this is all paying off in that regard. A lot of optimism there. Jeff Rulis: Great. Thank you. Appreciate it. Tyler Wilcox: Thank you. Thanks, Jeff. Gary: The next question is from Brendan Nosal with Hovde Group. Please go ahead. Brendan Nosal: Hey, good morning folks. Hope everyone is doing well. Tyler Wilcox: I'm doing great. Brendan Nosal: Maybe just to kick things off here, Tyler, in light of your comments around $10,000,000,000 and not wanting to cross organically. Can you take a minute to refresh us on your own view of the M and A environment both at large as well as for PBO and just remind us of the criteria you folks have internally for dealing with this point, whether it's a size range or geographic preference. Tyler Wilcox: Certainly. There's a yeah. A lot to say there. Obviously, there's been a lot of high-profile M and A. We enjoy when the large regionals engage in M and A because it allows us to attract talent and clients from some of the disruption. And so, you know, I think we'll continue to see some of that. As it relates to, you know, our outlook, you know, I'm gonna bore you and say some of the same things I've been saying for probably over a year. First of all, I'll start with my mantra of strategic patience. We continue to evaluate a number of opportunities and where we evaluate them is generally one a priority would be within our existing footprint, Ohio, Kentucky, West Virginia, and Virginia. You know, adjacent states that we would consider would be, you know, Pennsylvania, Indiana, Tennessee, and we continue to have conversations with banks throughout all of those regions. We have a size preference, although it is not exclusive preference. A size preference of, you know, larger deals being a bit easier to kinda execute all in one chunk. So in the $3,000,000,000 to $5,000,000,000 range, would be ideal. The alternative, would say, though, is increasingly become viable due to the regulatory environment where the expected approval timing of deals is more favorable, and have a supreme degree of confidence in the history of our team which includes, you know, multiple years where we did multiple deals. So we do hold out the possibility that small deals one or two or three small deals over a, you know, reasonable time frame are viable. As a path forward, and we will we have and will continue to consider those. So, you know, again but take you back to where we started with patience and discipline, and we desire nothing more than to ensure that our shareholders understand the strategic vision of where we're going and that we stay within discipline metrics in terms of earn back and we are optimistic about our ability to do that whether it's in, you know, three months or, you know, longer. Brendan Nosal: Okay. Fantastic. Got it. No. It's always good to get your latest thoughts in how you do get the question each quarter. Maybe switching gears here to NorthStar. Can you just update us on kind of the plateau that you guys have been about for the past couple of quarters of losses not improving for a while before you get that step down. It feels like that plateau is a little bit longer than you may have thought like three or six months ago. So just kind of curious what you're seeing there and kinda what, you know, benchmarks we on the ad outside should be looking for to make sure, you know, progress is taking place there. Tyler Wilcox: Yeah, Brendan. You know, as we mentioned in the script, the slight increases, I would call it, quarter over quarter in the dollars of charge-offs in that business. And that's largely related to, you know, two high balance accounts that we had already identified an individual individually analyzed and had reserved for. So you know, I think our predictability, I would go back to know, this entire year I believe we've been giving guidance that, you know, 2026 is when we expect that plateau to begin to decline, and that's exactly what we're seeing. So do I do I like the charge-offs being where they are at that plateau? I do not. Know, we've talked to, you know, pretty extensively about the discipline that we've exercised on credit. And if nothing else, you can certainly see that the overall balances dropping in that portfolio, which stands at $133,000,000 today. That's by design. But I am optimistic about that business over the long term. We have added new credit-conscious growth-oriented leadership in that business. They were very optimistic and I would say, Brendan, that this year, you know, with Northstar Leasing, represents kind of a systematic collections, credit, and production overhaul what we believe is a long-term sound and lucrative business so that delivers what we want on a risk-adjusted return basis for our shareholders. So, yes, you'll see, you know, from a dollar perspective, you'll see you know, first and second quarter, you know, somewhere consistent with the dollars charged off. This year. And then again, we have a very good handle on the vintages and those high balance accounts. And both of those continue to decline as predicted and as designed. So we are optimistic about the future with that business. Brendan Nosal: Okay. Alright. Thank you for the talk, Tyler. Much appreciated. Tyler Wilcox: Thanks, Brendan. Gary: The next question is from Daniel Tamayo with Raymond James. Please go ahead. Daniel Tamayo: Thank you. Good morning, Tyler. Good morning, Katie. Tyler Wilcox: Morning. Daniel Tamayo: Maybe kind of looking at your commentary around positive operating leverage, I think that was intended to be taken absent rate cuts. Do you think you can get the positive operating leverage with a rate cut or two in '26? Katie Bailey: So that the guidance includes a 25 basis point cut in '26 as we mentioned. In the prepared remarks. So yes, we do believe with a 25 basis point cut, we can get positive operating leverage in '26. Daniel Tamayo: Yep. Well, fair enough. Sorry about that. I guess, what's the biggest threat to that? In terms of the levers that we'll get there? Is it margin contraction on a core basis? Is it fee income not hitting your targets expenses? Obviously, it would be some combination of all three, but how do you think about what might be the biggest risk to achieving that? Katie Bailey: Yeah. I mean, I think we stand here, and we feel pretty good about budget or our expectations for '26. I mean, I think your point is it could be in any of any of those I don't know that I can say one's more more likely or you know, weighs on me more heavily. Tyler Wilcox: Expenses is obviously the one that is, you know, most controllable, and we have shown over the past years that the ability to pivot on expenses relative to where we're tracking, and we will obviously continue to pull that lever as we as we need to. Daniel Tamayo: Okay. Maybe asking, different question, but the kind of zeroing in on the margin a bit. With the movement happening in the first quarter with the sub debt redemption and then the rate cut, You gave obviously some comments earlier and some guidance on the margin for the year. But if we stripped out the accretion number, the eight basis points in the fourth quarter, to get you that four zero four How do think about just the pace of the margin moving through the year as we go? Katie Bailey: I mean, think it depends on when the rate cuts happen. I think we quantified, you know, two to every 25 basis point cut we'll see compression of about two to three basis points in the margin. So think that will play a factor. I think it's the mix of the loan growth and when it happens, will also drive the margin. So I know, I think it'll be fairly stable over time. But if we have big payoffs in a quarter or big production in a quarter, we could get some lift faster or slower than anticipated. Daniel Tamayo: Okay. So fair fairly stable kind of x rate cuts would be the you're thinking about that on a core basis. Katie Bailey: Correct. Daniel Tamayo: Okay. I mean, is that you you you hit on the the, I guess, the the what was what's top of mind to me is is the the reduction in the small ticket leasing, obviously, high yield stuff. Which is is impacting the the margin longer term, but you've got the ops offset on the the fixed rate loans repricing Is that do you think that offsets ultimately, over time? Or or is there more on one side of that equation that that you think could drive? I I mean, I guess I'm probably thinking it would be on the on the leasing, the REMAX. But, I mean, is that do you think that drives any kind of contraction over time as that plays out? Katie Bailey: Well, I think we have some expectations of the North Star leasing portfolio over time. I think what you've seen is that it's been shrinking a bit as we've kind of right-sized the portfolio, the credit metrics, experience, the charge off, So it's and that's not a very professional term, but a big juice to margin when you're putting on those types of rates even at small balances. To the extent we can see some recovery in that production, in '26, I think that adds some true value the margin on a go forward. We're not expecting that right off the bat, but over time, we do expect that to recover on a production side within the credit profile that we've set for that business on a go forward. Daniel Tamayo: Alright. That's helpful. Thanks for answering my questions. Tyler Wilcox: Thanks, Danny. Gary: The next question is from Tim Switzer with KBW. Please go ahead. Tim Switzer: Hey, good morning. Thank you for taking my question. Tyler Wilcox: Good morning, Tim. Tim Switzer: Good morning. Quick follow-up on the margin discussion here. If we get more than, say, two rate cuts in '26, which I think is what the market has priced in right now. We get more than two rate cuts. Do you think the NIM can end the year above that 4% level you gave, or do think it'd maybe push a little bit below that? Katie Bailey: I think we can still end above the four. I think it's as you I'm gonna state the obvious, it's dependent on timing. Of all of that. If all the rate cuts happen, you know, in March and the loan, you know, the production doesn't kinda happen in the early part of the year, that could compress it for a period of time. But I think in the for the total year, we could still end above the four. Tim Switzer: Okay. That's helpful. And I appreciate all the color you've given on North Star leasing. Given your modeling kind of flattish charge offs for the first half of the year and then it starts to moderate down, What does that mean for the provision if you already have know, charge offs embedded within the reserve right there, are are we able to stick around, you know, the levels we saw in the second half of, '25 rather than it being a little bit higher like you saw in the first half of the year. Katie Bailey: We do. We we expect a a lower provision as the year as the year goes on. As we said in the script, kinda absent any economic should, you know, our our model obviously drives some of that as well should you know, unemployment spike or other economic news like that that that would temper that. But on a on a core basis, yes, we feel well provisioned for the expected losses in those business. Tim Switzer: Okay. That's helpful. And then sorry if you already answered this, but are there any other capital action being contemplated beyond the sub debt pay down? Katie Bailey: Nothing outside of our history of what we've been active in. We continue to have a program in place for share buybacks. You know, the dividend we announced earlier this morning to with the continuation of our dividend rate. So think it's more of the same and continued with the organic growth that we laid out in our projections for 2026. Tyler Wilcox: We certainly feel comfortable growing our capital position as we, you know, anticipate obviously some M and A in our future. And so that gives us some flexibility, and we'll continue to balance all those priorities. Tim Switzer: Thank you. Gary: The next question is from Terry McEvoy with Stephens. Please go ahead. Terry McEvoy: Hi, good morning, Tyler. Good morning, Katie. Tyler Wilcox: Hi, Terry. Terry McEvoy: Maybe just a couple questions on fee income. The insurance income was up call it, 1% in 2025. I'm just wondering if you could talk about the outlook and plans to accelerate growth there. And then leasing income had a good year, call it $15,500,000 is that the appropriate run rate as we start 2026? Tyler Wilcox: Yeah. As it relates to the insurance, you know, the on a core basis, they had a a good amount of growth. Year over year, we saw a bit of a decline in our performance-based insurance income. Which hits in the first quarter. We are experiencing a hardening market, which I would say on a you know, if you see the market hardening, that should be, you know, kind of accretive to the bottom line. On the other hand, it creates a, you know, significantly more difficult sales cycle as clients are, you know, actively shopping and carrier appetite is constantly moving. So you you tend to run-in place quite a bit in the hardening market. We continue to be interested in there having multiple conversations on the acquisition side, most of which are you know, generally small in our history, but we've done a number of those. And, you know, insurance is a core part of our business and looking for ways to interrelate some of our lending businesses as well with our insurance business. Katie Bailey: Yeah. And as it relates to lease income, I think the full year number for that was around $15,000,000 $16,000,000. I think that's a good range for 2026. I think there's a couple activities that go through that line. As it relates to our mid-ticket leasing business. They do some operating leases, which you see us as the fee of that fee income, and then there's some end of term activities that, as we've mentioned historically, can vary quarter to quarter based on activity of the clients. And how that plays out for us. So I think the 25 expectation or act results is a good expectation as you proceed into 26 for lease income. Line specifically? Terry McEvoy: Thanks. And then just as a follow-up, within the twenty twenty six expense outlook, can you discuss where inside the bank you expect to make investments I know, Tyler, you talked about technology and 25 talent know, what what are what are the top three areas of investment? Tyler Wilcox: One of the primary areas is in is in data provision and data warehousing. As we've added and increased our sophistication with multiple systems. You know, centralized data is is a big part of $10,000,000,000 and beyond. You know, both from our expected infrastructure of what we're trying to build and you know, just what our all those systems demand. So that is part of it. Investments in a kind of continued investments in new talent, as I referred to earlier, are very opportunistic about, you know, kinda hiring the best people who become available in the businesses that we're in. As well as some investments into, you know, specialty areas within those existing businesses, that we have added talent with and, hope to see growth from in the future. So anything you would add? Terry McEvoy: Okay. Great. And, Katie, I'd say big juice is 100% a technical term in my book. Katie Bailey: Thanks, Terry. Like the support. Terry McEvoy: Appreciate it, Terry. Thanks for my questions. Gary: The next question is from Nathan Race with Piper Sandler. Please go ahead. Nathan Race: Hey, everyone. Good morning. Thanks for taking my Just going back to the capital question earlier. You know, just curious to get your thoughts on maybe contemplating a securities portfolio repositioning. Obviously, you have a good amount of excess capital, and it seems like some of those repositions have been well received in the market. So just curious on maybe using some excess capital to that end. The course of 2026. Katie Bailey: Yeah. I mean, I think our most recent one was in Q3. We didn't do much in Q4, although we had some calls on some discounted investment we made. So you know, we'll continue to evaluate. I don't think we have or have a need for or a desire to do a wholesale restructure and blow through a big loss. In a in a quarter. We've kept that to around the $2,000,000 loss coming through in a quarter. But continue to evaluate pretty much every quarter we do an evaluation to if there's anything we want to move on. And, in the fourth quarter, we didn't do it, but we will continue that analysis as we proceed through 26. Nathan Race: Okay. Great. And then changing gears a bit, you know, curious if the is for deposit growth to keep up with the 3% to 5% target for loans, this year. And, you know, based on what you're seeing in terms of, you know, production levels on each side of the sheet, you know, if you expect that growth in both loans and deposits to be accretive to the core margin around 4.4% or I'm sorry, four point o 4% in the quarter. Katie Bailey: Yeah. I don't I don't think we have expectations that deposits will keep up exactly with loan growth. I think we feel better that loan growth will be a little stronger than deposit growth, but we continue to be encouraging of the sales force to seek the opportunities equally. And so, we remain optimistic, but I think that's a will be more of a challenge. So I do think the loan to deposit ratio will increase as we proceed through '26. You know, we evaluate each deal we put on the book, into the margin that we have here today, and we look for it to be accretive or at least neutral too. So that'll be continued evaluation as we look at pricing both the loan and deposit side as the business. Tyler Wilcox: And we we continue to invest in a number of deposit-focused initiatives, particularly within the commercial and small business banking realms that I expect to bear fruit over the coming year, year and a half. Nathan Race: Okay. Great. Very helpful. Thank you. Tyler Wilcox: Thanks. Thanks, Nate. Gary: Again, if you have a question, please press star then 1. The next question is from Daniel Cardenas with Janney Montgomery Scott. Please go ahead. Daniel Cardenas: Good morning, guys. Tyler Wilcox: Dan. Katie Bailey: Hey, Dan. Daniel Cardenas: Maybe some color on competitive factors on the lending side. Are you seeing any slowdown in the intensity there? Excuse me. And, you know, what are your competitors doing in terms of credit standards? Are you seeing any signs of weakness on that front? Tyler Wilcox: Thanks, Dan. I would say we don't see craziness, and that's another banking technical term. In the deal structure or in pricing. There have been a limited amount of payoffs and things we have not renewed, very limited for the year or for the quarter, especially where we did not pursue, you know, existing loan or a new client opportunity because we weren't going to, you know, chase rate or make term exceptions. There is a high demand for high-quality borrowers. And it is competitive. But we win with the people, and we win with the services. Not to sound cliche, but we don't win by and our numbers would bear this out in terms of our yields and everything else that comes with that that we're not seeing that type of competitive pressure impact us nor do we expect it to. We would rather deliver lower loan growth than, you know, unfavorable metrics in those other areas. Is what I'm trying to say. Daniel Cardenas: Okay. And then just maybe a follow-up question on the M and A front, and I might have missed your answer. We answered this before. But on the for the fee-based income side, I mean, what's your appetite for those types of M and A transactions? And are there a lot of opportunities presenting themselves right now? Tyler Wilcox: As it relates to insurance investments, we are in the market. We would buy more and we will buy more. As it relates to specialty finance businesses for the reasons for the $10,000,000,000 threshold reasons, and I mean this by, you know, asset generators. And as to the, you know, loan to deposit ratio. We would rather add talent to those businesses than pursue an acquisition, although we remain active in the market and considering opportunities, but those are lower on our priority list right now behind primary bank M and A, you know, fee-based income M and A, and then, you know, passing on the mid, you know, considering too much in the specialty finance area asset generators. Katie Bailey: Yeah. Daniel Cardenas: Alright. My other questions have been asked and answered. Thank you, guys. Tyler Wilcox: Thank you, Dan. Gary: At this time, there are no further questions. Sir, do you have any closing remarks? Tyler Wilcox: Yes. I want to thank everyone for joining our call this morning. Please remember that our earnings release and a webcast of this call, including our earnings conference call presentation, will be archived at peoplesbancorp.com under the Investor Relations section. Thank you for your time today, and have a great day. Gary: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Greetings. Welcome to BOK Financial Corporation's Fourth Quarter and Full Year 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'd like to ask a question at that time, thank you. And as a reminder, this conference is being recorded. I would now like to turn the presentation over to Heather King, Director of Investor Relations for BOK Financial Corporation. Please proceed. Heather King: Good afternoon, and thank you for joining our discussion of BOK Financial's Fourth Quarter and Full Year 2025 Financial Results. Our CEO, Stacy Kymes, will provide open comments and cover the loan portfolio and related credit metrics. Scott Brower, Executive Vice President of Wealth Management, will cover our fee-based results, and our CFO, Martin Grunst, will then discuss financial performance for the quarter as well as our forward guidance. The slide presentation and press release are available on our website at bokf.com. We refer you to the disclaimers on Slide two regarding any forward-looking statements made during this call. I will now turn the call over to Stacy Kymes, who will begin on Slide four. Stacy Kymes: Thank you, Heather. We appreciate you joining the call this afternoon. We are pleased to report earnings of $177.3 million or EPS of $2.89 per diluted share for the fourth quarter. Full year 2025 earnings reached $578 million or $9.17 per diluted share. This marks a record high earnings per share for both the quarter and the year. Throughout the year, we delivered solid growth and continue to invest in our strategy to create long-term sustainable shareholder value while maintaining a strong and disciplined approach to risk management. During the year, we achieved solid loan growth, expanding loan balances by more than $1.5 billion or 6.4%. This growth was broad-based, both in terms of geography and lending segment. After the economic pause in the first quarter of the year, loans grew at an annualized rate of 11% over the last nine months of the year. We delivered growth in net interest income and expanded our net interest margin in every quarter of 2025. We maintained a loan-to-deposit ratio in the mid-60% range all year, positioning us for future growth and continued pricing optimization. Our fee income engine, which continues to be a differentiator for us, produced consistent strong results once again this year, contributing $801 million to revenue. This represents a peer-leading 38% of total revenue. Our credit quality remains excellent. We've maintained a combined allowance of 1.28% of outstanding loans, and our annualized net charge-off rate for the year was only three basis points. Our strong performance across business lines has been recognized by the market, as we have outperformed the KBW Regional Bank Index total shareholder return over a one, three, five, and ten-year period by 73%, 42%, and 51%, respectively. I'm proud of our performance this year and have strong confidence in the path ahead for our organization. With that, I will turn attention to our fourth quarter results. As I discussed the quarter, you'll hear me emphasize broad-based growth. This is a testament to the work we've done over many years to position ourselves to deliver exceptional value to our shareholders. During the quarter, outstanding loan balances grew $786 million or 3.2% sequentially. The growth was broad-based as our core C&I portfolio and our healthcare and energy portfolios all posted strong results this quarter, expanding 5.3% in total. Growth in Texas specifically was exceptional, representing $561 million of total fourth quarter growth. Net interest margin expanded again this quarter, increasing seven basis points. Fee income was very strong, exhibiting again broad-based growth across our various lines of business. Total fee income increased 5.1% sequentially. I'd like to call out our fiduciary and asset management and transaction card lines of business. Both posted not only record quarters to revenue but also record full-year results. AUMA continued its impressive trajectory this quarter, surpassing $126 billion and setting a new record high. Our capital levels remain robust, with tangible common equity of 9.5% and CET1 at 12.9%. Given these strong capital levels, we also had the opportunity to return value to shareholders by repurchasing over 2.6 million shares at an average price of $107.99 per share during the quarter. Slide six provides a closer look at our loan portfolio. Total outstanding loans grew 3.2% this quarter. Our core C&I loan portfolio, which represents our combined services and general business portfolios, grew 5.5% sequentially. Core C&I loan growth is inherently relationship-driven, requiring time, focus, and disciplined execution. We've seen three consecutive quarters of growth in this business, reflecting the progress from those sustained efforts. Healthcare loans increased 3.3%, driven by strong origination activity and funding of prior commitments. Healthcare production remains robust, the cyclical payoffs we experienced in the first and second quarters of this year have moderated to more typical levels. Energy loans posted strong results, growing more than $200 million. This growth was driven primarily by higher utilization rates across the existing portfolio as well as solid new loan origination. This segment experienced higher than normal payoff activity during the early parts of the year, largely driven by industry consolidation. This activity has moderated, resulting in a more normal payoff rate during the quarter. Our commercial real estate business decreased 1.4% compared to the prior quarter but has increased 12.1% on a year-over-year basis. This small quarter-over-quarter decline was driven by a moderate level of refinancing into the permanent market. We saw a strong quarter of originations in commercial real estate and have a robust pipeline in this space. Let's move to slide seven. Consistent with the last couple of quarters, credit quality is excellent, so my comments will be brief. Nonperforming assets not guaranteed by the US government decreased $847,000 to $66 million. The resulting nonperforming assets to period-end loans and repossessed assets decreased one basis point to 26 basis points. Committed criticized assets increased this quarter but remained very low relative to historical standards. We had net charge-offs of $1.4 million during the quarter, averaging three basis points over the last twelve months. Importantly, the limited charge-offs we've seen recently show no patterns or concentrations that raise concerns about specific business lines or geographies. Over the long term, we do expect that credit normalization will occur. In the short term, we expect net charge-offs to remain below historical norms. No provision was required this quarter, as the impact of loan growth was balanced by an improvement in the economic forecast. Our combined allowance for credit losses is a healthy $327 million or 1.28% of outstanding loans. Our results in credit continue to reflect a highly disciplined approach supported by consistent execution and a strong track record over time. And now I'll turn the call over to Scott. Scott Grauer: Thank you, Stacy. Turning to our operating results for the quarter on Slides nine and ten. Total fee income increased $10.4 million on a linked quarter basis, contributing $214.9 million to revenue, reflecting an excellent quarter. The 5.3% growth in these businesses is an exceptional outcome. Total trading revenue, which includes trading-related net interest income, was $34.1 million, growing $4.3 million over the prior quarter. Trading fees were up $5.4 million, driven by increased trading volumes for agency mortgage-backed securities. Investment banking revenue, which includes investment banking and syndication fees, decreased $1.9 million. However, this is following a record high for these businesses. Investment banking revenue of $14.3 million is still a remarkable quarter. Turning to slide 10. As you know, recurring fee income-based businesses are among the most resilient, valuable, and sought after in the industry. Achieving a $7.1 million linked quarter increase in asset management and transactions revenue reflects not only the strength of our business model but also the dedication and expertise of our team. It was a banner year for both our fiduciary and asset management and transaction card businesses. Fiduciary and asset management revenue grew $4.5 million, led by asset growth from customer expansion and increased market valuations along with transaction management fees. AUMA grew an impressive $3.9 billion to $126.6 billion, eclipsing last quarter for the highest on record. Transaction card revenue increased $2.1 million, reflecting growth in volume and increased customer relationships. Overall, these results underscore the strength and diversity of our fee-based businesses, which continue to deliver consistent growth and resilience across market cycles. With that, I'll hand the call over to Marty to cover the financials. Martin Grunst: Thank you, Scott. Turning to slide 12. Net interest income increased $7.6 million, and reported net interest margin expanded seven basis points. Excluding trading, core net interest income increased $8.7 million, and core margin grew six basis points. Drivers of core margin expansion are largely consistent with those for recent quarters, including fixed-rate asset repricing, beneficial repricing of deposits, and loan and deposit growth. In addition, Q4 net interest margin experienced a small net benefit from SOFR spreads and shifting some existing wholesale borrowings into wholesale deposits. That benefit was partially offset by the impact of our subordinated debt issuance. When those funding market spreads return to normal, we would expect to see those wholesale deposits run off and return to normal wholesale borrowing sources. Within the other gains category, I'd like to point out that we exited a merchant banking investment in the fourth quarter, recognizing a $23.5 million pretax gain. We've included Slide 22 in the appendix to provide more color on notable items during the quarter. Turning to slide 13. Total expenses decreased $8.7 million. Personnel expenses were down $3.6 million. Cash-based incentive payments were higher, driven by increased loan production and new business volumes. However, that was more than offset by seasonal declines in employee benefit costs and by lower deferred compensation costs. As you know, deferred compensation costs vary quarter to quarter, but the amount is consistently offset in the other gains line item within the other operating revenue section. Non-personnel expense decreased $5.1 million. During the quarter, the FDIC updated their estimate of the special assessment, and other adjustments were made, resulting in a $9.5 million benefit. This was partially offset by higher professional fees and data processing costs. Slide 14 provides our outlook for full year 2026. We expect end-of-period loan growth to be in the upper single digits. This reflects a continuation of the growth we've seen in our existing portfolio, which has grown above a 10% annualized rate over the last three quarters, and meaningful contributions from our new mortgage finance segment. We expect net interest income to be $1.44 billion to $1.48 billion, which assumes two cuts in the latter half of 2026 and a slightly steeper curve. Our rate curve assumptions are broadly consistent with implied forwards. Fee income is expected to be in the $800 to $825 million range. There are two drivers here. First, we expect our portfolio of fee-based businesses to grow revenue at a mid-single-digit growth rate in 2026. Second, we expect a steeper curve in 2026 to shift some of the trading revenue out of fee income into net interest income, as we've discussed on previous calls. For total revenue, we expect growth in the mid-single-digit range. Please note that our baseline 2025 total revenue number of $2.18 billion includes NII, fees and commissions, as well as the other gains and losses in the other operating revenue category. We anticipate the growth rate for expenses to be in the low single digits. We've been very thoughtful about aligning our expense base with the future needs of the business, investing in growth areas, and focusing on efficiency in more mature areas. This should result in a 2026 full-year average efficiency ratio in the 63% to 64% range. This ratio should migrate lower during the course of the year as revenue continues to grow. We expect 2026 provision expense to be in the $25 million to $45 million area. This reflects our upper single-digit loan growth expectation and a very strong starting point in credit quality that we can see today. While we see no tangible evidence of credit normalization beginning in our portfolio, the guidance does allow for at least some amount of that eventual normalization to begin later in the year. With that, I would like to hand the call back to the operator for Q&A, which will be followed by closing remarks from Stacy. Operator: Thank you. We will now begin the question and answer session. If you would like to ask a question, please press star then the number one on your telephone keypad to raise your hand and enter the queue. If you'd like to withdraw your question at any time, simply press star one again. Your first question comes from the line of Peter Winter with D.A. Davidson. Your line is open. Peter Winter: Thank you. I was wondering, the loan growth has been really strong, and you've got a positive outlook for loan growth. But could you give a little bit more detail to the drivers to this upper single-digit loan growth? You know, I noticed that consumer loan growth did moderate in the fourth quarter, and commercial real estate was down, but you talked about the refinancings to permit finance, but strong pipeline. Just some of the drivers, including, you know, mortgage banking, mortgage warehouse as well. Stacy Kymes: Sure, Peter. This is Stacy. I think the good news about the loan growth really over the last nine months is how diverse it's been. It's been diverse by geography. It's been diverse by lending type. Significant growth, obviously, in loans in the fourth quarter. About $100 million of that was driven by mortgage finance business. The change from third quarter to fourth quarter. So it contributed in a meaningful way, but it wasn't the main driver. It was diverse across all the areas. I mean, if you think about loan growth for the year, early in the year, energy was a headwind. Here in the fourth quarter, it became a little bit of a tailwind. In the fourth quarter, commercial real estate was a bit of a headwind. But for the year, it still was up solidly double digits. I mean, I think that's the kind of the beauty of what we've created here is we've got a lot of diversity both by lending style and type as well as by geography. And it ebbs and flows each one over a period of time. It's not necessarily all linear but has worked very well together. I mean, I'd love to give you the main driver, but there's not a main driver. It's very diverse. Across particularly the C&I world where, as you know, we've made very significant investments over the last three years both in terms of staff and expansion. And so we're really seeing the benefits of that. Peter Winter: Got it. Thank you. And, you know, positive surprise on the level of share buybacks in the fourth quarter despite strong loan growth and where the stock is trading. But how are you thinking about future share buybacks? And do you have a targeted CET1 ratio? Martin Grunst: Yeah. Peter, you know, we this is Marty. Yeah. We don't really have a targeted ratio. I mean, as you know, we've got a long history of our share buyback activity being opportunistic. And the Q4 number, you know, that kinda connects to the sub-debt issuance we made. So as you think about us share buyback going forward, just reflect on our long-run history of doing that in an opportunistic and shareholder value-oriented manner. Peter Winter: Got it. Okay. Thanks, Marty. Your next question comes from the line of Michael Rose with Raymond James. Your line is open. Michael Rose: Hey, good afternoon, guys. Thanks for taking my questions. Maybe just to follow-up on Peter's question of the buyback. Looks like on November 7, there were 2.2 million shares traded. I was just curious if you guys did an ASR or if there's anything like that. I know you just talked about the sub-debt issuance. But if you can talk about that and then maybe also address the change in short interest during that period. It was a pretty big jump from kind of the 4% range to around 12 or 13%. Martin Grunst: Yeah. Michael, if you look at the Q4 number, we did a portion of that share buyback in four kinda regular way. But as you noted, there a portion of that is related to ASR and that was done right in that early November time frame, which explains what you see. Michael Rose: Okay. So I assume that was one with one of the institutional shareholders that owns your stock? Is that fair? Martin Grunst: That's generally not how you do ASRs. Michael Rose: Got it. Okay. Maybe just moving on. You guys had really good deposit growth this quarter, especially in the IB category. Obviously, I understand the guidance. But can you talk about the competition for deposits and how we should think about, you know, not only growth, but the mix and deposit betas as we move through the, hopefully, two cuts this year? Martin Grunst: Yes. So a couple of things about deposits. So just on of questions there. So competition, I'd say that the environment is, you know, it's always competitive. It is today. It has been for a long time. But there's nothing in particular that's irrational in our markets that we'd point to. You know, it's just sort of competitive at that high normal level. Growth this quarter, we felt very good about deposit growth all year long. I would just point out that a portion of the growth you saw in the fourth quarter was just the wholesale deposit that, you know, for odd reasons relating to the rate cuts, it just turned out there were some wholesale deposits available that were cheaper than the wholesale, you know, normal secured wholesale borrowing that we would use. So we just replace that. So at some point, that washes out, and don't be surprised if you see that happen in the first or second quarter when those spreads kind of go back to normal. But as you look forward into 2026, we expect to grow loans well. We expect to grow deposits well. The loan growth will probably exceed the deposit growth. That would be normal for us and given, you know, the loan-to-deposit ratio we have to start with. We're very comfortable with that drifting up a little bit over the year. And then lastly, on deposit betas, we've had very good performance on deposit betas in the mid-60s here for deposit beta and upper seventies on interest-bearing liability beta, and those numbers are, you know, cumulative down beta cycle. And we expect that as we get into the rate cuts later in 2026 that we have performance right on top of that, we feel very comfortable with being able to continue with those levels for those cuts. Michael Rose: Alright. Great. Thanks for taking my questions. Martin Grunst: Yep. Thanks. Operator: Your next question comes from the line of David Chiaverini with Jefferies. Your line is open. David Chiaverini: Hi, thanks for taking the question. So wanted to ask about fee income. Clearly, very strong fees here. And the growth mid-single digit, excluding trading. Can you give some comments on what your expectations are on the trading front and drivers for overall fees? Martin Grunst: So let me start here, and so I'd say that our intention here is to talk about both trading, the trading portfolio of businesses we expect mid-single digit in that. Really very long run rate, at times we're above that. But that's kinda how we see those businesses. And any given business can be a little higher or lower in a given year, but that's how we see that portfolio. And that when I say that I'm including trading total trading revenue, which includes the NII and fees part, with the same expectation there that that will grow, you know, mid-single digit and certainly market opportunities where that could be notably higher. Let's see. Anything you'd add? Scott Grauer: Yeah. This is Scott. So I would say that in, you know, in addition to I think Marty frames it well at the top of the house. I think that what we're seeing is a continuation of really the momentum that we built throughout '25. We had a, you know, a good first month of '25, and then the last two months of the first quarter were challenging for all the fixed income markets, and we stabilized after that. And I really think returned to more of our expected trend lines. In terms of our trading volumes, you know, activity. And we've continued to see the demand really coming from our financial and institution client base, as well as asset managers have kind of returned to more normalized demand, particularly in the mortgage-backed securities. And then we've seen continued strength in the municipal sector as well. So I don't think that, you know, if there's anything, you know, extraordinary that occurred, but really more of a return to normalized levels of demand. And then the total revenue, as Marty articulated, both the fees and the NII out of that activity we feel pretty good about and feel constructive in terms of the trends that we're seeing build back to our more normalized rates there. David Chiaverini: Great. Thanks for that. And then shifting over to the expense side of things. Can you talk about the outlook? Looks really good on the efficiency side. With the guide of 63% to 64% versus the 65%. Can you talk about the drivers there? I know mortgage finance, you're going to see some revenue catch up versus the expenses that came through in 2025, but you can you talk about that and other drivers of this strong efficiency outlook? Martin Grunst: Yes. So you're right. Part of that is just continued good momentum on the revenue side and then part of that relates to some work that we completed in Q3 and 2025. To make sure we've got our workforce and other expenses invested in the areas that we wanna have them invested in. And so as you go from Q4 to Q1, you'll actually see some reduction in expense levels in the personnel line item as a result and the fee, you know, professional fees line item Q4 to Q1, we would expect, to see some benefit there as well. Stacy Kymes: And I might just this is Stacy. I might just add on there a couple of points. I think number one, we think about things for the long term. We're not focused on next quarter. And we've made several long-term investments over the last several years about how we think about growing the business. Certainly, the expansion in San Antonio was a big investment for us, the investment in mortgage finance was a big investment for us. And, obviously, you lead with expenses there, and it takes time for the revenue to catch up. And those investments to earn a return. Now beginning to do that, and so that's gonna show up in the results. We have taken actions to try to manage that and demonstrate to the market that, look. We can manage these expenses, but we're gonna invest, and as those investments mature, you'll be able to see that efficiency ratio come back to a level you're more accustomed to for us. For us, given the mix of free revenue, we're never gonna be a 55% efficiency ratio type company because of our high mix of fee businesses. But we do think that the guidance we provided is very reasonable for us. And I think you should expect us to achieve that unless given the disruption in the markets that we see, there may be some opportunities for us to continue to be aggressive in talent acquisition. And should that opportunity come to fruition, we may obviously choose to do that. Which may delay the kind of efficiency ratio falling. But based on what we see today, we're very confident in our ability to let that efficient ratio evolve. But there could be some things that very opportunistically come about that would allow us to build a better even better revenue future. And so we'll we're not gonna walk away from that. To manage the efficiency ratio. David Chiaverini: Makes sense. Very helpful. Thank you. Operator: Your next question comes from the line of Jon Arfstrom with RBC. Your line is open. Jon Arfstrom: Hey, thanks. Good afternoon. Stacy Kymes: Hey, Jon. Jon Arfstrom: Couple of follow-ups here. Stacy, you talked about $100 million in balances from mortgage finance in the fourth quarter. What kind of a contribution do you expect from that business in 2026 in terms of balance sheet? Stacy Kymes: You know, we think the number could be we could get to it easily get to, you know, a billion commitments by the '26. Assume half of that's funded. You know, probably do better than that, honestly. But I think that's easy to assume. A lot of these things, they happen to kind of just take longer than you think that they will. By three to six months. And so I'm trying to be a little bit cautious there to, you know, don't overpromise. But clearly, the trajectory there is very positive. The momentum that the sales team has is very, very strong. And we're just exceptionally pleased with how that business is progressing for us. Jon Arfstrom: Okay. Good. That helps, in terms of framing it. And then, Marty, for you, I asked you a similar question to this last quarter, but it seems like a decent setup for the margin for you. Do you expect the core margin to float higher? And can you share with us some of the repricing of the fixed-rate loans and securities and how that might flow through '26? Martin Grunst: You bet. Yeah. Yeah. And you're right. We do continue to expect both margin and core margin will continue to expand into 2026. You know, fixed-rate repricing is certainly a big driver there. And so it's about $700 million a quarter of securities portfolio that reprices up old rate to new rate. And as we go forward, that step up is, you know, not what it was a year ago, but think, you know, that's maybe in the 60, 70, 75 basis point territory that rate step up. At least currently. And then fixed-rate loan book kinda similar story there, call it $200 million a quarter on average. And that's probably more, you know, over a 100 basis points of rates step up as those occur. So that gives you a nice tailwind going into the year. You know, the six basis points in core margin we saw this quarter, you know, there might be a little bit of a to the mean because that average has been more like 4.5 basis points. But, you know, we feel like that's still that there's legs to that driver there through 2026. Stacy Kymes: K. This is Stacy. Just to kinda confirm too. I mean, you know, the actual rate movements don't make a big difference to us. Maybe rounding around the fringes in our forecast or the guidance that we provided, these things are, you know, a couple of rate cuts that are in the, you know, back half of the year that don't really make much of a difference. What does make a difference to us is the steepening yield curve as to all financial institutions. We're not unique there. And so you are beginning to see, you know, really some steepness to the curve or actually some shape to the curve, maybe not steepness, but shape. And that's certainly helpful to us and other financial institutions. As we think about 2026 and future periods as well. Because that builds over time. So that steepness would continue on. Martin Grunst: Benefiting through 2027. Jon Arfstrom: Plus. Stacy Kymes: K. Seems like a good environment. So okay. Thank you for the help. I appreciate it. Operator: Your next question comes from the line of Jared Shaw with Barclays. Line is open. Jared Shaw: Hey, everybody. Good afternoon. Stacy Kymes: Hey, Jared. Jared Shaw: Hey, maybe just going back to the growth rate on fees and on the loan book. It feels like looking at what we've seen for the last three quarters that the guide for '26 seems very conservative. Is there some area where maybe you're expecting a little more pressure than we're expecting? I mean, talking about 50% funded on $1 billion of commitments with mortgage warehouse. That's one-third of the growth that you saw on the whole balance sheet this year. Where should we think that maybe there's some pressure on growth? Stacy Kymes: Well, I think upper single digits is, you know, like, could be seven to 9%. So I'm pretty confident in our ability to deliver that. I think that we wanna convey to the Street what we believe we can deliver. And certainly, we'll do our very best to outperform that. But we think in this environment, particularly upper single-digit loan growth, is a very positive outlier and we'll continue to I think we're very well positioned. We've done a lot of work across lots of lines of businesses to be in a position to grow loans. You've seen that we've grown it at 11% clip over annualized over the last nine months. And that's with some headwinds and some tailwinds from various areas. But I think that's gonna continue, and that's what we don't know is, you know, will there be an unexpected headwind in, you know, an area that we can't put our finger on today? And so I think we can deliver, comfortably deliver the guidance that we provided, and hopefully, we can do better. Jared Shaw: Okay. Alright. Thanks. Appreciate that. And then maybe shifting to the credit outlook. I mean, obviously, credit has been great, and you sound like things are the outlook remains strong. Just as you look at your model, what would drive any incremental concern on credit or which would have more of an impact on potential credit concerns? Would it be oil prices, tariffs, inflation, I guess, where are you keeping an eye out more closely? Stacy Kymes: Yeah. You're right. I mean, I get teased a lot here internally about saying that credit is unsustainably good, and it seems like it's been that way for several years now. And certainly in the short term, we think it's gonna stay that way. The biggest driver for provision levels going forward will be loan growth expected economic outlook. I mean, those will be the two things that will drive higher or lower provision levels. And as long as the economic outlook remains strong, we're well positioned from an allowance perspective. And, you know, there will be a day that criticized and classified and nonperforming levels come up to a more normal level. You can see in the investor presentation kinda where we were essentially pre-COVID. And we think that when it goes back to that level, it won't be, you know, that credit's going bad. It's just going back to normal. But we don't have some of the early indications that others may have, like don't have low-end consumer and things like that that you're beginning to see some weakness around. That's not core to our portfolio. And so our portfolio is held in there very well. I think in the short term, it's going to continue to do that. And there's not just this easily identifiable thing that we think is the next thing to focus on there. But we have a great credit team, a very seasoned experienced team, and a great group of folks on the line who take risk management very responsibly. So we feel good about where we're at there. Jared Shaw: If we see sort of an unchanged economic backdrop from where we are today, and the loan growth that you're expecting. Should we expect provisions in each quarter in '26 but maybe potentially still some downward pressure on the allowance as a ratio or what's the or you're going have to provide for all loan growth from this point, and we should think about that ratio as stable from here? Stacy Kymes: Yes. What I would go back to the guidance we provided. I'm not going to into quarterly what would happen or what could happen. We've given you an outlook a positive economic outlook a range of loan growth, and a range for provision levels next year, and that's our best estimate today. You've seen how we've handled it over time, and so you can certainly provide your own color to that. But I'm not gonna get more specific than that. Jared Shaw: Okay. Thanks. Operator: Your next question comes from the line of Woody Lay with KBW. Your line is open. Woody Lay: Hey, good afternoon, guys. Stacy Kymes: Good afternoon. Woody Lay: To start on the mortgage finance business. And longer term, it's as that business continues to grow, how do you plan to fund that business? Will it be core deposit funded based on, you know, a low loan-to-deposit ratio, or as the volatility picks up, we'll use broker deposits to help fund some of that? Martin Grunst: Yeah. Woody, that loan portfolio, like any other loan portfolio, will be funded just by the broader funding mix, and you should expect that to largely look like it does today, where there's a portion of that that's wholesale, a portion of that that's deposits. This business will bring with it a decent amount of deposits. But we've got a very strong funding profile, and this particular asset class is very liquid. So it gives us a lot of different alternatives to use, and we'll just use the lowest cost, most sensible mix. Woody Lay: Got it. That's helpful. And then last for me, wanted to ask a follow-up on the trading business. You mentioned the outlook there is mid-single-digit growth. But there are market conditions that would support much stronger growth. Could you just remind me of the market dynamics out there that would support faster growth in your trading business? Scott Grauer: Yes. So this is Scott. So obviously, as mortgage origination activity and volumes in the mortgage sector tend to add momentum and volumes in a declining rate environment. So this is one of those businesses that we enjoy real, you know, higher growth rates in challenging economic times that are spawning lower interest rates. So in a declining rate environment, where mortgage origination were to increase, that activity given our, you know, we're fairly equal in terms of volumes and revenues from municipals and mortgage-backed securities. That mortgage-backed security, in particular, would benefit from lower rates. As would refinancing activity in the municipal space. So as rates decline, those two segments of our trading book are beneficiaries. Stacy Kymes: The other thing I might add too there is a lot of our clients or other financial institutions and they've been reluctant to, if you will, take losses in their securities portfolio. So as those portfolios get closer to par and there's fewer unrealized losses there, that's gonna create a little bit more opportunity as well. We think, as we move forward. Woody Lay: Got it. That's really helpful. Thanks for taking my questions. Operator: Your next question comes from the line of Ben Gerlinger with Citi. Your line is open. Ben Gerlinger: Hey. Good afternoon. Stacy Kymes: Hey, Ben. Ben Gerlinger: I was curious if we could talk through a little bit on the expense. Why you is little bit myopic here, so I apologize. But you said March '26. Is it fair to think, like, here to level set all these core items, it's a little bit more of a mid-single digit? Going forward. I'm just trying to think about just underwriting the future given you guys have a faster pace of growth than the national average at this point. Martin Grunst: Yeah. Just in Q3 and Q4, it was small, but there's a little bit of period costs related to some of the realignment we did, but that's not a material number in thinking about next year. But that is a little bit of a tailwind for us. From Q4 to Q1. Ben Gerlinger: Gotcha. Okay. That's helpful. And then in terms of just the mortgage kind of silo, I get that it's relatively new you maybe you don't have the perfect life at this point, but there's like a ballooning effect to the mortgage business improved generally on a seasonality basis. Do you expect something similar where or is it such you're starting at such a low base, it's just kind of growth throughout and you have new customers adding and funding up their relative commitments. Like, should we expect it to kind of peak in the roughly July time frame and then kinda wane there or would you expect a little bit more linear growth throughout the year? Stacy Kymes: Given we're starting from essentially zero, I don't think you're gonna be able to see the effect of that. And I think you're right. We see that somewhat intramonth as that business has natural ebbs and flows inside of it. But given our starting point here, I don't think it's gonna be discernible. It's gonna look like just pretty strong expected largely linear growth throughout 2026. Ben Gerlinger: Gotcha. If I can sneak one more in. Know the San Antonio expansion was it's a pretty big lift for everyone involved. It seems we're pretty successful at this point. Given the seasoning effects with the disruptions throughout. Kind of Texas, I should say, or even just this Texas area that every continuous state would you expect to do incremental hires to give you opportunity in front of you, or is it kind of a playbook that you're you already wrote it and you were gonna write it here? Stacy Kymes: No. I think you're exactly right. I think that if you look back in our history, some of the highest periods of growth for us has when there's been the most market dislocation. And M&A is highly disruptive. It's disruptive to talent. It's disruptive to clients. Who were forced to go through a conversion that wasn't their choosing. And so our intention is to be aggressive and take advantage of that dislocation as much as we can. But I suspect we're not the only ones with that strategy, and so that will be in a of itself a very competitive process. But we certainly expect in the markets where there have been significant M&A activity to be active from a talent acquisition and a customer prospect acquisition. Ben Gerlinger: Sure. Appreciate the time, everyone. Operator: Your next question comes from the line of Brett Rabatin with Hofty Group. Your line is open. Brett Rabatin: Hey, good afternoon. Stacy Kymes: Hey, Brett. Brett Rabatin: Wanted to go back to the NII guide for the full year. Just given the comments on the margin, it seems like the guidance that you're giving would imply a similar like, low single-digit growth of average earning assets. 26 relative to the high single-digit growth of loans. Know, is that fair? And then you talked some about the various borrowing pieces that you can use on the funding side. You know, do you end up reducing that throughout the year as a result? Martin Grunst: Yes. So you're right. You'll the blend of fairly stable securities portfolio and good growth in the loan book will blend out to a lower earning asset growth, but combined with a little bit of margin expansion, that's how you get to the number. And we expect deposits to grow to support overall margin but we also expect to see the loan growth be a little faster than the deposit growth. Brett Rabatin: Okay. And you guys have talked quite a bit on this call about the fee income guidance, you know, and the, obviously, brokers and trading is hard to predict at best. You know, and it's depending on rates to a large degree. You know, I'm a little bit surprised the mid-single guide seems reasonable for some of the businesses. You know? But I'm just curious if you just feel like maybe the growth in what you've accomplished, which is huge on the asset management side, if maybe that's tough to continue to replicate or if there's anything else that's driving maybe a more sedate growth level than what you've experienced the past two quarters in particular? Martin Grunst: Well, two things. Keep in mind well, number one, you're right. That business we feel great about, and that should have a good long very long-term growth rate. But note that within that fee guide that there is a shift from fee income into net interest income just within trading just based on the curve slope of this. So don't let that confuse our enthusiasm for fee-based businesses. Stacy Kymes: The other piece that you may be missing is remember in Marty's prepared remarks, he talked about $23.5 million kind of onetime gain. That's included in the 2025 fee number, essentially. So if you think about that, x that number, I think that probably gets you to a little bit higher number than what you see on the surface. But Marty alluded to that in his prepared remarks. Brett Rabatin: Okay. And, Marty, would you be willing to throw out a number for the movement from the income to NII guide on the brokerage trading? Martin Grunst: You know, that's maybe a little bit more into the weeds, than is constructive, but, you know, it's not small. And when you look at the other large banks that have trading, they're doing the same exact sort of guide for the same exact reason. Brett Rabatin: Okay. And I don't know if I'm last. The other question I really wanted to ask was just around you guys have been growing Texas in particular and Oklahoma really well. Arizona had a good 25, but it seems like Colorado and Kansas, Missouri have been lagging. Any thoughts on those two states or three states and those markets and, you know, if there are competitive dynamics that are flowing stronger growth or anything else you might comment on that? Stacy Kymes: No. Obviously, we're excited about the growth areas that you mentioned. I mean, Oklahoma, Texas, and Arizona, you highlighted. Those were all great stories for 2026. Still very excited about Colorado and Kansas City. That's the great thing about our business lines and about our geography is that they're not all linear at the same point, but the diversity is what creates growth over time. And so we're as excited about those markets as we are any of the other ones. That we're in. There's nothing necessarily unique about those that creates a different growth dynamic there. From my perspective. Brett Rabatin: Okay. Fair enough. Appreciate all the color. Operator: Your final question comes from Matt Olney with Stephens. Your line is open. Matt Olney: Yes. Hey, guys. Just a few follow-ups here. Going back to Stacy's comments about the importance of the steepness of the curve, can we assume that the guidance implies about a 50 basis point improvement throughout the year? So shorting comes down 50 bps from the intermediate part of the curves maintains kinda where it's at today. Martin Grunst: Yeah. That's more or less what forwards have, and that's basically how we think about the year. Matt Olney: Okay. Thank you for that, Marty. And then on the capital discussion, it sounds like there aren't any specific targets target ratios out there you wanna disclose. I think we're all just trying to understand if there could be additional deployment activity or for 2026, whether it's buyback, M&A, or something. Or something else. So he just addressed if you see any interest in capital deployment opportunities for the year. Stacy Kymes: This is Stacy. I think, you know, look, our kinda order generally has been our first choice is loan growth. Loan growth has been very good. Second choice is looking at M&A opportunities as they come along. Opportunistic there. We're not interested in doing something just for the sport of doing it. It needs to add intrinsic strategic value as well in being financially beneficial to shareholders. We don't see anything today on the near-term horizon that would indicate that that's a near-term deployment of capital. And obviously, you saw us be more aggressive in the fourth quarter with share repurchases. Likely to slow that down here as we get into 2026. Yeah. I think that's the use of the capital for us. So we're kinda not locked into any one favored, and we can pivot and be more aggressive as we have a view over time. And we're still active. We're looking for ways to deploy capital from an M&A perspective. But as you know, we kinda don't act like capital is burning a hole in our pocket. We're not afraid to sit on it and wait to find an opportunistic time to redeploy it. That's proven to be a good strategy for us over time. Matt Olney: Yeah. Okay. That's helpful, Stacy. And then just lastly, the loan yields in the fourth quarter, I thought, were better than I was expecting. Anything unusual on those loan yields in the fourth quarter? And then any commentary about just loan beta expectations within that guidance in 2026? Martin Grunst: Yes. Really nothing that's a change fundamentally in that portfolio as you know, it's very much a floating rate portfolio and very much a one-month floater portfolio. And so, you know, there's nothing that would change the characteristics to make it behave any differently. And that's all captured in how we constructed the margin guidance. Stacy Kymes: The one thing I would say there, Matt, is as you know, and we talked about earlier on the call, SOFR most of those loans are SOFR based. So there's been a little bit of quirkiness with SOFR. That remains. And so, you know, they've benefited just a little bit from that. But that's really it. Martin Grunst: Yeah. That kinda flows through to a basis point or maybe two for the quarter. Matt Olney: Okay. That's helpful, guys. Thanks again. Operator: Thank you. With no further questions in queue, I'd like to turn the conference back over to Stacy Kymes for any closing remarks. Stacy Kymes: As I've highlighted today, broad-based growth has been a defining thing for the quarter and for the year. It reflects the disciplined work we've undertaken over many years to strengthen our foundation, diversify our earnings stream, and consistently deliver results across the business. BOK Financial is a strong, stable, growing company. Our progress has positioned us well to navigate the current environment, capitalize on market disruption, and continue generating long-term value for our shareholders. Appreciate your interest in BOK Financial and your willingness to spend time with us this afternoon. Please reach out to Heather King if you have any additional questions at h.King@bokf.com. Operator: This concludes today's conference call. You may now disconnect.
Operator: Good day, and welcome to the Progress Software Corporation Q4 2025 earnings call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, press star 11 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker, Mr. Michael Micciche, Senior Vice President of Investor Relations. Please go ahead. Michael Micciche: Thank you, Sherry. Nice to have you back. Afternoon, everyone, and thanks for joining us for Progress Software Corporation's fourth fiscal quarter and fiscal year 2025 financial results conference call. With me this afternoon are Yogesh Gupta, President and CEO, and Anthony Folger, our Chief Financial Officer. Before we get started, let me go over our safe harbor statement. During this call, we will discuss our outlook for future financial and operating performance, corporate strategies, product plans, cost initiatives, our integration of ShareFile and Nuclea, and other information that might be considered forward-looking. Such forward-looking information represents Progress Software Corporation's outlook and guidance only as of today and is subject to risks and uncertainties, and our actual results may differ materially. For a description of the factors that may affect our future results and operations, please refer to the risk factors in our SEC filings, particularly the risk factor section of our most recent Form 10-K and 10-Q. Progress Software Corporation assumes no obligation to update forward-looking statements included in this call. Additionally, please note that all the financial figures referenced in this call are non-GAAP measures unless otherwise indicated. You can find a reconciliation of these non-GAAP financial measures to the most directly comparable GAAP figures in our earnings press release, which was issued after the market closed today. This document contains additional information related to our financial results for the fourth quarter and the full year of fiscal 2025, and I recommend that you reference it for specific details. We've also provided a slide presentation that contains supplemental data for our fourth quarter and fiscal year and provides additional highlights and financial metrics. Both the earnings release and the supplemental presentation are available on the Investor Relations section of our website at investors.progress.com. Today's call is being recorded in its entirety and will be available for replay on the Investor Relations section of our website shortly after we finish. And with that, I'll turn it over to Yogesh for his prepared comments. Yogesh Gupta: Good afternoon, everyone, and thank you for joining us to discuss our Q4 and fiscal year FY '25 results. Fiscal year '25 was Progress Software Corporation's strongest year to date, driven by a combination of ShareFile and the strong performance of our overall product portfolio, especially during the second half of the year, which was increasingly propelled by our customers' AI projects. This resulted in annual revenue of $978 million, up 30% year over year, and earnings per share of $5.72, up 16% from fiscal year '24. Our business got stronger throughout the year, as evidenced by the fact that we exceeded the midpoint of our original revenue guidance from last January by approximately $14 million and beat our operating income guidance by 6%. We continue to meet our customers' needs in an AI-driven business world by investing and innovating across the products they rely on. This is demonstrated by our 100% net retention rate and 2% year-over-year ARR growth to $852 million, which now represents over 87% of our total revenue. For the fourth quarter, revenue finished at $253 million, up 18% year over year, right in line with our most recent guideline. Earnings of $1.51 were well above the high end of guidance, thanks yet again to excellent expense discipline and consistent execution. As Anthony will discuss in detail, cash flow remains strong, and we continue to both pay down our debt and make opportunistic share repurchases. Our balance sheet is in excellent shape, and we remain flexible and well-capitalized to execute M&A as we carry out our total growth strategy. Looking ahead, the high end of our initial guidance for FY '26 is $1 billion, a very exciting milestone for Progress Software Corporation, with unlevered free cash flow of nearly $320 million at the midpoint. Our confidence in the FY '26 guidance is a result of the momentum in our business during the '25, which I mentioned earlier, and our expectation of continued investments in AI projects by our customers. Our AI product innovations are leading our customers to recommit to us as they see us as a trusted partner in their journey. Before I talk more about this, let me provide an update on our ShareFile and Nuclea acquisitions. During fiscal year 2025, we completed the integration of ShareFile, our largest deal so far, which is proving to be one of our best acquisitions, as you can see from our results. We passed every milestone and met every goal on or ahead of schedule. We also acquired and fully integrated Nuclea Agentic RAD technology, which has been extremely well received by customers and is adding significant functionality and value to our products. In addition to outstanding products and technology, ShareFile and Nuclea have brought us many new, very talented team members with significant and cutting-edge expertise. Let me also quickly recap some other highlights from the fourth quarter. Our investment in innovation and R&D continued across our product lines as we enhanced our offerings, delivering dozens of new AI capabilities in addition to the usual upgrades and features. To list just a few, we launched Progress Agentic RAD, an industry-leading product to help organizations leverage generative AI with confidence. We introduced the industry's first generative content management system with built-in RAC capabilities in Sitefinity. This innovation introduces native multilingual Agentic RAD-based AI technology to deliver dynamically generated user experiences driven by a site visitor's prompt and online activity. We launched an enterprise-grade Agentic UI generator that leverages our market-leading Telerik and Kendo libraries to automatically generate multi-component brand style page layout from simple language prompts. This UI agent delivers robust business functionality and works right inside the developer's IDE of choice. We launched Automate MFT, a new cloud-native file transfer solution that is helping customers reduce total cost of ownership by up to 50% compared to traditional products. To highlight the impact our data solutions are having on our customers' AI initiatives, let me provide a recent example. A Fortune 50 agriculture and food company was struggling to leverage the extremely large volumes of structured and unstructured data stored across its enterprise. This data is stored in hundreds of different sources in nearly a thousand different formats and contains invaluable business information gathered over several decades. They leveraged our Progress Data Platform to unlock value by creating a single unified view of all the information and gain relevant, accurate, and actionable insights worth tens of millions of dollars. This demonstrates the impact and relevance of our products in a world where Gen AI is making it critical for organizations to get their arms around their data and ensure that AI delivers fact-based answers that they can rely upon. Another important news from Q4, the U.S. Department of Defense Chief Digital and AI Office added Progress Federal Solutions Group to the Tradewinds Solutions marketplace, which is the DOD's list of pre-approved providers of AI products. This designation allows DoD customers to rapidly procure and deploy a Progress Data Platform, bypassing the usual government procurement processes. It underscores our commitment to delivering scalable, secure, and innovative AI solutions that help government agencies achieve their AI objectives. During the fourth quarter, we also announced our expanded presence in Costa Rica. Building on ShareFile's existing footprint, we opened a new facility that serves as a center of excellence for tech support, customer success, sales, and corporate functions. This new center strengthens our ability to support regional growth in US time zones and creates new opportunities to deliver value to our customers. Internally, our excellent expense control and operating performance continue to benefit from our own adoption of AI to increase productivity and drive efficiencies. Across engineering, our teams are using AI in every phase of development, whether it is to write PRDs, generate code, create QA tests, establish test environments, or create education and tech support content. This has enabled us to accelerate product innovation, as well as improve the quality of customer tech support while containing costs. Our finance, HR, sales, communications, and marketing teams are increasingly using AI in a variety of ways to improve the quality and increase the quantity of their work. Speaking of our teams, I'm very proud to say that for the fourth year in a row, we experienced a very low voluntary attrition rate, just 6% for fiscal 2025. Once again, this industry-leading metric reflects the positive, inclusive culture of our team, and our ability to retain critical talent, maintain continuity, and keep turnover-related expenses down. And the Boston Globe, in its recent list of top places to work, ranked Progress Software Corporation number one among large software companies in the region, just last month. Now let me touch on our commitment to our total growth strategy and the M&A outlook. As ever, there are many opportunities for Progress Software Corporation to look at, among the literally thousands of software companies. However, the right targets for us are infrastructure software vendors with solid technology and a strong, stable install base of customers. And over the past few quarters, few such assets have come to market. Selectivity, patience, and discipline continue to be the hallmarks of our M&A strategy, and we will evaluate all opportunities, whether they are an outright purchase from founders, VCs, PE sponsors, or a divestiture, as long as it fits our strict criteria. Our corporate development team remains active, and as I mentioned earlier, we feel very good about our ability to finance the next deal and execute well. We got off to a quick start to FY '26 and held our annual sales kickoff in Atlanta during December. Over 650 of our sales, field engineering, and customer success professionals gathered in person to learn about our latest product offerings, go-to-market initiatives, and to review key objectives for FY '26 and beyond. Our business momentum, and particularly our AI innovation work, created an extremely high level of excitement in our sales teams about the opportunity in front of us. It's hard to overstate the energy and excitement among our team. We returned ready to hit the ground running. To conclude, from an operating, financial, and strategic perspective, we're thrilled to be carrying steady momentum into 2026. We are excited about the year ahead. I want to congratulate the entire Progress Software Corporation team for an incredible year in fiscal 2025, and as always, thank them for a job well done. Let me now turn it over to Anthony for his prepared remarks, and then we'll be happy to take questions. Anthony Folger: Great. Thanks, Yogesh. And good afternoon, everyone. We're very pleased to share our outstanding Q4 and full year 2025 results, closing out a very successful year for Progress Software Corporation. Let's get right into the numbers, starting with ARR, which we believe provides the best view into our top-line performance. We closed Q4 with ARR of $852 million, approximately 2% pro forma year-over-year growth. For clarity, our pro forma results include ARR from acquired businesses in all periods presented. This growth in ARR was driven by multiple products, including ShareFile, OpenEdge, WhatsUp Gold, and our DevTools products. And consistent with prior quarters, our net retention rate remained strong at 100%. In addition to growth in ARR and solid net retention, Q4 revenue was $253 million, up approximately 18% year over year. Our revenue strength in the quarter was broad-based, with outperformance coming from OpenEdge and ShareFile, both of which performed better than our internal expectations. For the full year, our revenue was $978 million, up $224 million or 30% over the prior year. That growth is entirely driven by a full-year contribution from ShareFile. Reflecting on 2025, we believe we made the right investments in our products, keeping them mission-critical in an AI-driven world. And this is validated by our strong customer retention and consistent ARR growth across multiple products throughout the year, a demonstration of the resilience in our portfolio. Turning now to expenses. Total costs and operating expenses were $156 million for the quarter, up 16% over the year-ago quarter, and $593 million for the full year, up 30% compared to fiscal 2024. The year-over-year increase for the quarter and for the year was entirely driven by the inclusion of a full year of ShareFile activity. Operating income for the quarter was $96 million for an operating margin of 38%, exceeding our internal expectations. Earnings per share were $1.51, which was $0.16 above the high end of our guidance range. This better-than-expected performance in operating margin and EPS was the result of strong top-line execution, coupled with excellent cost management across the business. Turning now to a few balance sheet and cash flow metrics. We ended the year with cash and cash equivalents of $95 million and debt of $1.4 billion, for a net debt position of $1.3 billion. Our net leverage ratio at year-end was approximately 3.4 times, which was slightly better than where we expected to be with the ShareFile integration now complete. DSO for the quarter was seventy-three days, up six days compared to the year-ago quarter. Deferred revenue was $425 million at the end of the fourth quarter, up approximately $21 million year over year and $44 million sequentially, reflecting strong fourth-quarter top-line performance. Adjusted free cash flow was $62 million for the quarter, and $247 million for the year, an increase of 16% over the prior year. And we also continued to return capital to shareholders, repurchasing $40 million in stock in Q4 and $105 million for the full fiscal year 2025. We ended our fiscal year with $202 million remaining under our current share repurchase authorization. Okay. Now we'll turn to the outlook. And before getting into the numbers, I'd like to highlight the following items. First, we will continue to focus on ARR as a key metric, and we expect ARR growth generally consistent with the 2% growth we saw in fiscal year 2025. Also, our 2026 outlook assumes minimal revenue impact from the timing of multiyear contract renewals, and as a result, we expect annual revenue growth similar to our ARR growth. Second, we expect to aggressively repay the revolving line of credit that we used to partially finance the ShareFile acquisition. We've modeled $250 million of repayments for fiscal 2026, which would improve our net leverage ratio to approximately 2.7 times by year-end. As a reminder, in July 2025, we upsized the capacity of our revolving credit facility from $900 million to $1.5 billion. Finally, we expect to roll our 2026 convertible notes into our revolving credit facility when those converts mature in April 2026. With $900 million of unused revolver capacity today, together with our aggressive debt repayment plan, we'll have more than enough capacity to absorb $360 million in principal and continue executing our total growth strategy. With all that said, for 2026, we expect revenue between $244 million and $250 million and earnings per share of between $1.56 and $1.62. For the full year 2026, we expect revenue between $986 million and $1 billion, representing between 12% growth over 2025, an operating margin of 39%, adjusted free cash flow between $260 million and $274 million, and unlevered free cash flow between $313 million and $326 million. Finally, earnings per share are expected to be between $5.82 and $5.96 per share. Our guidance for full-year EPS assumes a tax rate of 20%, the repurchase of $20 million in Progress Software Corporation shares, and approximately 44 million shares outstanding. In closing, we're excited to deliver great fourth-quarter results, capping off a strong 2025. With the product investments we've made and the ShareFile integration complete, we believe we're well-positioned to execute our strategy and deliver solid results throughout 2026 and well beyond. With that, I'd like to open the call for Q&A. Operator: Due to time restraints, we ask that you please limit yourself to one question and one follow-up question. Please stand by while we compile the Q&A roster. And our first question will come from the line of John Stephen DiFucci with Guggenheim Securities. Your line is open. John Stephen DiFucci: Thank you. And nice job here, guys, on this quarter. And you know, as usual, the execution is really impressive, especially seeing ShareFile here. I guess I have a bunch in my mind. I'm gonna go high level right now. Because you guys see the market. You see what's happening to all of software, especially applications. And Yogesh, you've been in this for a long time. And I knew you. You've been a business, and that's meant to be a compliment. I've been around a while too. And you've been a business leader for a long time, but I first knew you as a technology leader. And I'm just curious about your perspective. Because right now, there's this fear out there on AI. You talked a lot about it in your prepared remarks. And especially for applications. So I wanna like, broadly speaking for software, how do you think this evolves? And I know there's no real like, no one really knows right now. How do you think? Yeah. What do you think it involves for software? And in that context, for Progress Software Corporation? Thank you. Yogesh Gupta: Yeah. Absolutely, John. Thank you. And you know, it is fascinating to see sort of the level of hype, if I may call it that, that has led to the level of fear around the disruption of software in the business world. You know, you said specifically, let me start with applications even though that's not our business. You know, I have yet to speak to a CIO of any meaningful size business who realistically is planning to write their own ERP, write their own financial system, their own HR system, like their own whatever. Right? So I think, you know, in the end, businesses are in the business of whatever business they are in, and the tools they use, applications they use to run their business, basically are, you know, a means to an end. And so unless they are a technology company themselves, I really don't see, you know, a lot of that today. Now, obviously, over time, things will get different. I think what can happen is that you can get new competitors come to market with offerings that are, let's say, similar to the application available in the market today. But then the question is how hard it is to do three things. One, get your data out of, let's say, a Salesforce or a ServiceNow or a whatever and move to the new offering, whoever that is, by the way, and they're not gonna be free either. So the question is, you know, how much effort will that be? Even more importantly, what risk will that create for the business? You know, we have seen historically when people have tried to move from one ERP to another, I mean, I remember, John, a long time ago when SAP was the appointed to by Fortune 50 companies as a reason why they were gonna miss results for a quarter and the year. Because their implementation of SAP was going like a disaster. Right? And they were trying to move from some ERP to SAP being a manufacturing company, that was the heart and soul of the business. So I think that there's a risk involved, and the question is can the risk be minimized? And then last but not least, what does it take to get the employees in the company and organization retrained in the new system? So I think these are real hurdles. So I actually think that the fears, at least in the near term and the near term in my mind is the next one to three years, are, to be honest, way overblown. And from a Progress Software Corporation perspective, it's even more fascinating because, you know, we sit inside, you know, environments, and our software is helping people run their environments well, govern their environments well, get access to the data, leverage that data for business-critical work, you know, do their workflows internally, manage their content, deliver digital experiences. And all of those are becoming AI-enabled. But it doesn't mean that people won't want to do that. Right? People will still want to have, you know, digital experiences. They just want to be able to have AI, you know, natural language interfaces, and easy to build out and easy to connect them to existing data, which we do today. Right? So I think as long as we continue to invest in our products, we will see continued success in the market. And you know, it's interesting that we have a footprint out in the world that ranges from, you know, fundamental design of ASICs companies to people who manufacture machines to build chips to chip manufacturers themselves, to everywhere up and down the tech stack also. And we're seeing interesting things happening there where they are using our products more because their needs are growing. So whenever a business grows, and sometimes the financial industry grows, sometimes manufacturing grows, sometimes the chip industry grows. It doesn't matter which one it is. Right? For us, it is as industries grow, as certain sectors grow, because we are so broad-based, and we are, by the way, in large companies and extremely small and midsized companies as well. We are actually quite well, you know, in my mind, broad-based and hedged that way. That I expect us to continue to do well, which is why I am excited about Progress Software Corporation, which is why we basically think that our growth this year will reflect what it was last year. That our ARR organic will continue to grow at a 2% rate. You know, it all is a reflection of how we feel and how I feel about our business. John Stephen DiFucci: Thank you. Thank you very much for that perspective, Yogesh. It sounds, if I could just as I was listening to you talk, it sounds like there's a lot of complications here that you can't just gloss over. One thing sounds clear is that software companies, including Progress Software Corporation, are gonna have to embrace AI and help customers leverage it. Thanks a lot for that. Yogesh Gupta: Absolutely, John. You're absolutely correct. And that is why we, as well as others, are, I think, doing it aggressively. John Stephen DiFucci: Awesome. Well, I'll turn it over to others and get back in the queue. Thanks. Yogesh Gupta: Thanks, John. Operator: One moment for our next question. And that will come from the line of Fatima Boolani with Citi. Your line is open. Fatima Boolani: Good afternoon. Thank you so much for taking my question. Yogesh, I wanted to drill down into the same line of questioning, riding on John's coattails a little bit. You know, the last time we had a conversation around, hey, how does Progress Software Corporation insert itself in the monetization path of AI? Because clearly, there has been a lot of considered and deliberate investment in your entire portfolio as it relates to AI and AI enablement. You know, I think one of the things you said very clearly was, you know, this should show up, you know, maybe more imminently or more materially visibly in net retention rates. And so when I kind of look at the trajectory of the 100% net retention rate levels, you kind of pretty consistently put up for the last four or five quarters. I wanted to ask you why we haven't seen maybe more of a meaningful uptick in that in terms of monetization manifesting in that figure, especially because you gave some very clear examples of how you are at the nexus of transformation for a lot of your customers. So any incremental detail around that would be very helpful. And I have a follow-up for Anthony, please. Yogesh Gupta: Sure. Happy to. So I think, and I'll share my view, and Anthony is happy to chime in as well. You know, I think that in terms of net retention rate growth, and increasing it over 100% means there's meaningful expansion across the broad customer base. And I think that even today, you know, the vast majority of investment in AI is limited to, to be honest, a relatively small number of tech companies. A lot of other companies actually are doing things that are more around, you know, trying to leverage infrastructure that is already being built by others. And so on. So they're spending money on data centers, they're spending money on things that are truly bottom level. And in the business space, in the business community, I don't see yet a spend that is taking place to the same level that I expect as time goes on. So I think it is early. This is sort of like reminds me of the, you know, Internet pipe laying era where everybody was saying, let's lay down dark fiber as fast as we can. And then we'll figure out how to leverage it. And if you notice, right, it took Amazon a decade to then really start getting into its stride after that. And people forget that, you know, what Amazon's trajectory was earlier. And then, of course, Amazon has been unbelievable over the last twenty years. So I think that it is just it takes time, and I think people always underestimate the short-term time it will take. But then they also underestimate how quickly it accelerates when it does accelerate. Fatima Boolani: I appreciate that nuanced perspective. Thank you, Yogesh. Anthony, maybe a more tactical one for you. You very specifically mentioned that from a revenue growth perspective in fiscal 2026, you are not going to see as much of a material impact from multiyear contract renewals. I'm wondering if you can translate that into how we should think about free cash flow and free cash flow linearity and seasonality over fiscal 2026? And maybe if you can also sneak in some commentary on some of the 4Q free cash flow performance that maybe was a little bit late from a seasonality side relative to where some broader expectations were. Thank you. Anthony Folger: Sure. So I guess maybe the second part of that question first. Q4 was a great quarter in terms of cash flow. Q4 was also a quarter where we had a significant beat on bookings. And, you know, a lot of what we do in the quarter is back-end loaded. So as we sort of work our way through year-end, we saw a pretty significant uplift in cash flow for the quarter. And also for '26. Right? I think a lot of the beat when a significant beat in bookings happens back-end loaded, a little bit of benefit in '25, but really where we saw it was '26. And I think you can see the growth in free cash flow in '26, you know, certainly outpacing growth in revenue or margins. And so, you know, I think we feel pretty good about sort of an acceleration that we're starting to see in terms of free cash flow. In terms of the linearity, you know, I don't know that it's gonna be any different. I think ShareFile is, you know, I would say, subject to seasonal fluctuations than the rest of our business would have been. Just because of the nature of that business. And so I wouldn't expect material differences in the seasonality or the linearity of our free cash flow from where we've been historically. Fatima Boolani: Thank you. Very clear. Yogesh Gupta: Thank you. Operator: And our next question will come from the line of Lucky Schreiner with D.A. Davidson. Lucky Schreiner: Congrats on the quarter and some impressive results here. It looks like your SaaS revenues, you know, had a pretty strong sequential increase, and I guess I was wondering, you know, what drove that? Was there anything to call out? And maybe translating that to guidance, you know, I assume you're not baking in similar strength on the SaaS side. You know, would you say it's, you know, roughly a similar mix in 2026 as in 2025 in terms of the different revenue lines? Anthony Folger: Yeah. Hey, Lucky. Yeah. It was a very good quarter. Q4 was a really strong quarter on the SaaS line. I think sequentially, you can see the move up, and, you know, I think there was a lot of strength in ShareFile, and there was a lot of strength in some of the other products, some of our other SaaS offerings. So both of those combined, you know, were really what led to the uptick. I guess I would say this. As we look forward to 2026, you know, ShareFile's growing well. But it's a single-digit grower. It's not a significant outlier with the rest of our business. So I don't, you know, I wouldn't want to leave anybody with the impression that ShareFile or SaaS generally is sort of driving outsized growth. It's a little bit better than the rest of our business, but it's not so dramatically different. So, you know, Q4 was a pleasant upside surprise for us on the SaaS side. I think we're, you know, we're probably, you know, looking for in '26, something that's a little more consistent with the annual results. Right? So sort of a steady up into the right growth trajectory as we go. Lucky Schreiner: Gotcha. That makes a lot of sense. And then maybe for Yogesh, a little bit of another philosophical question. You guys look at a lot of private companies, right, with your growth strategy, and I feel like you might have a unique vantage point here. Have you noticed any change in retention rates of the targets, the software companies that you're looking at acquiring? As, you know, there are these overhanging fears of AI startups disrupting, you know, fundamental software businesses. I'm just curious if you've noticed any change in retention rates at some of the companies you look to acquire. Yogesh Gupta: To be honest, Lucky, yes. And, you know, I mentioned that, you know, it's tough to find really good quality companies. I think one of the challenges I think smaller companies are facing is that the customers are questioning whether, you know, they will make it, and they're trying to decide whether they should switch to somebody larger or something like that. So there is a bit more of a churn. Some of the businesses we have seen that have had exposure to the federal government that has been significantly larger as a proportion of their business, I think they have seen challenges as well. So yes, we are seeing softening in their both gross and net retention rates. And, again, from our perspective, we want to buy a business that is a solid business that we believe, you know, we can sustain the 100% net retention rate going forward. And so we continue to be very selective in what we look for, and we continue to make sure that whatever we buy is a good quality business. There's a lot of stuff that's available cheap, but it doesn't mean it's a good business to have. Lucky Schreiner: I think that's why you guys have been so successful so far, so I appreciate that context. Thanks. Yogesh Gupta: Thank you. Operator: And that will come from the line of Ittai Kidron with Oppenheimer. Your line is open. Nolan Bruce Jenevein: Hi. This is Nolan Bruce Jenevein on for Ittai. Thanks for taking my question. Just kind of want to double-click a little bit on operating margins. It was a really strong quarter for operating margin. But you're kind of guiding for roughly flat next year. And it feels like you still have a lot of initiatives going on that, you know, seem to be favorable to operating margins. So I just kind of want to double-click. What are the sort of implicit assumptions for operating margins next year? In terms of the fundamental puts and takes. Thank you. Anthony Folger: Yeah. Sure. So I guess maybe the one thing I would point to is when you look at 2025 and sort of look back at the year, coming into the year, I think our initial guide was something like 37%, maybe 37 and a half as an operating margin. And, I mean, we just blew that away. Right? I think we were able to integrate ShareFile more quickly and at a much lower cost than we expected, and we ended up getting to our target margin a lot faster. And so, you know, we end the year with roughly 39% margins, which is pretty much where we were at prior to ShareFile. And so, you know, I think, to me, sort of the upside or the positive in this is that the ShareFile integration and the execution around it was fantastic. I think the team did an absolutely outstanding job, got us to our target margin a lot faster. And, you know, ultimately, as we look out into '26, you know, we're already at our target margin. That gives us an ability to make investments in other areas in the business. You know, we acquired Nuclea. We continue to make investments in AI. You know, smart investments, we think, that are gonna continue to propel us forward. And I think those are the dynamics. Those are really the puts and takes. But I think, really, the positive there is getting to that target margin in '25 a lot more quickly was just a really, you know, a lot of upside and a big positive for us. Nolan Bruce Jenevein: Got it. Thank you so much. Operator: Thank you. I'm showing no questions in the queue at this time. I would now like to turn the call back over to Mr. Yogesh Gupta for any closing remarks. Yogesh Gupta: Thank you, Sherry, and thank you, everyone, for joining us. We look forward to speaking with you in the near future. Have a good night. Operator: This concludes today's program. Thank you all for participating. You may now disconnect.
Operator: Thank you for standing by, and welcome to Interactive Brokers Fourth Quarter 2025 Earnings Conference Call. At this time, participants are in a listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 11 on your telephone. To remove yourself from the queue, you may press star 11 again. I would now like to hand the call over to Nancy Stuebe, Director of Investor Relations. Please go ahead. Nancy Stuebe: Thank you. Good afternoon, and thank you for joining us for our fourth quarter 2025 earnings call. Joining us today are Thomas Peterffy, our Founder and Chairman, Milan Galik, our President and CEO, and Paul Brody, our CFO. I will be presenting Milan's comments on the business and all three will be available at our Q&A. As a reminder, today's call may include forward-looking statements, representing the company's belief regarding future events, which by their nature are not certain and are outside of the company's control. Our actual results and financial condition may differ, possibly materially, from what is indicated in these forward-looking statements. We ask that you refer to the disclaimers in our press release. You should also review a description of risk factors contained in our financial reports filed with the SEC. In the fourth quarter, we continue to demonstrate the power and leverage of our diversified, fully automated global platform, which serves the full spectrum of investors from those new to the markets buying their first fractional share of a magnificent seven stock in a cash account, through sophisticated traders benefiting from low cost and geographical reach, to professionals using our APIs and algorithms to execute advanced quantitative strategies in portfolio margin accounts. Many clients start gradually and evolve into active sophisticated traders, and our platforms are designed to support that entire journey, supporting their growth with us along the way at every stage. We continue to see strong international interest in the global securities markets on a secular basis as people around the world seek higher returns on their assets as interest rates decline, and as other financial institutions pay them less. In 2025, we added more than 1,000,000 net new accounts, an annual record for the firm. Client equity rose 37% to $780 billion, an increase of more than $200 billion year over year and the first time we have ended a year with over three-quarters of a trillion dollars in client assets. Cyclically, rising markets and expectations for lower interest rates drive increased client engagement. Clients traded actively, grew more comfortable taking on risk, increased their market exposure, and made greater use of leverage through margin loans. They also expanded beyond equities into other asset classes, including options and futures. Our client-centric focus, by which we mean delivering global market access at extremely competitive pricing on state-of-the-art platforms, is best reflected in one simple measure: our client's performance. In 2025, the S&P 500 rose 17.9%. By comparison, our clients outperformed. Individual investors here were up on average 19.2%, or 130 basis points above the S&P 500. Financial advisers were up 20.57% on average, or 267 basis points above the market. Hedge fund clients were up 28.91% on average, a full 11 percentage points ahead of the S&P. This performance is the direct result of our focus on empowering clients through low trade and margin pricing and less drag from costs, superior trade execution, advanced order types and algorithms, the advantage of attractive interest rates on cash and short proceeds, as well as the many advantages of our platforms, from AI and research tools to comprehensive educational offerings. It is why clients come to us. No gimmicks. No games. Just the best prices and the most comprehensive platforms. It is why the best-informed investors choose Interactive Brokers. That client focus, combined with strong global demand for investing, translated into exceptional financial results. Quarterly adjusted pretax income reached a record level of more than $1 billion for the fifth consecutive quarter, despite lower interest rates. For the full year, we generated more than $6 billion in net revenues for the first time. We continually invest in improving our platform from front to back end, supported by a global team of programmers who deliver new functionality, ongoing enhancements, and client-driven improvements, while also meeting the diverse regulatory requirements across the many market centers and currencies we support. Throughout 2025, we introduced a wide range of new products and enhancements worldwide, guided by deep engagement with a strong understanding of the needs of our diverse client base. This year, we expanded market access to Brazil, Taiwan, the UAE, and Slovenia, with additional countries planned for 2026. We continue to add to our ever-growing list of country-specific tax-advantaged funds. We offer traditional and Roth IRAs in the US, as well as Canadian RRSPs and TFSAs, UK ISAs, French PEAs, and Hungarian TBSCs. This year, we added Swedish ISKs, Japan's NISAs, and Canadian FHSAs. We now have several billion dollars of client assets in these accounts and are able to support individual investors at all stages of their investment journey. From a funding perspective, clients can now fund their accounts using Stablecoin, making cross-border account funding easier and available 24/7. We doubled the amount of cash eligible for our FDIC suite program from $2.5 million to $5 million for individual accounts and from $5 million to $10 million for joint accounts. In October, we teamed with Carta to introduce our premium charge card globally. The Carta Visa Infinite card allows eligible clients to link their accounts and access their cash instantly anywhere in the world with no foreign transaction fees, an especially compelling benefit for our global client base. And it comes with premium cardholder benefits. Platform-wise, our Global Trader 2.0 mobile platform was launched with a comprehensive UI/UX revamp and an all-new look and feel. Quick access trading tools accessible via a swipe or long press were added. Watch list management was streamlined, and AI news summaries incorporated. Our leading-edge IBKR desktop platform delivered several highly requested enhancements this year, including multi-monitor support with independent windows for charts, option chains, and more, multiple new screener filters, a named strategy selector for clients to quickly access popular combo strategy types, and a new Linux beta installer, extending IBKR desktop into the Linux ecosystem and addressing another long-standing client request. We introduced connections where clients can enter a company's ticker and explore its broader investment ecosystem, including options, ETFs that hold the stock, forecast contracts, related economic indicators, competitors, and more. This feature is already seeing strong engagement. We have embedded artificial intelligence throughout our organization, benefiting both clients and employees. We launched AI-powered investment themes, allowing clients to enter a concept such as nuclear energy or quantum computing and instantly receive a list of actionable investment ideas, significantly streamlining the research process. We also launched AI-generated news summaries, receiving FINRA approval midyear. These summaries deliver timely, relevant news directly tied to clients' portfolios, helping them stay informed more easily. Across our platforms, we launched the first version of Ask IBKR, an innovative AI-powered tool that lets our clients interact with and ask questions in plain English about their portfolios. Clients can ask about performance and allocation analysis, track their activity, and get performance attribution. They can ask to compare their performance versus various benchmarks, find their top dividend payers, calculate their capital gains and losses, and analyze sector exposure. Performance can be analyzed across flexible time frames: one year, one month, period to date, etc. Staying on top of an active portfolio with rapid access to a wide breadth of data is critical for successful investors. Beyond these highlights, we have delivered a wide range of enhancements and new features. I encourage you to explore our platforms on our website. Or better yet, request a demo. Seeing our offerings firsthand across a broad range of client types and experience levels is the best way to appreciate what we have accomplished. In other areas of our business, to further enhance execution quality, we expanded our network of liquidity providers across bonds, options, overnight trading, international stocks, and ETFs and ADRs. And to further support our non-US client base, we translate our investor education courses and webcasts into multiple languages, making it easier for clients around the world to get started on investing on our platform. Trading volume during our overnight hours continues to grow rapidly, up 76% from last quarter and more than 130% from the fourth quarter of last year. Providing deep liquid markets that are not constrained by US regular trading hours is critical to meeting the needs of a globally active client base. And finally, a note on ForecastX. We created this exchange, which is regulated by the CFTC, to support trading on consequential predictions that have measurable third-party verified outcomes. ForecastX traded 286 million pairs this quarter, up from 15 million pairs in the third quarter, and now has four members quoting into the exchange, which has over 10,000 listed instruments. Our pipeline of new business, new initiatives, and enhancements remains as strong as ever, and our platforms resonate with people around the globe. We are not stopping here to rest on our achievements. We have many projects to work on, which we will look forward to sharing with you once they become a reality. With that, I will turn the call over to our CFO, Paul Brody. Paul? Paul Brody: Thank you, Nancy. Welcome, everyone, to the call. We will start with our revenue items on page three of the release. We are pleased with our financial results this quarter as we produced near-record net revenues and pretax income for the quarter and record results in all the major financial categories for the year. Commission revenues rose to a record $582 million this quarter. For the full year, commissions were $2.1 billion, up 27% from last year, driven by higher trading volumes across the major product categories. Net interest income reached $966 million for the quarter, and a yearly record of $3.6 billion despite multiple rate cuts in nearly all major currencies. The continued risk-on environment during most of the year led to a significant increase in margin borrowing, while strong net customer deposits led to higher segregated funds balances. These revenues were partially offset by the interest we paid to our customers on their cash balances. We saw fewer hard-to-borrow names in securities lending than in the third quarter, but their presence across the second half drove full-year results well over the prior year. Other fees and services generated $85 million for the quarter, and $291 million for the year, both up modestly versus the prior year period. This is primarily driven by higher payments for order flow from options exchange mandated programs and higher FDIC suite fees, despite reductions in risk exposure fees. Other income includes gains and losses on investments, our currency diversification strategy, and principal transactions. Note that many of these non-core items are excluded in our adjusted earnings. Other income was $10 million as reported, and $37 million as adjusted, primarily driven by a loss in our currency diversification program. Turning to expenses, execution, clearing, and distribution costs were $91 million in the quarter, down 21% from the year-ago quarter, primarily due to two factors. First, we had a full quarter of an SEC fee rate at zero. In 2024, SEC fees were $22 million. And second, higher volumes meant we earned higher rebates at exchanges as a result of our smart order routing optimization, particularly for options. These costs and rebates are largely passed through to customers, so these reductions do not have much impact on our profitability. But they are components of our clients' profitability, and this execution quality is one of the reasons they choose to execute with us to maximize their returns. As a percent of commission revenues, execution and clearing costs were 11% in the fourth quarter for a gross transaction profit margin of 89%. We calculate this by excluding from execution clearing and distribution dollars $23 million of non-transaction-based costs, predominantly market data fees, which do not have a direct commission revenue component. Compensation and benefits expense was $153 million for the quarter, for a ratio of compensation expense to adjusted net revenues of 9%, versus 10% of the prior year quarter. As always, we remain focused on expense discipline as reflected in our moderate staff increase of 6% over the prior year. For the full year, this ratio was 10%, down from 11% in 2024. Our headcount at December 31 was 3,182. G&A expenses were $62 million, up 5% from the year-ago quarter, primarily from increasing spending on advertising. For the full year, G&A was $247 million, down from last year, which included a legal settlement that added $78 million and a one-time charge of $12 million to consolidate our European operations. Excluding those items, G&A for the year was up 10%, predominantly on higher advertising expense. Our pretax margin matched the third quarter record of 79%, and achieved a new record of 77% for the year, both as reported and as adjusted. Income taxes of $99 million reflect the sum of the public company's $39 million and the operating company's $60 million. The public company's effective tax rate was 12%, below its typical range, primarily due to tax benefits we were able to capture in 2025. Moving to our balance sheet on page five of the release, our total assets ended the year 35% higher than the prior year at $23 billion, with growth driven by higher margin lending and segregated cash balances. New account growth also helped drive our record customer credit balances. We continue to have no long-term debt, and profit growth drove our firm equity up 23% for the year, to exceed $20 billion for the first time. We maintain a balance sheet geared towards supporting growth in our existing business and helping us win new business by demonstrating our strength to prospective clients and partners while also considering overall capital allocation. In our operating data on pages six and seven, we have record customer activity in options, with our contract volumes up 27% over the prior year quarter, and up 26% for the full year, in line with industry volumes. Futures contract volumes rose 22% for the quarter to a near record and were up 12% for the full year, well above industry volumes. Stock share volumes rose 16% for the quarter, and 38% for the full year. Stock share volume generally increased versus last year, as clients gravitated to larger, higher quality names, and traded relatively less in pink sheet and some other very low-priced stocks. Growth in the notional dollar value of shares traded in the quarter was significantly higher than the growth in share volumes, combined with the rise in major equity indices worldwide. On page seven, you can see that total customer DARTs were 4 million trades per day in the quarter, up 30% from the prior year. Commission per cleared commissionable order of $2.64 is down from last year, primarily due to a mix of smaller average order sizes in stocks and futures and slightly higher in options, and the previously mentioned SEC fee rate moving to zero, which lowered commissions as well as execution and clearing expense. Page eight shows our net interest margin numbers. Total GAAP net interest income was up 20% from the year-ago quarter to $966 million, just $1 million shy of the third quarter's record, despite benchmark rate cuts in multiple countries. Adjusted for NIM presentation, net interest income was just over $1 billion for the first time. We include, for NIM purposes, certain income that is more appropriately considered interest, but that for GAAP purposes, is classified as other fees and services or as other income. Our net interest income reflects strength in margin loan interest and securities lending, partially offset by a modest increase in interest expense on customer cash balances despite lower benchmark interest rates. Many central banks, including the UK, Canada, Hong Kong, and the US, reduced rates this quarter, while others, including Australia, Europe, and Switzerland, held steady. Year on year, the average US Fed funds rate fell 75 basis points, or by 16%. Despite this decline, our margin loan interest was up 17% and our segregated cash interest was down only 3%, both bolstered by higher balances. The average duration of our investment portfolio remained at less than thirty days. During this quarter, the US Dollar yield curve remained flat to inverted from the short to medium term. So we continue to maximize what we earn by focusing on short-term yields, rather than accepting the lower yields and higher duration risk of longer maturities. This strategy also allows us to maintain a relatively tight maturity match between our assets and liabilities. Securities lending net interest was higher than last year, and we did not see as much activity in hard-to-borrow names as in the third quarter. Contributors to annual growth included several factors: our growing account base, which increases our inventory of attractive stocks to lend, including international securities; the interest we pay on short cash balances, which makes us attractive to investors who utilize short selling; our fully paid lending program, which shares proceeds with clients generally on a fifty-fifty basis, appealing to investors looking to maximize the return on their portfolios; and finally, activity has picked up in some of the typical drivers of securities lending, including IPOs and merger and acquisition activity. As most benchmark interest rates are now sufficiently above zero, a portion of what we earn from securities lending is classified as interest on segregated cash. We estimate that if the additional interest earned and paid on cash collateral were included under securities borrowed and loaned, total net revenue related to securities lending would have been $290 million this quarter, up 58% over the prior year quarter. Fully rate-sensitive customer balances ended the current quarter at $24.7 billion versus $19.1 billion in the year-ago quarter. Now, for the estimates of the impact of changes in rates, we estimate the effect of a 25 basis point decrease in the benchmark fed funds rate to be a $77 million reduction in annual net interest income. Note that our starting point for this estimate is December 31, with the fed funds effective rate at 3.64% and balances as of that date. Any growth in our balance sheet and interest-earning assets would reduce this impact. About 29% of our customer interest-sensitive balances is not in US dollars, so estimates of the US rate change exclude those currencies. We estimate the effect of a 25 basis point decrease in all the relevant non-USD benchmark rates would reduce annual net interest income by $31 million. In conclusion, we posted another financially strong quarter in net revenues and pretax margin, leading to a record year. This reflects our continued ability to grow our customer base and deliver on our core value proposition to customers while simultaneously scaling the business. Our business strategy continues to be effective: automating as much of the brokerage business as possible, continuously improving and expanding what we offer, while minimizing what we charge. And with that, we will turn it over to the moderator and open up for questions. Operator: We will now open for questions. You will need to press 11 on your telephone. To remove yourself from the queue, you may press 11 again. First question comes from the line of Brennan Hawken of BMO Capital Markets. Your line is open, Brennan. Brennan Hawken: Hi. Thanks for taking my question. I was curious about the pull on the customer credit balances. It seemed as though the decline in the amount paid, the yield did not come down quite as much as we were looking for. Just some color around some of those dynamics, and what might have caused the lower rates not to flow through and whether or not there might just be some more on the come here in the next quarter or two? Paul Brody: Yes, sure. So obviously, the net interest income and the major segments there being segregated cash, and margin loans and because of our credit balances, all operate a little bit differently. So for SEG cash, when the rates come down, even though we have a relatively short duration, there is a little bit of tail out there. And we retain somewhat higher rates while we pay lower rates on our credit balances during that period because they are based on the overnight rates. The rest is balanced changes. So our very strong performance in the margin lending balances vastly overcame the drop in the general benchmark rates. Brennan Hawken: Okay. Got it. So we got a, basically, a repricing lag on some of the asset side. That makes sense. And for my follow-up, I believe the comment period for your bank charter application ended today. Could you maybe update us on that process, what you have heard back from the regulators, and what kind of impact we should expect if the bank charter is approved and you go forward with the bank? Paul Brody: So we have been in contact with the OCC for a while. The way this process works is you are in contact with them. You talk to them. You present the business plan. They point out what they do not like or what you would like to receive more information on. Once you get through this stage, they give you the go-ahead to officially file the application, which we did. And they acknowledge that, then there is a several months long time period that they have to actually approve your request. There are others applying for the National Trust Charter Bank. I do not know exactly where we are in the queue. But my expectation would be to be operational by the end of this year. Now exactly what that means for us is as a broker-dealer, the regulations do not permit us to custody assets of mutual funds and exchange-traded funds. A trust charter bank will allow us to do that. So that is the rationale behind our application. Brennan Hawken: Thank you for taking my questions. Operator: Thank you. Our next question comes from the line of Patrick Moley of Piper Sandler. Please go ahead, Patrick. Patrick Moley: Yes. Good afternoon, and thanks for taking the question. I had one on prediction markets. There has been a lot of speculation recently about whether regulators or the US courts will allow prediction market platforms to continue offering sports contracts. I was just hoping to get an update from you on how you maybe see this all playing out between the platforms and the sports books. And then with ForecastX launching NFL contracts in the fourth quarter, just wondering, you know, if there what you would need to see from regulators or the courts that would make you comfortable offering contracts like that to IBKR customers or if this is an aspect of prediction markets that you just think is, you know, will never make sense to commingle with your existing customer base? Thanks. Paul Brody: So, I do not know if you are aware that Massachusetts just came out with a ruling against Kashi. So the judge ruled against Kashi, and that probably means that Kashi will no longer take customers from Massachusetts. But, you know, this is certainly not the final word, so we, you know, your guess is as good as ours as to what will happen here. And so, luckily, you know, we Interactive Brokers does not rely on sports. We do believe that these contracts will have enormous applicability to many, many things about the future, and they will be very, very successful. And it does not really have to depend on sports. Patrick Moley: Okay. Great. And then just as a follow-up, you are sitting on a healthy pile of excess cash. Any updated thoughts on the appetite for M&A and capital return priorities? And then on M&A specifically, I know in the past, you have said that with traditional brokerage models, it has been difficult to make the deal map work with your pricing model. But in an emerging asset class like prediction markets, I am just wondering if M&A could make sense here for you. Thanks. Paul Brody: Anything is possible, but we are not going to buy a firm that is doing sports betting. And there is nothing else out there at the moment. Right? Thomas Peterffy: It is not only that. We have our own platform for aspect. It is growing nicely. Mid-December of last year, we had rolled out forecast specs on a 24/7 trading schedule. We added liquidity providers. ForecastX now lists over 10,000 different instruments, and the trading volumes have increased significantly. So no reason for us to look for an acquisition in this space. Patrick Moley: Alright. Thanks so much for the answer. That is it for me. Operator: Thank you. Our next question comes from the line of James Yaro of Goldman Sachs. Please go ahead, James. James Yaro: Thanks for taking the question. So you touched a little bit on the OCC, National Trust Bank Charter. I was hoping you might be able to touch a little bit on the aspirations for a European banking license. And if so, where you are in the process of looking to get one of those? Paul Brody: We have not started the process. Having a bank license in Europe would come with some benefits. Milan Galik: It is not urgent for us to have one. We will eventually have a license in Europe. The most likely place for us to acquire it would be in Ireland, where our broker operations are already regulated by a banking regulator with whom we have a very good relationship. James Yaro: Okay. Excellent. I just wanted to ask a follow-up on prediction markets. I was hoping, Thomas, you might be able to just update us on the institutional adoption of prediction markets so far. How you plan to cater to this client set specifically, versus on the retail side? And over what period, in your view, will institutional prediction markets fully develop? Thomas Peterffy: So our most frequently traded contracts are temperature contracts. We are currently working on tying up these temperature contracts with the electricity contracts and the natural gas contracts. And as you know, it is basically the utilities that have to every day make a judgment about the next day's use of electricity. So we are working on approaching those, and I think that sometime in the course of the year, you will see them onboarding. James Yaro: Okay. Thank you so much. Thomas Peterffy: Thank you. Operator: Our next question comes from the line of Craig Siegenthaler of Bank of America. Your line is open, Craig. Craig Siegenthaler: Good evening, everyone. Hope you are all doing well. My first one is on your expanding crypto offering. How should we think about the appetite for adoption across your base? And I am especially interested in the individual investors in the direct and the iBroker channel. You know, do they want crypto trading, and do they want it from IBKR? Milan Galik: Please tell the revenues are at the moment small relative to the overall company's revenues. Most clients who actively trade cryptocurrencies were already doing so before we entered the space. So we are not yet a major brand in the cryptocurrency space. You asked about the iBrokers. The answer is no. They have not been asking for access to crypto. I am not sure why that is. Our pricing is, we explained, over a number of earnings calls, is superior to our competitors in the United States and outside. We added crypto to our offering to round it up, particularly targeting investment advisers and multi-asset clients who wanted limited exposure to the assets. Our offering is competitive, we continue to add capabilities. New geographies, namely Europe, is currently the focus. I would expect us to go live with our offering in this quarter. And then I am hopeful that after transfers, once we support after transfers, some crypto assets will migrate to our platform and take advantage of our superior pricing. Craig Siegenthaler: Thanks, Milan. And just for my follow-up, it is one I have asked, I think, two quarters in a row now about account growth. Still very strong, worth at 30%. Thomas, any specifics on how long you can keep this up? Because your comments at that May conference, as long as I am alive. Thomas Peterffy: No. That is my answer. No. I do not see any reason why our account growth would slow down. It will continue at the rate that we have been going. You see, the benefit that we have is our platform is attractive to many people. Craig Siegenthaler: Okay. I will stop you. Thanks for taking my questions. Operator: Thank you. Our next question comes from the line of Dan Fannon of Jefferies. Please go ahead, Dan. Dan Fannon: Thanks. So just another question on growth, but more just in terms of investment and spend. As you think about all the initiatives you have entering this year, do you think the level of spend is growing? Is it consistent with the last couple of years? Or how should we think about, you know, overall expense growth? Milan Galik: The overall expense growth, I think, has been consistent over the past many quarters over the last few years. We have been cautiously adding to our headcount as we needed. This past year, it was around 6% growth. Our compensation went up by 10% or so. I would expect for us to see similar growth in the future. Of course, we have a number of AI initiatives in process, and those initiatives may affect the rate at which our expenses will grow in the future. Dan Fannon: Understood. And then just another one on account growth. In terms of the account growth today and where it has been coming from here in, you know, the latter part of '25 versus maybe where you think there is a growth going to change or other areas that could grow faster next year? Just trying to get a sense of what is different, in terms of where you are seeing more success or more markets are more mature versus less? Milan Galik: We have been universally doing well. We have been attracting large accounts, small accounts. Very active accounts, less active accounts. Retail, professional, institutional. They all come to us for the same reason. The technology works. Pricing is fair. Access is global. No need to rely on promotions or incentives. Dan Fannon: Understood. Okay. Thank you. Operator: Thank you. Our next question comes from the line of Benjamin Budish of Barclays. Please go ahead, Benjamin. Benjamin Budish: Hi, good evening, and thank you for taking the question. Maybe tying a couple of these previous questions together. I think, Thomas, in the press you made some comments about the US mid-elections later this year potentially juicing account growth. Can you maybe talk about the, and I think you have mentioned in the prepared remarks, the advertising spend is up a little bit. Even though I think a lot of your growth comes from word-of-mouth. Can you maybe talk about your plans to get or drive more engagement on Predictive Markets either through the Interactive Brokers platform onboarding more FCMs? How are you thinking about that opportunity coming up later this year, to kind of boost account growth even more? Thomas Peterffy: Advertising is certainly a key. We are getting better and better at advertising. And we are also increasing our advertising spending to some extent. So that is what it is. Benjamin Budish: Okay. Understood. We will not let our account growth go lower. Thomas Peterffy: Love the confidence. Maybe just one more question on prediction markets. You talked earlier about institutional interest. I am just curious, when we look at some of the institutional products offered at CME and ICE, we tend to see very, very large notional amounts and larger, you know, fees per contract, but less relative to the size to the notional amount of exposure. Just curious, onboarding insurance companies, electric utilities, these sorts of institutions, does that require any change to product design, or do you think it is more a matter of education, making sure the liquidity is there, and then it will, you know, be you will be able to onboard those kinds of customers. Paul Brody: Thank you. It is not a product design question. It is a matter of selling it. Benjamin Budish: Okay. Thank you very much. Fair enough. Operator: Thank you. I would now like to turn the conference back to Nancy Stuebe for closing remarks. Madam? Nancy Stuebe: Thank you, everyone, for participating today. As a reminder, this call will be available for replay on our website, and we will also be posting a clean version of our transcript on the site tomorrow. Thank you again, and we will talk to you next quarter-end. Operator: This concludes today's conference call. Thank you for participating. You may now disconnect.
Spencer Wong: Good afternoon, and welcome to the Netflix, Inc. Q4 2025 earnings interview. I'm Spencer Wong, VP of finance and capital markets. Joining me today are co-CEOs, Theodore Sarandos and Gregory Peters, and CFO, Spencer Neumann. As a reminder, we'll be making forward-looking statements, and actual results may vary. We'll now take questions submitted by the analyst community, and we'll begin first with questions about our results and forecast. The first question comes from Robert Fishman of MoffettNathanson. Who asks, "The Wall Street Journal report last year discussed an internal memo with long-term goals to double revenue and triple profits. Without commenting on those specific targets, about nine months later, is there anything you have seen in the core business to reevaluate the speed of growth over the next few years and can you clarify if those targets included any M&A?" Gregory Peters: Sure. We find it useful to talk internally about our long-term aspirations. Which, as we said at the time that this was reported last year, aren't the same as a forecast, but having said that, those goals were based on organic progress. They did not contemplate or assume any M&A because we didn't have any M&A on sort of our horizon at the time. And over the last nine months, we've seen continued growth. We are now forecasting more healthy growth for the year to come, organic growth. Of course, there's a lot of hard work ahead to fully realize those opportunities both short term and long term. But based on the progress that we've made so far and expect to make, and our continuing assessment of the opportunity, we still feel good about those targets. Putting maybe a little bit more meat on that bone, in 2025, we met or exceeded all of our financial objectives. We made solid progress on our key priorities. We delivered 16% revenue growth, roughly 30% operating profit growth, expanding margins, growing key free cash flow, Ad sales, two and a half times in 2025. We expect that business to roughly double again in 2026 to about $3 billion. So we're making good progress, and the opportunity ahead of us is massive. We are still under 10% of TV time in all major markets in which we compete, with hundreds of millions of households around the world still to sign up. We're just about 7% of the addressable market in terms of consumer and ad spend. So tons of room ahead of us. Anything you wanna add there? Theodore Sarandos: I would just say, you know, looking ahead to 2026, we're focused on improving the core business. You know? And we do that by increasing the variety and quality of our series and films, enhancing the product experience, and growing and strengthening our ad business. We're also building out some newer initiatives, like our live outside of The US, things like the World Baseball Classic in Japan, that's launching in March. We're expanding into more content categories like video podcasts, which just kicked off this week. And we're continuing to scale our cloud-first game strategy. We're working really hard to close the acquisition of Warner Brothers Studios and HBO, which we see as a strategic accelerant. And we're doing all this while we're driving and sustaining healthy growth. We forecast 2026 revenue at $51 billion, which is up 14% year on year. It's an exciting time. You know? This is an exciting time in the business. Lots of innovation, lots of competition. But that's also been true of us for twenty-five years. Netflix, Inc. kind of embraces change and thrives on competition because it pushes us to keep improving the service even faster and faster for our members. You know, years ago, when we moved from DVD by mail into streaming, we were in a heated battle with Walmart for that DVD business. So we're no strangers to competition, and we're no strangers to change. Through that change in competition, we've grown into an entertainment company that is thrilling an audience that is now approaching nearly 1 billion people. And producing series and films around the world with hits that resonate with audiences locally and globally. Spencer Wong: Thank you, Ted. So and just to circle back to Greg's point real quick, you know, we're very excited about the business. We're very excited about the organic opportunity ahead. See that in our performance, and we're as energized as ever to achieve our mission to entertain the world. Spencer Wong: Thanks, Ted. Our next question is about our outlook. It comes from Steve Cahall of Wells Fargo. The content amortization growth forecast of 10% in your earnings letter implies a bit of an acceleration from 2025. Can you provide some context as to where you're pushing for the most incremental investment, e.g., events, reality series, films, licensed content, etcetera? Theodore Sarandos: Yeah. Look. I think the cadence of our releasing is really strong. We have a really strong push out in the first half of this year already. With some great hits right out of the gate. So you wanna talk to that, Spence? Spencer Neumann: Yeah. I mean, I would say just generally, we've got a strong lineup throughout the year. But, yeah, Steve, as you noted, in 2025, our slate was heavily back half weighted, and we expect more typical seasonality this year. So still a bit heavier in the back half of '26 than the front half of '26. In particular, Q4, the fourth quarter is always generally the most packed for us in any given year, but overall, a smoother slate and smoother slate timing this year relative to '25. So as a result, you should see higher year-over-year content expense growth in '26 growing off of that smaller base that we had in the first half of last year. But for the full year, we're estimating, as you I think you see in our letter, content amortization to increase roughly 10% year over year. Our content cash to expense ratio should hold pretty steady at about the 1.1x ratio that we've been managing to the last few years. So it's no change in our approach. We aim to grow content spend slower than revenue so that it can contribute to our margin expansion while strengthening and expanding that entertainment offering as you heard from Greg and Ted across not just our core film and series, but kind of expanding into more content formats. Theodore Sarandos: Yeah. Let me tell you what that waiting looks like to the members too, what you just talked about, Spence. But, you know, in the first half of this year, we said we'd come out of the gate with some great hits. People we meet on vacation, the rip, his and hers, A New Year's Eve release of Stranger Things finale is still crushing. We've got Bridgerton season four that's coming up later this month and next month. So you see that we're really excited about the 2026 slate. Both H1 and H2. We've already mentioned the Bridgerton return, but we also have a return of One Piece season two, third season of The Night Agent, second season of Beef, A Hundred Years of Solitude from Colombia back for a second season, got Avatar: Last Airbender. We've got Emmy, Golden Globe, and SAG actor nomination for Diplomat season four back again for a new season. Tires season three. And the series finale of Outer Banks. That's, like, the returning stuff. For new things, we're really excited about something very bad in the boroughs. Both new series from the Duffer Brothers Following Up Stranger Things. Pride And Prejudice From The UK, Man on Fire, Can This Love Be Translated just launched from Korea, looks like it's gonna be another really nice hit for k-drama lovers. I mentioned some of our early films. We've got people we meet on vacation in the rip. We've got Affleck and Matt Damon that's already off to a great start. Still looking forward to Peaky Blinders, Immortal Man, from Killian Murphy. We've got Greta Gerwig's Narnia. We've got Apex with Charlize Theron. We've got Denzel Washington and Robert Pattinson in a great heist caper. Here comes the flood. And we've got a bunch of surprises upcoming too for '26. Spencer Wong: Thanks, Ted. Thanks, Spence. That's a good segue into our next question on the outlook from John Blackledge of TD Cowen. For your 2026 guidance, can you walk through the key drivers of the top-line revenue range, which was above consensus at the midpoint? And for the operating margin guidance of 31.5%, can you talk about the puts and takes to that guidance, and any other color would be great. Spencer Neumann: Yeah. Sure, John. I'll take this one. We've got a strong growth outlook. As you heard from Greg and Ted, we feel great about the organic growth outlook. I hope you see that on our top and bottom line guide. On the revenue side, for 2026, key drivers are similar to '25. So it's membership growth, it's pricing, and it's a rough doubling of our ad revenue in 2026 to about $3 billion. So a bit more relative contribution from ads as we're scaling that business. So we feel great about that, and we feel great about our operating profit growth and margin growth too. We're targeting 31.5% operating margins for 2026. That's up two points. So no change to our approach there. We set margin targets. So you think about the puts and takes. We're always balancing the investment into our core business to drive sustained revenue growth with spend discipline. And we aim to grow our margins each year. That rate of that year-over-year growth bounces around a bit based on investment opportunities and other considerations in a given year. If you look back over the last handful of years, we've expanded our operating margins about two percentage points annually on average. This guide at two percentage points, that actually includes about a half a percentage point drag from the expected M&A expenses that we referenced in the letter. So if you exclude that, we're guiding to about two and a half points of margin expansion. So very much in line with what we've been delivering. This year in particular, again, getting back to the puts and takes, we're seeing a number of attractive investment opportunities to strengthen and expand our entertainment offering and our product and commerce capabilities. Gregory Peters: So we are increasing our expense growth a bit this year. A bit higher pace of growth relative to last year to invest into those opportunities. All while continuing to expand our margins and deliver strong dollar and dollar profit growth. And don't know. Maybe, Greg, Ted, don't if you wanna talk a little bit more about our focus areas of investing in the content. Theodore Sarandos: I'll tell you a couple of things that we're excited about in this you know, we're investing into them because our members are showing a lot of excitement for them. So we've got some new license deals in place with Sony. That includes the first of its kind global pay one movie deal. We've expanded our universal licensing deal for the kind of that already included some very successful animation films. To include live action films. We have a new slate of licensed titles from Paramount which is gonna bring a lot of new series and television shows that Netflix has never had around the world. Very exciting. In the live area, we've we've now executed more than 200 live events. And we're expanding to do more now outside of The US. Including, World Baseball Classic in Japan, I mentioned that in March. And this Friday, have Skyscraper Live which is gonna be an edge of your seat TV experience for sure. So more to come there. And we just kicked off podcast this quarter, which has been exciting. We've launched new ones from Spotify and the Ringer. IHeartMedia, Barstool. We have a lot more to come, and some new originals. So these are all areas that have shown great promise. Members love them. We're excited to broaden the investment to include them. Greg, you wanna jump in there too? Gregory Peters: Yeah. I'd say on top of content, we got a number of other areas that we expect will drive meaningful growth and returns on the tech and dev side. We're continuing to build out that ad tech stack. We're evolving our mobile UI. We're adding two more live operation centers in '26. One is gonna be in UK and one in Asia to support the growth of our live efforts outside The US. In ads, beyond the tech side, we continue to invest in more sales, more go-to-market capabilities. That's a direct driver of advertising growth. On games, we are going to continue to invest in the cloud-first gaming strategy that we've added. This makes TV games more accessible by rolling out cloud games to more customers in more countries. If you take all of that sort of stepping back within the margin expansion model that Spence described, which keeps us disciplined on returning to shareholders as we invest in new growth, We also think about investing across our portfolio based on capability to translate those investments into value for members and returns for the business. We've got a solid track record of doing that, and our core content categories, so we're gonna continue to grow there. We're also increasingly about our ability to do that in ads and live where the 200 live events that Ted mentioned indicates that we should ramp and grow in those areas. And then for our other initiatives, those represent a small fraction of our overall investment, and we always remain very disciplined and measured in increasing those investments based on demonstrating that we can deliver member value, we can translate that investment into member value, and move the business forward. Spencer Wong: Thanks, Greg. Thanks, Ted. Thanks, Spence, for that Folsom I'll move this along now to a few questions around engagement. The first comes from Rich Greenfield of Light Shed Partners. At this stage of Netflix's maturity, how directly tied is engagement to churn and pricing power as you started taking talking more openly about how all hours of engagement are not the same? Gregory Peters: So viewing hours, that's a really important in assessing the value that we deliver to customers. And value delivered is what drives the outcomes that you mentioned, Rich, and really, it drives most outcomes that we care about. But it's just one of many metrics that we look at. And we continue to develop an increasing understanding of how to measure that value delivered. So maybe start by just noting that total view hours in the '25 grew 2% year on year. That's billion and a half additional hours. Slight acceleration from the 1% growth we saw in the '25 But even with that number, there's some nuance underneath that. Viewing of our branded originals was actually up 9% year over year in second half. Versus 7% in the first half. That represents roughly half of our overall viewing. But viewing on the second run titles was lower year over year because the volume of licensed titles that we're carrying came down across most regions. And that's due largely to the fact that we stepped up our licensing in '23 and '24, during the strikes, which had shut down new productions, So that's balancing out that volume right now. But beyond view hours then, as you stated, all hours of engagement are not the same. And we really care about the quality of that engagement. For example, we said in the letter, live programming is an example where any given hour of entertainment has the potential to deliver outsized value. That's certainly also the case when you have a huge fan of a particular series or a movie. We, as viewers, we feel this intuitively. Right? We feel that excitement that difference, that value when we watch something that we've been anticipating and we just can't wait to watch. And as a business, you know, we've become increasingly sophisticated, evolving our measures of that quality of engagement that we are delivering. It's very hard to do this, but we're getting better and better at it. And our primary quality metric we achieved in '25 an all-time high for the service We set a high goal for that metric and Bella and our content team stepped up and achieved that goal. That means that we deliver more entertainment value for our members and that shows up in core metrics like acquisition, like retention, You know, and retention's among the best in the industry, and we just completed a quarter where churn improved year on year. Customer satisfaction is at an all-time high. We also saw strong member growth. We really managed more and more towards that complete understanding of value delivered because it's really what translates best and directly to revenue growth, and it better captures the overall health of our business. Theodore Sarandos: Yeah. I would just add, Greg, if you don't mind, you know, do of course, we look at the view hours, Rich, but we also look at a myriad of other signals to assess how our members are engaging and how important are do they value that engagement. So, you know, members have different value for different types of programming. In the letter, we talked about the fandom for k-pop and for Stranger Things season five. How fandom is such a powerful engine for our business because it creates advocates for Netflix. Valuable even beyond the ten hours spent watching Stranger Things, or the hour thirty-nine spent watching k-pop demon hunters. You know, so we're really super confident we're gonna continue to grow engagement, but more importantly, the value of that engagement as well. Because that's what allows us to sustain healthy revenue growth in the long term. Spencer Wong: Thanks, Ted. Our next question on engagement comes from Ben Swinburne of Morgan Stanley. The engagement report gives us a sense of aggregate engagement across all titles and all members. Arguably, it's an overly simplified lens with which to view the health of the business. But one that suggests to some that the WB acquisition reflects a need for Warner and HBO's IP to address stagnant engagement levels on Netflix today. Why is that the wrong conclusion, and how do you see the underlying engagement trends, in the business? Very succinct bear case from Ben Swinburne. Over to, you know, Ted or Greg. Yeah. So I'll take this one. So, yeah, Gregory Peters: you're right, Ben, and as we sort of got to a little bit in the previous answer, total view hours by itself, it's an overly simplified view into engagement and engagement trends. Why is that? Because view hours is basically a very broad metric. It's influenced by a lot of things. It's You've got plan mix, tenure mix, geography, culture differences are a big factor. Just as one example, take consumers in Japan. They watch roughly half to two-thirds the amount of TV as American consumers. So as you have more member growth in places like Japan, and there are a lot of places like that and frankly where we have more upside and more potential growth over the years to come. That skews the view hours per member. So we look at engagement at a portfolio level. View hours is one element of that, but we also look to those quality metrics that we were talking about. And as we said, you know, we see improving quality translates into core metrics like better retention and, you know, just to reiterate, our retention is among the best in the industry. Customer satisfaction is at an all-time high. Those are more complete or maybe better said, those are outcome measures that we really, really focus on. So we have multiple tools. To keep improving those measures. And the value that we deliver. More and better production, back to pushing on the quality scores and how do we improve that. More licensing, more partnerships with local creative communities, with local broadcasters around the world. That improves local content market fit. We're very optimistic about organic growth prospects. As you see from our forecast, as well as maybe the aspirational goals that were referenced before, which don't include any M&A, we see huge opportunity to keep improving things there. But we also see Warner Bros. With one hundred years of IP, an incredible library, great new shows and films. That's an accelerant to our strategy, and it's another mechanism to improve our offering for our members. So our job is to identify the best opportunities to improve that offering, both organic and through selected M&A, and always remain flexible and disciplined in pursuing those opportunities. Spencer Wong: Thank you, Greg. Since Ben brought up Warner Brothers, I'll shift us to a few questions on the Warner Brothers acquisition. First from Mike Morris of Guggenheim. Does your planned acquisition of WB impact your approach to pricing the near to intermediate term? Would you consider raising the price of the service during the regulatory review process? Gregory Peters: There is no impact or change to our approach in how we're running the business in that regard. Spencer Wong: Right. Next one comes from Rich Greenfield of LightShed Partners. What surprised you most from the Warner Brothers due diligence, Greg? You in particular sounded less enthusiastic about major M&A back at the Bloomberg Screen Time Conference in October. As you went through the due diligence process, what got you more excited about the acquisition? Theodore Sarandos: Greg, can I interrupt you for one second here? Please go. I just wanna make it clear. That it was our default position going in that we were not buyers. We went into this with our eyes open and our minds open. And when we got into it, we both got very excited about this amazing opportunity. So Greg, you could share with what was exciting for us there. Gregory Peters: That's right. And thanks, Rich, for bringing this up again. Yeah. One more time. But to Ted's point, when we got into the hood, there were several things we saw that were just really exciting, and we saw were exciting additions to our current business. Take first the film studio. We already know that, you know, existing from existing film output deals that the theatrical model is a complement to the streaming model. So we've seen that before. And to be super clear on this point, we have often, in our history, debated building that theatrical business. But we were busy investing in other areas, and it never made our priority cut. But now with Warner Bros, they bring a mature well-run theatrical business with amazing films and we're super excited about that addition. Then you've got the television studio. Also a healthy business. It also complements our own, expands our production capability, You got great producers, great developers, and we intend to continue to produce shows for third parties and being a leading supplier to the industry. And then you get to the streaming side of things, You've got HBO. It is an amazing brand. It says prestige TV better than almost anything. Customers know it. They love it. They know what it means. You know, when you have programming from HBO, you know what an HBO show means. It's also very complementary to our existing service and business. So owning HBO will allow us to further evolve our plan structure, allows us to deliver more series, more film, more value to consumers, and we'll leverage our global footprint in our streaming expertise to make that an even better service for consumers. So big picture, we just saw tremendous opportunity very achievable opportunity as well in bringing these two businesses together. Spencer Neumann: You know, if it's okay to pile on a little bit, I'll just pile on to the trivia. So you know, I just maybe I'm the numbers guy. So to put some numbers against it, Rich, also, I just key from our perspective is that when you look at this combined company or when we look at the combined company on a pro forma basis, so pro forma post-close, We estimate that roughly 85% of the revenues in that pro forma post-close business that roughly 85% is from the core business we're in today. That's why we view this deal as primarily an accelerator to our core strategy. With this added benefit, a big added benefit of a complementary scaled world-class TV and film studio that we're excited to run and continue to build. Spencer Wong: Rich Greenfield also has a follow-up question on the transaction. What gives you the confidence the deal will get approved during the regulatory process? Ted, do you wanna take that one? Theodore Sarandos: Yeah. Thanks, Rich. We've already made progress towards securing the necessary regulatory approvals. We submitted our HSR filing. We're working closely with WBD and the regulatory authorities, including the US Department of Justice and the European Commission. We're confident we're gonna be able to secure all the approvals. Because this deal is pro-consumer, It is pro-innovation. It's pro-worker. It is pro-creator, and it is pro-growth. You know, Warner Brothers, we just said earlier, it's got three core businesses that we don't currently have. So we're gonna need those teams. These folks have extensive experience and expertise. We want them to stay on and run those businesses. So we're expanding content creation, not collapsing it. In this transaction, this is gonna allow us to significantly expand our production capacity. In The US and to keep investing in original content over the long term. Which means more opportunities for creative talent and more jobs. This is really a vertical deal for us. It allows us to gain access to a hundred years of Warner Brothers deep content and IP for development. And distribution in more effective ways that will benefit consumers and the industry as a whole. HBO, as Greg just mentioned, is a very complimentary service to ours. And the TV market is extremely dynamic and very competitive. So the TV landscape, in fact, has never been more competitive than it is today. There's never been more competition for creators. For consumer attention, for advertising and subscription dollars. The competitive lines around TV consumption are already blurring, you know, as a number of services put their content on both the linear channels and the streaming services at the same time. And the more platforms are making their way into the TV, in your living room. So TV is not what we grew up on. TV is now just about everything. Oscars and the NFL are on YouTube. Networks are simulcasting the Super Bowl. On linear TV and streaming. Amazon owns MGM. Apple's competing for Emmys and Oscars. And Instagram is coming next. So, you know, YouTube is just surpassed BBC and monthly average audience according to Barb that publishes these figures in The UK. So YouTube is not just UGC and cat videos anymore. YouTube has full name films. New episodes of scripted and unscripted TV shows. They have NFL football games. They have the Oscars. The BBC is gonna be producing original content for YouTube soon. They are TV. So we all compete with them in every dimension. For talent, for ad dollars, for subscription dollars, for all forms of content. So more broadly, you know, we compete for people's attention across an even wider set of options that include streaming, broadcast, cable, gaming, social media, big tech video platforms, Our deal strengthens the marketplace. And it ensures healthy competition that will benefit consumers and protect and create jobs. That's why we're confident in the approval, Rich. Spencer Wong: Thank you, Ted. We'll now go to a series of questions on the topic of content and content strategy. The next question comes from Ben Swinburne and Morgan Stanley. In light of the global Sony pay one agreement and the pending WB transaction, can you talk about your film strategy looking ahead? Are you leaning away from that original films and increasingly to licensing films after an exclusive theater run? Theodore Sarandos: Thanks, Ben. No. There's no change to that approach. Dan Lynn and his team are gonna continue to produce a slate of Netflix original films, and we'll also continue to license films in every available window as well. You know, our members love movies. And taste and diverse are very broad. Appetites are huge. So we wanna have a broadest offering as possible. Spencer Wong: Great. Next question is from Vikram Kisabhavola of Baird. What were your observations from recent live events such as Jake Paul versus Anthony Joshua, and the NFL on, Christmas Day. How should we expect your investment in live events to evolve from here? Theodore Sarandos: Well, Vikram, remember, this is still a relatively small portion of total view hours. So the big live events like the amazing fight you're just talking about and that six-round knockout, and our NFL Christmas Day games and this new halftime show. Really important and differentiated parts of the service. But, again, small in total view hours. These events typically have outsized positive impacts on the business, around conversation and acquisition, and we're also starting to see some benefits to retention as well. But I said, it's a small portion of the content spend. With two hundred billion hours of very small portion of the total view hours too. We remain really excited about it, and that's why we're building out and strengthening that offer. With things like Star Search premiering globally tonight with live voting. And we're beginning to invest in more events outside of The US like I mentioned, the World Baseball Classic in Japan, for local markets. Spencer Wong: Thanks, Ted. Another question from Vikram Kasavabola. What types of podcasts do you think will be most effective on the platform? What are your initial observations from the launches, this past month? Theodore Sarandos: Well, it's still very, very early, but we're super pleased by the early results that we're seeing. You know, we think about video podcasts like a modern talk show. But instead of having a single brand defined show, you have hundreds of them. So it's a broad offering versus a single broad show or format. But it does generate a lot of very passionate engagement, lots of variety. Are looking forward, you know, to the types of things we're gonna add here. The things that our members already love. So sports, you've seen it. We can build on the success of our sports adjacent strategy. Comedy and entertainment, and, of course, true crime. You may have heard we've got some true crime stuff on Netflix. Spencer Wong: Great. Last question on content strategy comes from Rich Greenfield of LightShed. This is our quarterly theatrical question. Why has your, why why has your view on theatrical windowing changed? Theodore Sarandos: Well, Rich, I will point out here, I have in the past made observations about the theatrical business. We were not in the theatrical business when I made those observations. This deal closes, we will be in the theatrical business. And remember this, I've said it many times, this is a business and not a religion. So conditions change and insights change, and we have a culture that that we reevaluate things when they do. So, you know, short list of examples there. The pivots we've made around advertising, around live, around sports, In theatrical, we debated many times over the years whether we should build a theatrical distribution engine or not. And in a world of priority setting and constrained resources, it just didn't make the priority cut. So now when this deal closes, we will have the benefit of having a scaled world-class theatrical distribution business with more than $4 billion of global box office. And we're excited to maintain it and further strengthen that business. Warner Bros. Films are gonna be released in theaters with a forty-five-day window. Just like they are today. This is a new business for us and one that we're really excited about. I'm actually quite proud of our long track record of evolving the business, and I believe our results speak to that as well. Spencer Wong: Thanks, Ted. We'll now move on to a few questions we have from analysts about advertising. Steve Cahall from Wells Fargo asks, as you look at the ads potential in 2026, do you think you could reach parity on ARM, average revenue per membership, or ad-supported for ad-supported versus your ad-free plans? Gregory Peters: Yeah. So there is still a gap between the ad tier ARM for standard without ads, but that gap is narrowing. And while because there's a gap, it means we're under realizing revenue growth in the near time. It also, therefore, represents an opportunity for us. So as we improve our ad capabilities, we can close that gap over time. We can drive more revenue. We've seen exactly that ability to do that over the last year. We've expanded demand sources. We continue to prove our speed of execution on our own ad tech stack. That's more ad features, ads products, more measurement, etcetera. That means increased fill rates and that's driven ads ARM higher. Now that we've grown to relevant scale, meaning consumer reach and all our ads countries, our main focus is on increasing the monetization of that growing and in inventory. It's likely to remain our focus for, you know, at least the next several years. So we believe we can close that gap and that means upside in terms of revenue growth. Spencer Wong: Thanks, Greg. As a follow-up from Ben Swinburne, as you head into your second year with your own ad tech, build out across the 12 ad markets. What's the opportunity to drive revenues? Can you maintain your premium CPE and so meaningfully increase bill rate in the year ahead to deliver another rough doubling of advertising revenue? Gregory Peters: Yeah. So as we mentioned a couple of times before, really the most immediate benefit we've seen from our rollout of our own stack has just been making it easier for advertisers to buy in our service, more places to buy. We hear that directly in terms of feedback from advertisers. We see it in the sales performance, of course. In 2026, we are making more Netflix first-party data accessible, of course, in a privacy-safe, data-secure way. For assessing media investments. That ability to tap into this deep library of insights that we have ultimately enhances the performance of media buys. We're also offering advertisers a wider array of ads formats so more ads products, enhanced interactivity, which should improve outcomes, At the end of last year, we started testing modular capabilities with interactive video ads. These ads cater to members' viewing behaviors and allows advertisers to benefit from essentially a dynamic template that uses mix and match creative elements to drive better business outcomes. We've seen good early results in the testing, and we'll roll those out globally by 2026. Additionally, now that we've been on our own ad stack for over six months, we've got a better set of data, historical campaign data, We can use that to enhance our RFP process. Drive better media planning, better outcomes for our advertisers. So get to the point of question, we see all of that adding up to the same kind of performance we saw over the last year, which means we can grow revenue targeting doubling that revenue growth by improving fill rate and growing inventory with similar CPMs. Spencer Wong: Thanks, Greg. We also have a question on gaming, which I'm excited for since I'm a big player of our new party game, Boggle. If my family's watching, I'm still the number one winner. But this question comes from Vikram, Kesap Abhotla Baird. Netflix had some key developments in its video game offering throughout 2025. How would you characterize your success and progress at this stage? What are your key priorities for this business in 2026? Gregory Peters: We've seen some really positive results with games like Red Dead Redemption, same kind of performance that we saw in GTA for folks that are familiar with that. We're also excited about more kids, more narrative feature releases in 2026. So those are good areas of growth for us. But a big advancement, as you sort of alluded Spencer, a big priority for us is our cloud-based TV games. It's an exciting launch for us. We're still in the early stages of this rollout of roughly a third of our members have access to TV-based games. This is sort of a process of upgrading the TV technology, the TV clients to be able to handle that. And recently, with our party games on TV boggle, as you mentioned, Pictionary, LEGO party games like that, we've seen, you know, really strong uptake. So it's off a small base because about think about 10% reach into those eligible members. But our TV-based games have enjoyed quite a significant engagement uptick, after that party pack launch. And then in 2026, this year, we're gonna be expanding that cloud-first strategy. We've got a growing set of cloud games to the TV like our recently announced newly reimagined, more accessible FIFA football simulation game. We're super excited to be able to launch that. And stepping back for a second, if you look at that in totality, why is this important? You know, as we said in the past, it's a big market, roughly $140 billion worth of consumer spend China. We are just scratching the surface today in terms of what we can do in this space. But we already are seeing multiple instances of how this approach not only extends the audience's engagement, with the service and with the story, but it also creates synergy that reinforces both mediums. So the interactive and the noninteractive side, that drives more engagement, more retention. So, you know, bottom line, we're very bullish on the opportunity side. We're seeing progress. Still got a lot of work to go do. And I should say, like, all of our developing initiatives we're gonna ramp our investment based on demonstrated value to members and returns to the business. Theodore Sarandos: We will have Spencer give us a Boggle demo next quarter. I watched the video of Greg playing with Elizabeth, and there's no way I'm gonna challenge Greg because I think he'd take me down in two seconds. But with that, we'll take our last question from Rich Greenfield of Light Shed, on innovation. His question is, why isn't vertical video a higher priority for Netflix? Gregory Peters: Rich, we've actually been testing vertical video features for some time, about six months or so. We've had a vertical video feed in the mobile experience that's been available for several months. So, that feed is filled with clips of Netflix shows and movies. You can imagine us bringing more clips based on new content types like video podcasts, which Ted mentioned that we're adding to the general service. We'll bring the, you know, sort of appropriate components of that into that vertical video feed. And really, this is part of a broader upgrade of our mobile experience. Just as you've seen us do with the new TV UI, we're working on a new mobile UI that will better serve the expansion of our business over the decade to come. We're gonna roll this out later in 2026. And just like our TV UI, it then becomes a starting point. It becomes a platform for us to continue to iterate, test, evolve, and improve our offerings. So don't worry, Rich. We got more vertical video coming for you. Spencer Wong: Thank you, Greg, Ted, and Spence. That is all the time we have now for our call. We thank all the listeners for tuning in to our earnings call. We look forward to speaking with you all next quarter. Thank you. Welcome to the Netflix, Inc. Q2 2024 earnings interview. I'm Spencer Wong. VP of finance, IR, and corporate development. Joining me today are co-CEOs, Theodore Sarandos and Gregory Peters and CFO, Spencer Neumann. As a reminder, we'll be making forward-looking statements, and actual results may vary. We'll now take questions from the sell-side community that have been submitted, and we'll begin with a series of questions on our Q2 results and our forecast. So the first question on our results comes from Doug Anmuth of JP Morgan. So, Spence, Doug asks, how can you provide some color on how churn is trending and perhaps share some color on what drove revenue growth in the quarter? Spencer Neumann: Yeah. Sure. Thanks, Doug, and thanks, Spencer. We were pleased with our performance in Q2. There were strong performances across the board, good momentum across the business. Strong revenue growth, member growth, and profit growth. In terms of that member growth in churn, I'd say that the kind of outside paid net outsized paid net adds in the quarter was primarily driven by stronger acquisition, a little stronger than we expected, but also very healthy continued healthy retention in the quarter, and that's across all regions. In terms of growth generally, there's probably a kind of three key factors that drove member growth. First, strong performance of our content slate, a wide variety of titles that delivered across genres and regions, and I'm sure we'll talk more about that. There was some positive impact from page sharing that continues. As we've said on recent calls, it's tougher and tougher to tease that out. We're clearly seeing healthy organic growth in the business, but we're also continuing to get better and better at it. Translating improvements in our service into business value. Including getting better and better at converting unpaid accounts, And on at least on the paid member front, we're also probably benefiting from that attractive entry point in terms of price point and feature set for our ads plan. So you put all that together, and it was a nice quarter for subscriber growth, but even more importantly, a nice quarter in terms of driving healthy revenue growth and healthy profit growth. So 17% reported revenue growth, and margins that were up five percentage points year over year. Spencer Wong: Thanks, Spence. Doug also has a follow-up question on the results. We noted or Netflix noted that India was our number two and number three country in terms of paid net ads and percent revenue growth in the second quarter. Do you feel like you're hitting more of an inflection point in that market? Or is that more about a very specific successful content slate in Q2? Ted, do you wanna take it? Theodore Sarandos: Yeah. Well, look. I think India's growth is a story that we see around the world. Playing out very similarly. So you look at the content, the product market fit, is what drives our ability to attract members and retain members. And monetize with them as well. So I feel like what's going on in the quarter has been this ongoing build. We had this great show here on Monday. Sanjay Leela Bansali, SLB is one of the most celebrated filmmakers in India, and he took on this incredibly ambitious series and brought it to screen on Netflix, directed every episode, and it's our biggest drama series to date in India. So on top of that, our original films and our licensed films as films in the pay TV window immediately following theatrical have continued to thrill our members. So we pick them well. We program well. We improve the product market fit. We improve engagement. We grow members. We grow revenue. It's the same formula I think everywhere else everywhere we go. And there's certainly plenty of room to grow in India long as we keep thrilling our audiences there. Spencer Wong: Thank you, Ted. Our next question on the results relates to operating margin, and the question comes from Jessica Reif Ehrlich of Bank of America. For Spence, how should we think about the pace of margin expansion going forward? And the drivers of the margin outperformance this year? Spencer Neumann: Well, thanks, Jessica. Well, you know, when we think about margin expansion, we're obviously pleased with how it's trending so far. You know, our focus kind of stepping back. Our focus is to sustain healthy revenue growth and grow margins each year. You know? So we feel good about what we've been delivering, As you see in the letter, we're now targeting 26% full-year operating income margin, and that's up from our prior guide of 25%, and it's up five percentage points year over year, assuming we kind of land there. But the amount of annual margin expansion as we look forward it could bounce around each year. We've talked about that this in recent quarters. Could bounce around because of foreign exchange in a year where that moves or other business considerations. But we're committed to grow margins each year and we see a lot of room to continue to grow profit margin, absolute profit dollars, and do that over an extended period of time for years to come. Spencer Wong: Thank you, Spence. Our next question comes from Steven Cahall from Wells Fargo, and it's regarding free cash flow. So the question is Netflix has raised their full year and margin outlook, but did not change their free cash flow forecast of approximately $6 billion. Is this just a pull forward in cash content spend, or is there anything else that is impacting your free cash flow guidance? Spencer Neumann: I'll tell you, though. Not nothing else impacting it. We you know, as we've noted as you noted, we continue to expect approximately $6 billion of free cash flow for the year. There's always some uncertainty in terms of timing of things like content spend, sometimes timing of taxes. So that kind of keeps us right now holding at approximately $6 billion, but no other read-through beyond that. Spencer Wong: Thank you, Spence. We have our quarterly question on page sharing next from John Hoodlik of UBS, which I'll direct to Greg. The question is, do you still have upside from the page sharing initiative, and have you moved forward on mobile page sharing? And if so, how big of an opportunity is this? Gregory Peters: Yeah. Spence already gave some commentary on this quarter's performance. I'll talk about it sort more from a long-term perspective. And as we said, a couple quarters now, we're at the point where we really operationalize page sharing. So it's just a standard part of our product experience. We think about the improvements there. To be clear, we do see still some significant areas for improvement there. But we see those as part of all the opportunities, essentially, we have to improve the product experience. So we're constantly prioritizing all those opportunities based on what we think is the expected value. And just to give you a sense of, you know, how wide that is, even things that we've been working on for over a decade, like our sign-up flows or the user experience that a consumer has when they wanna sign up for Netflix. We have found multiple improvements just over the last couple of quarters in those flows which have delivered material incremental revenue wins. We're gonna continue to look at all these opportunities. We're gonna improve things for members and for the business. We'll iterate. We'll improve them. And we think of this as a just a constantly improving value translation. So we wanna take all the value that's created by Bella's teams in film and series. We got more live events, games, and we want to translate that more effectively into revenue so we can continue to invest and keep that flywheel spinning. If we can keep improving that value translation mechanism each quarter, and keep improving the entertainment offering that it operates on top of those two things compound and drive the business. It'll drive the business through the rest of the year. It'll drive through '25 and beyond, and that really allows us to more effectively get more of those 500 million plus and growing smart TV households around the world that aren't currently members, to sign up. And it also drives our other levers of growth, like plan optimization, extra member, ads revenues, and pricing into more value. So I just I think about this as more of the, you know, constant work we are doing to improve for decades to come. Spencer Wong: Thank you, Greg. I'll now move us along to a series of questions about advertising, and we'll start first with Barton Crockett of Rosenblatt, and I'll point this question to Spence. You say that advertising is not a, quote, primary, unquote, driver revenue growth yet. Can you provide a little more clarity on what that means for both '24 and '25? Spencer Neumann: Yeah, sure. Thanks. So stepping back, I'd say we're very pleased with how we're scaling our ads business. We talk about that in our letter. We've been primarily focused on scaling reach. But if you think about even just the revenue portion of ads, it is growing nicely. The rate of growth, it just happens to be growing off of a relatively small base because we're starting from only eighteen months into ads, so to have the kind of primary revenue impact across a business that has been primarily for a long time, that just takes some time. So we're scaling well through reach, through engagement, through growing inventory, and that represents opportunity for us over a multiyear trajectory to have a big and increasing revenue and profit impact on the business. So again, stepping back, we feel really good about our position, our ability to sustain healthy revenue and profit growth. Ads is kind of one more tool in our tool chest there. We're doing the hard work now to improve our service across the board. So we the year strong in '24 and drive growth into '25 and beyond. We're small in every measure. We talk about it a lot. We're smallest share of TV time. We're small in terms of penetration of connected TV homes. We're small in revenue market share. And we're gonna grow in those areas across the board. And ad's gonna be a bigger piece of that puzzle. Just if we won't have it be primary in 2425, but it contributes. It's a meaningful contributor. That's what we've said, and that's what it is doing. And then when you get into '26 and beyond, it can be even more meaningful, and, hopefully, it becomes to the point where it is a primary contributor. Given all of that engagement and reach that we're building. Spencer Wong: Thank you, Spence. A follow-up question on advertising from Ben Swinburne of Morgan Stanley, and I will direct this to Greg. Looking into your advertising revenue ramp into 2025, what are the key areas that need to improve to bring in significantly more revenue? Can you talk about the opportunities and challenges scaling up your direct sales efforts and leveraging third-party sources of demand? Primarily programmatically. Gregory Peters: Yeah. We've said many times our priority, number one priority, first priority is scale. So we've been heavily focused on that. And the great news is we've seen great progress in regard. We've been scaling our ads member base very quickly from zero years ago to where we are today. And we're excited to say that we're on track to achieve our critical scale goals for all of our ads countries in 2025. Clearly, we expect further growth beyond that, but that represents a great threshold to get to and then to build more scale and more attractiveness from there. That allows us to shift more of our energy now on more effectively monetizing that rapidly growing inventory. And there's sort of two main fronts here. One is our go-to-market capability. So we're adding more sales folks. We're adding more ads operation folks. Building our capabilities to meet advertisers, A big component of that is giving advertisers more effective ways to buy Netflix. It's a big point of feedback that we heard from advertisers. So by adding demand sources that are already integrated into their processes and their systems, that just makes it easy for them to buy. And in some cases, that was a threshold item for them to buy in us we're gonna expand the number of buyers as a result of that. And then the other big area of growth for us is the sort of product and technology stack. We mentioned we're building our own ad server now. We're excited to launch that in Canada this year and then the rest of our ads markets in '25. That unlocks a whole set of innovations that we expect that are focused on a better user experience for our members on those ad tiers and better advertiser features. So think a lot about this as targeting relevance, more capabilities in that space, as well as thinking about, you know, do we do ROI, ROAS, incrementality measurements, all the things that we want. And ultimately, really, this is about bringing what has been amazing about digital advertising in terms of targeting relevance measurement, etcetera, and what we think is amazing about TV advertising, which is an incredible creative format, better creative format in many cases than digital, as well as the ability to put those advertisements next to content, to titles, stories that are you know, the social conversation which is important for advertisers. So lots of work ahead. We've got years of work to do but that's the line that we're moving forward with. Spencer Wong: Thank you, Greg. From Steven Cahall, his question is, given what we think are pressures on AVOD CPMs, and the ten hours per account per month of viewing time you disclosed at the upfront for ad-supported members what's the likelihood that ad-supported ARM drops below ad-free member ARM the second half, would you consider raising the price of ad-supported tiers as an offset? Gregory Peters: Okay. So perhaps starting by just providing some clarification here. Our engagement on our ads plans is very similar to what we see on our non-ads plans. That's close to the approximate approximately two hours of viewing per member per day across all the plans that you can calculate globally from our engagement reports. You should think of that as roughly, you know, how our ad plan members are engaging as well. And then in terms of ads ARM, so ads ARM, which is, of course, a combination of the subscription amount plus the ads revenue, Currently, because we've been scaling so rapidly, we are not we're racing behind essentially to fulfill all of that increasing inventory, and we're lagging in that regard. So currently, our ads ARM is lower than our non-ads ARM, and that's obviously we look at that both you know, it's a go-do, but it's a revenue growth opportunity for us as we scale into that that represents an opportunity to accelerate our revenue growth. As well. So you mentioned price. We think about pricing for ads tier very similar to how we would think about pricing for our non-ads. First of all, I just think it's, you know, worth noting that we love having an entry price that's lower. That means we are more accessible for more people in our ads markets. That's a great thing because get to all the amazing storytelling that we are doing there. But in terms of, you know, raising that price, we think about similar to how we think about pricing in general, which is, you know, it's our job to increase the value that we are delivering all of our members. We've got more amazing film, more series. The live events that are coming, more games. And when we have signals from our members, this is, you know, the amount of acquisition that we've got going on, engagement, what our retention and churn looks like, then we find the right moment to ask our members to pay a bit more to keep that fly while spinning. We'll think about that in the ads context just like we would in the non-ads context. Spencer Wong: Thank you, Greg. John Huluk from UBS asks, can you provide an update on the CTV ad environment? And update us on initial feedback from advertisers on your ad tech. What features do you expect to add with the ad tech build, and anything you can tell us about the cost associated with it? Gregory Peters: Sure. Well, there's a lot of excitement amongst advertisers. To you know, about the work that we're doing. I'd say the primary one and, again, one that we're responding to, which is sort of very tactical and immediate, is being able to provide advertisers more ways to buy on Netflix. So those demand sources are something we heard very clearly from advertisers that it was either a real improvement for them or it was a necessary point for them to be able to buy on Netflix. So then beyond that, we hear lots of enthusiasm for the things I mentioned before, increased ads relevancy, targeting personalization, better measurement, incrementality, all these, you know, things that we'll be building over the next several years. Lots of excitement about that. The biggest negative feedback we get is that we aren't there right now. So advertisers want us to have all those features in place today. We would love to have all of those features in place today for sure. So we're, you know, got the hard work ahead of us of, you know, building those as quickly as we can and closing that gap as soon as we can. But this is you know, it's years ahead of us to go ahead and keep building these things and quite frankly as we build those features I am quite certain that there'll be more that will come onto the roster that advertisers will be for us and more that we'll go be excited about doing. Spencer Wong: Thank you, Greg. And our next question is for Ted coming from Rich Greenfield of Lightshed. Hey, Spencer. Spencer Neumann: Spencer, sorry to interrupt you. We didn't really ask the answer to the kind cost thing unless I missed it. I miss it in terms. Spencer Wong: Sure. I can chime in if you like? You know, all of what Greg talked about in terms of investing in the business, suffice to say that is all embedded in our margin guidance. So we make trade-offs all the time with the business where, you know, expenses are up 7% year to date, where if you kind of step back, we're on track to be. You can do the math. It's probably north of $28 billion in total expenses across our business for the year, and we're still expecting to deliver five percentage points of margin improvement. So we try to run the business like owners, make smart trade-offs, and invest into growth. Like live, like ads, like games, like product innovation, and ads is part of that both for this year as well as into next year where, again, we expect to drive revenue growth and increase our margins while investing into ads. Gregory Peters: Thanks for catching that, Spence. Spencer Neumann: Yeah. Yes. Thanks for keeping us on this, Spence. Spencer Wong: So next question is for Ted coming from Rich Greenfield of LightShed Partners. Is your recent agreement to stream two NFL games on Christmas day signaling that you need live sports to build a robust advertising business, or are you trying to create a regular cadence of high-profile live events to bring onto Netflix platform who will then spend across your broad array of entertainment content? Theodore Sarandos: Thank you, Rich. That's a great question. Let me back up a minute. We're in live because our members love it. And it drives a ton of engagement, it drives a ton of excitement. And those two things are very valuable. So the good thing is that advertisers like that too, and they like it for the exact same reason. The excitement and the engagement. So everyone's interests here are perfectly aligned in that way. What we signaled to the world when we went live with the Chris Rock selective outrage special last year ago. Is that this company, Netflix, who you love for on-demand viewing of your favorite TV shows and movies, is also I say also gonna surprise you with amazing exclusive buzzy live entertainment. And since then, we've launched a golf tournament with the biggest stars in PGA golf and Formula One drivers, a tennis match with two, like, generational titans of professional tennis, Nadal and Alcaraz. A live comedy with Kat Williams, an entire week of groundbreaking live talk show episodes from John Mulaney, that epic roast of Tom Brady, our biggest livestream yet. And still to come, we've got a live show with Joe Rogan. Have this hot dog eating grudge match between Chestnut and Kobayachi that people are remarkably excited about. We have this long-awaited boxing match between Mike Tyson and Jake Paul in November. On Christmas Day, not just one, but two great NFL football games. So I would call that a really fast ramp, and it leads right into a weekly live coverage of WWE. So it's that thrilling excitement engaged watching that people are really thrilled about and we're thrilled about that we're thrilled that our advertisers are excited about it too. Spencer Wong: Thank you, Ted. Rich has a part two to this question, not surprisingly. How do you thread the needle licensing sports to drive advertising spend without becoming beholden to leagues at renewal? Theodore Sarandos: Well, hopefully exactly the way we're doing it, by making these Netflix events, not necessarily taking on a lot of tonnage from any one league, but actually making these games events, like having two NFL football games on Christmas Day, and two great games, the Chiefs and the Steelers and the Ravens and the Texans. They're both gonna be great games, and it really creates a lot of real excitement within the service, and it's one day of football. So when I look at that and I think along those lines, you'd see how we solved for that in our WWE deal, which was economics that we like and live with and can grow into and contemplate what the expansion of cost and viewing would be over the over in that case, as long as twenty years if we want it to be. So I think it's really not a matter of there's an automatic disconnect between you can't do sports and have profit. It's very difficult to have big league sports and profit. So, you know, in when you offer them entire seasons. But when you offer them in this event model that we're building on, really excited about our opportunity to do that without the risk that you're talking about right now. So and then beyond that, we were in love with the kind of very profitable storytelling version of sports. So if you can't wait for those football games on Christmas day, you can watch receiver right now. It just started on July 10. On Netflix, is part of that storytelling version of sports. Spencer Wong: Thank you. Thank you, Ted. Our next question comes from of Barclays. It's a question regarding our engagement. So, Ted, could you speak to the underlying engagement health, at now and what are you seeing there? Theodore Sarandos: Yeah. Look. I think I've talked about this a bit on the last calls well. But, you know, competition for entertainment is super intense, and we compete for every second of view time we get. So beyond that, you know, kind of the competitive intensity that's always been out there, we also anticipated some headwinds in our engagement because of paid sharing. Remember, we were taking folks who were watching Netflix and not paying off the service. So we thought that our engagement would go down. We took a deep dive into how that was impacting and how we could isolate the impact. And look at it as owner households. So those folks who are not impacted by paid sharing at all. And what we saw was in last last quarter, is that that that engagement was holding steady. So that much of the engagement headwind was coming from that. And I looked then but now we look forward accordingly. Now I'm not gonna get in the habit of releasing this as a new metric every quarter, but looking at that same segment again, that segment's engagement is actually not just steady, but up year on year. So we're very excited about that. I think it's a very healthy sign of engagement growth. And even with all of that, so beating down the headwinds of that and beating down competition, we're still about 10% of TV time in every country we operate in. So still lots of room to grow, but very pleased, with our engagement, but not fully satisfied. Spencer Wong: Thank you, Ted. Our next question comes from Ben Swinburne of Morgan Stanley. Your primary competitor for more passive home entertainment engagement increasingly looks to be YouTube. What are you doing in terms of programming and product to try and take share from YouTube in the future? Or is this not a focus? Are there key verticals like kids programming where you see YouTube as particularly advantaged? Perhaps Ted you and Greg can tag team on this one. Theodore Sarandos: Yeah. Sure. Looking at the Nielsen data that just released for June, what you see there is Netflix and YouTube are the clear leaders in direct-to-consumer entertainment. So our two services and YouTube represent about 50% of all streaming to the TV in The US. And we use The US only because we that's we have the data. So really what we're focused on here is focusing ourselves on that other 80% of total TV time that isn't going to either us or YouTube. So that's a ton you know, that's both streaming continuing to expand, which it did in June, so that share of TV time grew against linear. And as linear continues to give, I think there's a lot of opportunity for us to grow long as we keep executing well. Now we clearly do compete with YouTube in certain segments of their business, and we certainly compete with them for time and attention. But our services also feed each other really well. So remember, our shows are the most watched and, talked about and award nominated. We just came out of a 107 Emmy nominations for our slate this year. Yesterday. And so our teasers and trailers and behind the scenes clips and all those kind of things are incredibly popular on YouTube. So in that way, we kind of feed each other pretty nicely. Greg, I know you wanna add anything. Gregory Peters: Sure. I think it's also important to note that Netflix fulfills an important and differentiated need for both consumers who really want you know, they want amazing spectacle movies and TV shows well as an important need for creators who want partners that can share in the risk that's inherent in bringing those stories to life. So you think about, you know, shows like Stranger Things or Wednesday, Heartstopper, Outer Banks. These shows create amazing viewing fandom and especially with younger audience. So it's not, you know, just one generation. And it's really hard to imagine how that kind of big creative bet would happen and be possible within YouTube's model. So you know, to Ted's point, it is very competitive out there. And we also feel confident that our model works. It works well for our consumers. It works well for creators, and it works well for our business and helps us generate significant operating margins. Spencer Wong: Thank you, Ted and Greg. Our next question comes from Maria Ripps of Canaccord. Netflix's CTO, Elizabeth Stone, recently appeared on a podcast where she said that Netflix is exploring how to integrate generative AI into the platform to improve the member experience. Do you think the technology could have more of a potential impact on the content creation or discovery side? How do you think about the relative on engagement from improving discovery versus content? Greg, over to you for this one. Gregory Peters: Yeah. We've been using similar technologies, AI and ML, for many years to improve the discovery experience and drive more engagement through those improvements. We think that generative AI has tremendous potential to improve our recommendations and discovery systems even further. We wanna make it even easier for people to find an amazing story that's just perfect for them in that moment. But I think it's also worth noting that the QR success stacks. Right? It's quality at all levels. So it's great movies. It's great TV shows. It's great games. It's great live events. And a great and constantly improving recommendation system that helps unlock all of that value for all of those stories. Theodore Sarandos: Yeah. It begs the question about, you know, the impact on creative with AI coming going forward, which is hard to predict, obviously. But I would say this. I think that AI is a great gonna generate a great set of creator tools. Great way for creators to tell better stories. And one thing that's sure if you look back over a hundred years of entertainment, you can see how great technology and great entertainment work hand in hand to make to build great big businesses. You could look no further than 10% better than it is making it 50% cheaper. So remember, I think that shows and movies they win with the audience when they connect. You know? And it's when the it's in the beauty of the writing. It's in the chemistry of the actors. It's in the plot, the surprise and the plot twist. All those things And I'm not saying that, audiences don't notice all these other things, but I think they largely care mostly about connecting with the storytelling. I'd say they probably don't care much about budgets and are arguably, maybe not even about the technology to deliver it. So my point is they're looking to connect. So we have to focus on how to tell on the quality of the storytelling. There's a lot of filmmakers and a lot of producers experimenting with AI today. They're super excited about how useful a tool it can be, and we got to see how that develops before we can make any meaningful predictions what it means for anybody. But our goal remains unchanged, which is telling great stories. Spencer Wong: Thank you, Ted and Greg. We now have a question from Ben Swinburne, regarding product. And the question for Greg is can you dimensionalize the opportunity from a new home page you said that this is the biggest update in a decade, which sounds meaningful. What are the primary areas of improvement you are targeting with this? Gregory Peters: Yeah. It's hard to know exactly at this moment how much benefit that new homepage will, you know, derive I think it's worth noting that it's less about the improvements we're going to deliver initially, but it's more about creating a structure that allows us to evolve and advance more freely than the current structure does. In terms of what are the pain points, what are we trying to solve, a lot of this is getting to the increase in diverse of entertainment that we are now offering. We've been amazing at film and series for a long period of time, but now increasingly we're adding events into it. So live events like, you know, the Brady Rose which was incredible, but it's a user of one-off event that we have to create demand for. It's live events like WWE, which are consistent and repeating that we wanna make sure that fans of that experience have an easy way to access those things. We're increasingly promoting games as well into our service. What we found is we need to create structures that allow us to flexibly go from one type of content and entertainment to another in terms of how we're promoting and those. So there's things like that. There's also things like we wanna increasingly recognize that we're doing even in the same content type, we're doing different jobs for our users in different moments. And that could be, you know, Sunday afternoon family movie time. That'd be a great experience if we wanna provide exactly the right discovery and choosing experience for versus maybe late on Thursday night when you're coming home and you just wanna get into the episode of the series that you're currently cruising through. So it's that kind of flexibility we wanna provide. This is our expectation is that this new structure will allow us to deliver as the old structure did for, you know, a decade, multiple repetitive material benefits to users in terms of engagement, which lead into retention and then revenue. But again, that'll be a long iterative journey, and we're trying to take that first step and set us up for that. Theodore Sarandos: And less technical too, Greg. It's the UI is beautiful. Gregory Peters: There we go. We like beauty as well. Beauty is It is. It really is. Spencer Wong: Thank you. Next question is from Jason Helfstein of Oppenheimer. What have been the early results from phasing out the basic tier in a handful of your markets, and how does that tie back to success in selling ads? Greg, would you wanna take that one? Gregory Peters: Sure. As you've seen us do, you know, multiple times before, we spend a lot of energy on the right product experience. For doing this migration. And then what we do is we, you know, we roll it out and we test it. And we see how that goes and I let our members tell us if we did a good job there or not. Make whatever changes and iterations before we then scale it out and roll it even further. And I think it's, you know, worth noting here that we feel like in this migration we've got a very strong offering for our members. Essentially, we're providing them a better experience, two streams versus one. We've got higher definition. We got downloads. And, of course, all at a lower price, $6.99 in The United States. We think that represents a tremendous entertainment value, and it includes ads. And for members who don't, you know, want that ads experience, they, of course, can choose our ads-free standard or premium plans as well. And then in terms of performance, I'll just let our actions speak for ourselves. When those things go well, we typically roll it out and that's you know, we've had the confidence to move forward with that change in The US and France. That's an indicator of how it's going. Spencer Wong: Thank you, Greg. Next question comes from Eric Sheridan from Goldman Sachs. The question is regarding gaming. Can you provide any update on your gaming initiative and user engagement and your ability to scale your gaming efforts? Gregory Peters: Sure. Games is a big market, so it's almost $150 billion China and Russia, not including ad revenue, which we aren't participating in in our current model. And we're getting close to three years into our gaming initiative, and we're happy with the progress that we've seen. We've had set ourselves pretty aggressive engagement growth targets, and we've met those, exceeded those in many cases. In 2023, we tripled that engagement. We're looking good in our engagement growth in '24, and we've said even more aggressive growth goals for '25 and '26. But worth noting that that engagement and that impact on our overall business at the current scale, it's still quite small. And it's also probably worth noting that the investment level in games relative to our overall content spend is also quite small. And we've calibrated the growth and investment with the growth and in business impact, so we're being disciplined about how we scale that. So now, obviously, the job is to continue to grow that engagement. To the place where it has a material impact on the business. I think you can you've seen this trajectory with us before, whether it's been a new content genre like unscripted or film or maybe getting the content mix right for a particular country. You can think about Japan or India, which, you know, we're now an amazing place through the hard work of our teams there. We continually iterate. We refine our programming based on the signals we get from our members. If you look over several years with that model, can make a huge amount of progress. We've launched over a 100 games so far. We've seen what works. What doesn't work. We're refining our program to do more of what is working with the 80 plus games that we currently have in development. And one of those things that really is working is connecting our members with games based on specific Netflix IP that they love. And this is an area that we've been able to move in quickly in a particular space, which is interactive narrative games. These are easier to build and we place those in a narrative hub that we call Netflix Stories. Q2, launched Virgin River and Perfect Match. Starting this month in July, we're gonna launch about one new title per month into Netflix stories. This is, you know, amazing IP like Emily in Paris and Selling Sunset. And we have lots more, including very different types of games yet to come in the quarters and years ahead. Theodore Sarandos: Yeah. I just wanna chime in for a second, Greg, if you don't mind. This is why I'm really excited about the opportunity in games, which is the way that it's pretty rare for the content new content vertical like this to actually complement or draft off of one of the of each other. Every once in a while we get something like Squid Game the challenge following the Squid Game the squid the scripted series. But I think our opportunity here to serve super fandom with games is really fun and remarkable. I think the idea of being able to take a show and give the super fan a place to be in between seasons and even beyond that to be able to use the game platform to introduce new characters, the new storylines, or new plot twists, Event now you could do those kind of things, and then they could then materialize in the next season or in the sequel to the film. It's a really great opportunity and a rare one where one and one equals three here. And to kind of replicate some of the success we've seen building fandom in with live events and consumer products, this actually fits really nicely into that. So really excited to see where this goes. Spencer Wong: Thank you, Ted. Thank you, Greg. Our last question comes from Jessica Reif Ehrlich of Bank of America. The question is regarding content, spend. Ted, you have targeted $17 billion in cash content spend. This year. You're increasing your sports spending within that. How should we think about your spending on entertainment or non-sports entertainment, and what's the overall content spending growth going forward? Theodore Sarandos: Well, thanks for the question. I would like to have back up a little bit and say that, you know, creating TV and films for a big global audience, is a creative process. So remember, we're programming for more than 600 million people around the world. Who are watching us for a couple of hours a day every day. So we've got our work cut out for us. And that $17 billion, all those exciting things we talked about earlier are all tucked into that $17 billion, and that $17 billion will grow as our revenue grows. It won't grow as fast as our revenue grows, but it will grow to accommodate that. And I think what's really important and where I think we have a real interesting advantage here is that we have these distributed creative teams all over the world. So what's great about that is they are very tightly wound into the creative ecosystem in all these different countries, the star systems, the producer systems, and more importantly, the culture. What fans in those countries really love. So what we've got all these folks working at the same time, so that in this creative process, which does have you know, hot streaks and cold streaks, they can be operating pretty simultaneously to create a very steady cadence of big exciting hits. We certainly compete with Hollywood to make the best and most popular programming in the world. But we're also doing that in India, in Spain, in France, in Italy, in Germany, in Korea, in Japan, all over Southeast Asia, in Mexico, in Colombia, Spain, Argentina, and The UK. The program that's create the programming that we create in those countries all, again, all part of that $17 billion. Are all designed to thrill the local audience. And when they really, really thrill the local audience, there's a possibility and sometimes a probability that they could find a gigantic audience all over the world, in North America. So the team in EMEA, particularly in The UK, is doing a remarkable job of this right now. So, they have been able to deliver big global hits but they've been sensational in-country. So baby reindeer and the gentleman both landed with Emmy nominations yesterday and have been sensations in The US. But they are a phenomenon in The UK. So more than 50% of all of our members in The UK are have watched orTheodore Sarandos: are watching baby reindeer and the gentlemen. Similar with, one day, our original film Scoop, So those things that are thrilling the world are super serving the British audience. The same thing just came out of Paris or out of France with Under Paris, which was 90 million views, a 157 million view hours around the world. More than half of every French member loves this movie. Same thing with, the Osunte case in Spain. More than 50% watching in Spain and big watching all over the world. Queen of Tears in Korea is another example that's happening in APAC right now. So this kind of like super serving local audiences, creating global content around the world, gives us an efficiency that I think is getting better and better and a muscle that's getting stronger and stronger, I'm really excited about. And how does that play out? You know, our slate coming up is unbelievable. So as we've concurrently forecast, we're gonna deliver for the rest of this year and what we're gonna deliver into the net into in through '25 just for just before the end of this year. We've got Squid Game, returned. We've got Emily in Paris returned. You've got a new season of Selling Sunset, Lincoln Lawyer, the Diplomat, Virgin River, Love is Blind. Ryan Murphy has an incredible new season of Monsters that tells the Eric and Lyle Menendo story. That's all just coming up before the end of the year. And then looking forward, you know, over the next you know, through '25, you've got new seasons of Wednesday and Stranger Things and Night Agent. In production on One Piece, so there's a ton of excitement there just in our series. This week, we kicked off the finale of Cobra Kai, which is gonna blow your mind. August 8, we've got the finale of Umbrella Academy kicking off. And a brand new series that we're also thrilled about. Susan Beer's Perfect Couple, with this has got Nicole Kidman and just a really fun, fun thriller. Nobody wants this from Kristen Bell and Adam Brody. Black Doves is a beautiful show out of The UK. Beauty in black from Tyler Perry. No good deed, which is bringing Ray Romano and Lisa Kudrow back to TV, Classic spy with Ted Danson from Brazil. We have Cena from Colombia. We've got a hundred years of solitude. And then, of course, all those live events I talked to you about. And our movie slate is fantastic. With Rebel Ridge, Will and Harper, six the six triple eight, The Piano Lesson, Carry On, These are we we have got a lot packed into that. Our goal and our mission here is we have to spend the next billion dollars of programming better than anyone else in the world. And there's no one better at doing it than Netflix. So we're excited. Spencer Neumann: Spencer, how do you not get excited about that and then also get excited about that we're gonna do all that while, you know, growing content spend slower than revenue. That's a lot of stuff going on. Thanks Theodore Sarandos: It's all in there. It's all in there. And the hot dog contest too, Spence. Don't forget that. Spencer Wong: Alright. Well, I'm gonna leave it at that since it sounds like we're gonna have a lot to watch, so, we all need a little bit more time. So we'll end the Q2 call here. So thank you, Ted, Greg, and Spence, for joining us today. Thank you, investors and analysts, for dialing into our call, and we look forward to chatting with you next quarter. Thank you very much.
Operator: Good day, ladies and gentlemen, and welcome to Hancock Whitney Corporation's Fourth Quarter 2025 Earnings Conference Call. [Operator Instructions] As a reminder, this call may be recorded. I would now like to introduce your host for today's conference, Kathryn Mistich, Investor Relations Manager. You may now begin. Kathryn Mistich: Thank you, and good afternoon. During today's call, we may make forward-looking statements. We would like to remind everyone to carefully review the safe harbor language that was published with the earnings release and presentation and in the company's most recent 10-K and 10-Q, including the risks and uncertainties identified therein. You should keep in mind that any forward-looking statements made by Hancock Whitney speak only as of the date on which they were made. As everyone understands, the current economic environment is rapidly evolving and changing. Hancock Whitney's ability to accurately project results or predict the effects of future plans or strategies or predict market or economic developments is inherently limited. We believe that the expectations reflected or implied by any forward-looking statements are based on reasonable assumptions but are not guarantees of performance or results, and our actual results and performance could differ materially from those set forth in our forward-looking statements. Hancock Whitney undertakes no obligation to update or revise any forward-looking statements, and you are cautioned not to place undue reliance on such forward-looking statements. Some of the remarks contain non-GAAP financial measures. You can find reconciliations to the most comparable GAAP measures in our earnings release and financial tables. The presentation slides included in our 8-K are also posted with the conference call webcast link on the Investor Relations website. We will reference some of these slides in today's call. Participating in today's call are John Hairston, President and CEO; Mike Achary, CFO; Chris Ziluca, Chief Credit Officer; and Shane Loper, Chief Operating Officer. I will now turn the call over to John Hairston. John Hairston: Thank you, Catherine. Happy New Year to everyone, and thank you for joining us today. The fourth quarter of 2025 was a strong finish to a remarkable year. We saw year-over-year improvement in EPS of 8%, PPNR growth of 6% and tangible book value per share increased 12%. As we look forward to 2026, we remain focused on growing our balance sheet and continuing to improve profitability. As part of our multiyear organic growth plan, we expect to hire up to 50 additional revenue-generating associates this year. Additional offensive players will meaningfully support growth targets while improving profitability through a focus on full relationship clients. We are pleased to announce today that we completed the bond portfolio restructuring last week, which is detailed on Slide 7 of the investor deck. On an annual basis, we expect the restructuring exercise to benefit NIM by 7 basis points and EPS will improve $0.23 per share. Mike will give more details on the restructuring in his remarks. We provided guidance on Page 22 for what we believe will be a very successful new year. This guidance reflects our organic growth benefits as well as impact from the bond portfolio restructuring. Now for a few notes on the fourth quarter. We had another quarter of very solid earnings with an ROA of 1.41% and an efficiency ratio under 55%. Fee income growth again continued this quarter and expenses remained well managed, including thoughtful investments supporting revenue-generating activities. Net interest income continued to grow as we reduced the cost of funds and enjoyed higher security yields. NIM was relatively flat, down 1 basis point from prior quarter as a decline in loan yield outpaced our higher yield on securities and lower cost of funds. Loans grew $362 million or 6% annualized. As shown on Slide 11 of the investor deck, our production was quite strong. Our increase in production this quarter more than offset an increase in prepayments, which produced a net growth of mid-single digits. With the investments we're making into new revenue producers, we expect this trend to continue and loan growth in '26 will be mid-single digits compared to the previous year-end. Deposits were up $620 million or 9% annualized, largely driven by seasonal activity in public fund DDA and interest-bearing accounts, which increased $417 million. As a reminder, we usually experience seasonal public fund outflows in the first quarter of each year. Our interest-bearing transaction balances were up $223 million with higher balances driven by competitive products and pricing. Retail time deposits decreased $90 million due to maturities during the quarter and DDA balances were up $70 million, inclusive of a $191 million increase in public fund DDAs. DDA mix ended the quarter at a strong 35%. We expect our investments in financial centers and revenue producers will support our guidance for deposits, which we anticipate will increase low single digits from 2025 levels. As previously announced, we fully exhausted our share buyback authority last quarter, which impacted capital ratios. Despite enhanced repurchase volume, we ended the quarter with TCE a little over 10% and a common equity Tier 1 ratio of 13.66%. Our Board approved a new 5% buyback plan that will be effective through the end of '26. We are very optimistic as we look forward to the coming year. Our work over the past several years has resulted in solid capital levels, a robust allowance for credit losses, superior profitability, ample liquidity, benign asset quality and now positive trends in balance sheet growth. We are excited for the opportunities in the coming year and believe we are positioned well for a successful and growing 2026. Lastly, I would like to introduce you all to President of Hancock Whitney Bank and Chief Operating Officer, Shane Loper. He will be joining us on our earnings calls going forward. With that, I'll invite Mike to add additional comments. Michael Achary: Thanks, John. Good afternoon, everyone. Fourth quarter's earnings were $126 million or $1.49 per share compared to $127 million or again $1.49 per share in the third quarter. PPNR for the company was down slightly from the prior quarter to $174 million. Expressed as a return on average assets that continues to be a solid 1.96%. NII increased 1% this quarter, driven by favorable volume and mix for both average earning assets and interest-bearing liabilities, partly offset by a slightly lower NIM, which decreased or narrowed 1 basis point this quarter. As John mentioned, our fee income business had a solid quarter and expenses were up due to continued investments in revenue-generating activities. Our efficiency ratio was 54.9% for the quarter and 54.8% for the year. That was down 58 basis points from 2024's 55.4%, reflecting our net interest income growth, strong fee income performance and well-controlled expenses. Fee income grew in each of the 4 quarters this year, totaling $107 million in the fourth quarter. We enjoyed solid performance across each category with the increase this quarter driven by higher specialty income. We expect fee income will be up between 4% and 5% in 2026 with a continued focus on core deposit account growth that often delivers multiple categories of fees. As mentioned, expenses remain well controlled, up only 2% from the prior quarter. Much of this increase was from investments that we believe will enhance our revenue-generating capabilities in 2026. We expect expenses will be up between 5% and 6%, including an impact of about 185 basis points from the execution of our organic growth plan and a full year of expenses related to our acquisition of Stable Trust Company. Expense growth year-over-year was well controlled at only 3.6%, inclusive of ample reinvestments. The 1 basis point contraction in our NIM was driven by lower loan yields on both new fixed and variable rate loans and existing variable rate loans following the 2 rate cuts this quarter. Partially offsetting this was higher bond yields, lower cost of deposits and a favorable mix and rates for other borrowings. Our overall cost of funds was down 7 basis points to 1.52% due to a lower cost of deposits and better funding rates and mix as we ended the quarter with lower FHLB advances. Our cost of deposits was down 7 basis points to 1.57% for the quarter, with the cost of deposits down to 1.53% in the month of December. Following the rate cuts in October and December, we reduced promotional rate pricing on our interest-bearing transaction accounts and retail CDs. In 2026, we expect CDs will continue to mature and renew at lower rates, which will support improvement in our cost of deposits. The yield on the bond portfolio was up 6 basis points to 2.98% due to cash flows of $213 million rolling off at 3.55% and reinvestment in $290 million of bonds at a yield of 4.45%. In addition, we had a $0 loss bond swap of $230 million with a yield pickup of 45 basis points. As John mentioned, we completed a bond portfolio restructuring in the first 2 weeks of January 2026. We sold $1.5 billion of bonds at a yield of 2.49% and reinvested the proceeds in bonds carrying a yield of 4.35%. We're expecting the annual impact will support our NII and NIM growth in 2026 and will contribute 7 basis points to our NIM, $24 million to NII and about $0.23 to earnings per share. Our forward guidance for 2026 is on Slide 22 of the earnings deck and includes the expected impact of the bond portfolio restructuring, but excluding the pretax charge of $99 million. We are assuming 2 25 basis point rate cuts in April and July of 2026. We expect NII will be up between 5% and 6% from 2025 with modest NIM expansion, and our PPNR guide is to be up between 4.5% and 5.5%. Our efficiency ratio is expected to fall in the range of 54% and 55% in 2026. For the fourth consecutive quarter, our criticized commercial loans improved, decreasing $14 million to $535 million. Nonaccrual loans decreased $7 million to $107 million. Net charge-offs came in at 22 basis points. Our loan loss reserves are solid at 1.43% of loans. We expect net charge-offs to average loans will come in at between 15 and 25 basis points for the full year 2026. Lastly, a comment on capital. Our capital ratios remain remarkably strong, even with the full exhaustion of our share repurchase plan, where we bought back about $147 million of shares in the fourth quarter of 2025. Our Board reauthorized a new 5% repurchase plan in 2026, and we expect share repurchases will occur at a more even pace across 2026. Changes in the growth dynamics of our balance sheet, economic conditions and share valuation could impact that view. I will now turn the call back to John. John Hairston: Thanks, Mike. Let's open the call for questions. Operator: [Operator Instructions] The first question is from Michael Rose, Raymond James. Michael Rose: Noticed that the fourth quarter loan production was up about 7.5% Q-on-Q, but paydowns were also up. Maybe Mike or John, if you can just talk about what your expectations are for kind of gross production versus expected paydowns as we move through the year, inclusive of those 2 cuts. Michael Achary: Thanks, Michael. I'm going to ask Shane to start with that answer. Go ahead, Shane. D. Loper: Okay. Thanks, John. And really, what I'll do is I'll try to cover just kind of where the production came from and then tie out with what we see into the future. But first, I'd just like to say thanks to the entire team for delivering a good year of operating results and just thanks for that contribution to the success. I think it's important to note that loan production increased for the third consecutive quarter with nearly $1.6 billion of production in the fourth quarter. You typically, we'll see 35% of all that production funded and then grow to around about 40%. In the fourth quarter, the team produced an additional $260 million in production over the third quarter, which contributed pretty significantly to that 6% growth that we're talking about. Geographically, the banking teams delivered growth across all of our core markets in Texas, Louisiana and Florida. And this is also important because as we intentionally improve our commercial and middle market segment mix, that's going to deliver higher spread relationships. that may offset some of the thinner spreads in the specialty segments. Commercial real estate continues to deliver consistent production, which will fund up once that initial equity burns off in those deals. And we expect to experience sustained fundings that really have occurred with production over the last 18 to 24 months throughout the year in 2026 with expected and planned paydowns as a headwind to CRE growth. And I don't think that's anything new that we're talking about there. A lot of those paydowns will get to lease-up, CO and go maybe to the permanent market. CRE production for 2026 looks to continue to be steady as the 2025 production funds up. Looking at health care, that team continues to deliver growth with current and new banker adds. The production delivers good NII, but that's one of those slightly thinner spreads than the commercial and middle market segments. And I expect health care to continue to deliver as we've shifted our focus more to health care real estate and a selective focus on senior care sponsor operators. Commercial finance, which is our equipment finance and ABL teams, they also continue to deliver strong production and balance growth. We're experiencing good deal flow there so that we can screen credit and are considering and executing on capital -- those companies that are considering and executing on capital investments. As I said about health care, these balances produce positive NII, but are at a little bit lower spread. We saw some consumer loan growth for one of the first times, and it grew about $5 million in the quarter, led by HELOC production. Fourth quarter '25 was our first HELOC growth quarter in '25, about $15 million and a 3-year high of applications in the quarter. So we believe HELOCs will continue to be a solid consumer product into '26, and we get about 40% line utilization there. And finally, kind of wrapping up on growth, I'd like to call out our business banking team. They produced a strong $36 million in growth this quarter at our highest spreads. We recently recruited an accomplished executive from the super regional bank to lead our business banking segment and have high expectations of that team concerning loan and deposit growth throughout 2026. Our goal is to be the best bank for privately owned businesses in the country, and we're committed to delivering on that aspirational goal with quick credit execution, market-leading deposit products and sophisticated wealth management for both businesses and business owners. So if I look forward to 2026, I believe our team is calling on the right clients and prospects to deliver on a better segment mix and deliver on our mid-single-digit growth guidance. So kind of wrapping up, when you look at paydowns, I think we can expect paydowns in CRE. I think we can still expect some entrant of private credit and other lending opportunities like that with some of our clients. But right now, we feel like we've got a fairly stable base to work from, and it's all about generating business going forward. Michael Achary: Michael, any follow-up? Michael Rose: It's a very detailed response. So I appreciate all the color. Maybe just as my follow-up question. So it looks like the ROA target has been moved a little bit higher from last year, but the TCE ratio is also higher. Can you just walk us through some of the other assumptions that kind of underlie meeting some of those targets for your CSOs? I know you have the Fed funds rate at 3.25%, but would just love some other colors around kind of the base case expectations. Michael Achary: Sure, Michael. This is Mike. I can add some color to that in a few comments. I think the biggest thing is this notion of consistent balance sheet growth, organic balance sheet growth over the next 3 years. Our guidance for loans has stepped up this year to the mid-single digits from what we achieved last year, which was akin to more low single digits. So kind of continuing this notion of consistent balance sheet growth over the next couple of years is really important. You called out the rate environment. We're assuming just to keep the assumptions straightforward, Fed funds at 3.25%, which is where we expect Fed funds to end at the end of this year. We'll continue to reinvest back in the company. So I would expect expense growth to be something on par with what we're guiding for this year, which if you kind of strip away the investments that we're kind of calling out in the guidance and the annualized impact of Sabal is still a pretty reasonable run rate of somewhere around 3.5% to 4%, so that kind of continuing for the next couple of years. And then look, we've been tremendously successful in terms of kind of upscaling our fee income businesses. The guidance for next year is in the 4% to 5% range. So to kind of continue that going forward is equally important. We'll grow the deposit side of the balance sheet somewhere over the next couple of years, I think, in low to mid-single digits. And the NIM expansion will follow along with NII growth. So those are the main things. Now in terms of the TCE guide of 9% to 9.5%, we're well north of that now at just over 10%. You can assume that we'll continue buybacks at the levels we've done both in '25 and again, what we're guiding for '26. So I think the combination of continuing a pretty robust buyback program, along with addressing the dividend and organically growing the balance sheet should help us get our TCE down to those levels. So those are kind of the main assumptions. John Hairston: Michael, this is John. Just to -- I'll add very little to it. But I think if we kind of step back to or step up to 60,000 feet and you take what Mike and Shane both shared, the ROA guidance being a little bit steeper than where we are today doesn't seem like a tall task if we weren't reinvesting back in future years' revenue like we are today and what we guided to. But our goal is not to just become a very -- or be a very high profitability organization. It's also to deliver on pretty reliable balance sheet growth year in and year out. So investors see PPNR continuing to grow, but still maintain a pretty profitable book. And that's a hatrick to pull all that off at the same time. And just for a bonus, maintain excellent to very solid credit quality. So if we slowed the expense growth down some through reinvesting less, then our profitability guide would have been higher. But our goal is to add bankers and add offices perhaps the latter part of the year next year and continue growing a bigger balance sheet and higher-growth markets so that on an overall basis, investors are going to see that value build over time. So I hope that helps you kind of bring all those pieces together. Operator: The next question comes from Catherine Mealor from KBW. Catherine Mealor: A question just on the margin. You talked about seeing modest NIM expansion in '26, but we're getting 7 basis points immediately upfront from the bond restructure. Do you -- kind of walk us through kind of what you're thinking about the margin kind of outside of that onetime event? Is it -- do you kind of still see a core margin having upside? Or is it -- or is really that modest expansion coming from the bond restructure and outside of that, we're kind of stable once we hit that new rate? Michael Achary: Sure. I'd be glad to, Catherine. So I think the main underpinnings of what we're referring to in terms of our ability to widen the margin and grow NII next year is really around the balance sheet. So we've got the loan growth pegged at mid-single digits. So if you assume that's somewhere between 4% and 5%, that should add a healthy amount of volume to our balance sheet and certainly coming with that will be an intended increase of average earning assets. So I think, first and foremost, it's organically expanding the balance sheet. Then you called out the bond portfolio restructure. So that will contribute 32 basis points in terms of the bond yield and about 7 basis points on the NIM. But related to the bond portfolio, we also have about $1.150 billion of cash flow, principal cash flow coming back to us next year. That will be coming back at about 3.75% and going back on the balance sheet, call it, between 4.25% and 4.5% depending where rates are. So that's a significant improvement on top of 32 basis points related to the bond restructure. So that could be as much as somewhere between 45 and 50 basis points of bond yield improvement from the fourth quarter of '25 to the fourth quarter of '26. So that's significant. Then in terms of our cost of deposits, we're assuming the 2 rate cuts next year, one in April and one in July. So given that, we've got anywhere from about 25 to 30 basis points improvement in our cost of deposits from fourth quarter to fourth quarter. A lot of that's coming from our continued ability to reprice CD maturities. We've got about $8 billion of CD maturities next year. Those will come off at about 334. The assumption is that they'll go back on at about 280 or so that is inclusive of about an 81% renewal rate. So the organic growth of the balance sheet, the securities yield improvement, our ability to continue to reduce our cost of deposits. Those are the main tailwinds, if you will, toward NIM improvement next year. Probably one of the headwinds would be we do expect with a couple of rate cuts next year, our loan yield will continue to decline a bit next year, but I think at a slower pace than what you saw over the course of the fourth quarter. I think you put all that together and our NIM improvement, call it, somewhere between 12 and 15 basis points, maybe a little bit north of that, again, with 7 coming from the bond restructure. So that's how we're kind of thinking about the NIM and NII next year. Catherine Mealor: And by next year, you mean '26. Michael Achary: '26, yes, I'm sorry. This is the fourth quarter comment. Catherine Mealor: That was really helpful, Mike. And then maybe just as a follow-up back to the revenue producer and hiring plans that you have. You've hired, I think you said 22 new bankers third quarter '24 through fourth quarter '25, so call it, over the past year, and we're now going to do 50 in '26. So we're doubling the amount of bankers that we're hiring. I know part of -- you kind of gained momentum in that plan, I know throughout the course of the year. But maybe just walk us through kind of what gives you confidence in being able to hire that many more bankers this upcoming year versus last year and maybe kind of the pace that we should expect that to come on board as we move through the year? D. Loper: Sure. Catherine, this is Shane. Thanks for that. So we're confident in it. However, hiring is competitive as every bank is looking to hire from a limited pool of bankers. And the reason we're confident is we've significantly enhanced our banker hiring discipline to really look just like our client acquisition process. Our goals are to hire probably a split of 60% business bankers, 40% commercial bankers of that up to 50% in '26. And those folks really are targeted to intentionally generate a better portfolio mix, a little more granular business. The enhanced recruiting process is yielding expected results. We're out of the gate strong in the first quarter. We began this early fourth quarter, and it's a process that is really pretty tight in terms of ongoing meetings, pipeline review of potential hires and where they are and what their skill sets are. And we're following up on that on a very regular basis. So I think the strength of that process has been greatly enhanced. And as I've said before and we've said before, this organic hiring plan is designed to be like a flywheel with bankers hired in previous years and quarters ramping up production as those current year bankers are oriented to our sales and credit processes. So we're getting the production from those folks that the 22 that we've hired last year as we're hiring up to the 50 this year. And really, to date, the bankers hired are performing as expected and contributing to our growth, and we monitor that performance on an ongoing basis to ensure that we're getting what we expect. We're also going to continue to be opportunistic in hiring bankers in our specialty segments. So CRE, health care, equipment finance and ABL. So at this point, given the enhanced processes and the work that's going on, the pipeline, if you will, of potential candidates to bring into the company is good. I feel very good about getting that up to 50 in '26. Operator: Up next, we'll take a question from Casey Haire from Autonomous Research. Casey Haire: So I wanted to touch on fees. The fee guide, I know 4% to 5% seems like a lot, but it's -- you didn't have Sabal, which closed in the middle of the year. And it just doesn't -- it feels a little conservative because if I run rate this fourth quarter here, you're already at that 425% level. So I'm just wondering if there's -- if we're missing something or if it's just a little conservative. D. Loper: Thanks. This is Shane. I'll take that one, too. So fee income across all our banking segments and products, as you just articulated, continues to deliver in the fourth quarter. We've grown consumer DDAs in the fourth quarter and throughout the year. That's contributing to service charges, which will contribute even more as a full year of those accounts are on the books. Mobile openings have increased by 20% year-over-year as well as 80% of our new checking accounts are digitally active. So that really makes them very sticky in kind of primary accounts. Business service charges continue to perform, and those are reflective of the book that we have and our strong treasury service products and services. And as we improve our overall execution in business banking, as I mentioned before, I would expect those deposits and deposit fees to follow along that improvement curve. Card fees right now are generally holding flattish in a trajectory quarter-over-quarter. But I think there's an opportunity there to grow in 2026 through our purchasing card and business card growth. Merchant is another area where we have solid opportunity to grow as that business banking execution improves and our product bundling strategy gains momentum there. Mortgage fees, again, continue to perform, and we're ready for anything that may happen in the mortgage market with our direct-to-consumer digital offering that we have there. You mentioned the Sabal Trust fees. Wealth management continues to contribute and their strong execution with the Sabal team to retain clients and grow the base there. Annuity sales are a little softer in the fourth quarter, but have remained historically strong for us with our managed money contributing recurring fees at about $15.6 billion of AUM. So given those things and our focus on growing core deposit accounts, continuing to deepen wealth management, I think the fee income target of 4% to 5% is solid, and we should be able to chin that bar. Michael Achary: So Casey, this is Mike. One item just for consideration. Certainly, the 4.5% or 4% to 5% might look a little anemic compared to what we were able to do this year, '25. But certainly, you have the impact of Sabal year-over-year, which kind of distorted the '25 numbers a bit. And certainly, '25 was an absolutely outstanding year for something like annuity fees, which is just hard to imagine that that's going to repeat at that same level in '26. The other reminder, I think, is we have a pretty healthy specialty -- series of specialty lines of business in our fee income book. Those things are very unpredictable quarter-to-quarter and even year-to-year, things like BOLI, SBA fees, derivatives, very dependent upon the rate environment, syndication fees, SBIC fees. So if you dig into the quarter, one of the things that really drove the quarter, the fourth quarter was we had a really healthy quarter in terms of SBIC fees, which again is one of those things that's really hard to predict and really hard to count on year-to-year. So I think overall, we feel pretty good about the 4% to 5%. And certainly, we'll look at adjusting that if necessary as we go through the year. Casey Haire: All right. Great. That's super detailed. Okay. And then I just want to finish up on on the M&A question. You guys are doing all the right things and upping the buyback this quarter and pulling up your TCE ratio and clearly making a lot of hires and committed to the organic strategy. But when you talk to investors, there's -- for whatever reason, there's just a lot of concern that you guys are still in the M&A market and open to a deal even though you're saying you're not focused on it. So I guess just what would you say to that concern regarding M&A appetite? Michael Achary: Well, I think the most important thing for us to say is really consistency with what we've been saying in the last couple of quarters, which is really what you just kind of repeated in terms of not something we're particularly focused on. And I think the best way to describe our stance is really opportunistic. And I don't know what else to say about it other than to describe it that way. Again, as we've mentioned before, we're aware of the things that are going on around us. We're not sticking our head in the sand. So we pay attention to those things and talk to folks just as an effort to get to know folks and let them get to know us. But at the end of the day, opportunistic is really, I think, the best way we can describe how we look at that. Hopefully, that helps. Casey Haire: It does. I just -- when you say opportunistic, is there an opportunity above a 3-year earnback? Is that something that's not an opportunity for Hancock? Or is that something that you guys would consider? Michael Achary: I mean, look, in today's world, I think that this threshold of not exceeding a 3-year earnback is something that if we were to go that route, we would not cross that line. But look, that comment does not mean we're doing anything other than just approaching this from an opportunistic point of view. It doesn't mean we have something out there ready to reveal. That make sense? Operator: The next question comes from Brett Rabatin from Hovde Group. Brett Rabatin: I wanted to start on the purchases of securities during the quarter and the $1.4 billion at $435. -- can you talk maybe about what kind of securities those were? And then will that change the effective duration of 3.9 that you had at the end of the year? Michael Achary: It will not, first off, Brett. And in terms of the securities that we bought and sold in the bond restructure that we announced, those were almost entirely commercial mortgage-backed securities. The vast majority of the bonds that we sold, as you can imagine, were bought kind of in the 2020 and 2021 vintage, some in 2019, but almost exclusively commercial mortgage-backed securities. In terms of the no loss bond swap that we did during the quarter, that was also entirely commercial mortgage-backed securities. In terms of the bonds that we bought during the quarter, it was a variety of commercial mortgage-backed, some residential, some SBA. Brett Rabatin: Okay. So you effectively didn't change the duration of the portfolio. It was more just an opportunity you felt like with capital to improve the yield. Michael Achary: Yes. Certainly, we have the capital to invest in something like this. So we decided to pull the trigger on the $100 million. It felt like the right time, the markets at the time were behaving. I'm sure glad we did that when we did it instead of commencing that in the current environment. So we're very fortunate in terms of that timing. But yes, I think so. It was just an opportunity to enhance our NII, enhance our NIM and improve the yield on our bond portfolio. Brett Rabatin: Okay. And then the other question I had was just around deposits. Obviously, solid flows in the fourth quarter, some of that somewhat seasonal. If you look at last year, deposits didn't grow. They were down slightly. And it sounds like from the comments you've made so far, you're expecting to price down CDs and be fairly aggressive with managing funding costs in '26. I'm just curious how you guys think you're going to grow the deposits. Is -- will there be categories where you're more aggressive? Or is there anything in particular that would drive deposit growth relative to what we saw last year? Michael Achary: I'll start just real briefly. But again, the guidance for next year for '26 related to deposits is low single digits. That means 1% to 3%, I guess. But in terms of how we get that, I'll let Shane answer that question, but I think it has all to do with the new hires that we're planning for next year. D. Loper: Yes, Brett, it has some to do with new hires. It has to do with our business banking segment really getting traction in '26. We believe that quick credit execution there brings a multiple of those credit balances and deposits. You heard me talk a lot about the growth that we're experiencing in our geographies. That's core business in new relationships as we bring new bankers on and are calling on different types of clients that bring enhanced deposits. So we are adding -- we talked about investments. We're adding new capabilities in terms of treasury services, which will also be attractive to clients to bring additional deposits to us. So I think it's a combination of new bankers, good calling efforts in our core markets and additional investments that will be attractive to clients to bring additional deposits to us. Operator: Ben Gerlinger from Citi has the next question. Benjamin Gerlinger: I just wanted to -- I know we talked through the hires quite a bit in the notable step-up on '26 expectations. I just kind of curious, do you have any sort of mandate when the new bank kind of signs the bottom line, do they expect to have a loan within amount of time frame or be profitable in a certain time frame? Because I think 50 bankers is great for '26. But in reality, is it fair to think that, that a much stronger '27 and '28 for growth expectations? Michael Achary: Go ahead, John. John Hairston: I was going to say, Ben, your question is about like time to breakeven, time to get to target operating model. Is that the question? Benjamin Gerlinger: Exactly. D. Loper: Yes, Ben, this is Shane. All new bankers, whether they're business banking, commercial or middle market, we measure their effectiveness by risk-adjusted revenue. And we look at that from a total managed and self-originated perspective. And I think it's been said on previous calls, typically, we'll see kind of median breakeven at that 24- to 26-month range. So when you look at new bankers hired last year, a lot of those folks are approaching halfway through where their breakeven point is. And then this year, of that 50, I would think by the end of '27, they would be producing very well on a risk-adjusted revenue basis. And we measure that typically in multiples of the cost of that banker. Benjamin Gerlinger: Got you. That's helpful. And then is there any kind of mandate on -- whether it be the legacy core team you have today or new bankers being added on deposit gathering efforts specifically given the new kind of rate environment? Or how do you think about both sides of the balance sheet when you hire somebody in? Michael Achary: The question is around kind of our expectations on deposits versus loans? Benjamin Gerlinger: Correct. Michael Achary: I have a little trouble hearing you. I'm sorry to ask you to repeat. You want to tackle that one, Shane. Deposit expectations versus loans. D. Loper: Yes. I think it's -- for all of these bankers, we're expecting a blended portfolio. We're not interested in bringing on bankers that are just going to generate loan balances. I mean that's great, but we need the full relationship because with the full relationship, when I talk about that risk-adjusted revenue, you get the credit for the deposits, you get the additional fee income that comes through treasury and card and other activities like that. So when you think about how we are asking our folks to go to market, it's -- obviously, you're going to have to have a credit relationship at some point maybe to get into a new relationship, but we are expecting a full service to include treasury card and all the other fee products to include our sophisticated wealth management products for those business owners that I spoke about. John Hairston: Yes. Ben, this is John. I'll add some color, which I think may be helpful in what you're looking for. We've invested a tremendous amount of money and time over the last decade with tools that help our bankers understand what the implications are of their own portfolio balance sheet. So for example, if in a specialty line that generates credit, but really doesn't have the capacity to generate deposits, then their portfolio under their view is transfer priced on the lending side, risk adjusted for credit and credit degradation or improvement. So they really sort of are the balance sheet manager for their portfolio and their conversations with leadership around their goals look almost like an overall corporate balance sheet discussion in our ALCO meeting. It's a very sophisticated model that took us a long time to put together. And that really was the secret sauce to the improvement. We had an overall cost of funds while pivoting to loan growth last year and what we're expecting in '26. So it's a very balanced assessment. So I wouldn't call it as much a mandate as it is an overall risk-adjusted revenue target for the year and based on their tenure with the company, if that's a building revenue set over time, then the core folks really have to produce liquidity to keep up the funding requirement for the new folks if they're credit focused. But ultimately, their time to generate fee and deposit income will have to continue. So when we say risk-adjusted revenue, that's literally, as Shane said, that's deposits, fees and loans, offset by the risk. Does that make sense? Benjamin Gerlinger: Absolutely, that's helpful. Operator: We'll take the next question today from Gary Tenner from D.A. Davidson. Gary Tenner: I have 2 quick follow-up questions. I guess, the first, Mike, on your comment about NIM improvement, that 12 to 15 basis points you mentioned. I just wanted to clarify to me that sounded more like a 4Q to 4Q number, not necessarily not full year over full year. Is that the right way to think about it? Michael Achary: Yes, that's exactly right. Fourth quarter of '25, the fourth quarter of '26. Gary Tenner: Okay. And then the second, just in terms of the buyback, I don't want to put words in your mouth. But based on what you're talking about it being on a more level basis over the course of the year, subject to maybe leaning in if there were to be some kind of sell-off, it doesn't sound like there maybe is a great deal of price sensitivity at this point. It's more about working down the capital ratios a little bit. Is that also fair? Michael Achary: Well, I think it's fair to say that we're cognizant of the price sensitivity. So that's something we'll certainly consider as we execute that program over the year. the comment was really meant that you will not see a big aggregation or be unlikely to see a big aggregation of buybacks in one quarter like we did in '25. I think it will be all things equal, a little bit more spread evenly across the year. I mean that be literally be across the year. Operator: Next, we'll take a question from Christopher Marinac from Janney Montgomery Scott. Christopher Marinac: Just want to dig a little bit into credit quality. And just was curious if there's anything on the commercial charge-offs in Q4 that would sort of be more just temporary from year-end cleanup? Or would you see perhaps a slightly higher trend going into '26? Michael Achary: Thanks, Chris, for the question. We'll wake up Ziluca to answer that. Christopher Ziluca: Yes. Thanks for the question. Appreciate it. Yes. So from a credit quality perspective, actually, we really are quite pleased with what we see as kind of a very resilient portfolio. Over the past really a couple of years, we've fine-tuned our underwriting and portfolio management processes. So we feel that, that's helping us kind of navigate any sort of specific issues. And as you can see, with both nonaccruals and criticized going down in the quarter, we saw a lot less inflows in general this quarter, which kind of helped with that situation. And then on the charge-off side of things, if I look at, for instance, like the top 4 charge-offs in the quarter, they're really in many different industries. There's not a single industry in there that is similar to the others. So they really are very situationally specific. And in many instances, we had some reserves in place, some specific reserves in place on those matters that were already in our criticized and nonaccrual book. And so that's one of the reasons why you see -- if you go into the more details, specific reserves actually did come down a little bit this quarter because we made a decision to charge those off. Christopher Marinac: Great. So I guess the question, I think is, is there room for you to let the reserve kind of run down over this next year? I mean you're still having low losses relative to a 3- or 3.5-year maturity for the whole book. I'm just curious if you've got cover to kind of gradually lower that over time. Michael Achary: Yes, Chris, this is Mike. I mean, admittedly, we're fairly high where we are at 143 basis points. So I think the short answer is, yes, there's probably a little bit of an opportunity, but we're very cognizant of not letting that ratio get too low. So I don't know that you would see us below 125 or 130 basis points. And again, by making that comment doesn't mean that we're trying to get to that level. It just means all things equal, I don't think we would go below that threshold. Christopher Ziluca: Great. And then as this year plays out, depending on how many we do or don't get in terms of Fed rate cuts, how does that impact this kind of risk-adjusted pricing as you think about it? I know the nominal returns are coming down or nominal yields are coming down, but is the risk-adjusted you think going to be stable? Or maybe that's more internal than you share with us, but just curious how you think about it. Michael Achary: Yes. I don't think it'd be at least stable compared to where we are now, even with a couple of rate cuts. Again, from Shane's comments, and I'll let him add some color if he'd like to. But we're very deliberate in terms of the kind of new loan growth we're trying to add to the balance sheet, very deliberate in terms of the credit quality that we consider. So the risk-adjusted spreads should not, all things equal, compress considerably. D. Loper: Yes. I think we can get better at our pricing and overall deal execution to improve the overall loan yield. I know you're asking about risk-adjusted spread. But I think the better we can execute, the better we can price. And one of our strategic initiatives for 2026 is to calibrate how we actually price and our pricing models to win business and to put some positive pressure on loan yields. And that calibration is going to require intentional focus given potential rate reductions, competition for new deals and pressure on current clients. So I feel like we have an opportunity to put that positive pressure in and Emory Mayfield, who's our new Chief Banking Officer, will be leading that strategic initiative as we go into the year. Operator: [Indiscernible] and everyone, at this time, there are no further questions. I'll hand the conference back to Mr. John Hairston for any additional or closing remarks. John Hairston: Thanks, Lisa, for moderating the call. Thanks, everyone, for your attention. Have a wonderful new year, and we look forward to seeing you on the road. Operator: Once again, this does conclude today's conference. We would like to thank you all for your participation today. You may now disconnect.
Operator: Greetings, and welcome to ServisFirst Bancshares' Fourth Quarter and Year-End Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions]. As a reminder, this conference is being recorded. I would now like to turn the call over to Jim Harper. Thank you. You may begin. Davis Mange: Good afternoon, and welcome to our year-end earnings call. Today's speakers will cover some highlights in the quarter and then take your questions. We'll have Tom Broughton, our CEO; Jim Harper, our Chief Credit Officer; and David Sparacio, our CFO. I'll now cover our forward-looking statements disclosure. Some of the discussion in today's earnings call may include forward-looking statements. Actual results may differ from any projections shared today, due to factors described in our most recent 10-K and 10-Q filings. Forward-looking statements speak only as of the date they are made, and ServisFirst assumes no duty to update. With that, I'll turn the call over to Tom. Thomas Broughton: Thank you very much, Davis, and good afternoon, and thank you for joining our fourth quarter earnings call. I'll give you a few highlights, and then Jim Harper will give a credit update and then David Sparacio will give financial update. So let's start with loans in the quarter. Loan growth was really in line with our pipeline projection with annualized growth of 12% for the quarter. Our pipeline quarter-over-quarter increased by 11%, but net of projected payoffs had increased by 80%. I believe that projected payoffs are most likely understated, but it does appear the payoff headwind is diminishing to some extent. A loan pipeline is an exact, but we have found is indicative of a trend over several quarters. So we're pleased with the quarterly loan growth and a little bit optimistic that things will improve a bit as we go forward. On the deposit side, we did continue to manage down our high-cost deposits, primarily of municipal deposits for both the quarter and the year. We given that if we have some robust loan demand, we find that we can attract some of those type deposits back if they are needed. I talk about new markets, we are excited -- very excited about our new Texas banking team based in Houston that joined us in early December and some during the course of December as we went on. They are in the process of opening an office, but they have been productive in temporary office space already. This group has worked together in the past. So they have hit the ground and running. So we have 9 members on the Houston team today and anticipate hiring more in the first and second quarters of the year. This is a much larger team than we have hired in the recent past since opening the bank in 2005. In addition, the new Texas team, our correspondent -- Texas correspondent division has 35 active correspondent banking relationships and 2 correspondent bankers based in Texas. Speaking of correspondent banks, we do have 388 correspondent banks today, including 145 for which we settled at the Federal Reserve Bank. Our Asian credit card program is also not only endorsed by the American Bankers Association by 12 state banking associations. We have 150 Asian credit card banks in a robust pipeline of new clients and banks in 27 states. In the past year, we added Ohio and Maryland State Banking Association that endorse our agent program. So we're very pleased with the corresponding growth and outlook. I'll now turn it over to Jim Harper for a credit update. Jim Harper: Thanks, Tom. As Tom noted, loan growth for the year was solid, highlighted by a very busy fourth quarter of loan activity that produced an annualized growth rate of 12%. While loan growth was not centered in any particular geography or industry, I'd like to draw a particular attention to the nearly 10% growth in our C&I book during the year, which reflects the highest growth rate in that portion of our portfolio in the past several years. From a credit metric standpoint, net charge-offs for the fourth quarter were approximately $6.7 million, with the majority being related to 1 credit and charge-offs for the full year 2025 coming in at 21 basis points. Our allowance to total loans remain relatively stable throughout the course of the year, ending the year with an allowance to loan loss reserve to total loans of 1.25%. Nonperforming assets to total assets at the end of the year were 97 basis points, which was higher compared to 26 basis points at the end of fiscal year '24, but largely consistent with the 96 basis points we ended at third quarter. But the driver of that notable increase being a year-over-year change associated with exposure to a single merchant developer, which we've gone into detail about previously. We continue to proactively manage our loan portfolio achieving a number of successful outcomes within our problem loan book during the fourth quarter. And as always, we'll continue to actively manage this portion of our portfolio throughout the year. As Tom noted, we're really excited about the addition of our Texas team and based off early activity, they've really hit the ground running. I'll turn it over to David for our discussion of financial performance. Rodney Rushing: Thank you, Jim. Good afternoon, everyone. As you have seen from our press release, we recorded $1.58 of earnings per diluted share for the fourth quarter, which is a 32% increase from the third quarter of 2025 and a 33% increase from the fourth quarter of 2024. Full year earnings per share was $5.25 on an operating basis and $5.06 on a GAAP basis. Net income available to common shareholders was $86.4 million for the quarter and $276.5 million for the year. Our adjusted net income generated a return on average assets of 1.62% for the year and a return on common equity of nearly 17%. During the quarter, our tangible book value grew 4% to $33.62 per share. Our net interest margin experienced healthy growth throughout 2025, rising from 2.92% in the first quarter to 3.38% in the fourth quarter. This expansion was driven by disciplined loan pricing, including a 40% increase in loan fee collection and boosted by deposit rate reductions in the fourth quarter. We continue to experience tailwinds from our repricing opportunities on low fixed rate assets. Our efficiency ratio dipped below 30% for the quarter and as we maintain our cost control and increase our operating leverage. For the full year, the adjusted efficiency ratio stood near 32%, which is a 14% improvement over 2024. Looking deeper into our income statement, we will start with our net interest income. Our asset yields remain strong at 5.79% for the quarter, which is down 3 basis points from the third quarter of 2025 and up 10 basis points from the first quarter of 2025. Loan yields dropped slightly during the quarter to 6.30%, which was pleasing given the 75 basis point reduction in benchmark interest rates during the quarter. We are confident about our asset yields as we continue to be disciplined on our loan repricing efforts as we enter 2026, we are armed with a steady pipeline. During the quarter, we aggressively reacted to the rate cuts and customers responded favorably. This allowed us to reduce our cost of interest-bearing liabilities by 40 basis points versus linked quarters and by 65 basis points versus the same quarter last year. During this 2025 declining rate cycle, we experienced a strong deposit beta of 83 basis points. As Jim mentioned, our credit metrics remained normalized, and as a result, our CECL model, we recorded $7.9 million of provision expense for the quarter and ended the year with an allowance for credit losses ratio of 1.25%. On the noninterest revenue front, we continue to experience lift in service charges driven by our fee increases implemented on July 1, which are reflected in our 26% growth from full year 2024 to full year 2025. We also experienced an 11% annual increase in mortgage banking fee income driven by increased mortgage volume. Excluding our adjustments during the year, our operating noninterest revenue is up 12% for the full year. From an expense standpoint, our noninterest expense compared to the same quarter last year is flat and down about 3% versus linked quarters. For the full year, our noninterest expense is up only 2%. As we enter 2026 and continue to build the Texas franchise, we expect to see growth in our expense base. However, this should be neutral to our efficiency ratio as their book of business grows and generates revenue. In regards to our balance sheet, our loan growth was equally split between our C&I and real estate portfolios with about 10% annual growth in each. As you will recall, we recorded securities losses in both the second and third quarters of this year in relation to a conscious decision to restructure our bond portfolio. The remaining portfolio value has little in regards to embedded losses as evidenced by our small unrealized loss in accumulated other comprehensive income. From a liabilities perspective, year-over-year deposits grew by 5%, and our Fed funds purchase dropped by 26% which was driven by our downstream correspondent banks positioning for year-end. Additionally, during the quarter, we paid down $30 million of sub debt at the holding company level at a cost of 4.5%. Our dividend was recently increased in keeping with our long-standing policy of returning capital to our shareholders. We continue to make investments in our organic growth, as highlighted by our Texas expansion. Our liquidity levels remain strong and we continue to operate without broker deposits or FHLB debt. From a financial standpoint, we are pleased with the company's performance in 2025 and we are in a solid position entering 2026. Now I will turn it back over to Tom for closing comments. Thomas Broughton: Thank you, David, and we appreciate you joining -- we'll take your questions in a minute, but we are pleased we wrapped up 2025 with a good ending. And all of our markets are profitable, except our newest market in Texas, of course. So we do continue to have best-in-class efficiency ratio. We're -- we are excited about 2026, an outlook for banking, and we'll take your questions now. Operator: Thank you. And with that, we will be conducting a question-and-answer session. [Operator Instructions] And our first question comes from the line of David Bishop with Hovde Group. David Bishop: Good evening, gentlemen. Tom, I think last quarter, you mentioned that for every dollar of like new loans, you were seeing maybe half of that go out the back door in terms of payoffs, I think, it was 50 set of payoffs. Just maybe curious how you're seeing payoff trend this quarter from maybe a dollar perspective and maybe expectations in terms of loan growth as you head into the early part of this year? Thomas Broughton: Yes. The -- our net pipeline is way up this quarter over last quarter. And it all has to do with the projected payoffs are much lower this quarter, and I don't completely believe that's true. But the payoff -- projected payoffs has dropped substantially quarter-over-quarter. So again, I don't -- it's an inexact science, and there are probably payoffs we don't know about that are that are coming, though, based on the 10-year treasury yields today, maybe not anytime soon based on the Greenland change in treasury deals today, whatever the Greenland has got to do with it. But nevertheless, we are pleased to see -- at least it's trending in the right direction, Dave, the payoffs will be declining. David Bishop: Got it. Then I think we last spoke, I think on the call, you were saying, I guess, loan demand was okay, not great. Just curious with that in mind in terms of what's happening from an economic backdrop, 10-year rising. Just curious what you're seeing in terms of commercial borrower loan demand on both the C&I and CRE front? Thomas Broughton: It's a little bit better than I'd give it A minus, something like it right now, certainly not A plus, probably not an A. I give an A minus stay, which better than it has been. So we're certainly hitting in the right direction. And of course, you could there are certain asset classes we could book 100% of our loans and hospitality. There are a lot of hospitality loans out there in the market and -- we are pleased that we were very pleased to see C&I demand pick up during the quarter, and that was the best C&I growth we've had in a good while. So we're pleased with that. David Bishop: Got it. I'll stop there and get back in the queue. Operator: And our next question comes from the line of Steve Moss with Raymond James. Stephen Moss: Maybe just starting on the margin here. David, I heard your comment about there was more fee collection in the margin. Just wondering, is that juiced up the margin a little bit more than expected? And -- or should we use this December margin of 350 as a good run rate for you guys into 2026? David Sparacio: Yes, Steve, I think using the December spot margin is a good starting point for 2026. What we did on loan collection piece. The reason it's up was we added a metric in our bankers' incentives to pay them for fees that they collected. And so believe it or not, people do what you incent them to do. And so we've realized some of the loan fees coming through in our income statement. I haven't quantified it in regards to how much it is and margin, how many basis points it is in margin. I mean, I can tell you, our margin, we expect to continue to expand. We talked about how our loan rates, the loan yields are remaining steady in a declining rate environment or at least they're not declining as fast as index rates or even the deposit costs are dropping. So -- we've talked about in the past our repricing opportunities on low fixed rate loans, and we continue to see those throughout 2026. So we expect continued margin expansion -- expansion throughout 2026. Stephen Moss: Could you size up the repricing opportunity for 2026, David? David Sparacio: Yes. I mean, on the fixed rate loans, low fixed rate loans, we have right around $1 billion throughout 2026 that's going to reprice and the weighted average yield on those is 5.18%. So if you look at that compared to our going on rate of about 6.47%, then we got an opportunity to pick up 130 basis points or so on the loan side. And so that's kind of -- that offsets any rate reductions we're seeing on variable rate loans. And of course, we have the floors in as well. We've talked about that in the past. We have floors on about 86% of our variable rate loans and the weighted average rate on those floors is 4.74%. So I think we're in a good position given this rate environment. We remain slightly liability sensitive. And I talked about our beta. We were aggressive in reducing deposit costs. So we were able to take advantage of rate reductions late in the year. And we're going to get benefit of that going into 2026. As far as expectations of rate cuts in 2026. I mean, you guys know how crazy the market is right now. We don't know what's going to happen with Powell, if he can be removed early or not, but there's pressure on him to reduce rates. If you look at the economic projections that the Fed put out at their December 10th meeting, their projection is only a 25 basis point reduction in Fed funds rate for all of 2026. So it's not exactly science right now on what we expect the Fed rates to do. Thomas Broughton: And the $1 billion of repricing you mentioned, that does not include cash flow from loans. David Sparacio: Does not include cash flow. We have an additional $700 million roughly in cash flows and then we also talk about covenant valuations and loan modifications. We see about at least in 2025, we saw about $300 million in repricing as a result of covenant violations and loan modification. So all in, it's about a $2 billion opportunity we have going forward in the next 12 months, Steve. Stephen Moss: Appreciate all that color there. And then -- the other question I have here is just kind of curious in terms of the $5 million charge-off in the quarter. Just wondering which NCL that came from? And -- just curious as to how you guys are feeling about the multifamily workforce housing nonperforming from last quarter? Thomas Broughton: So the charge was related to the health care asset that's -- and this was not surprising in any way, and we were -- we were largely reserved for the charge before this happens. So this was not a surprise, largely has been put behind us now that we're through the fourth quarter. Now with regards to the multifamily asset that we discussed several times last quarter. I think Tom can weigh in here. I'd just say we're continuing to work with the borrower to try to manage those assets and find an orderly way to produce the best outcome we can across the portfolio of 8 loans. The process of trying to sell -- most all of this portfolio slow process in the course of this year. Yes. Stephen Moss: Okay. Great. Appreciate that color there. And I guess just 1 last 1 for me. Just curious as to what you guys were thinking about for the tax rate for 2026? Thomas Broughton: Yes. Tax rate, we're going to continue to take advantage of any kind of tax credits we can -- we did it, of course, in the third quarter, we saw that come through. And we saw really our state rates jump up. Our state apportionments in fourth quarter, so it bounced up a little bit from that. I mean we're going to continue to evaluate, Steve any opportunities we have, particularly around solar credits. That's what we got introduced to and that's what we like. So that we're going to continue to try to manage that down going forward. Operator: And it looks like we do have a follow-up from David Bishop with Hovede Group. David Bishop: Tom, maybe you noted in the preamble about the Texas lift out that the team you got going there. I assume probably too early to talk about balances, anything they booked here. But curious we think about 2026, any thoughts in terms of how big that group can get from a size perspective in terms of loan balances and deposits? Thomas Broughton: Yes. We've got their budgeted growth for 2026 is higher than any other region. To give you an answer. So we have great expectations from Texas, Dave. So we're optimistic. And again, it's -- they're primarily C&I lenders. They're not commercial real estate lenders and our commercial real estate has been -- we've got under 300% of capital right now, and our AD&C is down to 71% of capital. So we feel really good about the reduction in our CRE exposure and where we are. So we're optimistic. We think -- and they're optimistic. They're pretty active in the market. Feel good about the opportunities. David Bishop: Got it. And it sounded like from an expense drag perspective, any additional expenses there you expect to offset on a top line basis. So it sounds like you're expecting the efficiency ratio to hold in and fairly steady, it sounds like? Jim Harper: Yes. I mean we're not going to remain below 30%, David. -- especially with bringing Texas on, I mean, right now, they don't have a book of business, but they do have expenses right. We're paying salary benefits and releasing space. So they're going to be a drag not a significant drag, but there will be a drag, albeit on the efficiency ratio for the short term until they build their book of business and start to generate some revenue, but I think an expectation is in the low-30s for our efficiency ratio to closer to somewhere probably between 30% and 33% is where we expect to see it shake out for 2026. Operator: And it looks like we do have a follow-up from Steve Moss with Raymond James. Stephen Moss: David, you just partially answered my question there. In terms of just thinking about overall expense growth for 2026, it sounds like you're kind of thinking like high single-digit expenses for the upcoming year? David Sparacio: Yes. We're thinking high single digit, Steve. I mean we have -- we actually just went through the budget process for 2026, right? And so we've built in there some additional hires, but there's no back-office hires that are going to be drag -- drags on the efficiency. I mean what we have plugged in or producers who are going to generate a book of business and generate revenue for us as well as expenses. So -- but a good expectation is high single digits for expense growth, yes. Stephen Moss: Okay. Great. And then maybe just along those lines, just in terms of the investment thought process here. And obviously, helping the group hires in Texas. Just curious what you guys think will be the opportunity for the upcoming year. obviously we've had a lot of M&A, whether it's pinnacle or cadence. Do you think there could be additional large team hires that maybe push you guys above that number? Just kind of curious what your -- your guys' thought process thoughts are around the M&A disruption and your ability to hire? Thomas Broughton: Yes. As you obviously are well aware, there are a number of mergers going on, both in the Southeast and the Southwest. I don't know what you include in the Southeast, so I'd add to the Southwest there as well. So we think there will be significant people to talk to. But again, everybody wants to hire the same people. I think right? There's not that many good bankers out in the market. And you read people say they're going to hire 200 new bankers this year, like from where? I don't think there was 200 good ones in the Southeast, if I had to -- if I had to put my money on the line, I'd say there's not 200 good ones in the Southeast, but there -- certainly, we're going to hire everybody we can hire. One of our directors asked us today, if you have a choice between meeting and the earnings, our earnings budget or hiring people which you're going to do. And my answer is we're going to hire the people. We'll let the budget take care of itself next year instead of this year, if we need to. So we're going to hire as many good people as we can find. Stephen Moss: Got it. Appreciate that. And then 1 other cleanup question for me here, just in terms of the BOLI, I think $4.3 million was a death benefit. So the run rate here going forward about $4 million a quarter. Thomas Broughton: Yes, that's correct. We had a $4.3 million debt benefit. So yes, if you back that out, that would be a run rate going forward. Operator: Thank you. And with that, this does conclude today's question-and-answer session as well as today's teleconference. We'd like to thank you for your participation. You may now disconnect your lines at this time, and have a wonderful day.
Operator: Greetings. Welcome to Zions Bancorp Fourth Quarter Earnings Conference Call. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to Shannon Drage, Senior Director of Investor Relations. Thank you, and you may begin. Shannon Drage: Thank you, Bonn, and good evening, everyone. Welcome to our conference call to discuss the fourth quarter and full year earnings for 2025. My name is Shannon Drage, Senior Director of Investor Relations. I would like to remind you that during this call, we will be making forward-looking statements. Please note that actual results may differ materially, and we encourage you to review the disclaimer in the press release or Slide 2 of the presentation dealing with forward-looking information and the presentation of non-GAAP measures, which applies equally to statements made during this call. A copy of the earnings release as well as the presentation are available at zionsbancorporation.com. For our agenda today, Chairman and Chief Executive Officer, Harris Simmons, will provide opening remarks. Following Harris' comments, Ryan Richards, our Chief Financial Officer, will review our financial results. Also with us today are Scott McLean, President and Chief Operating Officer; Derek Steward, Chief Credit Officer; and Chris Kyriakakis, Chief Risk Officer. After our prepared remarks, we will hold a question-and-answer session, and the call is scheduled for 1 hour. I'll now turn the time over to Harris Simmons. Harris Simmons: Thanks very much, Shannon, and good evening to all of you. You've seen on Slide 3, our fourth quarter results reflected continued progress and steady improvement across a variety of key financial metrics. Earnings of $262 million were up meaningfully, 19% from the prior quarter and 31% from a year ago, driven by stronger revenues and notably lower provision for credit losses. Our net interest margin expanded for the eighth consecutive quarter to 3.31%, benefiting from an improved funding mix as customer deposit initiatives reduced our reliance on short-term borrowings. Customer deposits grew at a healthy pace, up 9% annualized. Average loans were essentially flat compared with last quarter, reflecting the payoffs we saw at the end of last quarter, though period-end balances increased by $615 million on solid production. Credit quality was strong with net charge-offs of just 5 basis points annualized of total loans. This quarter's results also included a $15 million donation to our charitable foundation to be spent down over the next 3 years to make charitable donations that we expect would otherwise have been nondeductible for tax purposes as a result of the recent tax law changes. Turning to Slide 4. Full year results were similarly improved relative to the prior year. Earnings grew 21% and net interest margin expanded by 21 basis points. Adjusted PPNR increased 12%. And when excluding the charitable contribution, we achieved over 300 basis points of positive operating leverage. After several years of industry-wide disruption from the 2020 pandemic to the 2023 regional bank crisis and stress in the commercial real estate sector, we're pleased with the resilience of our performance, particularly the stability in credit outcomes throughout that period. Tangible book value per share increased 21% this year, the third straight year of growth greater than 20%, and we believe that we are nearing the point where we'll be able to increase capital distributions while continuing to further strengthen capital. On Slide 5, diluted earnings per share was $1.76, up from $1.48 last quarter and $1.34 a year ago. This quarter's figure includes an $0.08 per share headwind from the charitable contribution, offset by a positive $0.11 per share combined impact from the reversal of the FDIC special assessment and net gains in our SBIC portfolio. As shown on Slide 6, adjusted PPNR of $331 million was down 6% sequentially and up 6% year-over-year. When further adjusted for the aforementioned charitable contribution, it was down 2% versus last quarter and up 11% versus the year ago quarter. With that high-level overview, I'm going to turn the time over to our Chief Financial Officer, Ryan Richards, for additional details related to our performance. Ryan? R. Richards: Thank you, Harris, and good evening to all. Beginning on Slide 7, you will see the 5-quarter trend for net interest income and net interest margin. Net interest income increased by $56 million or 9% relative to the fourth quarter of 2024 and increased by $11 million relative to the prior quarter. For the second consecutive quarter, growth in average customer deposits in excess of loan growth aided our ability to improve funding mix and reduce overall funding costs. As a result, net interest margin expanded for the eighth consecutive quarter to 3.31%. Our outlook for net interest income for the full year of 2026 is moderately increasing relative to the full year of 2025, supported by favorable earning asset and interest-bearing liability remix in addition to growth in loans and deposits. Our guidance assumes 225 basis point cuts to the Fed funds rate occurring in June and September of this year. Slide 8 presents additional details on changes in the net interest margin. The linked quarter waterfall chart on the left outlines changes in both rate and volume for key components of the NIM. The net interest margin expanded by 3 basis points sequentially as improved funding mix and lower borrowing costs offset reductions in asset yields. Against the year ago quarter, the right-hand chart on this slide presents the 26 basis point improvement in the net interest margin, which benefited from the improved cost of deposits. Moving to noninterest income and revenue on Slide 9. Presented on the left in the darker blue bars, customer-related noninterest income was $177 million for the quarter versus $163 million in the prior period and $176 million 1 year ago. You'll recall that last quarter's customer-related noninterest income results included an $11 million impact from the net CVA loss, primarily driven by an update in our valuation methodology. Adjusted customer-related noninterest income, which excludes net CVA, was $175 million for the quarter, representing a new record quarter for the company. This increased $1 million versus the prior quarter and $2 million versus the year ago quarter. The chart on the right side of this page presents both total revenue and adjusted revenue for the most recent 5 quarters, which were impacted by the factors previously noted for net interest income and customer-related fee income. While not presented on this page, it is notable that on a full year basis, capital markets fees, excluding net CVA, increased 25% compared to the full year 2024, driven by higher customer swaps, investment banking and loan syndication fee revenues. As was mentioned in prior earnings call, we set an aspirational goal to double capital markets fees when Zions Capital Markets was formally launched in 2020, consolidating existing product offerings under new executive leadership with a mandate to invest in additional capabilities. We have accomplished that goal and see continued opportunity for outside growth in this business. Our outlook for customer-related fee income for the full year 2026 is moderately increasing relative to the full year 2025. We currently expect that we will be at the top end of that guide. Growth will continue to be led by capital markets, followed by loan-related fees with broad-based growth in the remaining categories from increased activity. Slide 10 presents adjusted noninterest expense in the lighter blue bars. Adjusted expenses of $548 million increased by $28 million or 5% versus the prior quarter and increased 8% versus the year ago quarter. As presented here, adjusted noninterest expense includes the aforementioned $15 million charitable donation. When further adjusting for the donation, expenses were up 2% versus the prior quarter and up 5% versus the year ago quarter. Expense increases for the quarter include increased marketing and business development expenses, higher costs associated with application software licensing and maintenance costs and normalization of legal fees after an approximate $2 million reimbursement of attorney fees last quarter. We expect to continue to manage expenses prudently while investing in revenue generation to support growth. Our outlook for adjusted noninterest expense for the full year 2026 is moderately increasing relative to the full year of 2025. The expense outlook considers increased marketing-related costs, continued investments in revenue-generating people and business lines and increases in contractual technology costs. We continue to expect positive operating leverage in 2026 that we currently estimate around 100 to 150 basis points. Slide 11 presents the 5-quarter trend in average loans and deposits. Average loans were flat over the previous quarter and 2.5% over the year ago period. [ Average ] loans increased by $615 million sequentially with strong commercial growth in our Texas, California and Pacific Northwest markets. Total loan yields decreased 15 basis points sequentially. Our outlook for period-end loan balances for the full year of 2026 is moderately increasing relative to the full year of 2025 and assumes growth will be led by commercial loans, primarily in the C&I and owner-occupied subcategories with additional growth from commercial real estate loans. Average deposit balances are presented on the right side of the slide. Relative to the prior quarter, total average deposits increased 2.3%. Average noninterest-bearing deposits grew $1.7 billion or 6% compared to the prior quarter. This was partially as a result of the approximate $1 billion of migration into a new customer interest-bearing product -- excuse me, migration of a consumer interest-bearing product into a new noninterest-bearing product at the end of the last quarter, which is now being fully reflected in average balances, but also represents the success our bankers have had this quarter in executing on deposit gathering initiatives. The cost of total deposits declined by 11 basis points sequentially to 1.56%, aided somewhat by the lag effect from the time deposit repricing from benchmark rate cuts in the latter part of 2025. Further opportunities to reduce deposit costs will depend upon the timing and speed of short-term benchmark rate changes, growth in customer deposits and market competition and market deposit behavior. Slide 12 provides additional details on funding sources and total funding costs. Presented on the left are period-end deposit balances, which grew by $766 million versus the prior quarter, enabling us to reduce higher cost short-term borrowings, which declined by $653 million or 17% during the quarter. As seen on the chart on the right, our total funding costs declined by 16 basis points during the quarter to 1.76%. The trending in our securities and money market investment portfolios over the last 5 quarters is presented on Slide 13. Maturities, principal amortizations and prepayment-related cash flows from our securities portfolio were $554 million during the quarter or $288 million when considered net of reinvestment. The paydown and reinvestment of lower-yielding securities continues to contribute to the favorable remix of our earning assets. The duration of our investment securities portfolio, which is a measure of price sensitivity to changes in interest rates is estimated at 3.8 years. Credit quality is presented on Slide 14. Realized net charge-offs in the portfolio were $1 million -- excuse me, were $7 million this quarter or 5 basis points annualized. Nonperforming assets remained relatively low at 52 basis points of loans and other real estate owned compared to 54 basis points in the prior quarter. Classified loan balances declined sequentially by $35 million, driven by a $132 million reduction in CRE, offset in part by a $92 million increase in C&I classified loans. We expect the CRE classified balances will continue to decline going forward through payoffs and upgrades. During the fourth quarter, we reported a $6 million provision for credit losses, which when combined with our net charge-offs, reduced the allowance for credit losses by $1 million relative to the prior quarter. The allowance for credit losses as a percentage of loans declined 1 basis point to 1.19% and the loan loss allowance coverage with respect to nonaccrual loans increased to 215%. Slide 15 provides an overview of the $13.4 billion CRE portfolio, which represents 22% of loan balances. Notably, this portfolio continues to maintain low levels of nonaccruals and delinquencies. The portfolio is granular and well diversified by property type and location with its growth carefully managed for over a decade through disciplined concentration limits. As it continues to be of interest, we have included additional details on certain CRE portfolios in the appendix of this presentation. Our loss absorbing capital position is shown on Slide 16. The common equity Tier 1 ratio for the quarter was 11.5%. This, when combined with the allowance for credit losses, compares well to our risk profile as reflected in performance for loan losses. We expect our common equity, both from a regulatory and GAAP perspective, to continue increasing organically through earnings and the AOCI improvement will continue through unrealized loss accretion in the securities portfolio as individual securities pay down and mature. Importantly, our organic earnings growth when coupled with AOCI unrealized loss accretion has enabled us to grow tangible book value per share by 21% versus the prior year. And as Harris noted earlier, is our third year of tangible book value growth in excess of 20%. We believe that we are nearing a position to increase capital distributions while continuing to invest in our franchise to support profitable growth. Slide 17 summarizes the financial outlook slide over the course of our prepared remarks for the full year of 2026 as compared to the full year of 2025. Our outlook represents our best estimate of financial performance based upon current information. Shannon Drage: This concludes our prepared remarks. [Operator Instructions] Bonn, can you please open the line for questions? Operator: [Operator Instructions] Our first question comes from Manan Gosalia with Morgan Stanley. Manan Gosalia: I just wanted to start with a quick clarification question. Just on the guide for expenses. What is the base for the moderately increasing guide? I know you have at the back of the earnings release an adjusted noninterest expense number of $2.1 billion, $2.122 billion. Does that -- is that the right base? Or should we also be stripping out the charitable contribution for this quarter? R. Richards: Yes. I would ask you to think about the base stripping out the charitable contribution for this quarter and then rolling forward into next year, thinking about really that activity relates to, as Harris mentioned, the 3 years forward look about things that might otherwise be tax deductible with the spend outlay at that time. So that's probably where I would anchor you. Manan Gosalia: Got it. So basically take that $2.122 billion number and then strip out the charitable contribution from that and then to moderately increasing off of that. R. Richards: Yes, that's certainly how I think about our core result, yes. Manan Gosalia: Got it. All right. Perfect. And then just a broader question on expenses. You guys operate in a pretty attractive footprint, and we've seen a lot of larger banks come out and highlight growth in branches in new markets and including some of yours. Are you seeing any increased competition in your markets? And if you are, is that the driver behind some of the increased marketing and tech spend that you called out in the deck? Harris Simmons: I think we have -- for as long as I can remember, we faced new competition, particularly during good times. These times are reasonably good. And sometimes they go away when times turn tough. But it's -- that is not per se what is driving our focus on increased marketing spend. It's a revamp of some of our products. And it's a belief that after spending the better part of a decade doing a lot of internal kind of reengineering and fixing a lot of plumbing that we're really in a position to be able to grow at a better clip than we had been over the last decade. So we want to do it prudently and carefully. We care a lot about the credit culture in the company, et cetera. But we're determined to actually spend more on growth initiatives. And so that's what you've seen this past year. You'll continue to see that in the coming year. It's not because of any particular new entrant or anything like that, although they're certainly there. We're in markets that are pretty attractive. And so that's wonderful, but the dark underside of that is it's attractive to folks who aren't here yet. So that's always part of the story. Operator: Our next question comes from Dave Rochester with Cantor Fitzgerald. David Rochester: Just want to start on the NII outlook for '26. I appreciate all the color on the rate cuts. I was just wondering what you're assuming for the funding of loan growth if you're assuming that securities runoff continues and you fill in the rest with deposit growth. And then the magnitude of any kind of funding remix out of broker deposits or out of wholesale funding that you're assuming within that guide. Any color on any of that would be great. R. Richards: Yes. Thanks, Dave. And I can give you some broad strokes. We don't typically deconstruct deposit growth or have any specific guidance about that moving forward to a year. But to your earlier point, certainly, we see the potential for remix on both sides of the balance sheet contributing to the NII outcome. We believe we still have some room to run with the investment securities portfolio before we really feel pinched on the sort of how we think about liquidity stress testing and liquidity ratios. That said, I don't know that we'll continue to see it maybe as forceful as it has been in the past. We're probably getting closer to a taper point. But there is room for additional remixing out of securities into loans and/or paying down broker deposits or wholesale funding. We're spending a lot of time building back from Harris' comments, thinking about growth and what growth looks like for 2026. And we certainly have some aspirations and some plans more than aspirations to build out our deposit base, focusing on granular deposit growth and putting marketing dollars behind initiatives that would help us drive that with the intent, of course, of continuing to pay down those broker deposits where we've had good success year-over-year, but also other short-term borrowings and the like. So stopping short of giving you a specific number because I'd be hazarding a number of assumptions, that is certainly where we're headed -- intend to be headed as an organization. David Rochester: Great. Sounds good. And then I know you guys have -- we talked about this in the last call, talked about a 3.50% margin. We're only 19 bps away from that now. We're in '26. Is this something you think that we can hit by the end of '27? Harris Simmons: I'm not going to hazard a -- put a time frame on it. I think it has so much to do with what happens with rates. And we're going to have a new Fed Chair. We're going to have more going on there that I want to hazard a guess about. But as I've said previously, my comment about is really intended to suggest that I think over time that that's probably getting pretty close to what a stable state could look like for us. We've made a lot of progress. We've got a ways to go. I continue to believe that over a longer period of time that the risk is to higher rates. And so we've reduced our asset sensitivity somewhat. We're closer to neutral right now, but I think very mindful of the possibility of higher rates. I want to be careful that we can deal with that. And -- but in a little -- in a prolonged period where you have kind of moderate short-term rates, some slope to the curve, I think that's where we can get to. But whether that happens in the next 7 or 8 quarters, hard to say. Operator: Our next question comes from John Pancari with Evercore ISI. John Pancari: On the loan growth front, I appreciate the moderately increasing guide. Underneath that, could you help unpack it a little bit in terms of what type of dynamics you're seeing on the loan growth front? Are you seeing demand strengthen? Are you seeing some pull-through in terms of line utilization? And are any of these growth initiatives that you just discussed, Harris, in response to the question, is that banker hiring that in certain areas that can drive some of this growth? Harris Simmons: Yes. I mean we've hired some really good bankers, particularly in the California market, but elsewhere as well. We are very focused on small business lending. That's really central to our thinking about growth is banking smaller businesses. They bring great deposits. We think that our history and our organizational structure and our people are really geared toward that kind of business in a big way. We've seen this past year a near doubling of the number of SBA 7(a) loans that we made, and about a 53% increase in dollars produced. I expect that we'll continue to see very strong growth in that category. I mean we're putting training dollars and marketing dollars and a lot of focus into that. It's not just the SBA program, but just banking smaller businesses generally. And so if there's a particular sweet spot for me, it's kind of watching what happens there. $1 of growth there is better than typically than a couple of dollars of growth in a lot of other places. And so it's not always just the percentages, it's kind of the quality. I mean we're really trying to build a balance sheet that is more productive and it's growing and serving more customers at the same time. So that's -- anyway, that's in a nutshell, how I think about it. Scott McLean: John, this is Scott. I would just add to that, that similar to what I said last quarter, the growth is really going to come in C&I and owner-occupied. We do think we're going to see some growth in CRE. Our goal for as long as you've been covering us has been that we want to grow CRE a little less than we're growing the overall portfolio. And we've fallen a little short on that recently. But I think you'll see some CRE growth where we haven't seen much in the past. I think our municipal business and our energy business are two businesses that have some nice upside potential, and they've been a little flat. And so clearly, the real estate -- the sentiment about CRE and tariffs and economy has caused the whole industry to see sort of sobering loan growth numbers. But I think we're well positioned as business sentiment improves for the reasons Harris said, but also our -- this is going to sound kind of squishy, but it's true. Our call programs are more energized than ever before. And this advertising spend and marketing spend that Harris referenced, it's not just incrementally. It's not just sort of a sequential thing. I mean it's a significant change, and it's very targeted to small and medium-sized businesses, granular deposits, this SBA initiative that Harris mentioned. Harris Simmons: I'd add one other thing that is if you look across the industry, a lot of the commercial loan growth has come out of increased exposure to the NDFI sector. And notwithstanding having stepped on landmine in the fourth quarter, we have not been growing that portfolio and don't really intend to in any kind of meaningful way, any deliberate way. And so in a relative sense, that's actually kind of a headwind comparatively to peers. My hope is that we can actually make up for that again, in some of these areas we've been talking about, small business. We will have some CRE growth. And we'll probably see a little bit of municipal growth, but a lot of it will be commercial. R. Richards: And just underscoring what both Harris and Scott have said and bring you back to Dave's earlier question, it's not just the trade-off between securities and loans or broker deposits or wholesale borrowing, it's the mix within the loan portfolio that both Harris and Scott described that will be beneficial for NII as we're seeing it. The other part that I didn't pick up in my earlier response was, and we talked about it, the terminated swap effect, speaking of headwinds, that's been a headwind for us that's been diminishing thankfully over time that we -- as we chart the year of 2026, we see about $29 million worth of headwind associated with that, about half of what it was in 2025 as being another contributor towards a better NII outcome for 2026. John Pancari: Got it. All right. And then separately on capital, just wanted to get your updated thoughts on the potential timing of a return of share buybacks. I believe you had indicated you're kind of nearing the point where you could consider capital return and increase in it. I think your CET1 ratio, which you've been watching a little more closely, increased about 40 basis points this quarter and then your CET1 up 60 bps. And so both TCE and CET1 heading in the right direction. So curious what your updated thoughts are there. Harris Simmons: I think it's probably this year, but not -- probably not this next quarter. In the second half, I think you'll see -- I would expect we're going to be in a position to start to accelerate capital returns. But I'm not going to give you a target amount, et cetera. At some point, we're in a position to do so, we'll announce something. And -- but I don't think it's a long ways off. Operator: Our next question comes from Chris McGratty with KBW. Christopher McGratty: Just following up on that question on the buyback. I know during the 2023 banking drama, the rating agencies got pretty loud about capital levels. I guess when you do announce or when you are preparing to announce the buyback, how important is that? And again, what -- is that a tangible common equity consideration versus the CET1? How are you thinking about all the constituents? R. Richards: Listen, clearly, it's an important stakeholder for us, and we really appreciate the engagement that we get. And certainly, I think they've appreciated the fact that we've been in a build back mode here for a good long time. So we're not suggesting there's a wholesale change here. I think that it's more of a recognition that we're still building back on an AOCI inclusive basis to where we think peers are. It's just the timing, whether there's an opportunity to kind of change the pacing of how long it takes to converge. So as Harris pointed out, it's yet to be determined, all those things are subject to OCC approval and Board approval. But we continue to -- thank you for John's acknowledgment earlier that there's been some really good trending on this basis. We've seen that as well, and it's showing up in our statistics and how we're growing our tangible book value, all really, really positive. And when you look at that headline number, there's a lot to like on it. We still tend to screen lower among our peer set when you include AOCI. So we're not giving up on this kind of tangible book value accretion path that we're pursuing. It's just a question of whether or not there's an opportunity to do something along the way while you're driving convergence. Harris Simmons: I think it's helpful that a good portion of this tangible common equity build has been facilitated by -- it's locked in place. I mean it's highly predictable. And that ought to be important to rating agencies. It is to us that it's something that time takes care of as much as anything. So we'll feather things in. It's not going to be a cliff event, but we want to continue to build capital, and we're looking at it CET1. We think about it in a world where AOCI is included in the number. But also from a regulatory perspective, it looks like there's nothing really imminently on the horizon that would change the current treatment of AOCI in capital. So -- and I think we'll have some room. Christopher McGratty: Great. And then the follow-up would be on the source of deposit growth. You may have touched on it, so I apologize. Ryan, about 5% noninterest-bearing growth in 2025, I hear you on the initiatives. Within your guide for '26, did I miss what are you assuming for NIB growth or NIB mix? R. Richards: Yes. We don't typically guide on deposit side of that, Chris. And certainly, we just try to roll it into our NII and how we see that holistically. But suffice to say, based upon the things that we're prioritizing for strategic initiatives that we certainly would expect to see growth across the noninterest-bearing dimension as well as interest-bearing deposits, trying to pull those whole relationships, net new relationships into the bank. So that's where that whole growth orientation you're hearing from us, not just this year, but going into last year, putting some marketing dollars and some real focus behind those campaigns. In terms of the refreshing, as Harris alluded to before, of our offerings, potential to bundle products that we think are really relevant for our clients and the like. Operator: Our next question comes from Bernard Von Gizycki with Deutsche Bank. Bernard Von Gizycki: Maybe just following up on noninterest-bearing deposits. I'm just curious that most of the growth there, the $1.1 billion year-over-year and then the decline $310 million sequentially. Was there growth from new customer acquisitions within the consumer gold account? And can you just share now that legacy account migration has now ended, how do you expect this to trend from what you've been hearing from the branches? Harris Simmons: Yes, there was -- yes, there has been growth, although it's -- these accounts, we've opened new -- these aren't just conversions of existing accounts, but the new accounts, we've opened close to about 4,000 of them since we kind of relaunched this a few months ago. I expect that number to pick up in '26. We're seeing average balances of about $10,000 per account. For established accounts, we're seeing -- it's about triple that. And so in other words, it's attracting a kind of clientele that we think actually can lead to really substantial balances. The total size of deposit relationship in this whole portfolio of almost 50,000 accounts is -- averages about $125,000 per customer. And so we think it's a really attractive kind of focus that group to be focused on. And that -- yes, it should help. But it also -- I mean, noninterest-bearing accounts are also -- they're subject to what happens to interest rates. A big portion of the commercial loans are supporting the provision of services through account analysis, for example. There are a lot of other things going on that can move these numbers around. But we're trying to make sure that as we think about the long term that we're continuing to build a really solid base of granular accounts that are -- they're smaller, they're insured, but they're not tiny. They're actually really good business. So that's what we're trying to do. Scott McLean: And I would just add that the number Harris referenced on sort of net new kind of accounts, we're really just kicking this campaign off. We were piloting it in the second half of '25 and -- but it's now rolling out with greatly enhanced marketing across the entire company. Bernard Von Gizycki: Got it. I appreciate that. Just my follow-up. I think you've indicated in the past that you expect 2 to 3 basis points a quarter of fixed rate asset repricing. You mentioned the 2 rate cuts assumed in '26. Just update us here, same assumption. And if the rate -- if the Fed is at a rate cut pause, how does that estimate change, if at all? R. Richards: Yes. Thanks, Bernard. I mean what we're currently seeing now, obviously, with the changes we had later last year, we're not seeing quite that level in terms of fixed loan repricing impacts on our earning asset yields. Right now, we would say is that around 1 basis point as opposed to where we were previously. And then with additional cuts in the future, you can imagine that it would erode that value opportunity for us. Operator: Our next question comes from Ken Usdin with Autonomous Research. Kenneth Usdin: Just wondering -- I know the question of tailoring has come up on prior calls, but now that there's been even more discussion from the regulatory front about the potential to either index levels or maybe even raise the bar fully. Are you thinking about anything differently with the asset base still hanging around $90 billion in terms of either future growth investments you have to make, your outlook on acquisitions, et cetera, as we wait maybe a more formal change than we've seen in a couple of years? Harris Simmons: Yes, Ken, I think as we've seen -- as we've said periodically over the last couple of years, the -- even without the announcements from the OCC with respect to their heightened expectations rule and others, similar kinds of changes that have been proposed or made. We didn't see the $100 billion threshold as posing any real kind of a threat to -- as we noted, we were -- because we were the -- we were actually the smallest systemically important financial institution in the wake of the passage of Dodd-Frank back in 2011. I mean, we were subject to all of the industrial strengths that JPMorgan Chase and Bank and everybody else wants. And so we built the capabilities, the models, not only for credit stress testing and stressing the balance sheet, liquidity, et cetera, all of the work that went into building sort of COSO compliant, three lines of defense, risk management infrastructure, et cetera. Our intent is to never dismantle that. We found a lot of value in it. I mean, some of it was taken to extreme, some of it was -- some of the documentation, et cetera, was painful and overly expensive, et cetera. But we've maintained the capabilities and it, I think, makes us a stronger company. And so we just don't think there's even much of any kind of speed bump going across $100 billion. We don't feel compelled to try and boy, you're going to cross 100, you got to get to 200 or anything like that sort. It's going to be about the same as crossing 80 was, which was kind of a nonevent. So that's how we're thinking about it. It's not an inhibitor in terms of thinking about deals. It's not a reason that we would think about deals. We only think about deals in the event that they were really attractive. And right now, it's -- I don't know that we're likely to see anything. And we need to improve our valuation. Something comes along that is absolutely compelling, we'll certainly consider it. We're not going to be taking pledges or painted into a corner of thinking about things in a particular way. I hope we'll think about it as good long-term ownership of the business would. But the $100 billion threshold isn't a factor one way or the other in that thinking. Kenneth Usdin: Understood. And Ryan, one just follow-up on the operating leverage point earlier. So is it the right way to think about it? You mentioned the core base and then add back the charitable -- take out the charitable contribution. That's the base in which you're talking about the 100 to 150 basis points of operating leverage. R. Richards: Yes, that's correct. Kenneth Usdin: And just the range, it's great to hear you guys focusing to the $100 billion, $150 billion. But what would be the difference on your expense growth? Would it just be like how revenues come out and you have some flex to triangulate up and down? Sorry for that extra one. R. Richards: Yes. I think you always have to recognize that if the revenue environment changes, you have to rethink the way that you approach your expense side of it. But I just -- I included that as part of my written remarks and spoken remarks because it wasn't obvious, of course, with our forward guidance and the words we choose, whether or not there was a positive operating leverage in there. And we absolutely believe that's the case as we see it today. And that's where we -- if you look at what our results have been for quite a long time, we've been pretty consistent in driving customer fee growth on a compound annual growth rate of about 4%. That's really what we showed up with this past year as well. And we think we see an opportunity to do a little better on that dimension moving forward, building on some of the momentum we've been having in our businesses. And that's going to be, we think, really helpful in driving some of that leverage. But we'll pay attention to expenses as we move through the year. Harris has always said we're going to run this place for the long term. We're going to invest in growth and do things that maybe in the moment don't pay for themselves, but we've had some pretty nice returns on the investments we've been making in recent years. So that's how we're thinking about it. Operator: Our next question comes from David Smith with Truist. David Smith: On credit, you highlighted an expectation for CRE classified to continue to decline. There had been an uptick in C&I classified offsetting some of the CRE decline we had this past quarter. Is there anything chunky in that $92 million C&I increase this quarter in terms of like a few big particular names? And just as a follow-up, would you also expect general stability in the C&I classified size of the portfolio? Or would there be a bias towards an increase or a decrease as you see things today? Scott McLean: Sure, David. This is Derek. Let me answer the second question first. It's hard to say exactly where the C&I downgrades may come from or improvement. It just generally depends on the economy. We do see CRE improving throughout the year. We have a good line of sight on that. We just continue to see it taking a little longer for some companies to perform. One thing I will say because we're not concerned with losses, I think we're going to try to retain a lot of the loans. We may be willing to carry some of the criticized and classified real estate loans a little bit longer just because they're on their way to performance and an upgrade. As far as the C&I downgrades, I wouldn't say there's anything chunky in there. It's pretty broadly distributed across industries. And it's something we're watching. Again, it depends on where the economy goes. I would point out that while we've seen the uptick this quarter in the C&I classifieds, we're actually down since year-end 2024 for C&I classifieds. So it's not jumping out as concern at this point, but something that we're paying attention to. Operator: Our next question comes from Anthony Elian with JPMorgan. Anthony Elian: A follow-up on operating leverage. You gave us the base for expenses backing out the foundation contribution. But just to clarify the base for revenue, Ryan, does the base for fee income exclude the adjusted noncustomer fees? I think that was $44 million you have in the back of the press release. Harris Simmons: Yes, can you say that one more time? Anthony Elian: Yes. I'm just curious if you can give us the base for fee income, right? You have some items you back out on Slide 5 and the back of the press release. So if you can give us the base to use for operating leverage, that would be great. Harris Simmons: I think the customer fee income. R. Richards: It's hard to predict year-to-year what we're going to get on the security gains and losses. So that's just kind of how we think about core expenses. Harris Simmons: [indiscernible] related noninterest income, yes. Anthony Elian: Okay. And then my follow-up -- so from this call, it sounds like there's a lot more emphasis on growth initiatives this year, including hiring, which I fully appreciate. But you left the expense outlook unchanged. So I'm wondering if there's directionally a range you point us to for expenses within your guidance of moderately increasing. R. Richards: Yes. I mean, listen, if we first the tape about a year ago, we were coming out of a time when we were keeping things, I think, pretty tight, slightly increasing would have been more and maybe at times slightly to moderately, we allowed that to start migrating up because of this growth agenda. So I don't know that would point you to a specific point. We usually talk about moderately being like a mid-single digits type number. I probably just warrant you somewhere in the middle of that. We'll see what we get. But really, the intent here is to do things that feel strategic to us and to -- and it should feel different and look different if we're successful reaching in our growth goals. But the types of numbers that we're talking about that Scott alluded to before, may not be fully evident, but we have some real aspirations in driving commercial loan growth and allowing for some increased CRE. There could be some offsets there in the sense that we've talked a little bit in the past about what we're doing on our 1 to 4 family resi strategy and having more of an orientation to held for sale. So we think that there's potential for more of that to show up this year. But without that, we could really put, I think, some decent loan numbers up. Scott McLean: On the expense guide, also, I would just say that there's -- and we've said this in previous years, but there's probably about $40 million of savings initiatives in there that keep us at the expense growth rate number that we're at. So this isn't just -- it's just the same as last year, plus a little bit more. It's there's quite a bit of work on continued efficiency gains and optimization and particularly with AI and some of the things we're doing with process change and new technologies that can help us lower cost as well as outsourcing. We have a lot of levers to pull on, and that helps keep the expense number down and has for years. There's nothing new about it. Operator: Our next question comes from Janet Lee with TD Cowen. Sun Young Lee: For clarification on NIM. So if I look at your earning asset yields in the fourth quarter, it looks like lower rates had an impact on your earning asset yields declining about 15 basis points. And you talked about 1 basis point of fixed rate asset repricing lift. So if I assume 2 to 3 rate cuts in 2026, is it fair to say earning asset yields are declining through 2026 and the NIM trajectory is really dependent on the shape of the yield curve and what you can do on the deposit front? R. Richards: Yes. Listen, I think those are all fair observations and deposit production and our success there will always have an outsized impact on how we show up on NIM. Our success year-over-year has been able to manage down our funding costs more aggressively than what we're seeing in terms of on the asset side because we've had some really nice remix that as an offset to some of the things that would otherwise play through on the resetting of benchmark rates. We haven't guided yet, and it's almost like -- I can't imagine we go through a call without saying something about latent and emergent type things. But we do include some of those materials in the back. I think Harris alluded to before, we took a little bit of the edge off of some of our asset sensitivity metrics that you would have otherwise seen us maybe earlier through some hedging activities that we put on, just trying to guard against maybe some near-term rate cuts. What the asset sensitivity would tell you is that we still think there's opportunities for things to play through on a latent basis, things that haven't already found price discovery on fixed assets playing through. We have about 60% of our term deposits that are set to reprice in the first quarter of 2026. So -- but as somebody who as a group that's still asset sensitive on the whole, we say -- we show with the overlay of the forward curve that, again, just using a sensitivity view that we could stand to have a better 1-year quarter forward outcome even against the backdrop of a forward curve that would apply two more rate cuts. And that, of course, doesn't take into account our prospects for loan growth and a dynamic balance sheet, the mix of our loans, how we would be taking cash flows from our securities portfolio and reinvesting them in other places, including loans and other gainful uses. So there's lots of contributing factors in there. Hopefully, that gives you a little bit of direction about how we feel and how we're guiding for NII 1 year hence. Sun Young Lee: That was very helpful. And clearly, you've made some good strides in improving your capital levels, including AOCI accretion that has happened over the past years. Could you -- and clearly, you're more open to doing buybacks over the near to intermediate term. Could you give us a refresh on your M&A stance? Harris Simmons: Well, I think I did a few minutes ago. Our stance is we're not -- we don't have a stance per se. We're not looking for deals. They come along and they make a whole lot of sense, might be interested. I don't see us doing anything really large. That would surprise me at the moment. And so it's just not -- it's not a part of our daily day-to-day kind of thinking, frankly, in terms of what we're really focused on. So I've been pretty determined not to say that we're not -- that we would never do a deal or anything of that sort. That said, we're not looking to do deals to -- as I said earlier, to become a particular size or we do things that we think are really, really attractive financially and fit culturally, et cetera. It has to check some boxes before I'd be particularly interested. Operator: We have another question from Manan Gosalia with Morgan Stanley. Manan Gosalia: I think you mentioned in the prepared remarks that you could come in at the top end of the guide on customer-related fees. Can you just talk about what the drivers are there? Scott McLean: Yes. Manan, this is Scott. I think we're inclined to make that comment principally because we're seeing really good momentum across a wide range of our customer fee product areas, and we see that carrying into the new year. So that, combined with this additional advertising in these products, just give us really a nice outlook, we think, on customer fee income. But it's -- instead of capital markets dominating the growth in our fee income, we're very encouraged by what we're seeing across almost all of our fee income businesses. And that's a little bit different story and a little bit different guide. Manan Gosalia: Relative to what you've said before. Got it. Scott McLean: Yes, yes. Operator: Our next question comes from Jon Arfstrom with RBC Capital. Jon Arfstrom: A couple of follow-ups. Scott, one for you. When you look in the earnings release, the FTEs are down the last couple of quarters. And you might have just touched on it a few minutes ago, but can you talk a little bit more about what you're doing in terms of AI and tech and just the general FTE outlook? Are you seeing real impacts and that's what's showing up in the FTE count? Or is it... Scott McLean: Yes, Jon. Thank you for that question. And you'll remember a high point for us was August, really the third quarter -- second quarter of 2019 when we were at about 10,300 colleagues. We're now down below 9,300. And we think that, that number will continue to go down over the next couple of years. And it's -- over the short term here, outsourcing -- our outsourcing strategy, we've been reengaging with that and with three outstanding partners that work with us in other ways as well. And so that will continue to have momentum. We probably -- a year ago, we were well below where peers are. Most peers would report that they outsource somewhere between 10% to 15% of their stated FTE base, and we were probably around 3%. So we're really just leaning into a lever that has always been available to us, but we're more encouraged and confident about it. So that's where you're going to see some of it. But the use of AI, again, we've been using AI for a long time for things like fraud detection, client authentication, product recommendations, financial statements spreading, some unstructured document processing, et cetera. And so -- but the proliferation of new ideas that can remove touches, human touches from a process, can remove multiple data entry, can streamline what we do, it's significant. And we're moving kind of from an exploratory phase, which I'd say we've been in for the last 1.5 years to really highly focused on a small couple of handfuls of projects where we can see the most leverage in simplifying what we're doing in end-to-end processes. So those would be the kind of automation, AI, outsourcing would be pretty meaningful contributors. Jon Arfstrom: Okay. And then just one more on loan growth. Just the improved expectations, are the borrowers more optimistic? Or is it you becoming more comfortable or a combination of both? And then I'm just also curious kind of what's going on at Commerce Bank. The growth numbers were pretty strong there, if you could touch on that. Scott McLean: I'm happy to take the first one. I mean I think borrowers are business owners, CEOs, they're kind of in the same place they've been for the last couple of years, again, between commercial real estate industry concerns, tariffs, the economy in general, whatever happens to be in the newspaper this morning, it just has people a little uncertain. So I think that's one piece. And the other piece is just we are -- we feel very encouraged about all the steps we're taking to grow, which we've talked about in this call. Harris Simmons: I'd say Commerce Bank, their relative size can produce more volatility probably in terms of growth numbers than you'd see in other parts of the company. So I don't think there's anything that's probably necessarily trend there. Operator: This now concludes our question-and-answer session. I would like to turn the call back over to Shannon Drage for closing comments. Shannon Drage: Thank you, Bonn, and thanks, everyone, for joining us tonight. We appreciate your interest in Zions Bancorporation. If you have additional questions, please contact us at the e-mail or phone number listed on our website, and we look forward to connecting with you throughout the coming months. This concludes our call. Operator: Ladies and gentlemen, thank you for your participation. This concludes today's conference. Please disconnect your lines, and have a wonderful day.
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