加载中...
共找到 24,777 条相关资讯
Global stocks staged a relief rally after Trump rolled back his threat to take Greenland by force, recouping most of their earlier losses, just as they have after previous episodes.
'Mad Money' host Jim Cramer looks ahead to next week's market game plan.
One clear beneficiary of the turmoil: precious metals. Silver has been unstoppable, hitting $100 for the first time in history with a 43% year-to-date gain.
G2 Weather Intelligence's Paul Walsh joins 'Fast Money' to talk the impact of the upcoming snowstorm on the stock market.
President Trump delivered an address at the World Economic Forum (WEF) in Davos, Switzerland, this week that struck a softer tone around Greenland and NATO tariff threats. Earlier in the week, US leader touted his administration's economic achievements and domestic policy from the first year of his second term.
Investors may be tempted, after three years of double digit gains, to ditch the stock market amid this year's bout of volatility. Jim Lacamp, senior vice president with Morgan Stanley Wealth Management, is encouraging them to white knuckle it.
Ned Davis' Tim Hayes joins 'Closing Bell Overtime' to talk his approach to the current market momentum and if it could continue.
Market Domination Overtime anchor Josh Lipton breaks down the latest market news for January 23, 2025. Talley Léger, The Wealth Consulting Group Chief Market Strategist, discusses why cracks in the labor market could lead to more interest rate cuts and boost stocks.
The Dow Jones Industrials and the S&P 500 edged lower on Friday.
While stocks and Treasurys put in a partial recovery after President Trump's pivot on Greenland, the greenback struggled to keep pace and booked its worst week in eight months.
Morgan Stanley's former autos analyst has big ideas in his new gig covering the robot economy.
Consumer outlook improved in January, reversing some of the sharp deterioration seen at the end of last year, though the recovery remains tentative. The University of Michigan's Index of Consumer Sentiment, reported on Friday (Jan. 23) rose to 56.4 in January from 52.9 in December, reflecting gains in both current conditions and expectations.
Operator: Good morning, and thank you for standing by. Welcome to Booz Allen Hamilton Holding Corporation's earnings call covering third quarter fiscal year 2026 results. At this time, all participants are in a listen-only mode. Later, there will be an opportunity for questions. I'd now like to turn the call over to the Head of Investor Relations, Dustin Darensbourg. Thank you. Dustin Darensbourg: Good morning, and thank you for joining us for Booz Allen Hamilton Holding Corporation's third quarter fiscal year 2026 earnings call. Hope you've had an opportunity to read the press release we issued earlier this morning. We have also provided presentation slides on our website and are now on slide two. With me today to talk about our business and financial results are Horacio Rozanski, our chairman, chief executive officer, and president; Matthew Calderone, executive vice president and chief financial officer; and Kristine Martin Anderson, executive vice president and chief operating officer. As shown in the disclaimer on slide three, please note that we may make forward-looking statements on today's call which involve known and unknown risks, uncertainties, and other factors that may cause our actual results to differ materially from the forecasted results discussed in our SEC filings and on this call. All forward-looking statements are expressly qualified in their entirety by the foregoing cautionary statements and speak only as of the date made. Except as required by law, we undertake no obligation to update or revise publicly any forward-looking statements. During today's call, we will also discuss some non-GAAP financial measures and other metrics, which we believe provide useful information for investors. We include an explanation of adjustments and other reconciliations of our non-GAAP measures to the most comparable GAAP measures in our third quarter fiscal year 2026 earnings release and slides. Numbers presented may be rounded and, as such, may vary slightly from those in our public disclosure. It is now my pleasure to turn the call over to our chairman, CEO, and president, Horacio Rozanski. We are now on slide four. Horacio Rozanski: Thank you, Dustin. Welcome, everyone, and thank you for joining the call. Today, Kristine, Matt, and I will share Booz Allen Hamilton Holding Corporation's financial results for 2026. Before we dive in, I would like to begin by acknowledging the transition of our chief financial officer, Matthew Calderone. As we announced in December, Matt will be leaving on February 1, and today is his final Booz Allen Hamilton Holding Corporation earnings call. Matt has been with the company for over twenty-three years and has had a meaningful impact in all his leadership roles. Most recently as our CFO, he led us through a period of significant growth, deepened our connections with the investor community, and helped many analysts and investors better understand what we do by actually showing them our tech. He also played a pivotal role in strengthening Booz Allen Hamilton Holding Corporation's leadership position in the tech ecosystem through our investments and unique partnerships. Matt, I'm grateful to you for all your contributions. On behalf of all of us, we wish you the very best. To continue our search for a new CFO, Kristine Martin Anderson will serve as our interim CFO in addition to her duties as our chief operating officer. Kristine is an exceptional leader, has led and grown large businesses, and currently drives the execution of Booz Allen Hamilton Holding Corporation's strategic and operational priorities. Thank you, Kristine, for leading us with this transition. And now let's turn to our performance. During our October earnings call, we said we expected the macro environment to remain fluid and dynamic for the foreseeable future. We also outlined three priorities we would focus on to strengthen our near-term financial performance, expand our market leadership, and reaccelerate our growth. Those priorities were to reduce our cost, accelerate our transition to outcome-based contracting and product sales, and focus our investment by doubling down on proven growth vectors like cyber, national security, partnerships, and AI. Our third-quarter results demonstrate we're making strong progress against those priorities. Our results are in line with the revised fiscal year guidance we shared in October, and we are narrowing the ranges at the top and bottom lines. Our performance reflects Booz Allen Hamilton Holding Corporation's strong execution and our ongoing transformation in a continually evolving and complex macro environment. On today's call, Matt will walk you through the numbers in detail, and Kristine will share our outlook for the remainder of the fiscal year. Ahead of that, I will focus my remarks on progress against our three priorities, both in terms of current performance and on strengthening the foundation for the future. Let's begin with the first priority: reduce cost. Early in the quarter, we took swift action to execute the cost reduction program we described on the October earnings call. These crucial and difficult actions were necessary to enable agility in a changing market. They also create capacity to invest in growth. In parallel with the cost reductions, we navigated the longest government shutdown in history. The shutdown exacerbated an already slow funding and awards process. Our performance demonstrates our resilience, disciplined cost management, and strong execution. I am particularly proud that we supported our employees who were impacted during the historic shutdown. This decision was consistent with how we handled prior shutdowns. It ensured our people could immediately return to their customers' missions when contracts restarted. Overall, our results this quarter show that even in the midst of uncertainty and change, Booz Allen Hamilton Holding Corporation is managing the business tightly while preparing for the future. Shifting now to our second priority: accelerating our transition to outcomes-based contracting and product sales. As part of the overall transformation of our business, we continue identifying opportunities to reshape our portfolio and deliver more technical outcome-based work. The recent divestiture of a portion of our DARPA business sets us up to unlock technical performer opportunities that align with our growth vectors. For example, our investments in full-spectrum cyber capabilities are strongly aligned with DARPA's mission. As DARPA accelerates tech acquisition through their expedited research implementation series, or ARIES Marketplace, we are positioned to be a direct supplier of advanced technology and solutions. We also continue to partner with our customers to convert existing work and procure new opportunities through more commercially oriented buying practices, including fixed-price models. For our work on Thunderdome, this zero-trust cybersecurity program, we have successfully transitioned the majority of existing task orders to include a fixed-price component. We were also recently awarded nearly $100 million of fixed-price work to expand Thunderdome across the Department of War. Through these efforts, we will continue advancing Zero Trust capabilities, including accelerating AI and ML adoption for cyber defense use cases. As we shift more of our portfolio to fixed-price and outcome-based models, we gain more flexibility to innovate how we deliver. This will create cost savings for the government and support Booz Allen Hamilton Holding Corporation's margin expansion over the medium to long term. Staying on the topic of cyber, Booz Allen Hamilton Holding Corporation's Velox Reverser is a good example of how we are productizing our IP for commercial sales. Velox Reverser is our AI-native malware reverse engineering product. This week, we're launching it in general availability to both federal and commercial customers. Velox Reverser accelerates an organization's response to today's most complex cyber threats. It performs fully automated malware analysis and delivers actionable intelligence in minutes, versus what traditionally takes days. As AI-enhanced cyber attacks increase and become one of the primary threats of 2026, this product is a force multiplier for cyber defense efforts. Thus, Booz Allen Hamilton Holding Corporation is redefining our future, innovating what we build, how we build, and how we deliver to ensure the best value for our customers. Lastly, we've made advances in our priority number three: focusing investments by doubling down on proven growth vectors to drive acceleration. Our progress is evident through the expansion of our national security portfolio, the combination of our defense and intel businesses, as well as our industry partnerships. First, we continue to see strong demand for our technologies within the national security mission. Two United States Navy examples illustrate this point. We recently announced the award of a $99 million contract with the Navy's Military Sealift Command, where we'll deliver wireless capabilities onboard ships around the world. Using low earth orbit satellites, advanced Wi-Fi, and 5G, our tech will enable ships to have secure, reliable connectivity at the tactical edge. Additionally, many of our customers continue to increase our contract ceiling based on exceptional delivery and how well our exquisite tech works in their missions. We saw this with the Navy's Program Executive Office for Unmanned and Small Combatants. They recently expanded our work in the areas of unmanned and autonomous systems, mine and mine countermeasures, and mission modules for littoral combat ships. This is in addition to work already delivering for the Navy on our visual object localization and tracking solution. It uses machine learning and open architecture interfaces on autonomous platforms to passively detect and track objects in a maritime environment. Our national security portfolio is well aligned to the Trump administration's highest tech and mission priorities and positioned for continued growth and expansion. The other growth vector where we have doubled down is our industry partnerships. We are leveraging the tech ecosystem by engaging and investing in new ways, with a specific focus on the best companies in Silicon Valley. Earlier this month, we announced a new partnership between Booz Allen Hamilton Holding Corporation and Andreessen Horowitz, or a16z, one of the world's premier venture capital firms. Booz Allen Hamilton Holding Corporation is the first-ever a16z technology acceleration partner for governments. We've been working with a16z portfolio companies for many years and have an exceptional track record in building and delivering transformational solutions. That success is the foundation for this expanded partnership, and we look forward to building on our shared passion for driving the future of American technology. Together, we will co-create unique commercial tech for national security, public safety, healthcare, and other government missions. Booz Allen Hamilton Holding Corporation has committed to deploy up to $400 million in a16z's late-stage venture fund over the life of the fund. This is good for Booz Allen Hamilton Holding Corporation, it's good for our shareholders, and it's good for the country. Through this game-changing partnership, we will choose national challenges that need to be solved, build innovative tech solutions, and deliver outcomes at speed and scale. In closing, our performance this quarter and our progress against our three priorities give me confidence that we are on track operationally and strategically. Looking ahead, we will continue to anticipate change in a dynamic environment. We will operate efficiently and with agility, accelerate our transformation, and we will focus on returning to growth. And now I'll hand off to Matt to cover our third-quarter financials. Matt, for the last time, over to you. Matthew Calderone: Thank you, Horacio. And good morning, everyone. As Horacio noted, this has remained a dynamic fiscal year. I share his pride in how Booz Allen Hamilton Holding Corporation has risen to the challenge, as well as his optimism for the future. Here are my five takeaways for the quarter. First, our third-quarter results are in line with the revised fiscal year guidance we issued in October. Even with the protracted shutdown, revenue ex-billables, where most of our profitability is generated, tracked in line with expectations. Both adjusted EBITDA and ADEPS were stronger than anticipated. Second, we successfully navigated through both the government shutdown and significant cost actions in the quarter. The shutdown pushed some procurements and funding actions to the right. We believe, based on our estimates, these will have a cumulative impact of about $50 million on revenue and $20 million on profit for the full fiscal year. Additionally, in our national security portfolio, which includes our defense and intelligence businesses, the shutdown caused approximately $60 million in billable expenses in the quarter to move from Q3 into Q4. We also completed meaningful actions to adjust our cost structure, dropping our run rate spend by approximately $150 million. The full impact of these cost actions on profitability will be felt next fiscal year. Third, we continue to operate the business very well. We are running the business efficiently and seeing strong contract-level execution. This is reflected in our strong margin performance in the quarter. Fourth, while third-quarter hiring and near-term funding were impacted by the shutdown, the overall demand outlook has improved. As of December 31, our qualified pipeline for next fiscal year, that is fiscal year 2027, stands at nearly $53 billion. This is 12% higher than where our fiscal year 2026 pipeline was at the same point last year. And finally, we saw a meaningful decrease in our tax rate from a change in estimate related to the finalization of our fiscal year 2025 return. These changes included a higher R&D tax credit for more qualified technical work in our portfolio, as well as additional revenues qualifying for the foreign-derived intangible income deduction. We expect this to provide 47¢ of incremental benefit to ADEPS for the full fiscal year. Importantly, we also anticipate that a meaningful portion of this benefit will be recurring. I will now walk you through third-quarter performance in more detail. For the quarter, gross revenue totaled $2.6 billion, representing a roughly 10% decline versus the prior year period and a 7% decline on a revenue ex-billable basis. The government shutdown had two impacts on revenue in the quarter, one permanent and one temporal. We lost some revenue due to work not performed, and we also saw some revenue push from Q3 to Q4 given timing delays and billable expenses. Adjusting for these impacts, gross revenue in the quarter was down about 6% year over year, which is roughly in line with our expectations. Within these consolidated results, our performance remains bifurcated across markets. Our national security portfolio declined about 1% year over year in the quarter, inclusive of the impact of billable expenses shifting out of our Q3. Adjusting for the impact of the government shutdown, our national security portfolio grew about 4% year over year. As anticipated, our civil business declined about 28% year over year. We continue to expect this business to remain stable through the remainder of the fiscal year and are optimistic about its future. Turning now to demand, awards in the quarter were seasonally light. As noted earlier, the shutdown caused delays in some funding actions and shifted some award activities to subsequent quarters. Net bookings for the third quarter totaled $888 million. This equated to a quarterly book-to-bill ratio of 0.3 times and a trailing twelve-month book-to-bill of 1.1 times. The overall pace of funding was meaningfully slower than prior third quarters, down 32% year over year. As a result, funded backlog fell 10% year over year. However, we did see a meaningful pickup in funding activity in December as customers worked through backlog related to the government shutdown. Despite friction in the funding environment, we ended the calendar year with a record year-end backlog of over $38 billion, up about 2% over the prior year. As we look ahead, the qualified pipeline for next fiscal year, fiscal year 2027, stands at nearly $53 billion. This is 12% higher than where our fiscal year 2026 pipeline was at the same point last year, with national security up 12% and civil up 10% year over year. Turning now to headcount, Booz Allen Hamilton Holding Corporation ended the calendar year with roughly 32,000 employees. Our customer-facing staff was down 2% sequentially in the quarter. Notably, this includes involuntary terms of about 2.5% and headcount losses from the divestiture were about half a percent. Our focus remains on ensuring we have the right talent to execute our backlog and support pipeline growth. As funding flows and contracts continue to ramp, we are scaling hiring accordingly. Moving now to profitability, strong contract execution and disciplined cost management helped drive profitability in the quarter. Adjusted EBITDA for the third quarter was $285 million. This translated to an adjusted EBITDA margin of 10.9%. Through the first three quarters of the fiscal year, our EBITDA margin was also 10.9%. We still expect margins to step down in the fourth quarter due to normal spending patterns and the anticipated catch-up in billable expenses. Further down the income statement, third-quarter net income was $200 million, a 7% increase year over year. Adjusted net income was $215 million, an increase of about 9% from the prior year. Diluted earnings per share increased roughly 12% year over year to $1.63 per share. Adjusted diluted earnings per share increased about 14% year over year to $1.77 per share. These increases were driven by meaningfully lower effective tax rates and a lower share count that were partially offset by lower operating profit and slightly higher interest expense compared to the prior year period. In the quarter, we also recognized a $7 million pretax gain from the divestiture of our DARPA cedar work, which is excluded from our non-GAAP adjusted income in ADEPS. Transitioning now to the balance sheet, our balance sheet remains strong, and we continue to generate meaningful cash flow. At the end of the third quarter, we had $882 million of cash on hand, net debt of $3.1 billion, and a net leverage ratio of 2.5 times adjusted EBITDA for the trailing twelve months. As a result of particularly strong collections in December, free cash flow for the quarter was $248 million, inclusive of $261 million of cash from operations, less $13 million of CapEx. I will now turn to capital deployment. In the quarter, we deployed a total of $195 million. This included $125 million in share repurchases at an average price of $95.16. Our total repurchase activity was just over 1% of outstanding shares in the quarter. It included $67 million in quarterly dividends and $3 million in strategic investments made through Booz Allen Ventures. We are also pleased to announce that today our board of directors approved a quarterly dividend of 59¢ per share, which will be payable on March 2 to stockholders of record as of February 13. Finally, before Kristine walks you through the outlook for the remainder of our fiscal year, I want to take a brief moment to thank the people of Booz Allen Hamilton Holding Corporation. Booz Allen Hamilton Holding Corporation is an extraordinary place that does essential work for our nation, often in areas and in places that we cannot discuss. It has been a great joy and an absolute privilege to be part of this company. I'm truly excited for Booz Allen Hamilton Holding Corporation's future. With that, Kristine, over to you. Kristine Martin Anderson: Thanks, Matt. I want to add my thanks to Matt for his incredible contributions to Booz Allen Hamilton Holding Corporation's success. He will be missed, and we wish him great success in his new role. I will now walk you through our updated fiscal year 2026 outlook. Please turn to slide seven. We remain focused on execution in the remaining months of a dynamic year. We expect quarter four funding to improve over quarter three but remain slower than usual. We will continue running the business effectively and efficiently. As a result, we are tightening towards the lower end of our guided range for revenue, adjusting cash flow accordingly. We are also narrowing our EBITDA range and increasing adjusted EPS. We now expect to deliver revenue between $11.3 billion and $11.4 billion, given some of the impacts from the prolonged government shutdown. We expect an adjusted EBITDA dollar range of $1.195 billion and $1.215 billion. We are raising our ADEPS guidance to a range of $5.95 to $6.15 per share. Lastly, we expect to generate free cash flow between $825 million and $900 million. We enter the final quarter of this year confident in our trajectory and our right to win. Demand for our national security technology and expertise remains robust. At the same time, our civil business is reset, and demand is accelerating. It has been personally rewarding to work with our amazing people and commercial tech partners to develop and pitch big ideas that advance critical missions, about which we are deeply passionate. For example, this quarter alone, we've advanced our cyber tradecraft and prepared to launch Velox Reverser. We completed a major design review on the Air Force's tactical operations center light program, the Air Force's next-generation mobile command and control system. We launched America the Beautiful passes on recreation.gov. We engaged our allies on Zero Trust and Warfighter tech solutions. And we co-developed innovative solutions with our tech partners, from long-term partners like NVIDIA, AWS, and Shield AI to newer venture portfolio companies. We are shaping our future. With that, operator, let's open the line for questions. Operator: Thank you so much. And as a reminder, to ask a question, simply press 11 to get in the queue. To remove yourself, press 11 again. One moment for our first question, please. Colin Canfield: Hey. Thank you for the question. And, Matt, thank you for your leadership. Character is the long-run determinant of many nations alike, and honestly, it's something you've exhibited in spades from your 2022 starting point. A Russia's invasion of Ukraine to this year's volatility. So certainly want to thank you. As and then switching over to maybe the question side of it, as we think about the end market expectations for FY 2027, is it fair to characterize Defense and Intelligence as growing with civil flat? And then essentially, when do you expect the downdrafts to lift on Civil in FY '27? Thank you. Horacio Rozanski: Hey, Colin. Good morning. Let me start. Let me frame the conversation. First of all, I think the headline for this quarter is about strong execution across all aspects of our business and about positioning for the future by investing in our growth vectors and transforming the business, especially with an eye towards growing the bottom line and reaccelerating our overall growth. You know, our national security business continues to see good growth and very good prospects. But I think what's really exciting to us is our civil business is beginning to reignite. If you know, the pipeline is up double digits both in national security and in civil. And we're beginning to see some movement on the award activity in the civil side, which we have not seen all year. So my cautiously optimistic take is that the market does feel like it's at an inflection point. We obviously need to get through a couple of, still a couple quarters of challenging comps. But the business is certainly starting to feel a different energy across the board. And where we see the uplift is really in the areas that we're describing as our growth vectors. Our AI business continues to grow strongly. We see both good growth and acceleration in our cyber business, our defense tech business looks good, and this work that we're doing with commercial partnerships is also going to bring another wave of opportunity. Colin Canfield: Got it. No. I appreciate the color. And then in terms of the kind of multiyear civil setup, can you maybe kind of talk to it? As we think of, like, the pieces that have been downdrafts this year, that are likely to get made up over a multiyear period, maybe just frame kind of that construct versus the concept of just like a high-level rebuilding the civil administration and maybe, like, how you think about the multiyear level of work not just, like, the quantitative makeup from this year, but essentially, the level of cuts that have gone through civil this year and, essentially, how do you think about that as being an opportunity for Booz Allen Hamilton Holding Corporation over a multiyear period? Kristine Martin Anderson: Yeah. Thanks, Colin. I would say that civil has changed. And that happens across administrations. We got a bit of a delay this time, certainly with all the cuts. The biggest trend is that modernization and transformation on cloud to a focus on readiness of data platforms that are critical for AI. You see consolidation of platforms within and across agencies, and that's a focus and still a strength of ours. And, definitely, our delivery track record is what has them turned back to us. In terms of specific missions, while a smaller proportion of our forward-looking pipeline, health will always be a national priority. And we are seeing green shoots in AI-enabled public health, biothreat detection, fraud detection. At FAA, we're focused on an AI-powered aviation safety data platform. At Homeland Security, we're focused on autonomy at the edge, where integration of sensing and compute and decision-making is required. And then, you know, weather infrastructure ground processing, AIML for multisource intelligence, integrating commercial sources. There's just a few examples. Colin Canfield: Okay. I appreciate it. Thank you. Operator: Thank you so much. One moment for our next question that comes from Gautam Khanna with TD Cowen. Please proceed. Gautam Khanna: Yes. Thank you, and congratulations. Was wondering if you could talk about the cost reduction plan. How much of that is yet to unfold? And how much, if you could maybe you said it, how much was realized in the quarter? Matthew Calderone: Thanks, Gautam. I mean, the actions are done. Obviously, they happened over the course of the quarter. And remember, given the nature of how we do accruals, in that sort of cost-recoverable environment, it's not always a one-to-one impact of cost reductions to the P&L in a given quarter. They're essentially done. We'll see a little bit of the impact in Q4, but this really is about setting us up for next year. And to go back to Colin's question, you know, obviously took a shock on our civil business at the beginning of our fiscal year. And, you know, these actions will essentially reset our margin structure to accommodate for the shift in our portfolio caused by those one-time actions in civil. So you saw very little of it in Q3. You see maybe a little bit more of it in Q4. The full weight next fiscal year. Gautam Khanna: Gotcha. And then could you talk a bit about or expand on your comments about how things have picked up with respect to the pace of contract award activity? And maybe I don't know if you're comfortable sharing, but what do you anticipate submitting over the next couple quarters in terms of, you know, don't know if you can quantify? You gave the big pipeline opportunity set, but what are you actually pursuing? Kristine Martin Anderson: Yeah. Thank you. Over the next couple quarters? I mean, we are seeing more movement in December post the shutdown. So funding in December was more than twice what October and November were combined, and January has started off strong as well. Seeing some movement in the awards and just funding overall. We are pursuing the kind of work that we've talked about in AI and cyber, in defense tech, doing a ton of co-creating with our partners. We have focused in national security in areas like space ground and full-spectrum operations, AI-enabled cyber operations, and I've just talked a bit about civil. So still very much tied to our growth vectors. Horacio Rozanski: Yeah. And the other thing I would say is, as you know, we have plenty of contracts healing, and so what we're looking for are signs, and we're beginning to see signs, but it's early. Of demand picking up, and then this is Kristine pointed out demand in civil is picking up and demand against our key defense growth areas and national security growth areas remains strong. Gautam Khanna: Thank you. Operator: Thank you. Our next question comes from the line of Sheila Kahyaoglu with Jefferies. Please proceed. Sheila Kahyaoglu: Hi. Good morning, guys, and congratulations, Matt, and thank you for all the help. So maybe if we could just start off in terms of the civil, Kristine, you talked about the green shoots, and the color is really helpful with the pipeline growing double digits. But it was down 28% in the quarter or lower sequentially. How much do you think was tied to the shutdown? And how do we even start thinking about a return to growth in that market? Kristine Martin Anderson: Yeah. I think the civil business overall had, you know, this been a year of reset, right? And the shift from cuts to focusing on the president's priorities, I think, is what you're seeing in terms of, you know, there was very little award activity that occurred in the majority of the beginning of our fiscal year, and we are just starting to see that turn now. So that pipeline has been there. We're starting to see some on-contract growth. We're starting to see the awards unlock, and we are certainly seeing the pipeline expand. Sheila Kahyaoglu: Got it. Thank you so much. And then maybe, Horacio, one for you. I'm sorry. I'm gonna put a big picture question out there for you because I know you appreciate them more. Know, you think about the way you sell to the government, you know, maybe what are one or two biggest changes you've done to transition the business a bit more, whether it's in health or defense or civil? If you could just talk about that. Horacio Rozanski: Yeah. I mean, there are a couple of things that are different now than they were perhaps a year ago. One of them is we have been working on all of these commercial partnerships. We've had our venture fund for a while, but that has really picked up and accelerated. And we have become a lot more agile in the way we go to market with these companies, you know, hence, the a16z partnership. There's a good example there on payments, for example. You know, as you know, the US government is one of the largest, if not the largest payer in the world if you think about all the payments they have to process. And the idea of bringing commercial solutions to that, you know, we reimagined how we would approach that not just from the solution standpoint, but even from how we would have the conversation, how we would sell it, how we would run a pilot, who we would bring in. And we were able to put together a couple of companies from the Valley that have great capabilities, one of which was focused on this topic, one of which has nothing to do with this topic that was in the a16z portfolio. And we see more of that in the future, and we see ourselves advantaged because we can truly create a complete solution across all of these technologies. There are opportunities like that that we see in health. There are things we're already pursuing, and we have been pursuing against priorities for the Department of War. From counter US to integrated C2 to battle management. And so, to me, that is sort of one big trend. The other big trend is we continue to drive our own work towards outcome-based. We've been having this conversation with customers for a while. The level of receptivity of that, since acquisition reform was announced, has gone up significantly. I talked in the prepared remarks about the Thunderdome opportunities and how things there are moving to fixed price. We believe that this is going to be a significant trend over the next couple of years that we view very positively. Now, part of the way that plays out is once we take more control over the delivery, we can actually lower the cost to the government, which is why this is good for the government. While at the same time, if we perform well, driving our profitability, which is why I've been saying over the next couple of years, I would expect Booz Allen Hamilton Holding Corporation's bottom line to grow faster than the top line as we, again, deliver more value and capture more value. Sheila Kahyaoglu: Great. Thank you so much. Operator: Our next question comes from Scott Mikos with Melius Research. Please proceed. Scott Mikos: Morning, Horacio and Matt. Nice results. Good job on the cost. They got your headcount was down 12% year over year. Just as the business returns to growth and you leverage AI-based solutions, do we expect organic revenue growth to outpace headcount growth going forward? And is that enough to offset the pricing pressures you're seeing on some of the civil programs as they come up for recompetes? Matthew Calderone: Yeah. Thanks, Scott. The short answer is yes. Right? I think, you know, we're running the business efficiently, and we're also getting more leverage out of technology as, you know, even the things Horacio described. You know, we're leading with solutions that are more tech-forward. So you did see our revenue and profit per employee go up. I think that's a trend that you'll see persist into the future. Scott Mikos: Okay. And then one other modeling question. Previously, you had mentioned you expected a $170 million cash tax refund in fiscal 2027. Does the cash tax benefit from this year and the change in tax rate impact that refund you're expecting next year? Could it be a little bit higher? Matthew Calderone: No. But, you know, we do see, you know, there are still three cash tax headwinds for next year. There's the continued unwind of $1.74 and the state's ongoing assessment of the one big beautiful bill. There's what you just mentioned, the $170 million refund from the IRS. And then, you know, the benefit from the incremental R&D tax credit recognized this quarter, we don't expect to convert to cash this year. You're gonna see some of that next year, and then, you know, given the recurring nature of at least some of that tax credit, it should be a longer-term cash tax headwind. Scott Mikos: Okay. Got it. Thank you. Operator: Thank you. One moment, please, for our next question. It comes from the line of John Godin with Citi. Please proceed. John Godin: Hey, guys. Thanks for taking my question. I wanted to just kind of dialogue a little bit about the defense budget outlook. You know, there's this idea of the possibility of a $1.5 trillion budget. And I don't expect you guys to take a view on that, but what I was hoping was you could just offer thoughts on how a company kind of prepares for even the possibility of something like that. Do we, you know, look out there and say, let's make some investments ahead of that? We've seen other companies engage in M&A possibly ahead of a change in inflection in the budget. Do we just look at it and say, let's wait and see what really happens? Maybe you take a view and you say, alright. It could be 1.2 or 1.3. Seem to be so many permutations possibility of that kind of growth, I'm just curious when the customer's messaging, how does that kind of feed into the strategic thinking? And it's not a leading question. Obviously, we don't know. I just wanted to kind of dialogue a little bit about it. Horacio Rozanski: Well, you know, it's a great question. And, you know, what the president has been clear all along about rebuilding the industrial base, the defense industrial base around recapitalizing some aspects of it around bringing new technology to bear for our warfighters in the battlefield. And I think a larger budget, whatever the number ends up being, is consistent with the messaging that's been going on all along. And from our perspective, we have been preparing all along to support those priorities. If you go back a year ago, we were talking already about leaning forward heavily into opportunities with Golden Dome even before that got fully articulated. We expect that to accelerate in the coming year as one example. You know, we're doing a lot of work on space. Our traditional strength in cyber, we expect next year to be a significant year for cyber across the board. In part because of what we're seeing with the budget, but frankly, in part because the agentic cyber attack and, you know, the first publicized one was when Anthropic had the courage of coming in and explaining how cloth was used maliciously for an attack. All of that is going to, in our view, accelerate the need for more cyber at the intersection of Cyber AI in the next year. And we have been making significant investments in all those areas. Right? That's why the way we pick it up is there's a few growth vectors that we believe will ultimately drive significant growth for Booz Allen Hamilton Holding Corporation and significant value against these key priorities. Cyber, AI, national security, especially related to space, and the border. Defense technology. Right? I mean, and all of these commercial parts, again, set us up to be able to bring solutions quickly into those spaces, which is why we're excited about it. So that's the way we're thinking about it. You know, this is a very dynamic environment. And there's a level of unpredictability around the environment and across all of our markets that we have now sort of put into our management motion. And so we're looking to become more agile. Matt talked about the cost takeout. That is an element of that. So I believe we're well poised right now to respond a little bit ahead, but we don't need to get too far ahead of budgetary either headwinds or tailwinds in a stronger way than we have over the last twelve months. John Godin: Got it. That was very helpful. It sounds like, you know, needless to say, regardless of what happens, a budget like that is something that you think Booz Allen Hamilton Holding Corporation will find ways to participate in a meaningful way. Horacio Rozanski: Completely. John Godin: Okay. Thanks a lot. Operator: Thank you. Our next question comes from the line of Seth Seifman with JPMorgan. Please proceed. Seth Seifman: Hey, thanks very much, and good morning. And congratulations, Matt. I wanted to ask, when we think about the funded backlog and recognizing that the award situation depressed Q3, where do you think you can end the year on funded backlog? And will that be enough to allow for growth in fiscal '27? Kristine Martin Anderson: As I mentioned, we are starting to see awards accelerate, and we hope that continues through the rest of the quarter, although it has been choppy, good months and bad months in terms of pushing funding out. And we're less focused on Q4 at this point because we're keeping ourselves heavily focused on building momentum for next fiscal year. Work that we win in February would still have time to ramp up, which would affect the next year. But we are seeing strong funding in December, really positive signs. As I mentioned, so far in January, very strong, an improved demand environment. Pipeline's up. But lots of proposals being worked at all moments here, and also even unsolicited proposals, OTAs, CSOs, it's very active. And, you know, we are, you know, we've got ourselves right-sized and ready and positioned for growth. Seth Seifman: Okay. Okay. Great. Thanks. And then maybe, as a follow-up, in your filings, you guys have pointed out the potential for increased competition from new players and commercial competitors. Are there places you'd point out in the business where you see that threat being more acute or maybe where you already see more competition from new competitors? Horacio Rozanski: You know, the competitive market has already evolved. You looked at the people that we would have listed as primary competitors five years ago and even primary teammates five years ago, and the people that we team with now is a different competitive set. For us, we look at this as, you know, more as where can we create opportunities by taking advantage of the fact that we have a unique set of relationships with the tech world. Certainly, the work we're doing with AWS, I'll give you an example. We're working with AWS on an agentic AI platform that would transform intelligence analysis. That's one example. The fact that AWS is interested in co-investing with us and co-creating with us there is hugely exciting. Does that mean that somebody, another tech company, will work with somebody else on a competitive platform? Probably. And that's okay. We believe that teaming together, we can do more. You know, the work we've done with NVIDIA all the way back to 2017 positions us uniquely, and, again, I could go through the list. Right? But from Shield AI to hidden level, small companies that you never heard of to the largest companies, we have built, I believe, a unique ecosystem that can take advantage of the different trends that we see in the market. Seth Seifman: Great. Thanks very much. Operator: Thank you so much. Our next question comes from the line of Jonathan Siegmann with Stifel. Please proceed. Jonathan Siegmann: Good morning. Thank you for taking my question and good luck, Matt. Just in the past, you've highlighted tactical selling and on-contract growth as one of the challenges of this dynamic environment. And Kristine, you had some encouraging comments about seeing a recovery in civil. I just wanted to clarify whether this is normalized for the entire portfolio, or is it still below trend and expecting that there'll still be a challenge next year. Thank you. Kristine Martin Anderson: Sure. On-contract growth will always be important. And it's really just a matter of matching the customer's needs with solutions that we can bring forward to them. There's always a constant selling that's going on. As we mentioned, the funding environment has been choppy, right? So does two months make a trend? I hope so, but we're going to see here over time. There is a trend toward just funding smaller amounts, more frequently, and that's a lot more activity for a lessened workforce. But we do see encouraging signs in that area, both in the funding and also, as we mentioned, in the pipeline, and that includes pipeline for on-contract growth as well as pipeline for new awards. Jonathan Siegmann: That's great. Thank you. And then if I can slip in another one about larger new program, Golden Dome, the company's capabilities are really well suited for the mission. Can you just maybe level set what, if anything, we might hear about the company's role publicly understanding a lot of it's happening in the dark world? Thank you again. Horacio Rozanski: Yeah. We're, you know, we're excited about our space business in general from space domain awareness to ground systems and bringing AI to developing common ground systems and virtualizing that entire infrastructure. On Golden Dome, we have been very active pursuing a number of opportunities, many of which we are not prepared to talk about yet. But we see this as an area where Booz Allen Hamilton Holding Corporation, as you said, has a lot to contribute. And we expect and hope to see significant growth there. And, again, I mean, I'll take it back to something Kristine said. The environment is still choppy and uncertain. And so part of what we need to do and we need to continue to do is find these areas where the mission priorities, the funding, and our capabilities are well aligned and double down on those areas, which is why you're hearing us talk about this growth factor. You're gonna hear us talk about those growth vectors. You're gonna see us invest in these areas to drive both top-line and, in particular, profit growth. Thank you. Operator: Thank you so much. And our last question will come from Tobey Sommer with Truist. Please proceed. Tobey Sommer: Thank you and good luck, Matt. I was wondering if you could comment on what you might see as the interplay. You know, the president indicated an appetite for a real tectonic change in defense spending next year. But I'm wondering if there would be interplay in offsetting areas should the growth in defense be very substantial, you know, as opposed to just blowing up the deficit. In particular, is civil an area that you think would be a source of fiscal restraint? Horacio Rozanski: That has been the trend certainly over the last year. And even inside the Department of War, they've done a lot of work to kind of make sure that they're focusing funding against the key priorities. The one big beautiful bill was pretty specific in terms of the areas of investment. It was not broad-based. And so we interpret things going into next year as, again, you know, the president and the administration picking key areas of focus and doubling down on funding and national investment against those areas. With an expectation that industry will follow suit and participate in that, you know, part of what we're trying to do is anticipate it from the standpoint of positions that we're taking, the capabilities that we're funding, the growth vectors that we're investing in. But a big part of it is we've built more agility into our system. Again, I point you to the cost reduction. I point you to the fact that we've flattened and simplified the management layers in order to be able to respond more quickly to the fact that as funding potentially gets reprogrammed against these priorities, even if overall funding is higher, we need to be well-positioned to respond to that. And I believe that we are. We've made significant strides. Kristine Martin Anderson: And I would also add that, you know, if you go back a couple of years, when I was a civil sector president, I used to talk about enduring missions. These are missions that have to be done in civil regardless of administration, but what changes is the approach. And so we're seeing that, right? Still need a strong FAA and aviation safety. You still need to deliver healthcare. You still need secure borders. You know, you still need to have the right infrastructure to the nation. And so we're seeing exactly that. That the missions are enduring, the same ones that we have invested in for years, but the focus area has changed. And now they're really ready to move forward to impact. Tobey Sommer: Thank you. I appreciate that. And with respect to capital deployment, you've got a strong balance sheet. This is a period of significant change. Or do you think a lean in and utilize the balance sheet more to affect change in the portfolio? And maybe inclusive in your response, could you talk about the EO and share repurchase and whether or not you feel constrained in future repurchases as a result? Horacio Rozanski: Yeah. Let me start by saying, you know, let me start with the EO. The EO was focused on making sure the defense contractors, especially the ones that the Department of Warfield are underperforming, sure that they invested, got back up to track, and made consistent with the requirements in order to create the capacity and then to prioritize the government's mission. I think Booz Allen Hamilton Holding Corporation is already there, in addition to the fact that our much worthless capital intensive, we are very proud of our delivery, and we do not have any performance issues. So we don't think that on the whole domain, the EO applies to us in a negative way. Having said that, you know, to the other part of your question, absolutely. Right? I mean, our capital deployment priorities remain unchanged. The balance sheet is strong, it's a strategic asset. And we continue to look for, call it smaller, but impactful M&A that can behave as a strategic accelerator, especially in the growth vectors that we've been talking about all morning. And then so, hopefully, you'll see us be more active, especially in those areas. Beyond that, of course, we'll continue to support the dividend. And then, you know, share repurchases become something that's more opportunistic. Because, obviously, investors should not want us, do not want us, and we don't want to have an idle balance sheet. So that's the overall thought process. But, you know, we're very focused strategically on reaccelerating, reigniting our growth and to do it in a very focused way. Tobey Sommer: Thank you. Operator: Thank you so much. And this will conclude our Q&A session. I will pass it back to Horacio for closing comments. Horacio Rozanski: Thank you, Carmen, and thank you all for your questions this morning. I hope the discussion conveyed that even in what remains a complex and challenging environment, Booz Allen Hamilton Holding Corporation is on track both operationally and strategically and that our people are focused every day on building and delivering technologies that create value for our company, for our nation, and for our investors. And as we close, let me share my excitement about 2026. It's not only the things that we talked about this morning that give me confidence and optimism about the future. But this is a special year, and I'm excited for our company-wide celebration of America's two hundred and fiftieth birthday. We're planning a year of company-wide events to live our purpose and especially to show our commitment to passionate service both by amping up our work in our communities and also, certainly our work on these critical missions. And then with that, thank you all for joining us, and have a great day. Operator: Concludes our program. Thank you for participating, and you may now disconnect.
Operator: Ladies and gentlemen, thank you for joining us, and welcome to the Independent Bank Corp. Fourth Quarter Earnings Call. Before proceeding, please note that during this call, we will be making forward-looking statements. In addition, some of our discussion today may include references to certain non-GAAP financial measures. Information about these non-GAAP measures, including reconciliation to GAAP measures may be found in our earnings release and other SEC filings. These SEC filings can be accessed via the Investor Relations section of our website. Finally, please note that this event is being recorded. I would now like to turn the conference over to Jeff Tengel, President and CEO. Please go ahead. Jeffrey Tengel: Good morning, and thanks for joining us today. I'm accompanied this morning by CFO and Head of Consumer Lending, Mark Ruggiero. Our fourth quarter results reflect ongoing progress towards restoring Rockland Trust's historically strong performance. Quarterly highlights included continued NIM expansion, strong C&I growth, solid non deposit growth, stable credit costs, realized cost savings from the Enterprise acquisition and the return of excess capital to shareholders. Between the first quarter of 2025 and the fourth quarter of 2025, our operating EPS increased by 60%. Our operating ROA rose by 40 basis points, and our operating ROTCE improved by 529 basis points. Reflecting on 2025, it was a busy and rewarding year as we gained traction on a number of key initiatives. First, we closed an integrated Enterprise. I want to extend my immense gratitude to their former Chairman and Founder, George Duncan, as well as all of the Enterprise colleagues who help champion the integration process. Acquisitions are never easy and often are disruptive to the day-to-day operations of the bank, the Rockland Trust and Enterprise team members collaborated to ensure disruptions were kept to a minimum. Let me share a few examples with you. On the commercial banking side, we have retained almost 100% of client-facing personnel and have experienced negligible customer loss. Obviously, keeping the relationship managers has helped retain the customers. Despite distractions from the acquisition and integration process, there has been no material drop-off in Enterprise loan production, and their pipeline remains as strong as it was when they joined Rockland Trust in July. On the retail banking side, it is again important to emphasize that we did not close any Enterprise branches and all Enterprise branch employees were retained. Excluding ICS and municipal deposits, all Enterprise branches have exceeded our 95% deposit retention target with approximately 60% of these branches having stable to increasing deposit balances. Given the acquired bank typically loses 10% of their deposits post deal, we are delighted with our performance. In the fourth quarter, we opened 271 business relationships and 837 new consumer relationships in the acquired branches. Within our investment management group, we've been able to retain almost all employees. We have targeted the caliber of talent and strength of the client base and the depth of relationships between colleagues and clients are outstanding at both Rockland Trust and Enterprise at a client-centric focus and the cultural integration has been excellent. Secondly, we made solid progress on the credit front. Our net charge-offs averaged just 11 basis points over the last 3 quarters of the year and the challenges within our office portfolio are identifiable and manageable. Third, we continue to rebalance our commercial lending business. C&I loans increased 9% organically in 2025 and now represent 25% of total loans versus 22% at year-end '24. Commercial real estate balances were down 3.6% organically from year-end 2024 were flat from the third quarter. Our CRE concentration stood at 289% at year-end, we believe we have achieved most of the targeted reduction in transactional CRE business. Total commercial loans closed and were $789 million in the fourth quarter, up from $754 million last quarter. Funding on these commitments were $454 million versus $396 million last quarter. 52% of fourth quarter fundings were C&I. Our middle market C&I group continues to gain momentum as evidenced by the fact that it represented 27% of total closed commitments in the quarter. The regional banking, which represents Rockland's traditional lending business, accounted for 39% of total closed commitments. I would also note that our low-income housing tax credit business injected $100 million of capital into our communities. And lastly, we were named Massachusetts Third Party Lender of the Year for 2025, showing a solid progress in the SBA space. Fourth, we generated solid organic growth in non-time deposits of 4.2% in 2025, which has been a historical strength of ours. DDAs represent a healthy 28% of overall deposits about where we were pre-pandemic. The cost of total deposits was 1.46% in the fourth quarter, highlighting the immense value of our deposit franchise. Legacy Rockland Trust branches generated record new business relationships totaling 6,921 and 3,463 net new relationships. 97% of branches achieved positive net new growth in business relationships in 2025. 100% of all our legacy branches achieved positive net new consumer growth. Fifth, our Wealth Management business continues to be a key driver. Our AUA remained stable at $9.2 billion in the fourth quarter, while revenues grew at a 4% annual rate. Lastly, we returned $164 million of capital to shareholders in 2025, including the repurchase of 913,000 shares for $61 million. With the Enterprise acquisition completed in 6 months of customer integration behind us and with credit trends stabilize, we'll enter 2026 laser-focused on organic growth, expense management and capital optimization. With respect to growth, I would highlight the following items. We hired a number of commercial lenders in 2025. In addition, we're working to ensure our alignment and incentive structures to emphasize both loan and deposit growth. We are also intently focused on identifying opportunities within our acquired footprint to deepen our relationships with our expanded product set. Lastly, given the improved credit metrics, we are more open to resuming normal commercial real estate growth. As we always highlight, loan growth will be commensurate with our deposit growth. On the expense front, with the Enterprise transaction complete, we believe a hold-the-line mentality with respect to staffing levels is appropriate. We will continue to invest prudently in technology to leverage efficiencies. Examples include our core systems conversion scheduled for later this year and our AI innovation team. Our AI efforts are focused on enhancing back-office efficiency, including fraud review day-to-day processing and BSA/AML. With respect to capital, we acknowledge that current levels are above our internal targets and our improved profitability will add upward pressure to our capital position. We remain committed to returning excess capital to shareholders. We believe fourth quarter results represent another major step forward in driving improved growth and profitability at Rockland Trust. We expect to build on this strong performance in orders ahead. Prudent expense and capital management, combined with improved organic growth and sustained NIM expansion position us to unlock inherent earnings power. I feel particularly confident in Rockland Trust's positioning across our markets, driven by the strength of our products, the dedication of our people and the effectiveness of the strategies we've put in place. I want to thank all Rockland Trust employees for their tremendous efforts in making 2025 a successful year. Every measure of our success is a direct result of your commitment. On that note, I will turn it over to Mark. Mark Ruggiero: Thanks, Jeff. I will now provide a bit more color into some of the fourth quarter numbers that Jeff just discussed and wrap up with full year 2026 guidance. To summarize the quarter results, 2025 fourth quarter GAAP net income was $75.3 million and diluted earnings per share was $1.52, resulting in a 1.20% return on assets, an 8.8% return on average common equity and a 12.77% return on average tangible common equity. Excluding $12.3 million of merger and acquisition expenses and the related tax impact, the adjusted operating net income for the quarter was $84.4 million or $1.70 diluted EPS, representing a 1.34% return on assets, a 9.8% return on average common equity and a 14.3% return on average tangible common equity. It is worth noting that the fourth quarter results also benefited from a lower tax rate due to onetime adjustments associated with the filing and true-up accounting of the 2024 corporate tax return as well as the finalization of all tax-related estimates inclusive of the Enterprise acquisition. Diving more into the fourth quarter results, we'll start with loan and deposit growth. As Jeff alluded to in his comments, commercial growth was driven entirely by C&I, which increased 7% annualized for the quarter and over 9% on an organic basis for the year. This focus on C&I lending has also helped fuel an almost 50% increase in new commercial deposit generation in 2025 versus the prior year. On the consumer real estate side, total loan balances were relatively flat with an increased level of mortgage production sitting at year-end in the held-for-sale category, which bodes well for mortgage banking income momentum heading into 2026. And lastly, though much smaller in volume, a 2025 initiative to build out a more robust premier banking offering, drove a nice increase in the quarter and our wealth management secured consumer lines of credit. On the deposit side, I already mentioned the calendar year commercial deposit activity. But for the quarter, total period end deposit balances declined 0.8% and due mostly to seasonal business deposit activity related to year-end bonuses, distributions and tax payments. We are encouraged by the growth in average deposits for the quarter across both the consumer and business lines, with 3.6% annualized growth in average core deposits, while we allowed for some level of attrition in our highest rate time deposits. In terms of a capital update, tangible book value grew nicely at $1.04 for the quarter to $47.55 at year-end. During the quarter, we repurchased approximately 548,000 shares for $37.5 million, representing a weighted-average repurchase price of $68.39, and as Jeff noted, we are committed to returning capital to shareholders via buyback in a prudent manner throughout 2026. Shifting gears to asset quality, the overall picture remains very stable. Total nonperforming assets stayed relatively consistent at $85.7 million or 0.45% of total loans. Net charge-offs for the quarter were $5.3 million, with $4 million of that related to a C&I relationship that was fully reserved for the last quarter. Provision for loan loss was $4.75 million and total criticized and classified levels decreased 8.9% during the quarter. Moving to net interest income. Despite the modest balance sheet growth, Net interest income increased $9.1 million to $212.5 million for the quarter. The reported margin increased 15 basis points to 3.77%, while the adjusted margin, which excludes purchase loan accretion and other significant onetime items, increased 10 basis points to 3.64%. Breaking down the components of that 10 basis point increase. First, we were able to effectively reduce our cost of deposits by 12 basis points during the quarter to an impressive 1.46% total cost of deposits. This reflects an approximately 30% beta on the average Fed funds decrease of 40 basis points quarter-over-quarter, right in line with our expectations. Second, loan yields stayed relatively flat when excluding purchased loan accretion, as immediate repricing on floating rate loans was nicely offset by continued yield expansion from cash flow repricing. And lastly, the vast majority of the securities book continues to see yield expansion driven by repricing. Our fee income businesses performed right in line with expectations for the quarter. Assets under administration ended the year at $9.2 billion, with the expanded footprint and resources providing nice momentum heading into 2026. And we are optimistic that both loan level swap up and mortgage banking income should continue to serve as a natural hedge against any pressure over longer-term rates. On the expense side, I would point you to Slide 12 in our earnings deck to provide some context over the fourth quarter results. In addition to providing insight into our 2026 guidance, which I'll soon share. As noted on this slide, total fourth quarter expenses of $142 million on an operating basis, represent a 3.7% increase versus the prior quarter, which can primarily be attributed to a number of large onetime or outsized expenses. To highlight a few, the fourth quarter included a $2 million increase in incentive expense versus the prior quarter. $750,000 of consulting expense related to our 2026 core system upgrade, a $750,000 swing in equity securities valuations, an updated FDIC insurance premium assessment, which created an almost $1 million change quarter-over-quarter and approximately $325,000 in snow removal expense. So as noted on this slide, which is difficult to extract from the noisy reported results, we peg our core expenses plus full cost saves from enterprise right around the $136 million number for a quarter. With that, I'll now finish up with full year 2026 guidance. Before I get into the various components, a lot of the fundamentals that we have been highlighting over the last few quarters give us strong conviction in our ability to improve earnings in a focused, sustainable manner throughout 2026. As such, we have established 2 primary profitability targets for the fourth quarter of 2026. The first is return on average assets of 1.4% and the second is return on average tangible capital of 15%. As for the drivers behind those targets, starting first with loan growth, we are targeting mid-single-digit percentage growth for C&I loans, low single-digit percentage growth for combined CRE and construction and flat to low single-digit percentage growth for total consumer as we anticipate a higher percentage of mortgage volume to be sold versus the 2025 levels. For deposit growth, we are targeting low- to mid-single-digit percentage growth for total core deposits while relatively flat to slightly lower balances for time deposits. For the net interest margin, we are modeling in 2 Federal Reserve rate cuts, which we continue to suggest will drive a fairly neutral impact on the margin. Assuming the 5- to 10-year part of the curve stays consistent with current rates, we anticipate continued margin expansion from cash flow repricing dynamics in both the loan and securities portfolios. Assuming purchase loan accretion of 10 basis points, we estimate the net interest margin to continue to grow to a range of 3.85% to 3.90% in the fourth quarter of 2026. From a credit standpoint, we have no significant loss exposures that are currently in workout status. And as such, we expect overall asset quality metrics to remain stable. Regarding noninterest income, we guide low single-digit percentage growth off of the 2025 second half combined annualized results. And for noninterest expense, again, referring back to the details on Slide 12, we are estimating a range of $550 million to $555 million for full year operating expenses, plus another $4 million to $5 million for onetime costs associated with our planned core system upgrade. And lastly, for the tax rate, with the significant increase in pretax income versus 2025 results, we project a full year tax rate in the 23.50% to 24% range. I will close out with a reminder that the fewer number of business days in the first quarter will typically result in lower first quarter earnings versus the rest of the year. And with that, that concludes my comments, and we'll now open it up for questions. Operator: [Operator Instructions] Your first question comes from the line of Jared Shaw with Barclays. Jared David Shaw: Maybe if we could just start with the -- on the credit side in Slide 9 with the office. Can you just walk through some of the dynamics with the change that we've seen, sort of the criticized classified was down but NPLs are up, and it looks like the criticized classified '26 maturities increased. What was sort of the backdrop of that? Mark Ruggiero: Yes. I'd say the most notable mover in terms of NPAs versus prior quarter is one specific loan that is now in the first quarter 2026 maturity bucket. So that's the $18.1 million classified balance there. That's one relationship that was actually originally scheduled to mature last quarter. We put it on a short-term extension, that deal is actually with our current P&S. We expect that to go through. Right now, the negotiations are going well. The appraisal we had on that actually suggested there was sufficient protection from a valuation standpoint, but the P&S that is in process suggests a small loss there. So we did reserve about a $2 million loss in the fourth quarter. So that's already in the allowance, but we expect that to get resolved here early in 2026. So that was probably the biggest -- the only downgrade for the quarter, Jared. I think on a positive front, we had a maturity in the last quarter that was approved. This was a $27 million loan. That continues to perform well. That was actually upgraded from a risk rating standpoint. When you look out into 2026 and you look at the criticized and classified levels that are disclosed, it's really just a handful of loans. As I mentioned in my guidance, there isn't really anything out there that has imminent loss exposure that we feel exposed to, I think anything with a very modest loss like the one I just talked about, we've already specifically reserved for. So we feel good about the office book. Jared David Shaw: Okay. And then maybe shifting over to deposits as we move through the year and with that guidance sort of a backdrop, where do you see betas coming through with potentially a couple more cuts here. Do you still feel like you can get 20% in the non-CD beta and 80% in CD? Or how should we think about that? Mark Ruggiero: Yes. I do, Jared. I think fourth quarter was a really good example of our ability to do that. I talk a lot about how this deposit franchise is structured. We have real visibility into a lot of the small balance core deposits that we don't move a lot on, what we would call our rack rate pricing. We're probably only in a 5% to 10% beta in that bucket, but it's the higher rate more sensitive where we do very deliberate what we call exception pricing, and that's the bucket where we typically are seeing 70% to 80% beta. So that combined methodology gets you to that 20%, give or take, all-in deposit base -- beta on the non-time deposits. And We've talked a lot about keeping the CD book relatively short for that reason as well. So we are really well positioned to continue to get some cost savings on the CD book, if you see the Fed continuing to cut. Jared David Shaw: Okay. And if I could just sneak 1 final one. Looking at capital continuing to grow and the success you've had with some of the deals in the past, what's the outlook on M&A? And I guess, maybe what's the sort of the feeling on the ground from potential sellers in the market? Jeffrey Tengel: Yes. So we -- as we've said this a lot over the last few quarters that we're really not focused on M&A at the moment. We're -- the priorities are organic growth, launching our expenses and focused on the conversion that's coming towards the latter part of the year. And we got to get the conversion right. You don't get a second chance if you don't. And we were able to get the conversion and enterprise done, we think, pretty well. And so we're working at making sure the same experience happens with the entire the entire enterprise come October. And so those are the things that we're really focused on. I would say M&A is not one of them. Operator: Your next question comes from the line of Mark Fitzgibbon with Piper Sandler. Mark Fitzgibbon: First, I just wanted to follow up on Jared's question as it relates to capital. Jeff, you had mentioned that you have internal capital targets. Is that something you'd be willing to share with us, whether TCE or CET1 or whatever you look at? Mark Ruggiero: Yes, I can jump in there, Mark. I'd say long-term capital targets for us, CET1, probably in the high 11% to 12% range, call it, 11.75% to 12%. I think that suggests your tangible capital in the 8.75% to 9% range. So certainly, suggests lower than where we are today, which is why we are talking a lot about expecting to continue to return capital to shareholders via buyback in a prudent manner. I don't think you're going to see us get to those levels certainly in the next 12 months just from buying back stock. But I'd say long term, that's where we should be optimizing capital. Mark Fitzgibbon: I guess the challenge is based on your projections, organic growth is going to be relatively modest in the near term. So it looks like capital will continue to build unless you're aggressive with buybacks. And I would suspect that sort of $168 or $170 of book, it's kind of hard to justify doing buybacks up at these levels. So I guess how else -- if M&A is out of the equation and buybacks that are out of the equation, organic growth doesn't get you there? Do you raise the dividend? Or is there something else that we're missing? Mark Ruggiero: I would suggest, I don't believe buybacks are out of the equation. I know -- I get your point in terms of the valuation has moved nicely. I look at our profitability profile and the future profitability profile, and I would suggest we'd be comfortable buying back at levels in 2026. So I think that the target would be to keep capital fairly flat via buyback through 2026 and allow us to deploy capital, hopefully in a better growth environment heading into 2027. Jeffrey Tengel: I would also just add, Mark, maybe to slice it a little bit finer on the M&A question. Bank M&A, clearly not interested. But if there is an RIA that we thought was a good fit and we could get it at the right price and continue to build the wealth management business, we would consider that because it doesn't involve a big systems conversion. I think the execution risk is much less, assuming the culture is very similar to ours and there -- this is the business model they want to be in. Mark Fitzgibbon: Okay. And then just pivoting gears a little bit. You guys have seen non-accruals decline in the last 2 quarters. And one of your competitors sort of said today that they thought the third quarter was sort of the peak in this cycle for credit issues. Do you agree with that? Or do you think we're out of the woods? Or do you see things on the horizon that cause you to be a little bit cautious? Jeffrey Tengel: We don't see anything on the horizon per se that makes us cautious. I think in general, we're cautious because of all the geopolitical noise and the potential for more tariffs and things like that. It makes our customers a little anxious. And so I would say there is that. But the traditional ways that you might think of being worried about our credit profile, I would say we do think we're at the peak or pretty close to the peak. I know Mark and I often get asked the question, how -- this is a baseball game, how many innings? What inning are we at in the credit cycle? And we haven't been asked that in a few months, I guess. But honestly, I would say like 8 or I don't know, Mark and I haven't talked about this [indiscernible]. Mark Ruggiero: I was going to say the same thing. We might be making the call into the bull pen soon. Mark Fitzgibbon: Okay. Great. And then lastly, I guess, framing the M&A question a little bit differently. There's a bunch of similar-sized banks in Eastern Massachusetts today. I guess, philosophically, I'm curious, do you think that a well-structured and priced MOE can work? Jeffrey Tengel: My -- I have a bias against MOEs just because they're difficult to manage. There's more risk in it. The ones that have worked, I think, are fewer than the ones that haven't worked. And you need to have a -- one person in charge. And invariably, with these MOEs, you get like, okay, you get a position here and then you get a position here. It's like a trade-off. And unless the companies are incredibly well positioned, both financially and culturally and everything else, I think it's hard to make those work. Operator: Your next question comes from the line of Steve Moss with Raymond James. Stephen Moss: Maybe just starting here on loan pricing here. Just kind of curious what you guys are seeing in the market for C&I and CRE loans these days? Mark Ruggiero: Yes, it's competitive. I think not surprisingly in our market. I think in some C&I deals, you're seeing some of the spreads competitively bidding out under 200 basis points. But we're getting our fair share of deal flow at the pricing we would like, which is 200 plus. So I think in the fourth quarter, all in, you saw total loan yields in the mid 6s. So that kind of reflects the pricing that we'd like to be getting in an environment like this. So I think as long as we're -- kind of my caveat there on the margin guidance, as long as you're seeing the 5-, 7-year part of the curve, stay where it is, I'd like to see loan yields staying in that range, which has given us the nice lift on the repricing aspect of it. Stephen Moss: Okay. appreciate that. And then in terms of just the maturing cash flows from the securities book this year, Mark, what are your thoughts in terms of deploying that just into securities or maybe be a little more aggressive on pricing CDs down? Just kind of curious how you're thinking about that. Mark Ruggiero: Yes. I really like where we are with total securities as a percentage of the balance sheet today. So I would say the vast majority of what will generate cash flow out of the securities book will likely go right back into the securities book. If we start to see any major variations and the rest of the balance sheet composition, that could change slightly. But I think general guidance would be expect to see securities stay relatively flat, meaning we're putting the $670 million, that's repricing, that's coming off right back into the bank. And just to remind you there, a big portion of that, Stephen, is at lower rates. So of the $670 million, $625 million of that is yielding about $180 million today. So if we're conservatively assuming to put that back into 4% securities, that's a nice lift to the securities book throughout 2026. Stephen Moss: Yes, 100% on that. And then in terms of -- maybe just the other thing in terms of hiring talent here. Just kind of curious what are you guys plans for hiring additional commercial loan officers? I know, Jeff, you talked about wanting more organic growth. I'm just kind of curious as to how you guys are thinking about those plans and where they may be these days? Jeffrey Tengel: Yes. I think at the moment, we're in a good position. A number of the people that we hired in the second half of last year came over into a relatively new segment of the commercial business. And so some of them came over without a portfolio. And so I think there's a lot of just inherent C&I growth that we can get from getting some of our new hires, basically the support that they need and just let them go. They all came over with a Rolodex, and we feel pretty good about their ability to drive activity and drive volume. Stephen Moss: Excellent. [indiscernible] nice quarter. I appreciate all the color here. Jeffrey Tengel: Thank you. Operator: Your next question comes from the line of Laurie Hunsicker with Seaport Research. Laura Havener Hunsicker: Jeff and Mark. I Wanted to start here with expenses and really appreciate the Slide 12, and really appreciate your breakdown of the $5.1 million. But I just wanted to make sure that I heard it right. Included in that $700,000 was from the core systems upgrade and that's... Mark Ruggiero: That's right. In the fourth quarter, we had some consulting to start preparing some of the work associated with that upgrade that would be somewhat onetime in nature. Laura Havener Hunsicker: Got you. Okay. And that -- the $4 million to $5 million of onetime, that's going to be spread over the year or sort of over the first 2, 3 quarters. How should we think about that? Mark Ruggiero: Yes. I'd say probably pretty evenly spread over the year, maybe a little bit more in the first quarter to come. But I -- if I had to guess, it's probably $1 million or $2 million here in the first quarter, probably another $1 million or $2 million in the second quarter. And then as we get to the October time line, it probably -- I think a lot of that will be the work that needs to happen over the 6 months, including third-party consulting to just get a lot of the processes documented as we gear up for that conversion. Laura Havener Hunsicker: Okay. And the conversion is in October? Mark Ruggiero: That's right. If you recall, we're originally talking about it as May as we started to do some of the initial work in lining up all the teams that are going to be needed. We just felt it was appropriate to give us a bit more time. Further complicating it, you need to get the core provider with the weekend where they can facilitate the conversion as well. So it's almost similar to scheduling and acquisition deal where you need the FISs of the world to be able to have a slot. So the next table slot that we were comfortable with was in October. Laura Havener Hunsicker: Okay. Okay. And then you mentioned the AI innovation team. What is your spend this next year on AI? Can you share that? Jeffrey Tengel: I actually don't know what the spend is, but I can tell you what we're doing about it, because I think one of the things that could get people caught in the AI space is trying to boil the ocean and do too much. And so what we've been doing is putting a governance model in place and then have all the kind of AI business use cases flow through this governance to make sure that we're thinking about the right thing. We don't want to have every one of our different business units all doing their own kind of AI Skunkworks. So we'd rather get that flowing through a centralized governance and let that team, which is, as you can imagine, heavily populated by our IT announced folks and have them pick and choose 2 or 3 of these business cases and get them done and show ourselves that we can get and get them done and get them done right, and then we'll bring more ideas into the centralized utility that is going to have a hand in the AI work that we do anyways. So we're trying to be methodical about it because I'd rather get 2 or 3 wins and knowing that it got done correctly, and we got the output that we're looking for than try and do 25 of these in each business unit kind of doing it themselves. I think that would be counterproductive. Mark Ruggiero: Yes. I'll jump on to that. So from a dedicated spend, the guidance for '26 is exactly as kind of Jeff laid out, it's specifically 3 dedicated individuals that we would expect to sort of create this initiated project. And I would propose, as we learn more through what their capabilities are, if we feel the need to invest more money and/or ramp up from a people standpoint and/or a technology standpoint, we would need conviction that, that is being done with offsets and other expenses through the environment so that it's ultimately beneficial to the expense run rate to keep investing in AI. So I think we need to see those benefits come through, give us conviction to continue to invest in AI, which should allow us to either reduce or at a worst case, hold the line in other expenses. Laura Havener Hunsicker: Okay. Okay. That's helpful. And then just one more on expenses. Your onetime charges with EBTC, those are finished, correct? Mark Ruggiero: Those are finished, correct. Laura Havener Hunsicker: Yes. Okay. Okay. Great. And then just jumping over to margins. Do you have a spot margin you can share with us? Mark Ruggiero: For December? You know what, Laurie, I actually forgot to bring that with me and at the top of my head, I don't have it because I want to give you a core number, but I can follow up with that. I don't have it in front of me. Laura Havener Hunsicker: Okay. Okay. And then just 2 more questions on the income statement. The -- just thinking about sort of the nonrecurring, I guess, obviously, the $315,000 of BOLI benefits, but the $7.6 million that you had of other income, what's the nonrecurring piece in there? And that should be running $1 million, $1.5 million lower. Is that right? Mark Ruggiero: Yes. In the fourth quarter, it was about $400,000 or so on our equity securities book. So whether you call it nonrecurring or not, you do -- we always see a fourth quarter lift because you get capital gain distributions and redistribution that may generate realized gains. So increased interest, dividends, cap gain distributions typically give us a $200,000 to $300,000 lift in the fourth quarter. So that's what you saw as a big piece of that. I'm trying to -- there wasn't anything else of that size. There was probably a few different pieces with $100,000 increases quarter-over-quarter. So nothing really unusual that I would definitively pull out as onetime or nonrecurring in nature outside of those equity securities gains. Laura Havener Hunsicker: Okay. Okay. And then just last question, just circling back here on office. So I know you talked about the $18.1 million classified that is maturing in the first quarter. The $9.9 million that's criticized, how should we think about that? Mark Ruggiero: Yes. Let me just -- so the $9.9 million, that is criticized in Q1. That is a participated deal that we have basically received an appraisal that had suggested valuation had been challenged a bit. That appraisal came in at the time the government announced kind of some of the DOGE initiatives, and there was a pullback on GSA leases. So this is a property that is being impacted by that sort of out of market. The sponsor is looking to either refinance or sell, we'll likely be working with the sponsor on that. So we expect there'll be an extension coming. The property is cash flowing. It's continuing to make payments. It's current, but there is likely a longer-term resolution to hopefully get repaid out of that. So I think I -- if I had to guess right now, Laurie, I'd say you'd see that probably with an extension that gets executed in this quarter with hopefully exiting out of that without really any loss at some point in '26, hopefully. Laura Havener Hunsicker: Okay. Okay. That's great. And then just lastly, the actual increase in the office non performers from the $22 million to the $41 million. Can you just break down roughly what that $18 million, $19 million is? Mark Ruggiero: Yes. That's one loan. So that was a loan that I mentioned earlier, we actually have a P&S on, where we accepted a slightly lower value than what the appraisal suggested. So that $2 million loss that we expect is already reserved for. That's the only change. Laura Havener Hunsicker: Got you. Okay. I thought you were talking about the [ $18 million ] classified. My apologies. Mark Ruggiero: So I know that's the -- well, that is -- yes, that's the $18.1 million classified in Q1. So that was new to nonperforming. Operator: [Operator Instructions] your next question comes from the line of David Konrad with KBW. David Konrad: Yes. Just had a follow-up question on the Commercial Banking platform. Your guide for '26 mid-single-digit increase is fair, probably what I would do with all the uncertainty as well. But on the other hand, you've hired a lot of people in the back half of '25, and you grew by, I think Mark said about 9% organically in '25 as well. So it feels like you got a lot of momentum, and this is kind of a slower growth. So are you seeing something in the marketplace, whether it's competition that hold that back? Or maybe talk about potential upside to that growth rate? Jeffrey Tengel: Yes. So there probably is some potential upside just because I know all the people we hired last year and are they're all very, very talented. I would also point out that in addition to just getting our teams that are already doing well, pushing the zoo even more. We had one line of business that we started in '25, will be done in '26 that we just decided it wasn't where we wanted to be. And so we wound up -- we're in the middle, I should say, of exiting that business. It's around $100 million, give or take. And so we've been in process of moving that. So any of the growth that you see is going to include $100 million of runoff in this specific business segment. And that's a little bit of the headwinds that I think if you -- if we wind up, we're sitting here at the end of the year and we exclude the impact of that runoff, I think the low to mid-single-digit percentage increase could be higher. David Konrad: Got it. Got it. Okay. And then what was -- what type of loans were in this specific segment you're running now? Jeffrey Tengel: It's our floor plan business, not to be confused with our ABL business, which we like a lot. This was a business that had floor plan lines [ of ] very small used car dealerships. It was a bit of a legacy Rockland Trust business. And we just got to the point that we didn't have the right systems that help track the collateral. And the loans were small. We didn't think the outlook for this business was good, given the nature of the business. A lot of the floor plan companies are consolidating, just like the OEM part of this. And so to the extent that this just really didn't fit our risk profile. David Konrad: Got it. And I know, historically, those loans are actually pretty tight credit spreads as well. Jeffrey Tengel: Yes. Can be. Operator: There are no further questions at this time. I will now turn the call back to President and CEO, Jeff Tengel, for closing remarks. Jeffrey Tengel: Thank you. Appreciate everybody's interest in Rockland Trust and have a terrific weekend. And Go Pats. Thank you. Operator: This concludes today's call. Thank you for attending. You may now disconnect.
Operator: Ladies and gentlemen, thank you for standing by. And welcome to the First Citizens BancShares, Inc. Fourth Quarter 2025 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question and answer session. If you require operator assistance during the program, please press star then 0. As a reminder, today's conference is being recorded. I would now like to introduce the host of this conference call, Ms. Deanna Hart, Head of Investor Relations. You may begin. Deanna Hart: Good morning. Welcome to First Citizens BancShares, Inc.'s fourth quarter 2025 earnings call. Joining me on the call today are our chairman and chief executive officer, Frank Holding, and chief financial officer, Craig Nix. They will provide fourth quarter business and financial updates referencing our earnings call presentation, which you can find on our website. Our comments will include forward-looking statements, which are subject to risks and uncertainties that may cause actual results to differ materially from expectations. We assume no obligation to update such statements. These risks are outlined on page three of the presentation. We will also reference non-GAAP financial measures. Reconciliations of these measures against the most directly comparable GAAP measures can be found in section five of the presentation. Finally, First Citizens BancShares, Inc. is not responsible for and does not edit nor guarantee the accuracy of earnings transcripts provided by third parties. I will now turn it over to Frank. Frank Holding: Thank you, Deanna. Good morning, and welcome, everyone. Thank you for joining us for our fourth quarter earnings call. We will start by highlighting our overall performance for the quarter and provide comments on our strategic priorities for 2026. Then I will turn it over to Craig to take you through our financial results and outlook for 2026. Starting on page five, the fourth quarter was a continuation of what was a successful year for First Citizens BancShares, Inc. in 2025. This morning, we reported adjusted earnings per share of $51.27, an adjusted ROE of 11.93%, and an adjusted ROA of 1.1%. Despite the headwinds of lower rates, these earnings metrics exceeded our expectations, marked by resilient net interest income and stable credit quality. Before I highlight our balance sheet performance, I'd like to point out that we made a change in our operating segment reporting during the quarter. Previously, we reported SVB Commercial as a separate operating segment. In the fourth quarter, it was consolidated into the commercial bank segment. Now, despite this change in reporting, we remain committed to the innovation economy, and we will continue to report key metrics like loans, deposits, and off-balance-sheet client funds at the SVB commercial level. Compared to the linked quarter, loans were up $3.2 billion or by 2.2%, driven mostly by our global fund banking business with SVB Commercial, due to strong production and increased line utilization. Deposits were down sequentially by $1.1 billion or by 1%, primarily driven by anticipated shifts in the off-balance-sheet client funds and seasonal distributions. Despite the decline in actual balances at the quarter end, due to late-quarter outflows, average deposits were up by $2.26 billion or by 1.6%, driven by broad growth in the general and commercial bank segments. We returned another $900 million to our shareholders through share repurchases, moving us closer to our long-term capital targets. Despite loan growth exceeding deposit growth during the quarter, and the prepayment of $2.5 billion of the FDIC purchase money note, our liquidity position remains strong. Now turning to Page six. We made significant progress on our strategic objectives in 2025. And for 2026, our strategic priorities remain consistent with 2025 and are to: one, deepen client relationships; two, develop, retain, and recruit talent; three, optimize our balance sheet; and four, make investments in our franchise to improve our capabilities and poise us for growth in the years ahead. In 2025, we made great progress in improving our customer support within the general bank. We continue to make investments in our digital capabilities to serve customers in their channel of choice. These capabilities have enabled us to deepen relationships with existing customers and acquire key new ones through Burroughs branch and digital channels. We also continue to invest in our wealth business by expanding into new markets and increasing product and service offerings. We're excited about the momentum in the commercial bank as we head into 2026. By investing in technology and our teams, we're growing relationships and adding new clients. During 2025, we simplified the organizational structure and streamlined processes to meet the needs of our clients. In 2026, we will continue these efforts but will start focusing on optimizing systems and platforms for an improved end-to-end client experience. For example, we're investing in our payments capabilities to achieve client growth and increase capture of core deposits. Now, we can't do any of this without our associates, and we remain dedicated to attracting, retaining, and developing our associates, given that customer and client service is paramount to our success. Operational efficiency remains a key priority. We did a lot of foundational work in 2025 to reduce operating complexity and position the bank for continued growth and expect to continue to do so in 2026. While these efforts have resulted in expense growth over the past few years and will continue to have an impact in 2026, we're committed to delivering positive operating leverage over time and recognize that responsible growth is balanced through operational efficiency. Effectively managing expenses remains a priority for us. We made significant progress on balance sheet optimization in 2025, moving our capital ratios closer to our long-term targets, growing core deposits, and beginning repayment of the purchase money note. In 2026, we will continue to focus on a funding remix to core deposits, repaying the purchase money note, and moving capital ratios to our target range through share repurchases, all while supporting quality loan growth in our lines of business. I'd also like to take a moment to thank our Chief Risk Officer, Lori Rupp, for her outstanding leadership and unwavering commitment to First Citizens BancShares, Inc. throughout her thirteen-year career at the bank. Lori intends to retire in June 2026, and we wish her all the best in this next chapter of her life. She will be replaced by our current treasurer, Tom Eckland, who is a seasoned executive with substantial experience managing capital market, liquidity, and compliance risk. We're confident Tom will build on our strong risk foundation and drive continued success as we remain committed to maintaining a robust risk governance framework in pursuit of our long-term objectives. To close, 2025 was a successful year for First Citizens BancShares, Inc. despite a challenging macroeconomic backdrop that included interest rate volatility, competitive pressure on lending spreads, competition for deposits, and geopolitical uncertainties. As always, we remain vigilant on the macro and geopolitical landscape and keep prudent risk management at the core of our actions. I want to emphasize that even in volatile periods across markets and rates, our diverse business model and disciplined risk posture are key differentiators that have and will continue to serve us well. I want to thank all our associates for their contributions to making 2025 a successful year for our company, clients, and customers. We enter 2026 on a strong footing, and I'm excited about what we can accomplish in the years ahead. With that, I'll turn it over to Craig to take us through our fourth quarter financial performance and 2026 outlook. Craig? Craig Nix: Thanks, Frank, and good morning, everyone. I will anchor my comments to page eight of the presentation. Pages nine through 26 provide more details underlying our fourth quarter results and are for your reference. We earned adjusted net income of $648 million in the fourth quarter or $51.27 per share, which was up $6.65 over the linked quarter, driven mostly by a decline in provision for credit losses due to lower net charge-offs and a higher net provision release related to lower specific reserves on impaired loans, a mix shift to higher credit quality loan portfolios, and improvement in the macroeconomic outlook. Tangible book value per share grew by 11% in 2025 and 3% sequentially, including the impacts from share repurchases, which as of year-end totaled $4.7 billion since the July 2024 inception of the plan. Headline net interest income declined $12 million sequentially, aligned with our guidance. Net interest income ex-accretion was unchanged sequentially. Interest income ex-accretion declined by $46 million but was offset by a similar decline in interest expense due mostly to a lower rate paid on deposits. Headline NIM was 3.2%, lower by six basis points sequentially, while NIM ex-accretion was 3.11%, down four basis points sequentially. The decline was primarily due to a lower yield on earning assets impacted by the Fed rate cuts in 2025, only partially offset by lower funding costs and a higher average loan balance. Adjusted noninterest income exceeded our expectations, up 2% sequentially. The increase was broad-based, but the most significant items contributing to the increase were rental income on operating leases and wealth management income. Rental income benefited from a larger fleet and lower maintenance costs. Wealth benefited from higher assets under management and increased sales activity, including brokerage income. International factoring and deposit service charges were also up during the quarter. These increases were partially offset by a decline in client investment fees due to the lower Fed funds rate, only partially offset by a $3.1 billion increase in average off-balance-sheet client funds. Adjusted noninterest expense was up $89 million sequentially, driven by higher personnel, technology, and direct bank marketing costs. Personnel costs increased $38 million, mostly driven by higher temporary labor to support technology-related projects, performance-based incentive compensation, benefit expenses due to seasonally higher health insurance claims as employees reach their out-of-pocket deductibles, and termination costs. Technology-related costs contributed $22 million of the increase related to higher amortization expense as several technology-related projects were placed into service late in the third quarter as well as in the fourth quarter. In addition, software costs were up as we continue to scale our technology platforms and invest in new capabilities. Finally, direct bank marketing costs contributed to $12 million of the sequential increase. As I will discuss in a moment in our 2026 outlook, we expect year-over-year adjusted expenses to be up in the low to mid-single-digit percentage range, with less than 1% of the increase coming from the BMO acquisition expected to close in the second half of the year. Compared to the annualized run rate of the fourth quarter, we expect expenses to be flat to slightly down as episodic fourth-quarter items are offset by increases from merit as well as the full-year impact of higher depreciation from completed projects. Moving to the balance sheet. Period-end loans increased by $3.2 billion or 2.2% sequentially, led by strong growth in global fund banking. Global fund banking loans were up $3.8 billion sequentially, and loan production was over $5 billion, the highest since acquisition. Average line utilization continued to trend higher, resulting in growth in outstanding balances. We are encouraged by the momentum in this business, driven by increased market activity. General bank loans were down $267 million sequentially, as we moved approximately $700 million of mortgage loans to held for sale in advance of a strategic planned sale in 2026. Removing the impact of this transfer, general bank loans increased modestly, driven by growth in business and commercial loans within the branch network and wealth. Period-end deposits declined by $1.6 billion or 1% sequentially, mostly driven by expected outflows of global fund banking deposits into off-balance-sheet client funds and from seasonal fund distributions to limited partners. The decline was partially offset by growth in tech and healthcare banking, given higher VC investing activity during the fourth quarter. In the general bank, deposits were up modestly as balance growth was partially offset by seasonal outflows. Direct bank deposits were down $344 million compared to the linked quarter. On an average basis, deposits performed well during the quarter, growing by $2.6 billion or 1.6% sequentially, supported by strong customer retention and acquisition in both the commercial and general bank. Encouragingly, this was achieved while we continued to reduce our total cost of deposits. SVB Commercial off-balance-sheet client funds totaled $69.7 billion, up $2.7 billion sequentially, while average off-balance-sheet client funds were up $3.1 billion over the third quarter. Now let's shift to credit. Provision declined $137 million sequentially due to lower net charge-offs and a larger reserve release. Net charge-offs totaled $143 million or 39 basis points annualized in the fourth quarter, a $91 million or 26 basis points decline. The reserve release increased by $66 million over the linked quarter. You will recall that there was an $82 million single-name loss in the third quarter, which was the largest contributor to the sequential decline in net charge-offs. Both fourth-quarter and full-year net charge-offs were within our guidance. Reasonably consistent with prior quarters, approximately half of the net charge-offs were concentrated in the SVB investor-dependent, commercial bank general office, and equipment finance portfolios. The larger reserve release this quarter was driven by lower specific reserves, growth in higher credit quality loan portfolios, and improvements in the macroeconomic outlook. The allowance ratio was down eight basis points sequentially, driven by these same factors. On the capital, Frank mentioned that we continue to make progress on our 2025 share repurchase plan. As of the close of business on January 20, 2026, we had repurchased 18.3% of class A common shares or just over 17% of total common shares outstanding for a total price of $4.9 billion. Note that this is inclusive of the 2024 plan, which we completed in 2025. With respect to the $4 billion repurchase plan approved by the board in July 2025, we have completed approximately 30% of this authorization. Share repurchases will continue to be a tool to support capital management activities, providing us with an opportunity to return capital to our shareholders and to be more capital efficient over time. During the fourth quarter, repurchases were $900 million, and we expect repurchases to remain near or at that level during 2026. The pace will slow down as we get closer to our target range and as we regularly assess our growth outlook, economic conditions, the regulatory environment, and overall capital deployment. The fourth quarter CET1 ratio was 11.15%, a decrease of 50 basis points from the third quarter as the impact from share repurchases and loan growth outpaced earnings. I will close on page 28 with our first quarter and full-year 2026 outlook. Starting with the balance sheet, we anticipate loans in the $148 billion to $151 billion range in the first quarter. In the commercial bank, we remain optimistic about the momentum in global fund banking as we enter 2026. Pipelines remain robust, approximately $11.5 billion as of year-end. While we are optimistic here on absolute loan levels over time, I think it bears reminding that loan outstandings can ebb and flow based on client draws and repayments, and we may see some volatility in ending balances quarter to quarter. Outside of growth in global fund banking, we are projecting growth in our commercial finance industry verticals and middle market banking. Within the general bank, we expect loan growth to be supported by continued strong performance in our business and commercial portfolios within the branch network as well as in our wealth business. Additionally, we expect to close the BMO branch acquisition in the second half of the year, which we expect will add approximately $1 billion in loan balances. For the full year, we anticipate loans in the $153 billion to $157 billion range as we expect growth in both the general and commercial banks. We are continuing to explore some strategic loan portfolio sales similar to what we did in the mortgage book this quarter to provide liquidity for repayment of the purchase money note, which could impact absolute growth levels in 2026. We expect deposits to be in the $164 billion to $167 billion range in the first quarter. We think growth will be broad-based across our channels, including the direct bank due to competitive pricing and marketing efforts, expansion in the general bank within the branch network and wealth, and growth in SVB commercial as investment activity and overall valuations continue to improve. For the full year, we anticipate deposits in the $181 billion to $186 billion range, representing low to mid-teens percentage growth over 2025, driven by the momentum across our lines of business as well as the BMO branch acquisition, which will add approximately $5.7 billion in deposits in the second half of the year. We are projecting more significant growth in the direct bank as rates decline and we begin repaying the purchase money note more aggressively. While it is a higher-cost channel, it provides us with a source of insured granular deposits, and we anticipate benefiting from falling interest rates. The direct bank will be an important source of repayment of the purchase money note, even if leading to elevated marketing costs in the near term. Next, I'd like to take a minute to talk about our plans for repayment of the purchase money note. We began pledging US treasury securities against the note in 2025 as loan collateral available to secure the note diminished. As Frank mentioned, we made an initial payment of $2.5 billion in December as rate cuts in the back half of 2025 and the differential between the note rate and the yield on the pledged securities diminished. As we look into 2026, we expect at a minimum, we will make payments against the note for the incremental loss in loan collateral, which averages $500 million to $1 billion per month. We will also consider making other incremental payments if interest rates continue to decline and/or alternative funding sources become cheaper as we anticipate based on our interest rate forecast. Currently, our rate forecast covers a range of zero to four twenty-five basis point rate cuts in 2026, with the effective Fed funds rate range declining from 3.5 to 3.75 currently to as low as 2.5 to 2.75 by the end of the year. Our baseline forecast includes two rate cuts, but we do believe that stubborn inflationary metrics and possible impacts of macroeconomic policy could lead to fewer or no cuts. Therefore, we believe it is prudent to provide a range of expectations as we have done in prior quarters. With that in mind, we expect first-quarter headline net interest income to be in the range of $1.6 billion to $1.7 billion, a modest decline from the fourth quarter as the full impact of the December rate cut pulls through, resulting in a lower yield on earning assets. This decline will be partially offset by earning asset growth and lower funding costs. For the full year, we believe our headline net interest income will be in the range of $6.5 billion to $6.9 billion. We project loan accretion will be down approximately $100 million for the year. Given continued rate cuts, we expect loan interest income to decline, driven by declining yield despite asset growth levels. We also expect interest income on cash and investments to decline, given a reduction in yields as well as balances driven by lower absolute levels of cash and investments due to a reduction in excess liquidity. While despite balance sheet growth, we project a net reduction in interest expense due to lower cost of total deposits. This will only partially offset the decline in interest income. On credit losses, we anticipate first-quarter net charge-offs in line with our previous range of 35 to 45 basis points. We expect losses to continue to be elevated in the commercial bank general office portfolio and other portfolios where we have seen stress. While rate cuts could ease some of the pressure on borrowers in this sector, we believe losses will remain elevated in the medium term, even as market disruption may lessen as more companies reinstate office attendance requirements. While losses in the equipment finance portfolio have largely stabilized, we have a larger deal we are watching that could elevate losses during the first quarter. Additionally, we expect SVB commercial losses to remain slightly elevated in early 2026. With respect to the full-year range, we anticipate in the same range of 35 to 45 basis points. Moving to adjusted noninterest income, we expect to be in the $500 million to $530 million range in the first quarter. Overall, we continue to see strength in many of our business lines, such as fees from lending-related activities in capital markets, deposit fees and service charges, wealth, rail, and card and merchant services. For the full year, our adjusted noninterest income range is $2.1 billion to $2.2 billion. We expect year-over-year growth to continue to be driven by our rail business, which includes a balanced railcar portfolio and a strategic exploration ladder. We further expect rail to have continued momentum on repricing rates throughout 2026. We also expect continued growth in our wealth and deposit businesses. Moving to adjusted noninterest expense, we expect the first quarter to be in the $1.34 billion to $1.38 billion range, essentially flat to slightly down from the fourth quarter as we had some non-recurring items in the fourth-quarter expenses that will not impact our run rate. These declines will be offset by continued investments in our technology platforms to allow us to scale efficiently and improve our customer experience. We will also be impacted by the seasonal benefit resets for Social Security, unemployment, and 401(k) that drive the first quarter higher from a personnel expense perspective. Looking at the full year, our adjusted noninterest expense range is $5.37 billion to $5.46 billion. This is a low to mid-single-digit percentage increase from 2025, driven primarily by higher personnel costs due to merit-based increases, higher costs in equipment expense and third-party processing, given continued tech investments, and the full-year impact of projects that went into depreciation in the last half of 2025. Marketing expense is also expected to be up, given our focus on client acquisition and retention in the direct bank. Note that the full-year increase also includes the impact of the BMO acquisition, which will add slightly less than a percentage point to overall adjusted noninterest expense growth, which will be realized during the second half of the year. Our adjusted efficiency ratio is expected to be in the lower 60% range in 2026 as the impact of the Fed rate cut cycle puts downward pressure on net interest income. We believe that the investments we have made in our franchise, while driving up costs in the short and medium term, are foundational to delivering positive operating leverage over time. Meanwhile, exercising disciplined expense management is a top priority for us, given headwinds to net interest income. While we are not providing guidance beyond 2026, we are committed to returning to positive operating leverage as the interest rate environment normalizes, and we begin to recognize some of the efficiencies from our continued investments in the franchise. Longer term, our goal remains to operate at an efficiency ratio in the mid-fifties. Finally, for both the first quarter and full year 2026, we expect our tax rate to be in the range of 24% to 25%, exclusive of any discrete items. In summary, our 2025 financial performance reflected the strength and resilience of our diversified business model. We generated strong returns, maintained credit discipline, grew our balance sheet, and returned significant amounts of capital to shareholders, all while retaining strong liquidity and capital positions. We are excited about the opportunities in front of us and are well-positioned to continue to deliver long-term value for our shareholders. This concludes our prepared remarks. I will now turn it over to the operator for instructions for the question and answer portion of the call. Operator: Thank you. Ladies and gentlemen, if you have a question or a comment at this time, please press star then one on your telephone keypad. As a courtesy to others on the call, we ask that you limit yourself to one question and one follow-up. Please hold for a brief moment to compile our roster. From KBW, Chris McGratty, please go ahead. Your line is open. Chris McGratty: Great. Good morning. Craig, maybe to start with the guide for a moment. I hear you on the zero to four on rates, and I think you said in your prepared remarks two was your base case. Is it as simple as, I guess, putting two as the midpoint? How are you thinking about, I guess, the cadence of NII? And I think in past quarters, you've provided kind of exit rates. So any comments on exit NII margin would be great. Craig Nix: Okay. Yeah. Chris, our baseline forecast calls for two rate cuts in 2026 in June and October. So in terms of the guide, I would direct you in the baseline to the middle of that range. So for the first quarter of '26, we expect both headline and ex-purchase accounting net interest income to be down mid-single-digit percentage points. We expect headline NIM in the mid-three tens and ex-purchase accounting in the mid-three zeros. In the exit quarter, fourth quarter '26, we expect both headline and ex-purchase accounting net interest income to be flat with '25. With two cuts, we also expect that headline and ex-purchase accounting net interest income will trough in '26. We expect that net interest margin headline in the mid-three zeros and ex-purchase accounting in the high two nineties and expect headline NIM to trough in '26 and ex-purchase accounting in '26. So that's the trajectory at our baseline, which includes two rate cuts, one in June and one in October. Chris McGratty: Okay. That was a lot. Thank you very much for the color. On the investments, I think I heard you talk about kind of the focus on operating leverage, maybe not near term, but medium term. And I guess I'm interested in the cadence and the pace of technology and investment spend at the bank now that it's grown, and obviously, CCAR is on the horizon. Are we nearing the kind of the peak investment? Am I hearing kind of you're nearing the peak investments and then over time, you kind of grow into the returns a bit? Thanks. Craig Nix: Yeah. I think that's a fair statement. I mean, we've been very intentional about investments in our franchise and particularly in the areas of building out our risk management capabilities and in our technology infrastructure as we strive to, as we've grown four times, we're striving to reduce operational complexity. We're striving to meet category three expectations. All of this is to meet regulatory requirements, improve our client experience, and we recognize that this has put pressure on our efficiency in the short term, but we do like where we're heading. We are materially complete with the implementation of our risk management capabilities and are transitioning to maturity or a business-as-usual model. We will continue to make investments in technology, and really, that is to enable client-centric business solutions for our general commercial bank to streamline our processes to improve efficiency and to build a technical infrastructure commensurate with the bank's future growth. So those investments will continue, but we are hyper-focused on bending the cost curve, and costs were up 8% last year. We expect them to be low to mid-single-digit percentage points this year. So we're starting to bend the curve, and we do have a lot of focus on improving operating leverage as we move forward. Greg, I don't know if you have anything else to add to that on the technology side, other than that we're continuing to invest in our franchise. But the focus is now, as we've gotten our risk management infrastructure sort of behind us, and we're into the maturity model, to start bending that cost curve going forward. Gregory Smith: Yeah, Craig, I think you did a great job there. So this is Greg Smith, CIO. And, you know, Chris, the question is a good one, and we do recognize that we're on the higher end of our spend when you compare it to our peer group. But you have to put that in context with where we were, where we are in our maturity. So just like Craig said, we, at the end of our acquisitions in 2022 and '23, we took a step back, we looked at our entire technology environment, and we laid out a very clear plan to simplify and modernize the environment. And we are in full execution mode there. So the simple answer is we are indeed peaking in 2026 from a spend on the tech roadmap. But a couple of the key things that we're working on, so just coming into the year or leaving 2025, we've simplified or reduced over a third of our applications. So that's a big win as well. We have at least two-thirds of the actual program up and running in full execution mode. And this is both simplifying as well as modernizing our applications and our infrastructure. So another simple example is at the beginning of 2024, we had eight different data centers. By the end of '26, we will only have two data centers. Now that means we're closing seven, and we're building a new one. But the benefits of all that mean that at the end, we will not only have efficiency coming out of that simple example, but we'll also have much better resiliency, and more flexibility and scalability in our environment. Those are the kind of things that we're working on. It is a multiyear plan. But the simple answer is we will peak in that plan in 2026, and that will allow us some more capacity to spend in other areas of the business. Chris McGratty: Thanks. And just quickly on the tax rate, Craig, in the quarter. Were there any specific charges in the quarter on the taxes? John Wilson: This is John Wilson, the tax director. The only charge in the quarter was a return to provision adjustment that we recognized after filing our 2024 tax returns, primarily related to the estimate that we had for tax credits for the prior year provision. Chris McGratty: Alright. Thank you. Operator: The next question comes from Anthony Iulian from JPMorgan. Anthony, please go ahead. Your line is open. Anthony Iulian: Yes. Hi, everyone. Craig, your expense outlook is quite wide. The range is about $100 million. I'm curious, I recognize your previous comments on tech spend. I'm curious, just what gets you to the high end versus the low end? How much LFI cat three expenses you have that's baked in that may eventually go away? Elliot Howard: This is Elliot Howard. You know, I think when you look at that range, you know, $100 million, you know, on the entire base is only, you know, really kind of two percentage points. And really what puts us probably at the top end of that range is that includes, you know, we're doing the heavy lift on direct bank advertising to really raise deposits. And then I think, you know, as we kind of progress along the year, just kind of the timing of, you know, the tech expenses and when we can get efficiencies. So, you know, full year, you know, I think being able to get the efficiencies faster, and less in marketing expense would put us closer to the lower end of that range. And then really, you know, having a more competitive, really rate environment, you know, on the direct bank side, would probably give us a little bit higher to, you know, the top end of that range. Anthony Iulian: And then if Mark's on the line, you guys saw another really strong quarter in SVB total client fund growth. What specifically drove that? And I didn't hear the level of cautiousness that you guys have emanated the past couple of quarters on the outlook for SVB. So how are you guys thinking about that business and the growth in total client funds for this year? Thank you. Marc Einerman: Hi. Good morning, Anthony. This is Marc Einerman. And I think the growth in total client funds that we saw in the fourth quarter and really over the course of '25, I think, is a function of the incremental improvement that we're seeing in venture investment year over year and innovation economy activity. And as the longer we have been with First Citizens BancShares, Inc., the more things have stabilized within our four walls, and our ability to go to market and execute has just continued to get better. And so it's really a function of it's improving out there. As reflected in the guidance, there's that further expectation of further incremental improvement, and our ability to capture continues to improve as well. And so that, in a nutshell, is the story, if you will, behind the positive TCF trends. Operator: Thank you. Next question comes from Bernard Von Gizycki from Deutsche Bank. Bernard, your line is open. Please go ahead. Hi. The manager line is open. We will move on. The next question comes from Casey Haire with Autonomous. Casey, please go ahead. Casey Haire: Great. Thanks. Good morning, guys. So, Craig, wanted to touch on the purchase money note. If I heard you right, it sounds like the pace of retirement's gonna be a little bit slower between the half billion, billion a month. So 9 billion a year, if that's right. So just wondering, I thought the first tranche was gonna be the biggest. It just feels like it's a little bit slower. So just maybe a little more color on that. And, you know, how much, what, how low you're willing to go on the cash front as a percentage of earning assets? Thanks. Craig Nix: Okay. The reason for the lower than anticipated payment in December was really related to the loan growth that we experienced versus deposit growth and its impact on our excess liquidity. So that's just simple math there. In terms of just the 500 million to a billion, that relates to the amount of loan collateral that rolls off monthly as an estimate of that. And that would sort of indicate the minimum. The loan collateral, the loans that are eligible, would be loans in place at the time of the acquisition, and as those loans mature, that collateral pool gets diminished. And we have pledged US treasury securities as well to that, but that gets into whether or not we pay off. That gets into the rate arbitrage between those securities and the purchase money notes. So we're trying to balance both the need to get the note paid efficiently with doing it in a way that's most profitable, if that makes sense. So the 500 to 1 billion would be sort of, and you should think of that as sort of the minimum amount that we'd pay off this year. Tom, I'd let you amplify anything there. Tom Eklund: No. I think that was very clear on the 500 to 1 billion being the minimum. And, obviously, looking at the alternative funding costs is why we've sort of moderated our pace of pay down with the 3.5% we're paying on the purchase money notes. So as alternative funding costs come down, you can expect to see us accelerate those payments. I think you also asked about cash sort of as a percentage of earning assets. You know, we're currently right at about 10%. I think you could see that come down a little bit from there, but you know, it'll remain in that 8 to 10% range is sort of what we'll manage to from a liquidity risk perspective. Casey Haire: Okay. That's great. So and then I guess just switching to the loan growth outlook. So, you know, a very strong result in the fourth quarter here. The pipeline is up. And yet you're calling for growth to moderate to a mid-single-digit pace in '26. You know, the deposit growth guide does imply that the loan-to-deposit ratio moves up to the mid-nineties. So I guess the question is, like, are you purposefully constraining the loan growth for liquidity reasons, or do you expect loan growth to moderate from near double-digit pace? Craig Nix: Yeah. You know, I think there's a lot of positives certainly on the loan front. I think, you know, SVB, we talked about, you know, pipelines are full. We feel very good about the activity in the fourth quarter and where we are heading in the first quarter. You know, I think we have, you know, a really good outlook on commercial finance. Then in our general bank, kind of in our, you know, business and commercial side, I think that said, you know, as Tom touched on the purchase money note, you know, we will look certain places to sell portfolios. You know, we had the 700 million that we moved mortgage. I think we're exploring potential sales, you know, elsewhere, SBA, where kind of the financials make sense. And so, you know, we're gonna be there for our clients. We're gonna continue to lend. But I think, you know, the reality is we still do have, you know, over 33 billion, you know, we do need to repay on the purchase money notes. So it's gonna be a function of, you know, how much we can, you know, really, you know, generate deposits. Tom Eklund: I think one other component, this is Tom. One other component to add is when you look at the capital call line and the nature of the loan growth that has come through there, as you get further into that, obviously, a larger portfolio is gonna lead to larger paydowns. So even with the same elevated activity, it will lead to moderating growth. That portfolio is of natural duration. Craig Nix: That's right. Casey Haire: Yep. Okay. Alright. Just last one housekeeping. Craig, it was very helpful to watch for all the headline and core NIM NII. Just, and I apologize if I missed this, but what is the outlook for purchase accounting this year? Craig Nix: For just, are you speaking of net accretion income? Casey Haire: Yeah. Just per. Craig Nix: Yeah. We expect it to be, for 2025, we recognized around $250 million of net accretion income. We expect that to drop to about $203 million this year, so around a $50 million decline. So not very significant. Not as significant as it has been in prior years, as some of those shorter portfolios ran off. Casey Haire: Gotcha. Alright. Great. Thank you. Operator: As a reminder, that's star followed by one to ask a question today. I'm not showing any further questions at this time, so I'd like to turn the call back over to our host, Ms. Deanna Hart, for any closing remarks. Deanna Hart: Thank you, and thanks, everyone, for joining our earnings call today. We appreciate your ongoing interest in our company. And if you have any further questions or need additional information, please feel free to reach out to the investor relations team. We hope you have a great rest of your day. Operator: Ladies and gentlemen, this concludes today's conference call. You may now disconnect. Have a wonderful day.
Operator: Good morning. Welcome to Webster Financial Corporation's Fourth Quarter 2025 Earnings Conference Call. Please note that this event is being recorded. I would now like to introduce Webster's Director of Investor Relations, Emlen Harmon, to introduce the call. Mr. Harmon, please go ahead. Emlen Harmon: Good morning. Before we begin our remarks, I want to remind you that comments made by management may include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and are subject to the safe harbor rules. Please review the forward-looking disclaimer and safe harbor language in today's press release and presentation for more information about risks and uncertainties which may affect us. The presentation accompanying management's remarks can be found on the company's Investor Relations website at investors.websterbank.com. I'll now turn the call over to Webster Financial's CEO, John Ciulla. John Ciulla: Thanks, Emlen. Good morning, and welcome to Webster Financial Corporation's fourth quarter and full year 2025 earnings call. We appreciate you joining us this morning. I'm going to start with a quick synopsis of the year. Our President and Chief Operating Officer, Luis Massiani, is going to provide an update on operating developments, and our CFO, Neal Holland, will provide additional detail on financials before my closing remarks and Q&A. Webster continued to excel from a fundamental perspective in the fourth quarter, and we entered 2026 on our front foot. Our strategic efforts in 2025 largely focused on execution, and our performance was consistently strong over the course of this year. Despite an uncertain macro backdrop at times, we held our focus on delivering for our clients and enhancing the operating capabilities of the bank. On a full-year basis, Webster generated a 17% ROTCE and a 1.2% ROA. Our EPS was up 10% over the year prior, while we grew loans 8% and deposits 6%. Our tangible book value per share increased 13% over the prior year while accelerating capital distributions to shareholders by repurchasing 10.9 million shares. We produced strong financial results while continuing to invest in our nontraditional banking verticals, including HSA Bank, Mitros, and InterSync, as we look to fortify and advance the strategic advantages these businesses provide. We also aggressively remediated the two isolated pockets of our loan portfolio with less favorable credit characteristics, which optimizes our balance sheet and enhances forward profitability. One illustration of this initiative is the 5% decline in commercial classified loans relative to the prior year-end. The macroeconomic backdrop remains supportive of asset quality performance more generally as we continue to see solid asset quality trends from our portfolio at large. We entered 2026 with robust capital levels and a uniquely strong funding and liquidity profile. Diverse asset origination capabilities, consistent credit performance, robust capital generation, and a strong risk mitigation framework enable the sustainable and steady growth of the company. I'll now turn it over to Luis to review business developments. Luis Massiani: Thanks, John. Our performance in the fourth quarter echoed the solid results that we delivered through the year. Our clients continue to navigate well through the macro environment, and client activity remained robust in terms of both loan growth and lending-related fee income. Limited payoff activity also contributed to better-than-expected loan growth in the fourth quarter. Growth was generated across a broad range of asset classes, highlighting the diversity of origination capabilities that is a key strength of our franchise. We saw significant progress on credit remediation as classified commercial loans were down 7% and nonperformers were down 8%. Net charge-offs were 35 basis points. The trajectory of problem assets should continue to decline, with some quarters decreasing more than others, as was the case in 2025. Following the strong year of deposit growth in which our commercial, consumer, health financial services, and InterSync businesses all contributed to our performance, we see continued opportunity to grow across our diverse funding platforms. While still early stages, Fram's plan participants in Affordable Care Act health care plans have started opening HSA accounts. We enhanced our existing mobile and web enrollment systems to better serve ACA participants. We are seeing increased account openings in our direct-to-consumer channel, which should accelerate through the rest of the year. Expectation for deposit growth from HSA eligibility for bronze and catastrophic plans is unchanged. We believe newly HSA-eligible plan participants will drive $1 billion to $2.5 billion in incremental deposit growth at HSA Bank over the next five years, including $50 million to $100 million of growth in 2026. The acceleration in growth will be gradual as newly eligible enrollees in the ACA plans first recognize and then adopt HSA accounts. We're also closely watching health care policy development as there is growing appetite in Washington for a number of potential legislative actions that would enable HSA Bank to help a significantly greater portion of Americans manage their health care saving and spending needs. This includes the potential for unpatched provisions in last year's reconciliation bill to now be passed and proposed legislation that could direct some ACA subsidies directly into consumer HSA accounts. The outlook for deposit growth at Mitros also remains very strong. A greater portion of settlement recipients are recognizing the benefits of professional administration. We are adding sales capacity and leveraging Webster's scale and technology to further enhance the member experience. I'll turn it over to Neal. Neal Holland: Thanks, Luis, and good morning, everyone. I'll start on slide five with a review of our balance sheet. Balance sheet growth continues at a solid clip in the fourth quarter, with growth in both loans and deposits. Assets were up $880 million or 1% in the fourth quarter. On a full-year basis, they were up just over $5 billion or 6.4%. We continue to operate from a strong capital position relative to internal and external thresholds. During the fourth quarter, we repurchased 3.6 million shares. Loan trends are highlighted on slide six. In total, loans were up $1.5 billion or 2.8%, and on a full-year basis, were up 7.8%. Growth was diverse and predominantly driven by commercial loan categories, including commercial real estate. We provide additional details on deposits on slide seven, where total deposits were up 0.9% over the prior quarter. While we did see a seasonal $1.2 billion decline in public funds, we also saw growth across each of our business lines and backfilled the seasonal public fund outflows with corporate deposits. Deposit costs were down 11 basis points relative to the prior quarter. While deposit pricing remains competitive, we should see some repricing accelerate in the first quarter driven by seasonal factors and recent repricing efforts. Income statement trends are on slide eight. There were a number of adjustments this quarter. The net effect was a loss of $8 million to pretax income and $6 million to after-tax income. Excluding these, adjusted PPNR was down $4.9 million relative to the prior quarter, with slightly better revenue offset by expenses related to current and future growth. Adjusted net income was slightly higher than the prior quarter on a lower provision and tax rate. Adjusted earnings per share additionally benefited from a lower share count. The adjustments to GAAP earnings are highlighted on the following slide. On slide 10 is detail of net interest income. We saw a modest increase in NII as loan growth remained solid through the quarter, and we saw more limited payout activity than anticipated in the quarter-end. Better-than-expected loan yields also help support the net interest margin, which was a couple of basis points better than our most recent guidance. Our December and spot NIM were both 3.35% for the quarter and December. As illustrated on slide 11, we remain effectively neutral to gradual changes in short-term interest rates. On slide 12, linked quarter adjusted fees were up $2.7 million with contributions from increased client activity, direct investment gains, and the credit valuation adjustment. Slide 13 reviews noninterest expense strengths. Increases in expenses quarter over quarter were largely related to growth and growth potential, with higher incentive accruals, investments in expanded opportunity at HSA Bank, and investments in technology. Slide 14 details components of our allowance for credit losses, which decreased $9 million relative to the prior quarter. The decline was driven by charge-offs of loans previously reserved and improvements in underlying credit trends. Those improving trends are highlighted on the following slide, which shows that nonperforming assets were down 8% and commercial classified loans were down 7%. Criticized loans were also down 6%. Charge-offs for the quarter were 35 basis points. Turning to slide 16, our capital ratios remain above well-capitalized levels and in excess of our publicly stated targets. Our tangible book value per share increased to $37.20 from $36.42 in the prior quarter, with net income partially offset by shareholder capital return. I'll wrap up my comments on slide 17, with our outlook for full year 2026. We're anticipating loan growth of 5% to 7% and deposit growth of 4% to 6%. The midpoint of the guide has expected revenue of $3 billion for 2026. On a GAAP basis, we expect net interest income of $2.57 billion to $2.63 billion, which assumes two 25 basis point Fed funds cuts in June and September. We expect fees to be $390 million to $410 million and expenses to be $1.46 billion to $1.48 billion. While noting the '26 expenses will likely be a few percentage points higher than adjusted expenses in the fourth quarter, primarily due to seasonal impacts of payroll taxes, annual merit, and benefit costs. With that, I'll turn back to John for closing remarks. John Ciulla: Thanks, Neal. Our outlook for this year anticipates that we continue to drive growth that enhances our financial performance. As we also invest in and grow businesses that advance our strategic advantage in terms of attractive funding characteristics and asset origination capabilities, further building on Webster's substantial franchise value. We're in a unique period for the banking industry with positive momentum coming from macroeconomic and regulatory tailwinds. While we anticipate we will be a beneficiary of these dynamics, we will also ensure we grow while maintaining the resiliency and adaptability of the company. In terms of Webster's performance, 2025, our ninetieth year, it was a record year for the bank in terms of milestones and financial achievements. And we're positioned to prosper into the future. The efforts of those in our organization in the past several years have created a bank with a differentiated business model that organically and sustainably outgrows and outgurns the banking industry at large. Does so with a focus on risk-appropriate returns and at the same time is investing in the well-being of its communities at large. Thank you to our colleagues and clients for their contributions to our success in the fourth quarter and for the full year. And what it means for the future of the organization. Thank you for joining us on the call today. Operator, we'll take questions. Operator: Thank you. We will now begin the question and answer session. We also ask that you limit yourself to one question and one follow-up. For any additional questions, please re-queue. Your first question comes from Jared Shaw with Barclays. Please go ahead. Jared Shaw: Hey, everybody. Good morning. Good morning. On the loan growth side or outlook, can you just give an update on how the partnership with Marathon is influencing that and, you know, maybe where things stand there now that we've had a couple of quarters? John Ciulla: Sure. We're live, and we're operational. I would say we've not yet seen a material impact on loan growth trajectory in the sponsor business. I think we are having more swings at the plate just given the bigger implied balance sheet. So we remain optimistic that it was a smart strategic move, Jared. We promised people that this quarter we would give you a little indication of what it meant financially. It's obviously baked in, and it's not material. We expect a couple of million dollars in positive income resulting from the JV itself, meaning kind of returns, and everything we've quantified is in our loan growth forecast going forward. I think it could be an upside opportunity for us should we be able to get some more wins in the sponsor business. But we're kind of, I would say, relatively conservative in terms of our view of the impact on both loan growth and our financial performance in '26. But live operational, we have originated loans for the JV. As I said, we've been more competitive in competitive situations with borrowers. We just haven't seen a real change in the dynamic in the sponsor book as of yet. Jared Shaw: Okay. Thank you. And I guess as a follow-up, just looking at the expense trends and some of the investments you called out in systems and taking advantage of the bronze opportunity, is most of that marketing and, you know, sort of client outreach, or is there any system change that you're contemplating to, you know, to bring on more of those individuals? Luis Massiani: No. It's mostly marketing, Jared. It's, you know, as we've talked about the opportunity in the past, a large part of what we're doing is that we have to identify who those individuals are, which is very different from how our sales channels have worked historically because this is not an employer business, but a direct-to-consumer business. And so the vast majority of the investment in the technology is done. And we feel very good about the capabilities of what we have there. You are going to continue to see us investing in identifying those individuals and motivating and educating those individuals to become HSA holders. So that's where the larger investment dollars are going to work in the fourth quarter and will continue to, you know, you'll continue to see in 2026. Jared Shaw: Great. Thanks. John Ciulla: Thank you, Jared. Operator: Your next question comes from the line of Mark Fitzgibbon with Piper Sandler. Please go ahead. Mark Fitzgibbon: Thanks, guys. Good morning. John Ciulla: Mark, let's suppose the category four threshold is lifted meaningfully sometime soon. I know you'll be able to reduce sort of that annual cost number by, pick a number, $20 million to $30 million. But I guess I'm curious, strategically, how that might change your plans for the company. John Ciulla: Yeah. It's a great question, Mark. And I wish we could give more specific numbers. I mean, I think you see in our guide of expenses that we're not anticipating the additional incremental $20 million of expense this year because we're able to either potentially avoid some of those expenses or certainly have more time to spread out those expenses into the future. So it's our anticipation of changes is already impacting our forward look at investment, and we've already pivoted in terms of, you know, not pedal to the metal in terms of getting ready for category four because we think it's highly likely that it'll be significantly modified in the future. So I think that's important, and I think it gives us a lot of flexibility going forward. I think from an overall strategic perspective, it really doesn't change kind of the way we view life in terms of our growth trajectory, our organic path forward. So I would say it doesn't have much of an impact on the way we strategically look at growing the bank. It's really giving us the opportunity to either increase profitability in the short term or reposition dollars that otherwise would have been invested for category four preparedness into revenue-generating investments, which is obviously the goal. So I think that's the way I would characterize our view of category four. Mark Fitzgibbon: Okay. Great. And then separately, Neal, I wonder if you could help us think through the NIM trajectory in the early part of 2026. Neal Holland: Yeah. So we ended the quarter and December at a NIM of 3.35%. We expect that exit rate to maintain throughout 2026, and so we should see kind of a 3.35% for the full year. Now, obviously, there's variability there depending on what happens with the curve and other items, but we think 3.35% is a good midpoint guide for next year. There will be the normal seasonal factors. You know, we'll tick up a few basis points likely in Q1, and then that will come down a little bit in Q2. And pick back up in Q3. But I would be thinking in that mid-3.30s range for our go-forward NIM expectations for 2026. Mark Fitzgibbon: Thank you. John Ciulla: Thank you, Mark. Operator: Your next question comes from the line of Matthew Breese with Stephens. Please go ahead. Matthew Breese: Hey, good morning. Good morning. John, at a recent event, you noted that you and the Webster team can be a bit more aggressive on deposit pricing. Hoping you could provide just a bit more color there. How much more room do you see to lower deposit costs absent rate cuts this year? And if you have it, what was the period-end cost of deposits? John Ciulla: Yeah. I'll let Neal give you the numbers as usual. But I think we did we were a little bit more aggressive in the fourth quarter. There is still significant competition, particularly in our geographic footprint. And so I think we're kind of taking a very thoughtful and deliberate approach, and I'll let Neal kind of talk to you about what transpired in the quarter and how we're looking at pricing going forward. Neal Holland: Yes. For those of you who listened to our last public comments, we guided down NIM for the fourth quarter by a few basis points. And when we had the mid-December cut, we made more aggressive moves than some of our last cuts. And so we had nice pricing down, and we ended December with an average cost of deposits at $1.91 versus $1.99 for the quarter. So a nice trajectory down there. As John said, competition remains strong. But we did have some positive movement on that last cut and are continuing to look for ways to optimize our overall customer deposits. Carrying that into kind of beta assumptions, we're assuming for kind of this cycle through the end of next year, a 30% overall beta, which is a little bit higher than we are today, but that's how we're looking at deposit pricing within our guide. Matthew Breese: Great. And then just thinking about loan growth as it relates to reserve, maybe first, what are current spreads on commercial real estate and C&I? And do you expect to grow in some of these lower-risk sectors in 2026, resulting in further reductions in the, you know, reserve as a percentage of loans? John Ciulla: Yeah. That's another interesting question. Credit spreads have tightened significantly. I was talking with our Chief Credit Risk yesterday, and we've seen 30 to 50 basis points over the last eighteen months or so compression in spreads, particularly in kind of commercial real estate assets that have gone kind of stabilized down to 180 basis points to 200 basis points over reference rates. So I do think you're seeing in our and what you saw in our provisioning this quarter, Neal mentioned the fact that we resolved some problem assets and that sort of continues to release. But you're right in that what we've been adding in terms of stabilized commercial real estate, in terms of fund banking, in terms of some of the other asset categories, public sector finance, tend to make the weighted average risk rating of the overall portfolio better. And so I think you'll continue to see that. Quite frankly, and we've mentioned it, we'd like to see the sponsor business at some of our verticals that have higher risk-return profiles and higher yields grow more. So it's not all by choice. It's also by what the market's giving us. But I think if you see continued benign credit and you continue to see trend lines in where we're growing assets, I think your supposition is correct that we would have less risk in the overall portfolio and we could still have room in that reserve as we move forward. Matthew Breese: Thank you. John Ciulla: Thank you. Operator: Your next question comes from the line of Casey Haire with Autonomous Research. Please go ahead. Jackson Singleton: Hi. Good morning. This is Jackson Singleton on for Casey Haire. Just starting out, I hear your thoughts on 11% annualized growth in 4Q and really just strong growth in all 2026. It feels like the guide is still a little conservative. So just wondering if you can maybe provide some thoughts on kind of why the 5% to 7%. John Ciulla: Sure. You know, I do think that there was and Neal mentioned the fact that there were lower payoffs than we had anticipated in the fourth quarter. And so I think if you normalize that, we feel kind of our growth was a little bit less than the headline number was. I think the other dynamic here is we've talked a lot about making sure we maintain our profitability and our returns as we move forward. And so I think one of the things that Luis and Neal and I and the rest of the team have been doing is spending a lot of time thinking about really deliberate capital allocations and looking at what businesses are going to continue to grow franchise value in the long term. We may be deemphasizing some businesses and really looking at kind of core franchise building full relationships. So I think when you put everything together, as I said earlier, I think we do anticipate continued competition from private credit in the sponsor group, although the moves we're making hopefully will get a little bit more growth out of that business than is in our numbers. So that could help us surprise to the upside. But I think we think we can grow loans 5% to 7% in a very profitable manner, continue to show at or better than market growth over time, and do it profitably. So we think that's the right number for growth. Could we outperform that if the economy continues to kind of along and we get a few breaks with respect to M&A activity and then the sponsor book? Yes. But we think this is our best guess of optimal growth and profitability mix. Jackson Singleton: Got it. Thanks for that. And then just my follow-up is on loan-to-deposit ratio. So the deposit guide, the midpoint of the deposit guide's a little bit lower than the midpoint of the loan guide. So just wondering maybe is there any kind of ceiling for the loan-to-deposit ratio that you guys wouldn't want to go past? And then maybe how should we think about the mix of deposit growth in 2026? Neal Holland: Yeah. I'll start that one. We don't have a formal ceiling that we're looking at. We are in the low 80% range. I personally believe sitting in the CFO seat that kind of in that low to mid-85% range is the optimal place to be. So I would be surprised if we went over 85%, and we tend to stay more in that 80% to 85% range. On the deposit growth side in the mix, the mix should be fairly similar to how we've grown loans this year. We are expecting a little bit more on the HSA side from the bronze opportunity that we've talked about. We expect continued strong mid-20% growth from our Amitros business and then similar growth rates across the board in the other categories. Jackson Singleton: Got it. Okay. Perfect. Thanks for taking my questions. John Ciulla: Thank you. Operator: Your next question comes from the line of Chris McGratty with KBW. Please go ahead. Chris O'Connell: Hey. Good morning. This is Chris O'Connell filling in for Chris. Hey, Chris. Hey. Just wanted to start off just quickly on the balance sheet on the liability side. On the end-of-period basis, there seemed to be, you know, a bit of movement outsized here and there on the borrowing side. Anything driving that outside of seasonality in kind of the movement with the sub-debt? Neal Holland: The quarter? Nothing unusual. I guess I would say the one unusual factor relates to what you mentioned, the sub-debt. So throughout the quarter, we were a little bit elevated on the sub-debt side with long-term debt just over, I think, we're at $1.1 billion, slightly over $1.1 billion, and we now sit at $650 million back where we wanted to be after we redeemed two outstanding notes. So we also have some seasonality in the quarter where I mentioned in my prepared remarks, we had $1.2 billion of public funds leave. Those are already starting to flow back in Q1, just those seasonal trends. So, you know, we offset some of that with broker deposits and FHLB advances. But during Q1, we'll see, as I mentioned, those public funds flow back in and the broker deposits reduce back down. So no, nothing unusual there. Just some transactions that tie into seasonality and tie into our September sub-debt issuance. Chris O'Connell: Okay. Great. Thank you. And then, you know, on the fee guide, if I'm, you know, reading the, you know, numbers correct on a year-over-year basis, it's a little bit of a wide range, 1% to nearly high single digits. Can you just maybe frame some of the drivers and growth for next year? And kind of what would push you towards, you know, the lower or higher end of the upside? Neal Holland: Yes. We've talked about our fee earnings having kind of four major areas in the past. And on our kind of health care services, our loan business, and our deposit business, three of the main businesses, we kind of expect that steady, you know, 2% to 4% growth from client activity. What really drives some variability in our fees are some of the unusual categories. When we look at BOLI, when we look at our CBA, and when we look at some of our direct investments, which have been very for us, but do have some volatility, leads us to leave a little bit wider range on our fee guide just because of that last 25% and some of the lumpiness of when those flows come in. Is how I would address that one. Luis Massiani: Yeah. I'd add one more thing there is the, you know, to the place where you see a little bit of seasonality and volatility, but where we saw a lot of good performance in the third and fourth quarter and the back half of this year was in loan-related fees. So we actually did see with the, and that's been pointed out in the call, with the higher origination activity that we saw and the growth that we saw in C&I and in CRE, we do get a fair amount of, you know, swaps, syndications, and FX business as well. And so what could potentially move it to the higher end of the range is if we continue to see good momentum in those, you know, kind of, we'll call it, the larger commercial asset classes. Then we feel very good that, you know, '26 should be a good year for loan-related fees, and that could potentially move it a little bit higher towards that high end of the range as well. But tough to forecast those because it is very much driven by what overall origination activity is going to be. So it's but it's a good opportunity. Chris O'Connell: Thank you. Great. Operator: Your next question comes from the line of David Schiavarini with Jefferies. Please go ahead. David Schiavarini: Hi. Thanks for taking the questions. Wanted to start on HSA. How did the open enrollment season go? I know that normally leads to a nice bump in deposits in the first quarter. Luis Massiani: Yeah. David, so far so good as I were characterizing it. So we're slightly ahead of where we were last year. We've opened up approximately about 15,000 more accounts than what we had at this point in 2025. And, you know, total account opening so far about are just shy of 250,000. So we had, as we mentioned on prior calls, you know, during the, you know, course of the year, we've had a fair amount, we made a fair amount of investments on just broad-based client experience, you know, new technology, new investment experience, that led to some nice client wins. Obviously, it's a competitive market, so we had some losses as well. But net-net, the client wins have outweighed the client losses on the employer side. And so, therefore, we've seen some, you know, some nice momentum on, you know, account opening. And so we think that it should be, it sets up pretty well for having good performance, and we should be slightly ahead of where we were in 2025, you know, when you'll see, you know, for first-quarter results. What we haven't seen yet and we're still waiting on is on the direct-to-consumer side. So the, you know, we had, guided to the, you know, the new ACA opportunity to be a slow-moving target, I guess, that's going to take some time for us to play out. We've seen account openings that are faster in our direct-to-consumer channel as of the, you know, through this date, you know, last year. So we have seen growth, but we have not yet seen, you know, the type of growth that we think we're going to see over the balance of the year. So we should see the direct-to-consumer channel, you know, kind of increasing and accelerating growth in account opening should accelerate over the course of the year, and we should be able to continue to maintain the good positive momentum that we have in the employer channel as well. So we feel good about the business and where it is today. David Schiavarini: Great. Thanks for that. And then shifting over to capital management. Nice uptick in the buyback activity in the fourth quarter. Can you talk about the pace looking forward on the buybacks? And I see your CET1 is 11.2% with the near-term target 11% and long-term target 10.5%. Can you talk about the timing of bringing that CET1 down? John Ciulla: Sure. I think our kind of capital strategy from the top of the house remains the same. We look to invest in organic growth, and we're still looking for tuck-in acquisitions to enhance and supplement our health care verticals. And if those aren't available to us, we obviously look to return capital to shareholders in the form of dividends or buybacks. I think we think that you could see another year like you saw in '25 with respect to share repurchases as we move forward. As it relates to changing from our short-term to our long-term 10.5% target, I think you see that the industry en masse is kind of getting closer to pivoting, and you've seen some people announce. We go through at the end of the first quarter and into the second quarter our annual stress testing and capital management activities. And I think, you know, we're more likely than we were last year to feel comfortable to start to move that thing down after we go through that exercise. So I think we're a couple of quarters away from giving you a little more specificity on moving that down. But we certainly feel more comfortable. The credit coast seems pretty clear. We've got some good economic momentum. So I think you'll continue to see us buy back shares. Absent other organic uses of capital. And I think we're getting more confident that we can start to reach that 11% CET1 ratio as we move through the year. David Schiavarini: Great. Thank you. John Ciulla: Thanks, David. Operator: Your next question comes from the line of Daniel Tamayo with Raymond James. Please go ahead. Daniel Tamayo: Thank you. Good morning, everyone. Good morning. Maybe we can start on the credit. I know that's not as pressing a topic as it has been, but new year, maybe just kind of reset expectations and give your latest thoughts on the office book and what that could look like through any further sales, etcetera, for the coming year. John Ciulla: Sure. I feel really pretty good overall. I mean, I think we nailed it, and I give credit to our Chief Credit Officer in terms of calling the inflection point. We've had three good quarters of underlying risk rating, migration trending. As you saw, we've materially reduced criticized class and nonaccrual loans. And so the overall credit profile, I think, continues to improve and be certainly well within our comfort levels. With respect to those two portfolios we've talked about over and over again, our office and our health care services, they still represent a large portion of NPLs and classifieds, which is sticky and frustrating, but also really portends to the fact that the vast majority of the $55 billion loan book is performing really, really well. The way I would characterize office, and this would also go to health care services, is that I think we have it pretty much ring-fenced. You know, we're about $720 million left in the office portfolio. There's a good amount that's performing as agreed. We've risk-rated it appropriately. We've got the appropriate reserves. And so we don't think it's going to be a big contributor as we move forward to kind of outsized nonaccruals or losses. We could see, obviously, more as we try and resolve some of the sticky nonaccruals we have now. We'll make the right calls in terms of loan sales or charges. But we feel pretty good about the fact that we can operate within that 25 to 35 basis point annualized charge-off rate. Obviously, when you're a commercial bank with big credits, that can sort of bump around a little bit as you've seen in the last several quarters. But we feel pretty good that we've kind of have a good handle on everything in there and that we don't see any significant deterioration in that portfolio. And the same goes with the health care portfolio, which is now down to, like, $400 million. So in aggregate, those two portfolios are roughly $1 billion. We've identified the problems that are in them. We've adequately reserved, and we're not as concerned to have contributions in big contributions and charges and NPLs going forward. Daniel Tamayo: Okay. Great. Yep. That's great color. Thanks. And then, you know, we've talked a lot about the deposit portfolio today. You know, the noninterest-bearing side, obviously, tied to commercial loan growth. But it really has continued to trend down for reasons that, you know, you're growing in other areas. You had a lot of growth opportunities, understandably. But that has kind of continued to trend down over the last few years, even in quarters. Just curious if you see a bottom from a mix perspective with noninterest-bearing anytime soon. Thanks. Neal Holland: Yeah. You know, I would answer that with two different directions. The first is saying that we are seeing a slowing pace and reductions in noninterest-bearing. For the full year, we were down just over $200 million. So we believe that we're very close to an inflection point there. Looking at it a little differently as an organization, we really focus on noninterest-bearing, including our health care services. You know, priced at 15 basis points. You know, where we had $450 million in growth this year. And so when we have a marginal dollar of marketing where we could put towards the Mitros or towards the HSA versus going out and competing head-to-head for a new consumer client, we tend to go in the direction of our health care services book, which is differentiated, and we have a strong opportunity there. So, overall, kind of look at those combined, and we do think for the pure, noninterest-bearing excluding health care vertical, we are close to an inflection point. John Ciulla: And I want to be clear that we still have a significant focus on driving core commercial and consumer relationships in noninterest-bearing accounts. We're investing in treasury management capabilities. We continue to push all of the line folks to make sure that they're deepening their share of wallet and that we're getting our share of operating business along with the loans we're making. I agree with Neal's comments, but I don't want that to be that we're not still focused on making sure that we're growing kind of core traditional consumer and commercial deposits. Daniel Tamayo: Great. Thanks for the color. Operator: Your next question comes from the line of David Smith with Truist Securities. Please go ahead. David Smith: Hey. Good morning. Hey, David. You had mentioned deposit competition was elevated in a lot of your geographic footprint right now. I'm wondering if you could just help us frame, you know, within your broader what areas are seeing more or less competition from a geography standpoint? Thank you. Neal Holland: Yeah. I would put it across multiple categories. When we look at consumer CDs, we've seen some of the large banks in our market maintain very aggressive pricing there, which were priced a little bit below some of those competitors at this point in time. On the direct bank, we don't have a large portion of our portfolio there, you know, $2 billion to $3 billion, but there's some offers still sitting out in the market, well over 4% where we moved lower. The commercial side continues to be competitive as always, especially in our market. So I would say it's generally across the board. We're seeing a competitive landscape. As we talked about, we did move pricing down at the mid-December rate cut, and we'll continue to be aggressive. But we do very much focus on that balance between liquidity and net interest margin, and we feel like we're in a good spot. But competition does remain strong in the market. David Smith: Thank you. Operator: Your next question comes from the line of Manan Gosalia with Morgan Stanley. Please go ahead. Manan Gosalia: Hey. Good morning, all. Good morning. You noted earlier on that loan yields were better this quarter than you anticipated. Can you talk about what's driving that? You know, you also mentioned the credit spreads have tightened. So it seems like the loan growth is coming in higher-yielding categories. I guess two-part question, is that right? And if that is, then what is baked into the flattish NIM trajectory that you just spoke about? Luis Massiani: Yeah. I'll take the first one for the first question, Manan, Neal can answer on the NIM. You know? So, no, I don't think that we said that loan yields were better than expected in the fourth quarter. It was actually loan payoffs. And so part of the kind of better performance that we saw from a loan growth perspective and just the overall stability that saw in the portfolio was driven by the fact that loan, you know, the expectations regarding loan payoffs with rate so forth did not turn out to be what we thought it was. So we actually better performances, so we were able to retain, you know, a larger, you know, larger percent of particularly of the real estate book, which was great. On loan yields, it's competitive out there. And so we've, you know, we've seen, similar to what we've talked about a little bit on the deposit side. We've seen a bottoming out in an inflection point where spreads for the most part have contracted to where they're going to contract. And part of the spread contraction that we've seen in new originations for us is driven by the fact that we've been focusing on higher quality, you know, just better more middle-of-the-fairway type of assets that are just by design gonna have a tighter credit spread than, you know, than things that are not middle-of-the-fairway, not as bank eligible or as bank friendly from an asset class perspective. So, you know, we feel good about where the, you know, the origination and pipeline activity is for '26. We think that spreads are going to hold, you know, hold in relative to what we've seen for the back half of this year. And if anything, to the extent that there's a, you know, a better supply-demand imbalance with credit providers into the market to the loan demand. We think that there could be some potential for credit spreads to, you know, move slightly up over the course of the year, but that's not factored into our numbers today. And if anything, that would be a positive. Neal Holland: Yeah. And so clearly, with market rates coming down, our overall loan yields for the quarter were down about 17 basis points. When we were sitting midway through the quarter and seeing the performance at the beginning of the quarter, we were expecting to see it come down a little bit more. At the end of the quarter, we had a few positive movements and a little bit of change in mix that were better than we were anticipating. So overall, from that middle of the quarter, clearly, loan yields were down based on the overall market, but came in a little bit better than expected for the quarter. Manan Gosalia: Got it. Perfect. And then just wanted to get your thoughts on the leverage lending guidance withdrawn. Does that help loan growth a little bit? As you look out the next two or three years? And does that help you do more with clients that you already have a deep relationship with? John Ciulla: Yeah. It's a great question. I think the answer is it does not really change our financial outlook. I think it does give us a little more flexibility in terms of those kind of prescriptive guidance things. It's interesting. The unintended consequences is you end up maybe doing transactions that are not as optimal and actually not as credit strong, but within a box of a leverage covenant. This gives us a little more flexibility to do deals we know are good, you know, in the sponsor book. We've been in the business for twenty-five years, and we're really good at it. So I would say, you know, during the course of the year, will it allow us to do three to five more transactions that we otherwise might have not done because of regulatory scrutiny that we know are really, really good transactions? Yes. Does that really move the needle and change our kind of forward look on loan growth or profitability? Probably not. It's factored into what we're giving in guidance. So I would kind of say it's definitely and I know this question's been asked across the board. It's definitely not as impactful as people say. But it's another good sign consistent with a more constructive and tailored regulatory environment. It gives, you know, good bankers and good bank management teams the ability to serve their customers better. Manan Gosalia: That's very helpful. Thank you. Operator: Your next question comes from the line of Bernard Von Gizycki with Deutsche Bank. Please go ahead. Bernard Von Gizycki: Hey, guys. Good morning. Just my first question, sorry I missed this, but I think you acquired SecureSafe in December, which adds employer-sponsored emergency savings accounts. Can you just talk more on the acquisition, sizing of the deal, any economic or any color you can share on that? Luis Massiani: Yeah. On the size of the deal, Bernard, we're not, you know, we didn't put anything out when we announced it. And so you could assume that it's, you know, relatively small, and it's already, you know, factored into all of the, you know, quarter-end balance sheet numbers and, you know, capital metrics and so forth. So it's a, you know, SecureSafe is a relatively small company still in, we could characterize it as almost in, you know, still pseudo start-up phase. But it does have, it's a market leader in that growing business of ESAs, of emergency savings accounts. It's clearly, or the mission of the business is focused on helping, you know, large employers that have, you know, large workforces, you know, help those, you know, employees through an incremental benefit to being able to save for, you know, eventuality, specific rainy day funds, and so forth. And so it's largely viewed as a retention tool by employers. It's a big, you know, kind of focal point of HR officers for large employers. They're trying to figure out other ways to help those, you know, places that have large employee workforces to, you know, just, you know, kind of put more arms around them and bear hug their employees to, you know, to stay, you know, stay on and kind of limit turnover. But, again, it's a small business. We think that it adds a lot of good potential. It's a product that we had started to sell through our HSA Bank channel to our employer clients for some time and saw some good receptivity. We've been very familiar with the product for about the last year, year and a half, and we think that could be, again, it's going to be well received into our existing channels, but we're also expanding the universe of potential large employers that we can now target because this is something that we think is going to be well received by the large world of, you know, human resources in large corporate. But more to come on how that business will continue to evolve, and you'll start seeing, you know, we'll call out deposit balances and start highlighting those as those flow in over the course of this year. Bernard Von Gizycki: Okay. Great. And just as a follow-up, so what is your appetite on further deals? And how actively are you looking at them? And any color on, like, pricing and is it just harder to find these types of, like, bolt-ons to add to the HSA business? John Ciulla: Yeah. It is. I mean, I think, you know, it's always a good question, and we answer every year. We're obviously very active in looking to enhance two things. Our deposit-gathering low-cost, long-duration deposit-gathering capabilities. We've got a first-mover advantage in health care through HSA and Amitros. Or potentially adding more fee income streams to our business. So we continue to look at those tuck-ins where we can. We have been very transparent in the past that most banks are also looking at those two categories to grow. And when companies go to auction, metrics in terms of tangible book value dilution and others get very challenging. So I'd say we're active. If you think about it, since the Sterling MOE, we've done Bend in HSA. We've done InterSync. We've done SecureSafe. We've done Amitros. We have a really good track record, I think, of acquiring businesses that enhance our existing business and let us leverage our core competencies without making it shareholder unfriendly. And so I think that's the key. We'll continue to look at it. We'd love to do that sort of on a serial basis. Again, we're going to be really disciplined in terms of how much we pay and what we are looking to acquire. Bernard Von Gizycki: Great. Thanks for taking my questions. John Ciulla: Thank you. Operator: Your next question comes from the line of Jon Arfstrom with RBC. Please go ahead. Jon Arfstrom: Thanks. Good morning, guys. Good morning, John. Neal, question for you on expenses. It looks like the fourth-quarter run rate, the core run rate, puts you at the low end of the '26 guide. Which is fine. But what do you think the slope looks like for the year-end expenses? Neal Holland: I think you said what does the slope look like. You're a little hard to hear, but okay. Perfect. Background, I guess, maybe. Yeah. Yes. As I mentioned in prepared remarks, we'll move up seasonally a little bit in Q1 due to those three factors that I mentioned. I'll tell you that I think fairly stable expenses on the quarters after. We're going to continue to invest in our client-facing businesses and look for opportunities to grow. At the same time, we'll be continuing, as we always do, to look for ways to drive efficiency into the organization. So I would say that we'll have a percentage point increase in Q1, as I've mentioned before, and then probably neutral to a slight increase each quarter going forward. So not a material upslope after the first quarter. Jon Arfstrom: Okay. Good. That helps. And then back on growth, like, I heard your comments on less payoffs maybe caused an aberration in growth. But do you have any reason for the lower payoff activity? And it also looks like the way I see it, originations in commercial and commercial real estate are up pretty nicely. Is that seasonal, or is there something else going on there? Thank you. Luis Massiani: Yeah. I think that it's a little bit of easy now. So it's a little bit of all the above that you mentioned. If you go back to the performance of 2025, the first part of the year, first and second quarter, we did not have as much commercial real estate growth as you saw on the back end. So a little bit of that was pipeline buildings over the course of the year. And, you know, so we continue to feel good that, you know, pipelines are building up nicely for '26 as well, but you're unlikely to see the same type of growth trajectory that we saw in the fourth quarter on those specific, you know, CRE and C&I asset classes as you saw in the back half of the year. But then you'll see potentially some seasonality in the back half of '26 as well that could get you to the higher end of the range that we put out there today. So there's, you know, there's a little bit of all the above. Why did the expected payoffs, you know, perform better? It happens at times. You know? So we, again, we think that there's, you know, we go through the portfolio. We have, you know, pretty good, you know, visibility onto, you know, how things will perform. Rate moves being a little bit later in the quarter than what we had originally anticipated also, you know, drove some of that performance. But, you know, rates continue to go down. You should see some, you know, accelerated payoffs, particularly on the CRE book, but, you know, we'll see what happens over the course of the year. And if rate cuts do come, that will have some sort of impact. So it's a little bit of a conservative guide from that perspective, but the overall theme is pipelines are good. Feel good about the origination activity for the year. And we think that there's, you know, there could be good potential opportunities for us to the high end of the range. Jon Arfstrom: Yeah. Okay. Alright. Thank you very much. Operator: Your next question comes from the line of Anthony Elian with JPMorgan. Please go ahead. Anthony Elian: Hi, everyone. On the loan growth and deposit growth outlook, are you anticipating the growth within those ranges spread evenly throughout this year? Or do you think the growth will be more first half or second half weighted? John Ciulla: You know, that's always tough to predict. There is a general seasonality. The last year actually was a little bit different given the pipeline build in CRE. We had a stronger third quarter than you'd normally see. The fourth quarter is usually the strongest quarter for us, but I think for our modeling purposes, thinking about kind of an even growth trajectory is, you know, you can build it into your models. The first quarter is usually a little bit slower, but, again, it has a lot to do with payoffs, which we can't predict. So very difficult to give you kind of the seasonal growth aspects. Anthony Elian: Okay. And then on HSA and the $1 billion to $2.5 billion incremental deposit growth, you could see from the bill over the next five years, is all the necessary infrastructure technology in place to support that growth, or is there any further build-out required? Thank you. Luis Massiani: No build-out required from a technology perspective. It's in place. And we feel very good that we've made the investments that if there's a mad rush of potentially to say client trying to open up accounts through our direct-to-consumer channel that we have all the capabilities and scalability to be able to, you know, to take that on at no incremental cost to where today. So we feel very good about that tech investments that we've made there. Anthony Elian: Great. Thank you. John Ciulla: Thank you. Operator: And that concludes our question and answer session. John, I'll turn it to you for closing remarks. John Ciulla: Yeah, I just want to thank everybody for joining us today. Hope you can survive the storm this weekend no matter where you are, and enjoy the day. Operator: And ladies and gentlemen, this does conclude today's conference call. Thank you for your participation, and you may now disconnect.
Operator: Excuse me, ladies and gentlemen. Thank you for your patience. The call will begin momentarily. Thank you for your patience. The call will begin momentarily. Good morning. My name is Megan, and I'll be your conference operator today and would like to welcome everyone to the Fourth Quarter and Full Year 2025 SLB N.V. Earnings Call. At this time, all participants are in a listen-only mode. After the speakers' remarks, there will be a Q&A session. If you would like to ask a question during that time, simply press star followed by the number one on your telephone keypad. You may remove yourself from the queue by pressing star two. A reminder, this call is being recorded. I will now turn the call over to James McDonald, senior vice president of investor relations and industry affairs. Please go ahead. James McDonald: Morning, and welcome to the SLB N.V. Fourth Quarter and Full Year 2025 Earnings Conference Call. Today's call is being hosted from Houston, following our board meeting held earlier this week. Joining us on the call are Olivier Le Peuch, chief executive officer, and Stephane Biguet, chief financial officer. Before we begin, I would like to remind all participants that some of the statements we will be making today are forward-looking. These matters involve risks and uncertainties that could cause our results to differ materially from those projected in these statements. For more information, please refer to our latest 10-K filing and other SEC filings, which can be found on our website. Our comments today also include non-GAAP financial measures. Additional details and reconciliations to the most directly comparable GAAP financial measures can be found in our fourth quarter and full year earnings press release, which is on our website. With that, I will turn the call over to Olivier. Olivier Le Peuch: Thank you, James. Ladies and gentlemen, thank you for joining us today. I'll begin by reviewing our fourth quarter performance followed by an update on market conditions and the unique opportunities we see developing for our business. I will then share our outlook for the first quarter and expectations for the full year 2026. Stephane will then provide additional details on our financial results, and finally, we will open the line for your questions. Let's begin. We ended the year with strong financial performance in the fourth quarter, achieving sequential revenue growth, margin expansion, and substantial cash flow generation. This performance reflects the breadth of our portfolio and the impact of our strategy in a challenging macro environment. Growth internationally, sequentially, volume increased by 9% driven by high single-digit and mid-teens growth in North America. Excluding ChampionX, organic revenue increased by 7% internationally and 6% in North America. We saw sequential growth across all our geographies for the first time since 2024. This demonstrates that global upstream activity has stabilized with key markets showing early signs of a rebound. This helped us to deliver approximately $500 million of organic revenue growth this quarter, in addition to a roughly $300 million contribution from ChampionX resulting from an extra month of consolidation. Let me briefly discuss a few highlights from the quarter. First, we benefited from strong year-end product sales in production globally, higher exploration data sales, and strong demand for digital operations across all areas. Second, activity increased across The Middle East led by Saudi Arabia and with momentum in UAE, due to a combination of sustained gas development and increased oilfield intervention activity. Third, we delivered strong results across Asia, with increased activity in North Asia, East Asia, and Indonesia as these markets continue to benefit from offshore gas development. Notably, this quarter also marked the return of growth in Saudi Arabia and across Sub-Saharan Africa with flat revenue in Mexico. These three basins actually accounted for the entire organic revenue decline for the full year of 2025. Directionally, we expect activity in these markets to improve as we move throughout 2026. Turning to the divisions, in the fourth quarter, production systems and digital led the way, while reservoir performance was up slightly and well construction revenue was steady. The strength in production systems was driven by increased demand for production chemicals, offshore lift, and process technology and solutions, as well as backlog execution completions and OneSubsea. When excluding the ChampionX contribution, this division still grew by double digits sequentially and maintained its momentum with several contract awards during the quarter, as you can see from today's highlights. Digital also continued to grow at a healthy rate, driven by strong growth in digital exploration with year-end sales in the Gulf of America, Brazil, and Mongolia, as well as a robust increase in digital operations and platform applications. Digital annual recurring revenue surpassed $1 billion, reflecting year-on-year growth of 15%. We also announced several exciting digital milestones in the fourth quarter, including launching Tela, an AI system purpose-built to transform the upstream energy sector, and forming a partnership with ADNOC to launch an AI-powered production system optimization platform. These underscore the opportunity for AI to continue to reshape industry operations. Meanwhile, in reservoir performance, sequential growth was a result of increased stimulation activity in the Middle East and Asia and higher intervention activity in Europe and Africa. In well construction, higher offshore drilling activity in North America and Europe and Africa was offset by declines in some land markets. Additionally, our fourth quarter revenue benefited from the resumption of production APS projects in Ecuador. Overall, our fourth quarter results are a positive indication of the opportunity that lies ahead. I want to thank the entire SLB N.V. team for delivering excellent performance for our customers throughout 2025 and finishing the year on such a strong note. Turning to the market environment, near-term oversupply may continue to exert downward pressure on commodity prices through 2026, while elevated geopolitical uncertainties should provide a price floor. E&P operators are therefore expected to remain cautious and to backlog their 2026 budgets. As supply and demand continue to rebalance into 2027, conditions will likely support a gradual recovery in upstream investments and activity in key international markets and offshore deepwater, exiting 2026 at higher levels than 2025. Indeed, economic growth, increasing population, and large-scale manufacturing and infrastructure investments, particularly in the US and China related to AI, will inherently drive more demand in both oil and gas. Coupled with the natural decline of existing oil and gas assets, we believe these will be the key drivers for the rebalancing of supply and demand. In the meantime, our customers are focused on delivering the lowest cost incremental barrels. This means capturing efficiencies at scale, and in our view, that requires more technology, more integration, and more digital solutions. Today, operators are increasingly prioritizing performance assurance across the asset life cycle, reducing development timelines, and accelerating optimization through digital solutions. SLB N.V. is uniquely positioned to deliver value in this environment by integrating equipment with intelligent and autonomous digital capabilities to reduce downtime, improve efficiency, and increase productivity, as witnessed by the rapid uptake in our digital operations. Additionally, production recovery has emerged as a critical domain for value creation, not only in brownfield and mature assets but also across greenfield developments and tiebacks. This is not an either-or proposition between CapEx and OpEx, but an opportunity to increase our share of CapEx spend and capture OpEx white space with new solutions. With SLB N.V.'s expanded production portfolio, including the addition of ChampionX, we are uniquely positioned to meet the developing demand in the production space. Globally, the international markets are stabilizing and trending upwards directionally, with Latin America and the Middle East and Asia leading the rebound in 2026. Regionally, the Middle East continues to operate on the largest international scale, and we are positive in that investment outlook. Indeed, there is a resurgence of oil production across the region, driven by OPEC+ policy, while gas remains a strategic priority to meet seasonal demand and long-term capacity expansion. In 2025, we witnessed double-digit growth in The United Arab Emirates, Iraq, and Kuwait, which was more than offset by the decline in Saudi Arabia. In 2026, the Middle East market will be characterized by a rebound in drilling and more cove activity in Saudi Arabia, with rig counts potentially returning to early 2025 levels by 2026. And this has already begun. Offshore also continues to present compelling long-term growth opportunities for SLB N.V., particularly in deepwater, where we expect activity to inflect toward 2026 as white space subsides. With OneSubsea, we have the unique ability to combine subsea processing capabilities, digital solutions, and SLB N.V.'s integrated port-to-process expertise across subsea intervention and integrated well construction to create differentiated value for customers. Specific to the subsea market, more than 500 subsea trees are expected to be awarded across 2026 and 2027, about 20% higher than the 2025 run rate. And this is an opportunity we aim to capitalize on. In 2025, OneSubsea was awarded approximately $4 billion in subsea bookings, and we see a path to cumulative bookings exceeding $9 billion over the next two years, supported by this tendering activity. Finally, we are excited about the strong progress in our data center solutions business since its launch less than two years ago. This year, we plan to expand our range of offerings, our customer base, and the geographies we serve, paving the way for future growth. The opportunity is growing faster than anticipated, and we expect to exit the year at a quarterly revenue run rate of $1 billion per year. Overall, SLB N.V. is clearly positioned to fully benefit from a rebound in international activity as supply and demand rebalance, supported by ongoing investments for oil capacity, gas expansion projects, and a constructive long-term outlook for the quarter. Regional activity dynamics further reinforce the favorable directional trajectory beginning in 2026. Let me now share our outlook for the year. The headwinds we faced in 2025 in certain markets may become tailwinds for our business this year. We anticipate this will translate into a higher fourth-quarter revenue exit rate in 2026 compared to the fourth quarter of 2025. For the full year, assuming oil prices remain range-bound in the high fifties to low sixties range, we expect 2026 revenue to be between $36.9 billion to $37.7 billion. North America will benefit from the addition of seven months of activity from ChampionX, stronger offshore activity tied to customer plans, and accelerated growth in data centers, while upstream land activity will continue to decline year on year. International markets' revenue is expected to trend upwards over the year, resulting in a slight year-over-year increase. Growth will come from Latin America and The Middle East and Asia, while Europe and Africa are anticipated to decline slightly. Let me now describe how these dynamics will unfold across the divisions. In digital, revenue is expected to grow at the same pace as 2025, driven by digital operations. Production systems will increase, mostly benefiting from the full year of ChampionX revenue. Reservoir performance will be flattish, while well construction will decline slightly. Revenue in the all-other category will be flat year on year, considering the loss of revenue from the divested Palliser assets will be offset by growth in the data center solutions. This revenue outlook translates into adjusted EBITDA between $8.6 billion to $9.1 billion, with margins remaining in line with full-year 2025 levels. Finally, with visibility into another year of strong cash flow, we will return more than $4 billion to shareholders in 2026 through the combination of the increased dividend that we announced this morning and share repurchase. Turning to the first quarter, we anticipate revenue to decline by high single digits sequentially, similar to the prior year, due to outsized year-end product sales and project milestones in production systems in the prior quarter. We also expect adjusted EBITDA margin to decrease by 150 to 200 basis points versus the prior quarter. This seasonal dip will be followed by a rebound in activity during the second quarter, with further expansion into the second half driven primarily by international markets. Finally, before I hand over to Stephane, let me briefly touch on Venezuela. SLB N.V. is the only international service company actively operating in Venezuela today, as we are delivering a diverse set of services for NRC under their license. With nearly a century of experience in Venezuela, we have maintained active facilities, equipment, and local personnel on the ground. Historically, we have been linear in the country and remain confident that with appropriate licensing, safety parameters, and compliance measures in place, we can rapidly ramp up activities in support of the oil and gas industry in Venezuela. We are excited and we are already receiving a lot of inquiries from our customers. I will now turn the call over to Stephane to discuss our financial results in more detail. Stephane Biguet: Thank you, Olivier, and good morning, ladies and gentlemen. Fourth-quarter earnings per share, excluding charges and credits, was $0.78. This represents an increase of $0.09 sequentially and a decrease of $0.14 compared to the fourth quarter of last year. We recorded $0.23 of net charges during the fourth quarter. This includes an $0.11 goodwill impairment charge relating to our carbon capture business, $0.08 of merger and integration charges, $0.07 related to workforce reductions, and $0.03 of other charges. Offsetting these charges is a $0.06 credit relating to the reversal of a valuation allowance that was recorded against certain deferred tax assets. Overall, our fourth-quarter revenue of $9.7 billion increased $817 million or 9% sequentially. Approximately $300 million of this increase is due to an additional amount of activity from the acquired ChampionX businesses. Excluding the impact of this transaction, SLB N.V.'s fourth-quarter global revenue increased 6% sequentially. The sequential revenue step-up was higher than expected and was driven by strong year-end digital sales, significant backlog deliveries, and project milestones in production systems, as well as higher reservoir performance activity in international markets. Fourth-quarter adjusted EBITDA margin of 23.9% increased 83 basis points sequentially, primarily driven by very strong digital performance. Margin growth during the quarter was, however, constrained by a loss in the carbon capture project that negatively impacted margins by approximately 50 basis points. Let me now go through the fourth-quarter results for each division. Fourth-quarter digital revenue of $825 million increased 25% sequentially, while pretax operating margin expanded 557 basis points to 34%. These results were driven by strong year-end sales in digital exploration and increased revenue in both digital operations and platforms and applications. Notably, for the full year, digital revenue of $2.7 billion grew 9%. The combination of this growth rate and the full-year EBITDA margin of 35% well exceeded the widely recognized rule of 40. In addition, digital annual recurring revenue surpassed $1 billion, reflecting year-on-year growth of 15%. Finally, trailing twelve months net recurring revenue was 103% at the end of the fourth quarter. Reservoir performance revenue of $1.7 billion increased 4% sequentially, driven by strong international activity, particularly in Saudi Arabia, East Asia, Qatar, and Indonesia. Pretax operating margin of 19.6% increased 105 basis points, largely due to a favorable activity mix in The Middle East. Well construction revenue of $2.9 billion decreased 1% sequentially, primarily driven by declines in The Middle East and Asia, while pretax operating margin of 18.7% was slightly down. Production systems revenue of $4.1 billion increased 17% sequentially, reflecting a full quarter of activity from ChampionX. Excluding the impact of this acquisition, production systems revenue increased 11%, driven by strong sales of completions and artificial lift, as well as project milestones in process technologies, subsea, and valves. Pretax operating margin of 16% increased 20 basis points due to improved profitability in completions and production chemicals. Now turning to liquidity. During the fourth quarter, we generated $3 billion of cash flow from operations and $2.3 billion of free cash flow. This strong performance was due to the unwinding of working capital, significant customer collections, and reduced inventory driven by year-end product deliveries. For the full year, we generated free cash flow of $4.1 billion, marking the third year in a row with free cash flow at or above $4 billion. As a result, net debt reduced by $1.8 billion during the quarter to end the year at $7.4 billion. Capital investments, including CapEx and investments in APS projects and exploration data, were $716 million in the fourth quarter and $2.4 billion for the full year. For the full year, we returned a total of $4 billion to our shareholders, with approximately $2.4 billion in stock repurchases and $1.6 billion in dividends. Looking ahead, let me now provide some additional color on our outlook for 2026, building on the details Olivier shared earlier. We expect revenue to benefit from a full year of ChampionX, which will result in incremental revenue of approximately $1.8 billion in 2026. This increase will be partially offset by the effects of the 2025 divestitures of our interest in the Palliser APS project in Canada and of our RIG business in The Middle East. These two businesses accounted for approximately $350 million in combined revenue in 2025. As Olivier mentioned, adjusted EBITDA margin for 2026 will be relatively consistent with 2025 levels, with differing dynamics by division. Digital margin will increase slightly year on year on continued top-line growth. Production systems margin will increase, primarily driven by synergies from the ChampionX acquisition, where we still expect to achieve approximately half of the $400 million of total synergies by 2026, $30 million of which were achieved in 2025. About 75% of the synergies will benefit production systems, with the remaining portion benefiting well construction and reservoir performance. The positive effect of ChampionX synergies on production systems margins will be partially offset by unfavorable technology mix within the division. In reservoir performance and well construction, despite activity levels stabilizing, margins will be down year on year due to activity mix and pricing headwinds in select markets. From a below-the-line perspective, corporate costs will increase year on year, driven by an incremental $70 million of intangible asset amortization expense as a result of a full year of ChampionX. Additionally, we expect our effective tax rate to be approximately 20%, representing a slight increase from 2025. While we expect overall activity to stabilize and increase from today's level in certain key international markets, we will remain disciplined in our capital allocation. In this regard, we expect our total capital investments to be approximately $2.5 billion in 2026. This should lead to another year of strong free cash flow generation. As a result, today, we announced a 3.5% dividend increase, and we expect to return more than $4 billion to our shareholders in 2026 through a combination of dividends and stock buybacks. We are currently targeting to buy back the same $2.4 billion that we repurchased in 2025. However, this amount could increase as the year unfolds, depending on our free cash flow generation progress and our visibility on the business outlook. I will now turn the conference call back to Olivier. Olivier Le Peuch: Thank you, Stephane. I believe, Megan, that we are ready for the Q&A session. Operator: We will now begin the Q&A session. If you would like to ask a question, please press star followed by 1 on your telephone keypad. Your first question comes from the line of Steve Richardson from Evercore ISI. Your line is open. Steve Richardson: Hi. Good morning. Good morning, Olivier and Stephane. Olivier Le Peuch: Hi. Good morning, Steve. Steve Richardson: I was wondering if we could talk a little bit about CapEx. I appreciate you've given some outlook here on 2026. There seems to be something with investors of an old rule of thumb about your CapEx leading revenue expectations. And I thought it'd be helpful if you could maybe give us some context around the trend line of CapEx, but also how is the capital intensity of your forward business different than perhaps it was in the past? Stephane Biguet: Thanks for the question. Yes. So we increased CapEx slightly compared to last year to a total with APS and exploration to $2.5 billion, as I just said. We think this is what we need to operate this year and to capture new opportunities as activity recovers gradually throughout the year, particularly in international markets. So, yes, compared to the past, our capital efficiency has improved quite a bit in the last few years. We can do more with less, basically, but clearly, we will not miss any opportunity. In fact, if activity recovers faster, we want to be ready for the ramp-up. We'll bring more equipment and tools as needed. By division, clearly, reservoir performance is probably the highest capital intensity, followed by well construction and production systems, especially with the addition of ChampionX, which has quite lower capital intensity. Steve Richardson: Thank you. And on The Middle East, your comments are appreciated about the other regions picking up the slack in Saudi and your view on the full year improving. I was wondering if you could talk about what we're seeing as the IOCs are seeing a lot more opportunity across North Africa and The Middle East. And I was wondering if you could talk a little bit about your mix or your expectation of your customer mix as you go into '26 and how much of that is driving some of this optimism on improvement versus some of your traditional customers on the national oil companies? Olivier Le Peuch: No. At first, I would comment to reinforce the trust and the confidence we have with our national company to continue to execute their capital program. And I think indeed, we are foreseeing and already witnessing the rebound of the Saudi rig and drilling and workover activity, which is very probable. And I think, as I said, coming from a dip in 2025, rebounding in 2026 to, as we expect, to the level of entry of 2025, which is a V-shaped recovery. I think that will set the year very well and also the 2027 as a much stronger year going forward. So beyond that, obviously, the region still continues momentum, high momentum in Kuwait, in UAE, and has been witnessing significant growth. But coming to international, indeed, India, I think that parking is confirmed this week and next week. And Libya is attracting a lot of investment, and we are in the early benefit of this, and we see Libya as a high product of growth. We have seen it in the last couple of years, and we foresee this will continue well into 2026-2027, driven by investment coming back in-country from international companies. Algeria has been successful in the licensing round, and I think it's exploring commercial in the South and also getting additional independents coming back into the country. So we see a rebound in Asia that will strengthen in 2027. Egypt, in the region, I think, is back in offshore. Additional rigs will mobilize in deepwater offshore Egypt as well as in Egypt due to the support that the government has provided and again, the return of investment into Egypt. Finally, Iraq, I think, has been and our growth last year will continue to be significant going forward. So Iraq is where some international companies are investing, and I think we are associated with this directly. So we have a strong exposure in all of these markets where international companies are joining. And finally, I would say that the unconventional UAE is a place where newcomers are appraising the resource and ready to scale the investments from appraisal in '26 to 2027 development and going forward. So a combination of oil attractiveness in the region, Iraq, particularly for international companies, and gas in the region, Qatar, obviously, steady, but also the upcoming UAE and unconventional and deepwater offshore is met. So that's the template, and I've set the favorable outlook from NOC and international companies in The Middle East. Steve Richardson: Thanks so much. Olivier Le Peuch: Thank you. Thank you. Operator: Your next question comes from the line of James West with Melius Research. Your line is open. James West: Thanks. Good morning, Olivier and Stephane. Olivier Le Peuch: Good morning. Morning, James. James West: So, Olivier, curious. So with the new headwinds bottoming here, you know, Saudi, Mexico, some of the white space in deepwater, Sub-Saharan Africa, and everything looking kind of up into the right, how are you thinking about the exit rate for '26 versus the exit rate we saw in '25? Certainly, it's gonna be higher, but what kind of if you give us some observations or thoughts on the magnitude of how this upcycle will begin? Olivier Le Peuch: I think first, I think we have guided into our prepared remarks that we expect 2026 to be higher than 2025. And this would be led by the international rebound. So only as we gathered the first quarter as a marked decline compared to last year's Q4, we will see gradual recovery. Again, driven mostly by international markets throughout the year. That is setting the scene, I will say, for 2027 to be favorable. Driven by first and foremost continuous regain momentum in The Middle East with the addition of the rebound activity in Saudi and a combination of what the factors I mentioned before. Asia, I think, has been on a momentum. Latin America, as well. I think a bit the offshore base in Latin America or a bit in Argentina. We are experiencing a slight rebound of Mexico driven by deepwater activity in Mexico coming back. And we will see, we expect that gradually and into 2027, the activity in Sub-Saharan deepwater will resume to higher levels. This will be higher levels. The combination of FID in Namibia, in Mozambique, in Angola, and the early pickup of activity in Nigeria are already showing signs of a very promising 2027-2028 cycle. So directionally, international gradually recovering. And exit rates at the end of this year to be driven by international addition so that it will result in Q4 of this year being higher than last year. James West: Okay. That's helpful. Thank you. Thanks, Olivier. And then maybe a follow-up on the digital side of the business. Obviously, strong results in the fourth quarter, but my sense is we're still fairly underpenetrated on Lumi and Delphi and the cloud platforms, and the AI platform that you have. I, you know, my numbers may be a little bit dated, but I think, you know, a couple, you know, 300 or so customers out of your 1,500 or so customers were on the cloud as of maybe a year ago. Could you give us a sense of kind of where that stands now or where you see that heading? I'm assuming everybody, you know, eventually goes there. Most everybody goes there. But just the magnitude of what that could mean for your digital business. I'm assuming it's pretty accretive. Olivier Le Peuch: No. Long term, I think, I think we believe that the potential of digital to transform our industry from the asset team productivity to the efficiency of these operations between drilling and producing assets is very significant. I think we are just touching the early innings of that transformation. And we're using multiple approaches towards this first and foremost strategy built on a platform approach to it. And I think you mentioned the combination of Delphi, Lumi, and Tela. And we have been indeed gradually gaining a lot of traction in customers to recognize that a platform is the approach to have the most benefit to combine the geosounds, the production, the drilling, the operation workflow improvement that everybody is looking for. But if we look at the momentum that we are benefiting from today, momentum comes from digital operations, that I think you have seen is getting significant benefit. Because it's a way I think the river hits the ground and where the customers are seeing and materializing the savings in the training performance, in production and prediction, in production optimization, we have anything from that. But, obviously, we are pursuing adoption of data and AI, Lumi, which we launched four or five quarters ago, is already having more than 50 customers of an adoption. Tela, that we launched less than three months ago, has already more than a dozen customers that are engaging and working with us to create this foundation model that can transform their geosounds workflow or that can automatically detect and optimize autonomously some producing assets as you have seen with ADNOC announcement that we have done. So while we are pleased with progress, surprised with the tech digital portion, believe this momentum continues. And we're very confident that the secular trend that the industry is continuing to witness will benefit our platform approach and that Lumi, Delphi, and Tela will be at the core of this industry transformation going forward. James West: Thanks, Olivier. Olivier Le Peuch: Thank you. Operator: Thank you. Your next question will go to the line of Arun Jayaram with JPMorgan. Your line is open. Arun Jayaram: Yeah. Good morning, Olivier. I was wondering if you could frame your thoughts on the near-term and longer-term opportunity for SLB N.V. in Venezuela. You mentioned you're the only international service company now actively operating. But talk to us about what type of product lines could benefit if we do get a revitalization of the oil industry in Venezuela? Olivier Le Peuch: Obviously, we have to preface this with the right conditions, including licensing, including payments, and operating licenses will have to be put in place. But assuming that the conditions are set for investment to resume and to accelerate, hopefully, from the customers that we are serving today and from new customers reentering or entering the country, we have historically been the largest supplier, the largest partner of the national company, the largest supplier in sales technology in the country. Historically, we have had about ten years ago, more than 3,000 people, and we were recording visibly more than $1 billion in revenue at that time. So we have the track record in integration. We have a unique subsurface digital leading all that we had at that time that we can resume, and we have today a significant set of assets that are ready to be deployed across the drilling services, across production with no less than 10 production sets across rig operation with rigs that we are ready to mobilize. And I think across intervention, across drilling, for infill drilling, or production optimization, we believe to have a capacity in-country and we believe that we have the access to the village and nationals, about 80 of them already in-country. We have more than 1,000 Venezuelan country employees in the company. And some of them will be welcoming to work back in Venezuela. We have almost 2,000 alumni that I think we have kept in touch with that will be also ready to be joining us as we move forward. So as I said, long term, under the right conditions, we can be the leading partner for customers there, and I think I've quoted the number. Where we are before. And I think the future will tell us when and as this can accelerate. But we are ready. And we're already seeing a lot of incoming calls, as I would say, to explore options going forward. Arun Jayaram: Great. That's helpful. Olivier, my follow-up is wondering if you could talk a little bit about your data center infrastructure business. You mentioned that you expect to reach a $1 billion run rate in revenue, if I heard you correctly, by year-end? Can you talk a little bit about the solutions you're providing today and maybe how you're thinking about organic and even inorganic opportunities to grow that business over time? Olivier Le Peuch: Yeah. I think and you heard me correctly. I think this is amazing what we have put together in less than eighteen months. I think the rate of growth, the customer engagement that we are getting, the we're getting with hyperscalers, and I think is amazing. And yes, we put together a setup that is focused on the modular manufacturing capability and co-engineering of data center solutions. From several and cooling solutions. And we are aiming at increasing not only our scope but also our footprint as we have announced last quarter. Doubling our capacity to respond to the pipeline and to respond to the backlog we have. And we continue to be expanding both in terms of scope, in terms of around this manufacturing design capability for modular data center solutions. We will be this year going and going internationally. We'll be this year adding new customers to our portfolio and preparing ourselves to go in throughout the year in 2027. $1 billion is their own rate, but it will be significant to above this in 2027. And we believe that we see growth today, rest of the decade internationally. And indeed, as we explore and respond to the request from our customers who are looking for integrators in this space. We will look for complementing our current capability that you have built organically. And to look at what could help complement this and accelerate market penetration. And make us a fulfilled partner for customers going forward. Technology throughout the life cycle of the data center for construction and operation. Arun Jayaram: Great. Thanks. Operator: Thank you. Your next question comes from the line of David Anderson with Barclays. Your line is open. David Anderson: Great. Thank you. Good morning, Olivier. You know, if we compare SLB N.V. today versus ten years ago, in addition to digital, I think the biggest shift is now the emphasis on production recovery. Was wondering if you could talk a little bit more specifically about the growth opportunity in the next few years as we think about OneSubsea, ChampionX, artificial lift. If I think about OneSubsea, I'm thinking about backlog conversion accelerating. You know, in Guyana, Venezuela, potentially Venezuela could be growth engines, chemicals, and then artificial lift in The Middle East. Could you sort of frame this growth opportunity for us over the next few years on this side of your business? Olivier Le Peuch: No. Absolutely, Dave. I think production recovery, as we call it, is a new chapter for the company, something that we have strategically invested in because we believe that first, it is a market that has significant opportunity for value creation through technology, through integration, through digital, and we believe that we needed to own and have access to a broader portfolio, hence, the access to the ChampionX chemical, OpEx, and full lift technology and the digital platform addition that put us very well placed into that market. So now, the customer response is very positive. And indeed, I think as you see, look at the priority of our customers today into a challenging commodity pricing environment, it's all about getting more from the assets they have on production. And hence, the return of the higher barrier for lower cost is a priority. So I am getting a lot of intake into our lift solution, into our digital production, as you have heard, and indeed, trying to realize and realizing today the benefit of chemistry. Chemistry for not only a shoe. Production assurance, chemistry for but also chemistry for reservoir performance or recovery. So we believe that the integrated capability that we have built together will give us a positive trade solution for the market. End-to-end solution that will help to improve the performance of existing producing assets. We'll have to transform existing assets into a solution for eco re-solution for the team and we'll have the cost to bring digital solutions. So, yes, lead solution in the metro basin or into the most producing oil basin in the world, including The Middle East. Yes. Subsea as a beneficiary for the long-term deepwater, but also the boosting processing capability we have in subsea, that are quite unique. And contribute to this recovery production, gain, and goal we have. So, yes, it is a new story for us. It's a new chapter. We're excited. Customer feedback is very strong because they believe that they need somebody that has the subsurface, has the technology, and has the full integrated portfolio to respond to the transformation of operation recovery landscape as we have contributed and that the industry transformed the well construction or exploration. Historically. David Anderson: That makes a lot of sense. Shifting gears a little bit to another area of potential growth in geothermal. You've been dabbling there for a number of years. But now you, as you noted in the release here, you're working with Ormat on a pilot project, I believe, later this year in enhanced geothermal. It looks a lot of this. When we look at geothermal, a lot of this sounds a lot like shale in the early February. We know the resources there. But it's a matter of process and technique to solve for the economics. Do you agree with that conceptually? And where is your confidence that this can be scaled up to create, say, hundred-plus megawatt geothermal plants in the next few years? Olivier Le Peuch: Let me know. Absolutely. I think, Dave, let me first step back and explain the reason why we have partnered with Ormat and the potential we've seen in this partnership first. Is to put together the two leading companies in their field. We are subsurface leaders in geothermal, being able to characterize the geothermal source and then develop the wells and develop the solution to produce the heat and the hot water from those wells, and Ormat is leaders into building geothermal power plants and understanding the full life cycle. Putting this together and providing industry for one integrated offering, I think, was very well received by the industry. And will help accelerate providing conventional geothermal bridge power or base power for some of the data centers in the future. So that's clearly one of the first aspects. The second, obviously, we have put this together because we believe that we want to together optimize, explore, and optimize through the development of an asset. Or two assets in the future in a recent near future. Into the unconventional geothermal. And, yes, we believe this is a field that has significant potential, but we want to do it right. We want to do science. We want to do technology. We want to do digital modeling. Of the process so that we get it right, and we understand how to scale it economically. How to make it viable, how to make it safe, and then how to afford together to the market, in the near future. So that's the ambition. So we have done this for a reason. And I think we will be developing this asset. It would be experimenting with these assets, appraising. And then getting ready for technology of digital and with joint offering. To offer this at scale to the market in The US and beyond. David Anderson: Very exciting. Thank you. Olivier Le Peuch: Thank you. Thank you. Operator: Your next question comes from the line of Neil Mehta with Goldman Sachs. Your line is open. Neil Mehta: Yes. Thank you so much, Olivier, and team. I guess the first question is more of a macro question, Olivier. You have a unique perspective on this big debate that's in the market right now about how much OPEC spare capacity really lives there in markets like The Middle East and, you know, of course, recognizing that there's probably limitations about what you could say. Your perspective on that question, I think, would be helpful for us. As we think about the back end of the oil curve. Olivier Le Peuch: No, I think you have been reading what I'm reading, and I think I don't want to read anymore. But I think OPEC+ has been unwinding 2.2 million barrels. And I think when you fast forward in a year from now when the unbalance that still exists today will start to subside and then the market will balance itself. I don't think there will be much spare capacity available. A sign of which you see by the reinvestment into oil capacity sustenance investment that are happening to their cost across The Middle East, and all intervention and interventional activity in which we have a strong exposure is benefiting from this. So, yes, I don't think you have some of the OPEC members beyond The Middle East that are not necessarily having an easy path towards sustaining their existing production. So I think it bodes very well to focus on production recovery, which is focusing on providing technology, the integrated capability to sustain production, enhance recovery. And I think that's where we will see the adoption of this. But I don't think there is significant spare beyond what has been released back to the market. Hence, the market will tighten in the balance into '27 and beyond. Hence, we set the condition for a better outlook as an investment backdrop for an industry from '27 and beyond. Neil Mehta: Yeah. That makes sense. And then another market I would love to get your perspective on is Mexico. Olivier, this is probably the most constructive I've heard you on Mexico in a little bit, but we're in a bottoming phase and even a cash recovery phase. Perspective on that market and how it should evolve from here? As we think about SLB N.V. Olivier Le Peuch: Yeah. The market that we say has normalized from a market that has dropped significantly and has had a need for getting the confidence of the whole industry to reinvest, I think it has normalized in the last few months. I think it's we anticipate it to be steady from the land activity for the foreseeable short to midterm, and we expect the conditions are gradually in place getting in place for investment going forward. In 2020, however, where we see the upside is in offshore activity in Mexico where the deepwater asset that we are developing with that is being developed by the which side will give us an upside. Whereas the activity in land now will make the assumption it is steady. But we've got potential to start to strengthen as moving to 2027. Neil Mehta: Thank you, sir. Operator: Thank you. Your next question comes from the line of Mark Bianchi with TD Cowen. Your line is open. Mark Bianchi: Hey. Hey. Thank you. Good morning. I wanted to ask on Good morning, Bob. So we've got these activity increases in your outlook for '26 for certain international markets. Earlier, I think a few months ago, was some discussion of some pricing potential weakness. Can you talk about what that looks like today and what your expectation is embedded in the outlook here? Olivier Le Peuch: Yeah. I think first, first to comment on that, I think the industry has been under pricing pressure. In the last couple of years starting with North America, and I don't see a change there. I think although we believe in North America, we are shifted to the mix of the portfolio we have and exposure where data center and digital and our exposure in deepwater and Gulf of America is proportionally bigger and also the OpEx exposure where ChampionX is a bit of a shield towards some of the pricing pressure in North America internationally. The model has been, and I keep repeating every time I get to comment on this, has remained highly competitive for a large tender in international markets. And the market has been keeping pressure considering that the market has been declining. The last eighteen months or twelve months in the international market. And supply share pricing pressure has been sustained and, in some clinical markets. And we have been responding to this pressure when we felt it was the appropriate thing to do to keep us in the market, but at the same time, I think we are able to maintain our margin steady in 2026 compared to 2025. Building on the ChampionX synergy, on the digital growth margin accretive business. And therefore, we are going to continue to use technology performance as a differential to protect where we can margin against the pricing pressure. Mark Bianchi: Okay. Thank you for that. And the other question I had was related to the offshore outlook. So you've talked about an expectation for improvement in offshore. And I think if we go back a year or two, there was an expectation for offshore improvement that didn't really materialize. So what are you seeing now that you think is different from that prior period and gives you the confidence to make those comments? Olivier Le Peuch: Well, the comments I'm making is that I believe that the FID and the booking will improve in 2026. Setting the right setup and context for 2027, 2028 offshore cycle rebound. Whether this is material in 2026, yes, in certain markets, in East Asia, the activity of Indonesia, the market will strengthen in deepwater, and I think this reflects into this year. In South Africa, this is more a trend of FID of projects from Namibia to Angola and Mozambique that will set the context for a marked rebound going forward, and these FIDs are happening as we speak. Being negotiated and being pending. And in the Americas, I think the continuous momentum in Brazil, in Guyana or Suriname, and I think I have to stay with the metro basin, Gulf of America metro basin of the North Sea remaining steady somehow. Although with a slight decline in the North Sea. So we believe that the FID economics are favorable. And the pipeline of FID across Africa and Asia are set to create a rebound of activity going forward from as we turn into 2027. Mark Bianchi: Thank you very much. Olivier Le Peuch: Thank you. Operator: Your last question comes from the line of Scott Gruber with Citigroup. Your line is open. Scott Gruber: Yes. Good morning. So I want to come back to the data center solutions business. Olivier, you mentioned expanding the business abroad. So does the billion-dollar target capture any of that international growth opportunity? Or would that be future upside? And how quickly could this materialize? And ultimately, you know, as you leverage your global relationships, you know, could the international opportunity become even larger than your US business? Olivier Le Peuch: Difficult to say whether it could become larger. But easy to tell you that it will grow. And this year will be the first step into establishing ourselves in Asia. And to provide this modular manufacturing solution to our customers there. Also, we initiate partnerships to design a next-generation data center in one country in the Asia region. And then we expect to also look at our relationship to embed and go further, including The Middle East in the near future. So these are the places where we have ambition to leverage our hyperscale relationship and modular manufacturing capability. Ability to source locally, ability to manufacture everywhere, I think it's something unique that not so many companies can do and scale. And replicate what we have done in the last eighteen months. So that's what we look forward to and that's where I about the international market. But the US is still the hot market, and the US is where we believe we have the most exciting pipeline in '26 and '27 coming our way. I will not miss that market. Scott Gruber: Oh, got it. Appreciate that color. And I want to come back to the question Steven asked at the beginning on CapEx. So your $2.5 billion of CapEx this year will support the second-half growth rate that you'll achieve, which will be led by digital and data center solutions. Some contribution from the core. But overall, the capital intensity of the portfolio is improving. So my question is, can you sustain similar growth rates for a couple of years into the future at a CapEx level that's still broadly around $2.5 billion given those kind of less capital-intensive drivers of growth? Or do you think CapEx would need to creep a bit higher? Stephane Biguet: Look, as I said before, we'll do what it takes to not miss any opportunity. But again, we have really improved our capital efficiency over the last five to six years, so we can really operate with less. But if growth really comes at high growth rates, we will have to increase beyond the $2.5 billion for sure. But as a percentage of revenue, that will still remain pretty low compared to what we were doing before and still quite in the low range of in the low end of the range we had guided before of 5% to 7% of revenue. That's excluding APS and exploration data. So, yes, we'll increase as necessary, but will go with increased cash flow as well. And some of the growth that we will be seeing is production and recovery as we elaborated on before as well as digital. And that doesn't require as much CapEx as the well-centric businesses. So this is how we can maneuver within that range, basically. Scott Gruber: So it's without some acceleration in the kind of core business, you would expect the CapEx to sales ratio to continue to improve over the next couple of years? Is that fair? Stephane Biguet: It will be more or less a percentage of revenue, which will stay within that 5% to 7% we've guided before, but it's more below. As you have seen, we've been closer to 5% to 7%. So we will remain at the low end of that range in the future. Scott Gruber: Okay. I appreciate the call. Thank you. Stephane Biguet: Thank you. Olivier Le Peuch: Thank you, Scott. Ladies and gentlemen, as we conclude today's call, I would like to leave you with the following takeaways. First, our strategy focused on production recovery, including ChampionX, digital, and data center solutions present new pathways for growth supporting a full-year revenue and margin guidance. Second, I'm confident that we continue to generate strong cash flow enabling us to return more than $4 billion of shareholder return in 2026. Third, in the longer term, the outlook is becoming more positive for SLB N.V. The recovery of Saudi Arabia, the positive pipeline in subsea, growth dynamics in both digital and data centers, are all catalysts. And Venezuela represents an upside. In summary, the current cycle is recovering towards the strength of SLB N.V. With this, I will conclude today's call. Thank you all for joining. Operator: This concludes today's conference call. You may now disconnect.
Operator: Hello, and welcome, everyone joining today's Kimberly-Clark de México Fourth Quarter 2025 Earnings Conference Call. [Operator Instructions] It is now my pleasure to turn the meeting over to CEO, Pablo Gonzalez. Pablo Roberto González Guajardo: Thanks so much. Hello, everyone. Thanks for participating on the call. We wish you and your families a terrific 2026. We'll go straight to results and then make some brief comments about the quarter and our expectations going forward. So I'll pass it on to Xavier. Xavier Cortés Lascurain: Thank you, Pablo. Good morning, everyone. Our sales reached MXN 14.1 billion in the fourth quarter, an increase of 2.1% versus the same period of 2024. Total volume was flat and price/mix improved 2%. Growth was driven by consumer products, which expanded 5.5%, supported by healthy year-over-year growth of 1.4% and price/mix of 4.1%. Export hard rolled sales continued to decline as we converted more tissue towards higher-value domestic products. Sequentially, results continued to improve from Q3 to Q4 as sales increased 4.8%, with Consumer Products up 8.5% primarily volume less, reflecting strong commercial execution, the planned innovations to products and improved market dynamics. Cost of goods sold was flat and as a percentage of sales improved by 130 basis points. Compared to last year, virgin fibers, recycled fibers, SAM and resins were favorable, partly offset by higher fluff costs. The peso remained supportive with an average appreciation of roughly 8%. Our cost reduction program once again delivered solid results, generating approximately MXN 500 million in savings during the quarter, mostly within cost of goods sold. These efficiencies came from sourcing, materials optimization and ongoing process improvements across our operations. As a result, gross profit increased 5.4% and our margin reached 40.4%, reflecting both disciplined revenue management and cost tailwinds. SG&A expenses increased 0.8% year-over-year and as a percentage of sales decreased 22 basis points as we continue to carefully prioritize brand investment and overhead efficiency. Operating profit grew 9.2%, and our operating margin expanded to 22.9%. We generated MXN 3.7 billion of EBITDA, an increase of 6% with an EBITDA margin of 26.4%, a 140 basis point sequential improvement and 100 basis point expansion versus the fourth quarter of 2024. Financing cost was MXN 398 million compared to MXN 350 million last year, driven mainly by lower returns on cash balances. Net income reached MXN 2.2 billion with EPS of MXN 0.73, a 23% increase year-over-year. For the full year, sorry, sales reached an all-time record of MXN 55.4 billion, up 1.1%. EBITDA was MXN 14.1 billion, representing 25.5% of sales, while margins declined 170 basis points due to the cost pressures we faced, particularly during the first half of the year. Net income was MXN 7.6 billion or 13.7% of sales. Throughout 2025, our cost reduction initiatives delivered MXN 1.95 billion in savings, driven by sourcing, operating efficiencies and product design optimization. We invested MXN 1.8 billion in CapEx, consistent with our plan and focused on technology upgrades, cost reductions, efficiencies and strategic capacity additions. We also repaid MXN 3.7 billion of debt, paid MXN 6.2 billion in dividends and repurchased nearly 43 million shares, equivalent to 1.4% of shares outstanding. We closed the year with a strong and healthy balance sheet. Total cash stood at MXN 9.7 billion. Net debt-to-EBITDA was 1.0x, and EBITDA to net interest coverage remained very solid at 10x. Thank you very much. I return it to Pablo. Pablo Roberto González Guajardo: Thanks. So we continue to operate against a soft consumer backdrop. However, we've delivered year-over-year growth, strong margins and a meaningful sequential improvement. Consumer Products performance was notably stronger, supported by innovations and commercial initiatives. Overall, consumer confidence remains subdued and private consumption growth has moderated. Within retail, value formats and private label continue to gain share as shoppers seek savings, while e-commerce growth remains robust. Against this backdrop, our categories continue to show resilience, and our brands have benefited from our strong innovations, price and mix discipline and market execution. As we get into 2026, we have solid plans to strengthen our core businesses, accelerate growth in our diamond categories, expand into adjacencies and new categories, most notably in pet food as well as participate in markets we have traditionally not emphasized in the past, such as private label. On costs, we're seeing the benefits of lower pulp, recycled fibers, resins and superabsorbent materials, which together with a stronger peso, will provide important tailwinds as we move into 2026. Cost reduction program remains a key structural lever, and we will stay aggressive in sourcing, product design and process efficiencies. A few additional comments before we open it up for Q&A. First, Kimberly-Clark Corporation, our strategic partner, announced in November its agreement to acquire Kenvue. This combination will create a leading global health and wellness company with a complementary consumer portfolio and expanded capabilities. As the transaction progresses towards closing expected in the second half of 2026, we will evaluate potential strategic implications for Kimberly-Clark de México, including the possibility of integrating Kenvue's operations in Mexico. Our focus will remain on achieving operational excellence and capturing value-accretive growth opportunities for the business. Additionally, we will hold our Annual Shareholders Meeting on February 26, where the Board will propose a dividend increase in the high single digits, reflecting our solid cash generation and confidence in future performance. We will also propose a share repurchase program, which will remain significant and aligned with our commitment to disciplined capital allocation. One final note. Starting with the first quarter results, we will be releasing them to the public on the third Tuesday of the month after the end of the quarter as soon as the Board approves them at the regularly scheduled meeting later on the same day, and we will hold our call early on Wednesday morning. In summary, looking ahead to 2023, we face 2026, we face external risks, including ongoing tariff uncertainty and a slower domestic demand backdrop tied to softer formal employment and slower remittances. However, we are optimistic. We are entering 2026 with better momentum than 2025, and we have mitigating factors to those risks, including our leading positions in essential categories, portfolio initiatives focused on value and affordability, continued excellent execution with customers and, of course, a robust balance sheet. With that, let me turn it over to questions. Operator: [Operator Instructions] Our first question comes from Alejandro Fuchs with Itaú. Alejandro Fuchs: Congratulations on the results. I have 2 very quick ones. First for Pablo. I was wondering, Pablo, if you could comment on the expectations for this year, maybe on competitive environment, what you're expecting? And maybe if you can elaborate a little bit more into going into private label, how relevant do you think this will be for the business in the medium to longer term? And then the second one, very quickly to Xavier. I was wondering, Xavier, if you could give us some color on the tax rate during the quarter. I think it was quite low. So maybe you could explain a little bit more what was the case, that would be very helpful. Pablo Roberto González Guajardo: Thanks, Alejandro. Thanks for being on the call. Yes, first, on the competitive environment, I mean, we faced a pretty competitive environment during 2025, again, given that the economy is not growing much and consumption is subdued. I don't think it was more aggressive than in some years past, but it certainly was, I would say, maybe a tidy more aggressive. And we expect that to continue this year. I mean we expect the economy to grow at a higher rate not what it should be growing, but certainly at a higher rate. So we expect categories to expand a little bit, but competitors to be aggressive to try and gain share and grow at a faster clip than categories. So nothing that we haven't seen in the past. This is the nature of our categories. And against that backdrop, I guess, we performed very, very well, particularly in consumer products during the second half of the year and we're entering with that momentum and with stronger shares into 2026. And we've got plans on innovation, price mix, et cetera, that I think will carry us forward. So we're pretty optimistic with the year as a whole. It might start a little bit slow, but I think for the year as a whole, we're pretty optimistic. On private label, as I mentioned in my opening remarks, and you guys know this, I mean, given the consumer is so stretched, private label has been gaining ground in many categories, not only ours. We've been able to fend off on our part the private label, given our -- the strength of our shares, but it is no doubt increasing. It's important and both hard discounters and overall retailers are pushing it forward. So what we decided to do is to participate more aggressively in private label, and we put together a dedicated team with dedicated assets to look into this and with some early successes. And we will be going forward, competing on private label and of course, competing overall in the market for this business. So we expect this can be a benefit for us going forward. And together with, again, strengthening our core, accelerating diamond categories, being more aggressive on the supply chain front with Kimberly-Clark Corporation, Private label, I think, can add an additional opportunity for growth in KCD Mexico's case. Javier, on the tax rate? Xavier Cortés Lascurain: Sure. Alejandro. You are correct in pointing out that the tax rate -- the effective tax rate shown in the fourth quarter was lower than what we traditionally have. And that, of course, also had an impact for the full year. This comes from an accounting adjustment that primarily reflects improvements in our estimation processes and those yielded a more accurate estimate, and that allowed us to reverse some provisions. This adjustment does not result from any change in our tax strategy nor from the adoption of new tax positions or any aggressive tax assumptions. And it will also not impact how much taxes we pay. This is -- these are mostly accounting and noncash adjustments. And let me underline that we continue to apply a consistent, conservative and very responsible approach to tax accounting. So I hope that helps. Operator: Our next question comes from Ben Theurer with Barclays. Benjamin Theurer: Congrats on the results. Two very quick ones. So one, obviously, 2025, you've done a relatively good job on continued cost savings initiatives. And I mean, the run rate was really good. So if you could share maybe how you think about that into 2026, also in the backdrop of the better environment that you're expecting? And then as it relates to raw materials, I mean, I would say it was mixed, but obviously, FX supportive. So how do you feel about the raw material price environment and then obviously, as FX as a tailwind and how that then ultimately comes down to profit margins into 2026? Pablo Roberto González Guajardo: Thanks, Ben. Thanks for the questions. First, on the cost reduction program, as we've said before, I mean, this is really an essential part of our culture. And that's why year-over-year and every year we deliver very strong results. And we are confident 2026 will not be the exception. We have identified already upwards of MXN 1 billion in savings for this year and most likely will be close to what we achieved in 2025. And again, this is just part of our culture of continuously looking for opportunities in product design and sourcing and materials on efficiencies to continue to improve our execution operationally. So we expect another strong year on our cost reduction program, and we are off to a very, very good start. When it comes to raw material price environment, I mean, we're entering 2026 in a very different position as most of our raw materials are -- have come down, and we don't necessarily expect them to continue to go down throughout the year. But certainly, they will compare very, very favorably at least through the first half of the year and maybe through the whole year. I mean it's hard to tell these things can -- they're very volatile and they can change. But the scenario we're looking at right now is pretty favorable to start the year together with the exchange rate. So we do expect, as you could see in the fourth quarter, that to trickle down to our margins on the bottom line. Operator: We will move next with Antonio Hernandez with Actinver. Antonio Hernandez: Congrats on your results. I wanted to check what's the current standpoint on the Nutec partnership? At what stage are you currently in terms of operations, distribution and sales? Pablo Roberto González Guajardo: Sure. Thanks, Antonio. We -- as you know, we entered the pet food business in the second quarter of last year and really have been working on ramping that up over the last half of last year, and that will continue to be our priority this year. We continue to gain space at shelf as consumers have reacted very, very positively to the products, I would say, particularly to the premium offering, so Prime Care. And as that has happened, of course, retailers have become more and more interested in giving us more space, putting the brand out there, and that is allowing us to increase our penetration. And that will be our main focus still on 2026. As we said from the very beginning, this is a category that will contribute to our results in the medium term. It won't be immediate. But I think we continue to make very good strides, and we believe 2026 will be a breakout year for us in that sense. And in the coming years, it should be a category that delivers more in terms of both top line and bottom line for Kimberly-Clark de México. Operator: We will move next with Renata Cabral with Citibank. Renata Fonseca Cabral Sturani: I have one that is a follow-up about the consumer segment that you just commented. Just would like to ask if you can provide some color in terms of price mix for this quarter. And since last quarter, I think it's performing really well, and you already commented something about why this is going well. And my second question is if you can comment something about dividends and buybacks for 2026. Pablo Roberto González Guajardo: Sure. First, on the price/mix, Renata, I mean, as we mentioned, Consumer Products overall grew 5% for the quarter. Volume was a little bit over 1% and price/mix was a different 4%. And when you look at price and mix, if you break it down, it was pretty much even, 2.1% price was up and mix was up 2%. And again, this is not only a testament to the discipline on our pricing, but also on our good commercial execution and the effort we've placed on improving our mix in all of our categories and driving consumers up to the higher tiers. And we've been very successful, for example, in doing that in bathroom tissue as we move users up to Cottonelle. So even in a very, I would say, subdued consumer environment, we've shown that we can bring mix and price to the table. So those 2 components together with gaining a little bit of volume, that's what really has delivered a very strong showing for Consumer Products in fourth quarter and also third quarter. So we'll continue to work on that to think about where we see pricing opportunities, continue to push for a stronger and better mix and of course, continue to look for ways to grow the categories and volume. So it's really the combination of the 3 that allowed us to post these results, and that will that's the objective for 2026 is to continue to move on all those 3 fronts. When it comes to dividends, as we mentioned, we will have our shareholder meeting late in February, and we will be discussing with the Board on February 10, the dividend that we want to propose and the repurchase program that we want to go forward with. But we are -- we will -- we know we'll be proposing a dividend increase in the high single digits. And again, this reflects our solid cash generation and confidence in future performance. So it will be another year where we provide this high single-digit dividend increase into 2026. Xavier Cortés Lascurain: And we will also be proposing a share buyback, which will continue to be significant. Operator: We will move next with Guilherme Mendes with JPMorgan. Guilherme Mendes: I have 2. First, on your short-term and long-term thoughts about the degree of cannibalization between private label and your own branded portfolio. Where do you see it now? And long term, is there some, let's say, mindset around what degree of cannibalization this can make to your long-term volumes in your core branded brands? And secondly, if you could share more thoughts around what the Kenvue potential acquisition in Mexico could mean in terms of incremental revenue, CapEx, returns? That's it. Pablo Roberto González Guajardo: Thank you. Thanks for the questions. First on cannibalization. Look, with our strategy of multi-tier, multichannel, multi-brand in our categories, our brands have held up steady very, very nicely. I mean our shares are very strong in many categories growing, even though private label in the category is growing. So in many, many instances, we're the #1 player with very strong shares and then private label is now the second player in those categories. So we will continue to focus on our brands, and I want to be very, very clear about that. Our brands are our priority. We're a branded consumer products company. But given the opportunity for growth in private label and the fact that we believe we could be good partners with some of our clients in strategic areas, we want to participate -- and -- but our, again, multi-tier innovation program, multichannel, multi-brand continue to be the priority. And as it's held up very strongly until this point, we expect it to continue to hold on very strongly going forward. We just see an added opportunity for growth if we can participate in private labels. And as we've started to do this, we've seen some early success. So we'll see what it means going forward. But I can't stress enough that our main priority is our brands, innovation behind our brands and bringing to consumers the best products at the best cost in every single tier, in every single channel with the best brands, which -- and preferred brands, which are ours. On the Kenvue issue, and thanks for asking that question. As I mentioned, we've just started conversations with our partners -- with our strategic partner. And these conversations will evolve here through end of January, February, March. By -- I'm going to say by April, we should have a much clearer understanding of where we stand, what the Kenvue business in Mexico would mean for Kimberly-Clark de México and whether we can come to an agreement with our strategic partner as to how to move forward. So we'll have more information certainly in our conference call when we report first quarter results in April. But let me just say this. Our understanding is that on the top line, Kenvue, Mexico is about roughly $200 million in sales company. So it's about 1/10 of where we stand. So not huge, but also not insignificant. It's a nice size, and it would be a transaction that would add quite a few categories that we're interested in, in the health and wellness. And as we've always said, categories that have great growth potential, categories where we see we can add value given the way we operate innovations, brands, channels, tiers, et cetera, categories where we think we can add value not only to consumers but also to clients and that in the medium term would be accretive to our, of course, top line, but also bottom line results and margins. So early. Again, we've just started the conversations, but it's a good opportunity for us. Again, not a huge one, but an opportunity that opens very nice windows of growth going forward that would add to our core diamond categories, new categories where we've entered like pet supply chain integration with Kimberly-Clark Corporation. And if this happens, then Kenvue categories. So the whole scenario, I think, paints a very good picture of the possibilities of growth for Kimberly-Clark de México going forward. Operator: Our next question comes from Bob Ford with Bank of America. Robert Ford: Congrats on the results. Pablo, given the concerns around private label, could you maybe provide some examples of innovations across major categories and price tiers? And maybe touch on like some of the materials innovations, right? We're going through this pretty big technology cycle. And I'm just curious if you -- if there are any things that have been patented or maybe a product cycle that you feel really comfortable that you can maintain leadership in for an extended period of time? Pablo Roberto González Guajardo: Yes. Thanks, Bob. Thanks for the question. These are all very, very dynamic categories. And I can talk about a few of the things we did this past year. I wouldn't want to get ahead of myself and talk about 2026. But I'll give you some color on where we stand. But in 2025, for example, we -- in bathroom tissue, we introduced new products in a whole range of products. And particularly, we were very aggressive in bringing new technologies into the premium category with Cottonelle with great, great results. I mean our sales in Cottonelle are growing double digits and continue to do so very strongly. When you look at diapers, we also brought even a Tier 7 diaper to continue to premiumize the category with softness that is unparalleled in the market and of course, the absorbency that consumers come to expect from Huggies. And we've also improved even our economy tiers with now stretchable ears in diapers, which is a first really for the economy tiers. So again, across all of the tiers, -- we've improved our products in feminine care. We brought a new nocturnal pad that it's considered by consumers the best product in the market by an important margin, and it's just a new platform that we're bringing to that category. And incontinence, we brought new products, again, in pads and panty liners that have also preferred by consumers that also offer a new platform. So very, very excited about what we've done and even more so with what we see going forward because I think we're going to be bringing to market some new technologies, first-in-market technologies and in some cases, first to the world technologies that I think will continue to strengthen our platform, strengthen our brands and strengthen our position in the market. So this is never ending, and I'm very excited about our plans for 2026 and innovation, but already looking at '27, '28 and making sure we bring very relevant innovations to market and try and step ahead -- and keep stay a step ahead of competition in every tier in every channel going forward. So sorry, I can't say more about '26, Bob. I'll share more as we go through the year and bring those innovations to market. But as you can see, I'm very, very excited with what I see we can bring to the table in this year. Robert Ford: No, that's definitely well communicated. It's a great teaser. With respect to maybe playing a greater role in the supply chain, can you touch on what you think your competitive advantages are, right? I mean you're clearly doing a much more sophisticated kind of tiering of products. You're doing more shorter production runs. I'm familiar with some of the productivity rates that Kimberly-Clark de México versus the rest of the system. Beyond that, what should we think about when it comes to maybe selecting Mexico to play a much bigger role in the North American supply chain? Pablo Roberto González Guajardo: That's a great question, Bob. Look, we are at a great point on that issue because after working with Kimberly-Clark on specific projects over the past years, we really have -- it's come to the point where we're sitting down, we're taking a look at the whole supply chain. We are being completely transparent in putting the numbers out there, costs, efficiencies, logistics, et cetera, and identifying the biggest opportunities going forward. And as you mentioned, in many respects and particularly when it comes to certain of the tiers in the market, we have advantages because of the way we operate, because of our costs and because of how we know to manage different tiers, which, again, it's much easier said than done. So we're finding very interesting opportunities. But the key thing is where I started that it's not now just hey, we found this project, how do we move forth together with it. It's really a holistic look at the supply chain, figuring out where we can add value, figuring out where they can add value and putting all of that together so that when we think of a project now, it's really for the medium and long term. It's not just a one-timer. We will still have some one-timers, but it is becoming more of a, hey, can we think of certain area of the U.S. where Mexico would be better positioned to supply products and put us in a better competitive position overall in such a market. So we're delighted that that's where the conversations stand. And we just had our Kimberly-Clark Board members attend our Board meeting, and they expressed the same confidence that we're finding very interesting opportunities and that we're very confident going forward our supply chains can come together and deliver very positive improvements for both Kimberly-Clark Corporation and Kimberly-Clark de México. So again, another area where we're very excited and where we think that '26, '27 could be breakout years when it comes to really determining how to play together. Operator: [Operator Instructions] We will move next with Jeronimo de Guzman with INCA Investments. Jeronimo de Guzman: I had 2 questions. The first one was just a follow-up on what you talked about with the shift. You talked a little bit more about the shift or increasing the emphasis on private label and value. And I was just -- you kind of touched upon it, but I just wanted to see if we should expect any kind of impact on pricing/mix or margins as a result of this. Pablo Roberto González Guajardo: No, we don't think so, Jeronimo, certainly not in the short term. And in the medium to long term, we'll see how successful we are and how many -- how strongly we can participate. But of course, and you know our culture, we're already working into, okay, if we are very successful and can participate meaningfully, how do we change our cost structure so that we continue to deliver the margins that we've targeted and that continue to be our target. So no, don't expect a change anytime soon on that target. And we will find ways to, over the medium to long term, be there within that target range. Jeronimo de Guzman: Okay. Makes sense. And then a question on just how are you thinking about pricing because you're mentioning the raw material environment being very supportive, but you're also talking about competition continue to be aggressive, trying to gain share. So yes, kind of how are you thinking about pricing going forward? Pablo Roberto González Guajardo: Thanks for the question. We are looking at all of the opportunities on pricing because notwithstanding, as you say, that raw materials are a tailwind right now and so is the exchange rate. These are very volatile, particularly -- well, both of them. And we've seen in past years that things can change relatively quickly. We don't expect that to happen, but it could. So we're ready. We're ready to move on pricing. And with our revenue growth management initiative, we're always looking for opportunities, both on pricing and mix. So we -- I would venture to say that we will -- you will see some pricing coming to the market this year and aiding our results. And again, we'll continue to work on the mix, and you will see some mix also come into the equation and also help our results during the year. No specific plans at this point, but pretty confident that both factors will be relevant and help us with the results in 2026. Operator: Our next question comes from Juan Guzmán with Scotiabank. Juan José Guzmán Calderón: Congrats on the strong performance. Just one quick question here as most of my questions have already been answered. Regarding Away from Home, given this 10% contraction that you mentioned due to channel inventory adjustments, what's your outlook for this business going forward? And even when it's early in the year, what trends have you been observing recently? And what strategies are you implementing to recover sales growth here? And that will be it. Pablo Roberto González Guajardo: Thanks, Juan. Thanks for the question. Yes, not happy with the results on the professional side. Again, a combination of a softer economy and our wholesalers reducing their inventories given their concerns on the market. Having said that, again, we believe the economy will pick up a little bit this year. And particularly on that side, when it comes to hotels, restaurants, et cetera, we will definitely see the benefit of at least some of the games of the World Cup being played in Mexico. And not just because of some of the games, I think tourism overall will be a positive for the country this year. So we expect really this to turn around in the coming -- I don't know by the first quarter, I think we'll do quite better, and we're already seeing much better performance in the first quarter, early, but we're seeing much better performance in the first quarter. But certainly, by the second quarter, I think we'll see better performance. And our strategies, same as in consumer products, we're very clear of the different areas we want to go after, and we're bringing also innovation and interesting -- very interesting innovation to the different categories, and we're working very, very closely with our wholesalers to go after specific accounts and to try and premiumize in different categories. So not very different in terms of the strategies that we're pursuing in Consumer Products. And again, we expect this to turnaround certainly by second quarter, and we expect the business as a whole to grow nicely throughout the rest of the year. And again, we're already starting to see early signs of that turnaround, but I think it will take a little bit more so maybe by second quarter. Operator: And at this time, there are no further questions in queue. I will now turn the meeting back to Pablo Gonzalez for closing remarks. Pablo Roberto González Guajardo: Well, thanks again, everyone, for participating. As you can see, very exciting things going on at Kimberly-Clark de México, and we -- we will have more to share when we have our call on April, certainly on many of the initiatives that I just mentioned on innovation, on Kenvue, et cetera. So looking forward to it and looking forward to have a very good year at Kimberly-Clark de México. And with that, again, thanks so much, and I hope that you also have a terrific 2026. Thank you all. Operator: Thank you. This brings us to the end of today's meeting. We appreciate your time and participation. You may now disconnect.
Operator: Good day, and thank you for standing by. Welcome to the First Western Financial Fourth Quarter 2025 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I'd now like to hand the conference over to your first speaker today, Tony Rossi. Please go ahead. Tony Rossi: Thank you, Marvin. Good morning, everyone, and thank you for joining us today for First Western Financial's Fourth Quarter 2025 Earnings Call. Joining us from First Western's management team are Scott Wylie, Chairman and Chief Executive Officer; Julie Courkamp, Chief Operating Officer; and David Weber, Chief Financial Officer. We will use a slide presentation as part of our discussion this morning. If you've not done so already, please visit the Events and Presentations page of First Western's Investor Relations website to download a copy of the presentation. Before we begin, I'd like to remind you that this conference call contains forward-looking statements with respect to the future performance and financial condition of First Western Financial that involve risks and uncertainties. Various factors could cause actual results to be materially different from any future results expressed or implied by such forward-looking statements. These factors are discussed in the company's SEC filings, which are available on the company's website. I would also direct you to read the disclaimers in our earnings release and investor presentation. The company disclaims any obligation to update any forward-looking statements made during the call. Additionally, management may refer to non-GAAP measures, which are intended to supplement, but not substitute for the most directly comparable GAAP measures. The press release available on the website contains the financial and other quantitative information we discussed today as well as the reconciliation of the GAAP to non-GAAP measures. With that, I'd like to turn the call over to Scott. Scott? Scott Wylie: Okay. Thanks, Tony, and good morning, everybody. We executed well in the fourth quarter and saw positive trends in many areas, including loan growth, net interest margin expansion, well-managed operating expenses and generally stable asset quality. This resulted in an increase in our level of profitability. The market remains very competitive in terms of pricing on loans and deposits, but we continue to successfully generate new loans and deposits by offering a superior level of service, expertise and responsiveness rather than winning business by offering the lowest rates -- highest rates on deposits and the lowest rates on loans as other banks are doing. We continue to maintain a conservative approach to new loan production with our disciplined underwriting and pricing criteria. As a result of the additions we've made to our banking team over the past few years as well as generally healthy economic conditions in our market, we've had a solid level of loan production, which was diversified across our markets, industries and loan types. As a result of our financial performance and the balance sheet management strategies, we had a further increase in both book value and tangible book value per share. Moving to Slide 4. We generated net income of $3.3 million or $0.34 per diluted share in the fourth quarter, which is higher than the prior quarter. We had a write-down of value of an OREO property that reduced our earnings per share by $0.10 after tax in the fourth quarter. With our prudent balance sheet management, our tangible book value per share increased 1.6% this quarter. So, now I'll turn the call over to Julie for some additional discussion of our balance sheet and our treasury -- trust and investment management trends. Julie? Julie Courkamp: Thanks, Scott. Turning to Slide 5. We'll look at the trends in our loan portfolio. Our loans held for investment increased $59 million from the end of the prior quarter. We continue to be conservative and highly selective in our new loan production, but with the higher level of productivity we are seeing from the additions to our banking team that we made over the last several quarters, we are seeing a solid level of new loan production, while we are also seeing an increase in our CRE loan demand that meets underwriting relationship and pricing criteria. We also saw some construction loans that moved into our CRE portfolio after completion of their projects. New loan production was $146 million in the fourth quarter. The new loan production was diversified with the largest increases coming in our commercial real estate portfolios, and we are also getting deposit relationships with most of these new clients. We continue to be disciplined, and we are maintaining our pricing criteria. This resulted in the average rate on new production being 6.36% in this quarter. Moving to Slide 6, we'll take a closer look at deposit trends. Our total deposits increased $102 million from the end of the prior quarter. While we continue to successfully add new deposit relationships, this was partially offset by seasonal outflows we saw largely related to title company operating accounts who typically see declines in their deposit balances during the fourth quarter due to lower home purchase activity. In addition, we were able to run off high-cost deposits as a result of the strong core deposit production in the third quarter. Average deposits increased 10% in the fourth quarter of 2025 compared to the fourth quarter of 2024. Turning to Trust and Investment Management on Slide 7. We had $155 million decrease in our assets under management in the fourth quarter, primarily attributed to net withdrawals on low fee and fixed fee product categories, which was partially offset by improved market conditions on investment agency accounts that carry a higher variable fee, which increased $15 million or approximately 1% during the quarter. Now I'll turn the call over to David for further discussion of our financial results. David? David Weber: Thanks, Julie. Turning to Slide 8, we'll look at our gross revenue. Our gross revenue increased 1.5% from the prior quarter, primarily due to an increase in net interest income. Relative to the fourth quarter of 2024, our gross revenue increased 12.2%. Turning to Slide 9. We'll look at the trends in net interest income and margin. Our net interest income increased 5.6% from the prior quarter and 21.7% from the fourth quarter of 2024 due to an increase in our net interest margin. Our NIM increased 17 basis points from the prior quarter to 2.71%. This was due to a reduction in our cost of funds, which was primarily due to lower rates on money market deposit accounts as a result of the company reducing deposit rates commensurate with the short-term rate decreases and runoff of high-cost deposit accounts. Now turning to Slide 10. Our noninterest income decreased by approximately $800,000 from the prior quarter. This was primarily due to a decrease in gain on sale of mortgage loans, which typically see seasonal declines in the fourth quarter and a decrease in risk management and insurance fees. We have successfully transitioned to previously discussed new leadership and focus in Trust and Investment Management and insurance that are expected to produce improved results going forward. Now turning to Slide 11 and our expenses. Our noninterest expense increased $1.2 million from the prior quarter. Our noninterest expense was impacted in the fourth quarter by a onetime $1.4 million write-down we took on the value of an OREO property. Excluding the write-down of the OREO property, our noninterest expense decreased $100,000 in the quarter. Most areas of noninterest expense were relatively consistent with the prior quarter as we continue to tightly manage expenses while also making investments in the business that we believe will positively impact our long-term performance. Now turning to Slide 12. We'll look at our asset quality. As Scott indicated earlier, we saw generally stable trends in the loan portfolio in the fourth quarter with decreases in nonaccrual loans and NPAs. And we had a minimal level of net charge-offs in the quarter. Our last piece of OREO is currently under contract for sale and is expected to close during the first quarter. Our allowance coverage remained unchanged at 81 basis points of total loans as the decrease in nonaccrual loans and NPAs resulted in a more normal level of provision during the quarter. Now I will turn it back to Scott. Scott? Scott Wylie: Thanks, David. Turning to Slide 13, I'll wrap up with some comments about our outlook. Overall, we continue to see relatively healthy economic conditions in our markets, and we're seeing good opportunities to add both new clients and talent due to the ongoing disruption from M&A activity in the Colorado banking market. We also recently added a new market presence for Arizona, where we're seeing good opportunities for growth. Our loan deposit pipelines remain strong and should continue to result in solid balance sheet growth in 2026 with loan and deposit growth at similar levels to what we had in 2025. In addition to the balance sheet growth, we also expect to see positive trends in our net interest margin, our fee income and more operating leverage resulting from our disciplined expense control. We had net interest margin of 26 basis points in 2025. And while we expect further expansion in 2026, it may not be at the same level as we saw last year. And while we remain disciplined in our expense control, we believe that investing in the business will drive future shareholder value. The ongoing disruption from the M&A activity in our markets creates opportunities for us to add banking talent, and we will continue to take advantage of these opportunities if and when they materialize as well as opportunities to add new clients. Based on trends we're seeing in the portfolio and the feedback we're getting from our clients, we're not seeing anything to indicate that we'll experience any meaningful deterioration in asset quality. The positive trends we're seeing in a number of key areas are expected to continue, which we believe will result in a steady improvement in our financial performance and further value being created for our shareholders in 2026. With that, we're happy to take your questions. Marvin, please open up the call. Operator: [Operator Instructions] Our first question comes from the line of Brett Rabatin of Hovde. Brett Rabatin: I wanted to start off on the margin and just the outlook in terms of magnitude of margin expansion opportunities you see in the next few quarters. And then if you add it, the amount of loans that are repricing this year at lower rates from fixed rates? David Weber: Yes. So we had -- certainly had good NIM performance in the fourth quarter. Pretty pleased with the expansion that occurred there. That was primarily driven by our ability to reduce our -- primarily deposit costs. And we do expect further expansion to continue through 2026. Now it may not be at the same level that we saw through 2025, if you look at Q4 '24 to Q4 '25. It may not be at that same level, but we do expect to continue through 2026. And then specifically on the loan portfolio, we have about $250 million in fixed loans -- fixed rate loans maturing over the next year. And those average yield on those is in the low 5s. So that does give us an opportunity, obviously, to continue to reprice our loan book and see some positive trends on the yield on interest-earning assets. Scott Wylie: The only thing I would add to that is we have shifted our balance sheet interest rate risk to be closer to neutral over the last six months, and we feel like continued improvement in NIM is not dependent on continued rate cuts. If we do see rate cuts, that will be beneficial to us. But we're expecting for the purposes of planning and budgeting, no rate cuts. I think we could debate that one all day, but the feeling is that we should have the balance sheet more neutral, and that's where we are today. Brett Rabatin: Okay. That's helpful. And then on the asset management, wealth management business and the mortgage banking operation, you've obviously made some changes. I was hoping for maybe some clarity on the AUM levels in the fourth quarter relative to 3Q, if you had clients that were just taking money out to do things? Or what was the driver behind the trends in that business in the fourth quarter? And then just thinking about '26, given the changes, what do you think those businesses might do? Obviously, rates will impact mortgage, but just any thoughts on those businesses and the growth of fee income? Scott Wylie: Yes. So, maybe I'll start on that one, Julie, do you want to pick it up. So with respect to the wealth management fees, the AUM, we obviously did a deep dive on that because we were a little surprised to see the decline happening in the quarter. And what we have seen is a lot of the lower-yielding categories and the fixed rate categories have had reductions. We're actually in the higher-yielding categories for us on the AUM side that we're seeing improvements. So, I think the trend there is positive. It looks negative on the surface. But in reality, those are actually things that we're trying to do to improve the trend on PTIM over time. We've made a pretty major shift there over the last year, which we've talked about a little bit before from being so investment management focused and led in the PTIM world over the last 20 years to being more fiduciary and trust and especially planning driven now. And we've talked about the change in leadership there and a number of very positive changes that have been underway over the last six months. We've seen a lot of progress here in the last few months, and that's going to show up in the numbers in 2023 -- 2026. The other thing that I think you asked about in there was the risk and insurance revenues. And those are typically quite strong in the fourth quarter, and they were not in this quarter. And we've also made a pretty big restructuring of that group. And there were two very high-cost leaders for that group that we're comfortable operating as a loss leader. We're not a big believer in loss leaders here. And so we have made some changes there and brought that into the wealth planning team more directly. And you don't see the expense save that went with that, and you do see the cost reduction. So, I think that those were actually very positive developments that we wanted to see in Q4 there. What I missed, Julie? Julie Courkamp: Maybe something on mortgage. I don't think that was part of your question as well. But Q4 mortgage production, Q1 mortgage production for us is typically lower just given the seasonality. But we continue to remain very focused as a strategic part of our business. We've added, I think, eight MLOs in the year of 2025. And as you know, it's hard to move MLOs whenever times are strong. So we feel like continuing to make that effort. Even though overall, the production isn't at the level we want it to be, we're profitable in that area. We're still adding and contributing net positive clients into the bank and the portfolio of the bank. And I would expect that second and third quarters of the coming year, 2026 are going to be seasonally stronger than the first and fourth. So I think we have good outlook there. I think we're doing the right things. And then to add on to the wealth planning conversation, we have a lot of really strong momentum in that business line and feel really good about what we're doing there. We've also added a B2B offering that's really just now getting going, and we're seeing some early green shoots on that. So I think the outlook for us is strong, but the last year's production really hasn't shown that yet. So we're looking to that growth into 2026. Scott Wylie: Good points there, Julie. And just to give some context to the eight people, that's a 45% increase from where we were a year ago. on MLOs at no direct expense. It's a variable cost that's commission-based. Brett Rabatin: Okay. That's really helpful. And then if I could ask one last one. You're almost a double-digit grower in '25 on loans and deposits. Does the outlook for you guys as you see it in your economies and markets, does that suggest another similar performance in '26? Or any thoughts on how you see the pipelines playing out for the year? Scott Wylie: We are expecting growth in 2026 in line with what we saw in 2025. We continue, as you know, Brett, to have really small market share in all of our markets. We're in strong economies. I mean I think the big change that we've really seen in the past few months is this market disruption. And it continues and in fact, is accelerating and it's creating all this opportunity for talent and for new clients. We set up this disruption task force, when Julie? Was that in the third quarter? Julie Courkamp: Yes, late summer. Scott Wylie: And we're working through that group on a series of very specific recruiting and sales and marketing initiatives. And we just had our big annual manager summit the last two days and the success stories coming out of that were remarkable. I mean there's just a lot of momentum in the field from prospects that don't want to be with these new organizations, and they want a stable local expert team and an expert stable local institution. And I think that's especially true in our niche with the private bank and trust focus. And with strong and healthy and diverse economies, I think all that's going to continue on into '26 and give us good opportunity for balance sheet growth. Operator: Our next question comes from the line of Woody Lay of KBW. Wood Lay: I wanted to start on the expense outlook. If I adjust for that OREO adjustment, it was good to see sort of the core run rate flat. You talked about continuing to want to invest in the business, especially given the M&A disruption. So how should we think about the expense growth rate in 2026? Scott Wylie: The way we've talked about it internally is we wanted to keep our expense below $20 million a quarter. And I think we've done that. Did you go back and look, David, I've been saying it's something like 12 quarters in a row. I don't know exactly. But certainly, over the last eight quarters, that's been true. And so I think that's kind of our base case is how do we drive more efficiency and more effective teamwork here without driving up expenses. But having said that, and this was very much in your question, Woody, if we see opportunities, we have an internal business case process, and we told our people, if you can bring in some good people that are going to have a strong short-term and long-term impact, we want to hear about it and we want to look at it and support you with that. So I think we're doing the best of both worlds here where we can manage expenses, grow revenues, get that operating leverage. And if we see opportunities for more revenue growth, go ahead and invest in that. That's the outlook we're taking for '26. Wood Lay: Got it. So if I pair that with the commentary of growth remaining strong, the NIM should continually grind higher. How should we think about the profitability improvement potential in 2026? Is there kind of an ROA range that you're hoping to be at by year-end? Scott Wylie: Yes, there is, but I'm sworn to secrecy. I'll give my answer and let Julie and David do their rebuttal if they want. If you look at our operating run rate, in the third quarter and again in the fourth quarter, we're doing something like $0.50 a quarter if you take out things like that OREO write-down, which, again, that was a decision we made. We had this last property up in Aspen in Basalt, actually near Aspen. And there were some unpermitted construction done by the former owner that we foreclosed on. And the city has just really taken it out on us and made it very difficult for us to sell that thing given the strong attributes, but the unpermitted construction that was done on it. And so we've been back and forth and back and forth with them. We had a buyer that was really interested and she worked with the city and she couldn't get them anywhere. And then we have a buyer now that put under contract and is taking it kind of as is, and he was supposed to close in December, and he hasn't finished his diligence yet. So we gave a 60-day extension. his request supposed to close in February. And the update from this week is he's on track. So I think that's going to get sold. It's $1.4 million write-down from the discounted value that we had already put on it. So frankly, we're looking forward to having that off our books, not having OREO. So that is a onetime thing. We don't have other OREO. We had that marked below our appraised value. We worked hard to realize that value at some point, that's not really our highest and best use of our executives' time and efforts. So, hopefully, that will get sold here in Q1. So if you take that out and you look at kind of the typical monthly expenses, and we always have puts and takes, and I'm not adjusting for that. I'm saying if you take out the big things and you kind of run through the net interest income, you look through the fee income, you look through the operating expenses, we're doing kind of a $2 run rate, and it improved actually a little bit from Q3 to Q4. So that's my starting point going forward is under a normal world, we ought to be starting the year at a 2% operating run rate, $2 that was wishful thinking a 2% thing, $2 a share operating run rate. And then I do think we can grow from there. We have said our near-term objective here is to get to a 1% ROA, which would be 3.50-ish. And so we got people focused on that. Can we get there on a run rate basis this year? I think that's pretty stretchy. But I think we will get there. And I think we can get beyond that, but we have to get there first with the improvements in NIM and the operating growth and the impact of all these initiatives we've been talking about, we seem well on the way. Is anything, David or Julie, you want to add? Yes. David Weber: No, not for me. Wood Lay: Well, that's really helpful color. And I guess just last for me, with a strong loan pipeline, how do you think about matching that with core deposits? The growth has been a little lumpy as you've optimized the balance sheet. But just curious on your thoughts on maybe the deposit competition in the next year. Scott Wylie: Yes. The team is really focused on that. And one of the questions we asked folks while they were here for the summit was how do you feel about the loan pipeline and the deposit pipeline? And the feedback is that both are strong. I think the focus that we've put on the deposit side seems to be paying dividends in terms of that new business. Historically, if you look back at the 22-year whatever history of First Western, we have found that at the margin, when we need deposits to fund the loan opportunities that we want to do, we can bring those in. And there was a period there. Actually, after our last call, it was interesting. One of our bigger holders texted or e-mailed Julie and me and said, hey, great quarter, good report on the third quarter. must feel good to get out of the slog of the last couple of years. And for me, that just really resonated. It was kind of a difficult period there with the bank failures and the darling of the private banking industry going out of business and all that. So I think getting out of that slot, getting back on a growth track, getting off of defense, which I feel like we played well to get back on offense. And those are all things that I think are panning out in our deposit growth story, which your use of the term lumpy was kind. I mean that was obviously not what we would choose to see all that great growth in Q3, but it did let us run off some of the high-cost deposits in Q4 and in some way kind of proved what we've seen over the years, which is when we want deposits, we can bring them in. And when we don't need them, we can pay them off and those things help NIM. And I like the NIM slide this quarter, I'm not sure which page that's on. But if you look at kind of the full year trends for the last five quarters, it shows a nice upward trend that gets us -- is that Page 9, Julie? Yes. It gets us on this trajectory back to 3.10%, 3.15% that I've talked about before that historically we've seen in our banks. Operator: And our next question comes from the line of Matthew Clark of Piper Sandler. Matthew Clark: Just the first question on the deposit beta, 54% this quarter from an interest-bearing perspective. Do you feel like you can hold that kind of mid-50s beta this year? Or do you feel like that might come down a little bit? David Weber: No, I think we can hold that. Matthew Clark: Okay. And then do you have the spot rate... Scott Wylie: An unhedged response, I like it. I mean we have seen it come down, you know, Matt. And we do think that -- well, David said it. Matthew Clark: Yes. Okay. And then do you have the spot rate on deposits at the end of the year? David Weber: Yes, it was 2.86%. Matthew Clark: 286%, okay. Got it. And then -- assuming that's the case and just thinking about the near-term margin kind of implies your beta steps up here actually in the first quarter. With the noninterest-bearing deposits down at the end of the year, I'm assuming they'll come back to some degree, but borrowings are up a little bit. You'll likely see some asset yield pressure from the December rate cut on the floating rate portfolio, which I think is 25% of the book. It appears like your NIM might come down a little bit here in the first quarter, but I'd love to hear your thoughts and tell me why I'm wrong. David Weber: Our NIM in the month of December was 2.72%. Matthew Clark: Okay. Okay. But in terms of the end-of-period balance sheet, you don't think there's some incremental pressure there? David Weber: No, I don't. Matthew Clark: All right. Fair enough. And then the other one I had -- actually, I think it was already asked and answered on expenses. Operator: Our next question comes from the line of Bill Dezellem of Tieton Capital Management. William Dezellem: Two questions from the balance sheet. The first one is mortgage loans for sale jumped in the fourth quarter from, I think, $22 million or so in Q3 up to $40 million in Q4. Would you discuss the dynamics behind that, please? David Weber: You're asking about the mortgage held-for-sale balance. William Dezellem: That's right. David Weber: Yes. Yes. There are timing dynamics there, timing of when the sales occur relative to the end of period. Scott Wylie: Can you explain what those are? Which are loans that we're originating and selling in the secondary markets that are on the balance sheet in the interim. David Weber: Yes. Yes. Those loans are originated for the purpose from the beginning of application and lock and everything, those are originated for the purpose of selling. So the balance typically will kind of trend up and then we'll package those and we'll do a sale and move those off the balance sheet. So it does get impacted simply just by the timing of when those sales occur relative to the end of the period. Scott Wylie: Your question is a good one, though, Bill, because generally, when volumes are higher, that balance goes up, but then it's also offset by this timing thing that David was talking about. So, I wouldn't read too much into that. William Dezellem: And part of the, I guess, backdrop of the spirit of the question was wondering if there was some dynamic that you saw in the market, whether it was sale premiums or something else that led you to conclude you wanted to hold those a little bit longer or if it truly was simply timing and getting proper volume set up for your sale? Scott Wylie: No, it's mechanical. We don't play that game. William Dezellem: So, it's truly just a timing phenomenon? Scott Wylie: Correct. William Dezellem: Okay. And then the other question was relative to your construction and development loans. You had a pretty significant reduction in the amount of those loans. And the question is whether that was an intentional risk mitigation strategy or whether it was all part of the normal ebb and flow of bringing on new loans and loans paying off moving out of that C&D category. Scott Wylie: I would say much more the former than the latter. We had a review of that portfolio 18 months ago, something like that, and felt like that was as high as we wanted to get, and we wanted to work it down. And so if you look on Page 5, you can see that's gone $315,000, $230,000, $189,000, and actually, a lot of the increase that we've seen in nonowner-occupied CRE is that those construction projects getting finished and then moving on to our investor real estate. And I don't think that those generally sit there very long because they get refinanced into permanent financing. So that's something that I think we'll continue to see there is less of an increase in that investor real estate line item, too. Operator: And our next question comes from the line of Brett Rabatin of Hovde. Brett Rabatin: Just one follow-up around the tax rate. It's been jumping around a lot the last few quarters. Any thoughts on the tax rate from here? And then just any strategies that you guys are implementing on the tax side, whether it be municipals or other things? David Weber: Yes. Good question, Brett. The tax rate, I agree, it has been a bit lumpy over the quarters. And some of those dynamics at play just have to do with some of our LIHTC investments and the K-1 losses that flow through and the timing of when we actually receive that information of the actual losses versus the projected losses that we're kind of using to work that through the year for the effective tax rate as well as there are components of equity compensation and the differences that come with that, that come at play as well, and that had an impact in the fourth quarter. So that's -- that was one of the main drivers of why we saw the fluctuation in the effective tax rate in Q4. But going forward, I think we're more in that 23% to 24% range from an effective tax rate perspective. Scott Wylie: We have added some tax-exempt interest income sources, I think, over the past 12 months, and we're working on another one now or looking at it. So I mean it's something that we do pay attention to, Brett. But I think for planning purposes and forecasting purposes, that 23%, 24% is a reasonable range. Operator: Our next question comes from the line of Ross Haberman of Rlh Investments. Ross Haberman: Scott, I got on a bit late. Could you just tell me -- did you touch upon your opinion of the mortgage market and what your expectations are for '26? Let's say, I don't know, rates stay about the same or maybe come down a little bit. What's your expectation on your mortgage operation? Scott Wylie: Well, thanks for the question, Ross. We have been trying to build our production capability there, even though the market is slower, and Julie did talk on the call a little bit about our experience has been that when the market is really strong and you want to add more mortgage loan officers, which are commission-based the producers, they won't move because they have a big pipeline wherever they are. So building that team when times slow is pretty much how we've experienced that you have to do it if you want to get good ones. And so as we talked about on the call, we've increased -- that has been a focus for us, and we've deliberately gone out and increased our MLO team by 8 producers in 2025, which is a 45% increase year-over-year. So that's somewhere we are investing. We do think -- well, investing, they're commission based, so it's not a cost. But we're investing effort for sure in building that team for future productivity. We do think that there just has to be a lot of pent-up demand out there for people that want to move. We know people aren't going to leave their 2% or 3% mortgages behind. But at some point, if you got another kid or you're moving, relocating, you need to do that. And we're seeing prices, I think, at least in the Denver market, moderate. And so at some point, that's going to create some mortgage opportunities for us, I think. And obviously, the decline we saw this year and this quarter, it's not us, it's the industry. And so I think that we are doing a good job of being -- playing the hand that we're dealt by this industry. But I also think we're well positioned that when that comes back and we see some growth, we're well positioned to take advantage of it. Ross Haberman: Are you seeing any pickup in that division, either in Phoenix or Wyoming or I think you opened up -- was a lending office in Bozeman, was it? Are you seeing -- are those -- would those -- would you see a pickup there first? Or maybe the Denver area, if you saw any sort of pickup, it would show up there first. Julie Courkamp: We have actually brought in a few in the Lowes and Arizona. So we've seen some nice production out of that region. And then we've also brought in a few from the Wyoming region, which has really helped us there, too. And these are really high-quality producers that have really our type of clients. So some of that you'll see adding to the portfolio. Montana is a little bit trickier. We haven't been successful finding a pure-play MLO there, but we have a great lending team and they're capable of doing all of the lending needs. So it's definitely a focus of ours is to make sure that all of the markets are seeing the growth that we want. So -- and we've been seeing production in all of the markets. Scott Wylie: And to be clear, Bozeman is a full-service First Western profit center that is actually contribution positive. They've made really nice progress there. Julie Courkamp: Yes. Ross Haberman: And just one other question. Have you been looking around for other operations to buy either money management or branches or other little banks? Are you actively looking at in either -- in any of those other three markets or any other -- now that you have a little bit of a currency this year than you had in the year or two past. Is that on your radar screen? Or that's a backseat and you would rather -- if you found some great relationship bankers, you would rather hire one or two and/or a lift out rather than a whole bank. Scott Wylie: Yes. So, as you know, we have a long history of acquisitions and our currency really is not been in a place where that has made sense here for the last couple of years. Our focus is on organic growth. We talked on the call a little bit about all this market disruption. And the beauty of hiring the people you want is you get the business that you want, you have to take the stuff you don't want. And so definitely, there's a strong focus here with this disruption task force and with our internal focus on how do we take advantage in an organic way. And that's Front Range, that's resort markets, that's Arizona, Montana and Wyoming, all of them. So we do think there's a lot of opportunity right now for us to just do our jobs and get after this organic growth. Ross Haberman: Thanks a lot, and best of luck. Operator: I'm showing no further questions at this time. I'll now turn it back to Scott Wylie for closing remarks. Scott Wylie: Great. Thank you. So we said for several quarters that we had success playing defense through that slog of '22 and '23, and now we're shifting back on to offense. The headwinds out in the market have changed to tailwinds for 2026, and that's both in financial and economic and competitive terms. We feel like our 2025 shift to offense really worked, and we've leveraged our investments that we've been making in these five key areas I talked about last time, which is our tech infrastructure, our product teams, our local PC teams, profit center teams, our reset of our internal processes for more efficiency and more value add. And we've also now strengthened our credit and risk support and marketing teams to support the First Western of the future. So with the positive trends that we saw from Q3 to Q4, where our net interest income was up 22% quarter-over-quarter annualized or it was also up year-over-year nicely. Our NIM was up 17 basis points quarter-over-quarter, 26 basis points year-over-year on a continued path back to where that should be. We -- if you adjust for the operating -- the OREO write-down, our pre-provision net revenues were up another 39% quarter-over-quarter annualized or double from a year ago. Our efficiency ratio when adjusted for that OREO continues to trend down nicely and our operating run rate in the last quarter was, as I said, $0.50 if you take out -- if you normalize it, and that's a little over $2 annualized. So looking at our 2026 business plan, assuming a stable environment, we expect these positive trends to continue, as we've talked about. Market disruption continues and increases. The opportunity for talent and clients, I don't think has ever been better. Our disruption task force is we're focused on recruiting and sales marketing initiatives. Our prospects are telling us they want a stable local team of experts and a stable local institution, especially in our niche. This small market share that we have in each of our markets provides lots of upside in our strong and healthy and diverse economies that we are operating in. Our PTIM restructuring is working. We'll see some results of that this year, both with the reemphasis on planning and our B2B initiative that we've launched. Our MLOs are up, and that's taking advantage of the slow market for building for the future. And our NIM, I think, is going to continue to trend up towards the 3.15% number we've talked about as the economy and our financial markets normalize. So those NIM gains and some modest balance sheet growth, they will generate some nice net interest income gains and they'll generate some nice earnings gains. So our intent is to get back to being a financial high performer. We see a clear path to 1% ROA and plenty of room beyond that. So, thanks, everybody, for your support. We really appreciate you dialing in today, and we'll look forward to connecting in the future. Thank you. Operator: Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.
Operator: Good morning. Thank you for joining us, and welcome to the Customers Bancorp 2025 Q4 and year-end earnings report. My name is Devin, and I will be your call moderator for today. [Operator Instructions] I will now hand the call over to Philip Watkins, Executive Vice President, Head of. Please go ahead. Philip Watkins: Thanks, Devin, and good morning, everyone. Thank you for joining us for the Customers Bancorp's Earnings Webcast for the Fourth Quarter and Full Year 2025. The presentation you will see during today's webcast has been posted on the Investors web page of the bank's website at www.customersbank.com. You can scroll to fourth quarter and full year 2025 results and click download presentation. You can also download a PDF of the full press release at this spot. Before we begin, we would like to remind you that some of the statements we make today may be considered forward-looking statements under applicable securities laws. These forward-looking statements are subject to change and involve a number of risks and uncertainties that may cause actual performance results to differ materially from what is currently anticipated. Please note that these forward-looking statements speak only as of the date of this presentation, and we undertake no obligation to update these forward-looking statements in light of new information or future events, except to the extent required by applicable securities laws. Please refer to our SEC filings, including our most recent Form 10-K and 10-Q and our current reports on Form 8-K for a more detailed description of the assumptions and risk factors related to our business. Copies of these filings may be obtained from the SEC or by visiting the Investor Relations section of our website. At this time, it is my pleasure to introduce Customers Bancorp Executive Chairman, Jay Sidhu. Jay Sidhu: Thank you so much, Phil, and good morning, ladies and gentlemen. I too want to welcome you to the Customers Bancorp Fourth Quarter and Full Year 2025 Earnings Call. Hope you've all had a great start to 2026. I'm joined this morning by Customers Bank and Bancorp CEO, Sam Sidhu; and Customers Bank and Bancorp CFO, Mark McCollom. I'd like to start by congratulating Sam again, on his appointment as CEO and also to the Board of Directors of Customers Bancorp. The Board of Directors and I are delighted with this transition, which has been in the works since we began our succession planning exercise at the Board level over 5 years ago. We have every confidence that Sam and the team that he has assembled will continue to build upon the incredible results we have achieved over the past few years. Since we founded this bank in late 2009, the journey has been exciting. With a clear vision and a lot of determination, what began as an approximately $175 million troubled failing bank has now grown into a $25 billion asset institution recognized for its unique single point of contact strategy, its exceptional customer service focus and a forward-thinking approach to technology. That success did not happen by chance. It's the direct result of superior execution by a world-class team. We have consistently put customers first and build a best-in-class risk management infrastructure while embracing innovation and change. Moving to Slide 4. We are pleased to report another quarter and a very strong quarter and a very impressive full year of 2025, which Sam and Mark will talk through in more detail. As you know, our 2025 core EPS was $7.61 a share and up from $5.60 a share in 2024. Before they discuss the details of 2025 with you, I wanted to spend some time putting into perspective our performance over the past few years. Customers Bank has been one of the strongest organic growth stories in the entire industry, and we see no reason that will change in the years to come. We've had incredible deposit-led growth in our balance sheet with low-cost core deposits growing at a 16% compounded annual rate over the last 6 years. And we did this while materially improving the quality of our deposit franchise, as you will hear much more about that later from Sam and Mark. Moving to Slide 5. We highlight that we believe is the clearest way to evaluate sustainable franchise value creation, long-term compounding returns in revenue, earnings and tangible book value. We've been an industry leader in growing these metrics by a number of years now for a number of years. We are the #1 compounder of core earnings per share over the last 6 years, which represents outstanding performance against the peer medium and so we performed over 5x better than the peer median and we performed over 3x better than the top quartile. Similarly, tangible book value per share compounding is the #2 among the entire peer group and represents outperformance of the peer medium by about 3x and the top quartile by over 2x. Finally, on Slide 6, our core strategy has translated into significantly improved profitability over the last several years. Our margin increased by 57 basis points and our return on assets increased by 33 basis points. And very importantly, our return on equity increased by 450 basis points, while we simultaneously increased our capital level by 500 basis points. This profitability improvement has been achieved while making substantial investment for the future, investments in people, investments in technology, investments in processes and huge investments in risk infrastructure for the future. These have turned into incredible results for our shareholders while helping us build a very strong foundation for the future. Our 5-year total shareholder return has been over 300%, placing us at the very top of our peers as an industry. In fact, in the entire financial services industry. It is exactly these kinds of financial results and multiyear transformation that give us the great confidence in Sam and the rest of the management team to continue building on our momentum and to take on tomorrow. Our mission will remain unchanged, and that is to deliver long-term value for shareholders and our communities by putting clients first and continuing to innovate and build strong risk management and execute with excellence. We believe our best years are still ahead of us. With that, I'm going to turn it now over to Sam. Samvir Sidhu: Thank you, Jay, and good morning, everyone. I want to begin by expressing my deep gratitude and excitement to Jay and our Board of Directors as I lead the organization through its next phase of growth as CEO. It is truly an honor to step into this role and to build upon the extraordinary foundation Jay and the team have established since the bank's founding 16 years ago. What makes this moment especially meaningful is the opportunity to lead alongside such an extraordinary team. Across the organization, from our client-facing bankers to the team members in our operations, technology, risk finance and many other areas, I see a shared drive to innovate, serve with purpose and never settle for average. It's the efforts of this exceptional team and their relentless focus on the customer that has resulted in our Net Promoter Score, increasing to 81, up 8 points from 73 last year. This is nearly double the industry average and places us among the very top of companies not just in the banking industry but all service-oriented firms. With that, I'll turn to our top priorities for 2026. You'll notice in many ways, these look similar to last year, but evolved, highlighting our consistent strategic focus and entrepreneurial culture. First, our top financial priority is continuing our organic growth story on both sides of the balance sheet with the hires we made in 2025 stacked on top of '23 and 2024 vintage teams hitting their stride, we have the pipeline in place for 2026, which brings me to our next priority. Our team recruitment strategy has been foundational to our recent success. On top of the previous team onboardings, we continue to have active discussions with top-performing teams that are looking to join an entrepreneurial and customer-centric bank. We will have more to share on this as the year develops. But if 2025 was any indication, top talent is excited about leveraging the unique platform here at Customers Bank. Third, we believe payments are a key driver of the future of banking. We have an ambitious goal of being a commercial payments leader in the industry. We are tirelessly working on expanding our payments offerings and capabilities to meet that target. Next, as a future focused bank, we see an immense opportunity to leverage AI to deliver enhanced client experience and productivity gains across our organization. More importantly, we look to do all of this while not taking our eye off the risk management areas, ensuring we maintain strong capital, liquidity and credit quality. We did an amazing job executing our priorities in 2025, and that was evidenced by the fact that we were one of the top-performing bank stocks of the year as our stock price increased by over 50%. On Slide 8, I'll cover our priority to continue to enhance our payments capabilities and further establish Customers Bank as an industry leader across verticals. First, I want to provide some more insight into exactly what makes our approach so powerful. Core to our strategy was the in-house development of cubiX, which allows clients to communicate and operate seamlessly across all of our payment rails. cubiX allows our clients to digitally interact with and access both traditional products like wire and ACH as well as more advanced systems like RTP, FedNow and our 24/7 365 intra bank's instant payments platform, which gets a lot of the attention. Turning to our Instant Payments platform. 2025 was truly an exceptional year where we saw incredible scale and utilization. We had over $2 trillion of payments volume during the year, which was a 30% increase over last year's impressive $1.5 trillion. That level of payments activity now puts us as the #1 commercial payments network in the U.S. ahead of household names like Max and VISA based on latest publicly available data. That volume supported consistent average deposit balances quarter-over-quarter of $3.9 billion. As exceptional as these results have been going forward in 2026, we will look to showcase the durability and unlock the franchise value of the network. We'll seek to achieve this by deepening and broadening our existing network and product offerings, by expanding cubiX utilization to other existing commercial clients in traditional verticals and onboarding networks of new clients in verticals that can drive meaningful low-cost deposit growth. With that, let's move to our AI efforts on Slide 9. For us, AI represents an opportunity to elevate quality, customization and responsiveness across the bank while continuing to deliver the high touch, white glove experience our clients expect. AI will redefine the banking industry and our organization. Given this, I'm personally leading our AI efforts and empowering and encouraging our team to effectively leverage this transformational technology. After building a strong foundation, 2025 became a year of broad enablement and adoption. Our company has trained every employee on AI. Over the last year, we began rolling out more focused AI training for each department to develop use cases from generative and agentic AI tools. As you can see from the chart here, our employees already report a nearly 20% productivity gain using this technology, and over half of our firm is already using our enterprise-level AI operating platforms. As we continue to leverage this technology, we see the ability to orchestrate our workflow across our operating platform and deliver our products and services to our clients faster. Frankly, we're only in the early innings of unlocking the vast potential of AI for our clients in our organization. Moving to the next slide. We had an excellent quarter and an exceptional year. Let me start off by saying a big thank you to all of our team members. We really went above and beyond in 2025 and the entire executive team, our Board and I'm sure our shareholders are so incredibly appreciative. We had a strong finish to 2025. This quarter and full year 2025 was yet another clear demonstration of the strength of customers' diversified model. Our results represent a very strong financial performance across the board. Here are a few of the highlights of the year's performance. Deposits grew by about $2 billion or 10%. This was led by our new commercial banking teams, which added $1.6 billion in deposits. Loans grew by 15%. We had record net interest income, which grew by 15%. Our efficiency ratio dropped by over 6 percentage points and we grew tangible book value, as Jay mentioned, over 14% in the year, continuing our multiyear trend of 15% annualized growth, which is industry leading. We accomplished all of this while maintaining strong credit performance and ample liquidity. Moving to Slide 11. You'll see our GAAP financials, and then moving to Slide 12. I'll run through a few core financial highlights for the quarter and full year. In the quarter, we delivered core EPS of $2.06, core ROE of 13.8% and ROA of about 1.2%, respectively. And for the full year, we achieved $7.61 in core EPS, which is up 36% from last year. With the highlights now covered, I'll turn it over to Mark to dive deeper into the details of the quarter. Mark McCollom: Thanks, Sam, and good morning, everyone. Turning to Slide 13. During the quarter, we continued to enhance the quality of our deposit franchise with a meaningful shift toward relationship-based granular, high-quality deposits. Total deposits grew almost $400 million during the quarter, ending at just under $21 billion. And as you heard from Sam, these balances were up about $2 billion or 10% for the year. This was led by a great performance from our new teams, which I'll give more detail on shortly. This growth is also after giving effect to the fact that we averaged about $675 million of quarterly deposit remixing throughout 2025, which helped drive the strong deposit beta I'll detail shortly. For noninterest-bearing deposits, our core franchise again delivered 9 figures of growth at about $150 million for the fourth quarter. And for the year, we had over $500 million of noninterest-bearing DDA growth apart from the large DDA increases we saw from our cubiX clients. Because of the momentum with our deposit teams, we think we have the potential to replicate or even beat this performance in 2026. Our team responded very well to the Fed rate cuts in October and December. Our deposit beta in the quarter was 54% and a very strong 71% on interest-bearing deposits only. Through the full easing cycle to date, our total deposit beta has been about 61%, which is a number that we're very proud of. The results of our deposit transformation over the last few years can be seen on the right-hand side of Page 13, which shows we've been steadily converging to peer median deposit costs from a spread of over 200 basis points in the fourth quarter of 2022 or 3 years ago to 165 basis points today. Now let's turn to Slide 14, where I'll provide more detail on the incredible success of our deposit gathering efforts with a particular focus on our new banking teams. Sam discussed earlier how critical recruitment is to our strategy. And here, you can see the results of that hard work. The teams we've recruited over the last 2.5 years now manage over $3.3 billion in deposits, excluding our cubiX payments business. And that's a very granular book of business with over 8,000 commercial accounts. In 2025, the increased deposit balances by $1.6 billion, essentially doubling the balance from the prior year. And in the fourth quarter alone, they added $585 million in deposits, of which 40% was noninterest-bearing. And that's without any meaningful contribution from the teams that we onboarded in 2025, which we believe could be a meaningful driver of deposit growth in 2026. Now let's turn to loans on Slide 15. Loans grew approximately $500 million or 3% quarter-over-quarter. Growth was broad-based and led by commercial real estate, health care and mortgage finance while we saw net paydowns in our fund finance business. You can see the same diversification in loan growth when looking at the full year view as the majority of our businesses contributed to 2025 growth in some way. As we often say, the chart on loan growth can vary each quarter, but the diversified nature of our quarterly and annual results highlight the multifaceted nature of our asset generation capabilities. Given the depth and breadth of our platform, we see opportunities to add franchise-enhancing loans in 2026 with a continued focus on credit quality. Turning to Slide 16. Net interest income increased 22% year-over-year to $204 million, and our net interest margin expanded by 29 basis points to 3.4% over the same period. Net interest income increased $2.5 million sequentially and was driven by the following core trends, an increase in average loan balances of nearly $800 million, an increase in average deposits of over $300 million, a decline in our blended cost of deposits from 2.77% last quarter to 2.54% in the fourth quarter and nearly $250 million of higher average noninterest-bearing balances despite flat average cubiX balances quarter-over-quarter. This performance highlights our ability to grow net interest income even in a falling rate environment. And with levers to pull on both sides of the balance sheet, we're optimistic about our ability to continue net interest income growth in 2026. Moving on to Slide 17. Our reported noninterest expense was $117 million in the quarter. The linked quarter increase was mostly driven by expenses that were either unique to the quarter or directly related to fee income or tax savings. To give some more color, we had a total of $4.8 million of unique expense in the quarter, which included $1.9 million in legal fees associated with the new team on boarding, $2.2 million of insurance expense on tax credit purchases, which had a corresponding direct benefit to our effective tax rate and $700,000 in compensation and benefits. Additionally, our commercial lease depreciation expense was $2.2 million higher quarter-over-quarter, but that came with higher volume in the business. So our noninterest income for that business was up $2.7 million linked quarter. It's also worth noting that our expenses last quarter benefited from a positive adjustment to our FDIC expense of about $1.8 million. But even with these discrete items, our efficiency ratio was 49.5% and our noninterest expense to average asset ratio was 1.88%, placing us firmly in the top quartile of peers even as we invest in growth. Now turning to Slide 18. Many of you recall that during our third quarter 2024 earnings call, we outlined our first operational excellence initiative. It was designed to identify revenue enhancement and cost saving opportunities that we could use to reinvest in the areas of strategic growth for our future while maintaining strong efficiency for our organization. Based on the success of that program, we're once again undertaking a similar program. Between revenue and expense initiatives, we are targeting $20 million in run rate proceeds, which we will again invest in our future. We believe this ongoing philosophy is reflected -- well, sorry, the results of this ongoing philosophy is reflected in the guidance I'll provide in a minute. And it's a key component to having sustainable, long-term positive operating leverage. On Slide 19, you can see our tangible book value per share grew to $61.77, up 3% sequentially or 14% annualized. This represents one of the clearest markers of long-term shareholder value creation and continues our multiyear track record of double-digit tangible book value growth. And we achieved 14% growth during the year in which we added 9% to our shares outstanding and enhanced our capital ratios across the board. Let's now turn to Slide 20 to discuss that capital growth. We further strengthened our capital position this quarter with a successful sub debt issuance, which provided us with $100 million of additional Tier 2 capital. Our tangible common equity ratio continued to climb higher, now reaching 8.5% even after a quarter of strong balance sheet growth. And this ratio was up 90 basis points year-over-year, growing meaningfully while still supporting 12% growth in our asset base. On Slide 21, credit performance remains stable across the board. A strong credit culture will always be a critical success factor for customers and our results support this. NPAs were just 29 basis points of total assets and have been consistently below peers for the last 5 quarters. Total net charge-offs declined by 10% in the quarter as we saw strong performance from both our commercial and consumer portfolios. Excluding our small consumer portfolio, which represents only about 5% of our loans, commercial net charge-offs remained very low at 16 basis points annualized. Overall, we believe the loan portfolio is well positioned, and we have a strong reserve coverage within our allowance for credit loss. With that, I'll wrap up my comments with our 2026 outlook on Slide 22. As most of you on the call know, I've been with the company for about 8 months now. I went back and reviewed last year's guidance against what we delivered, and I was very impressed with the fact that we beat on every line item. We had also raised our guidance a couple of times along the way as our execution panned out. So with another strong quarter and year in the books, we're pleased to share our initial guidance for 2026. With strong pipelines across the franchise, we are targeting loan growth of 8% to 12%. Led by the commercial teams we've onboarded and continue to recruit, we see deposit growth net of remixing of 8% to 12%. The result of this growth is expected net interest income of $800 million to $830 million for the year or growth of 7% to 11%. On noninterest expenses, we project $440 million to $460 million for the year. This is growth of 2% to 6% as we continue to make investments in our future, largely in people and technology, but this range results in very significant positive operating leverage. On capital, we are targeting common equity Tier 1 of 11.5% to 12.5% with our strong organic earnings potential positioning us well to support solid balance sheet growth. And lastly, we expect an effective tax rate of between 23% and 25%. With that, I'll now pass the call back to Sam for closing remarks before we open up the line for your Q&A. Samvir Sidhu: Thanks, Mark. In closing, Customers Bank is executing on its strategy, delivering exceptional client service, differentiated deposit gathering, diversified loan growth, the recruitment of top talent leading payments capabilities and maintain strong capital and credit. Our teams delivered a phenomenal deposit gathering year. Total deposits increased approximately $2 billion with $700 million of that being noninterest-bearing growth. Our commercial teams delivered over $500 million of that noninterest-bearing growth, which should be the floor for 2026 and with this momentum, we feel good about the growth in our guidance. Similarly, our loan teams are well positioned to build on the diversified loan growth we delivered in '25. Our team recruitment efforts are kicking into high gear. We're already in active discussions with half a dozen teams. That's on top of the long runway from our recently onboarded teams. We are seeing a big payoff from the investments we've made in our payments infrastructure. We did over $2 trillion of cubiX activity in 2025, strengthening our market position and competitive moat. Last Friday, we enabled a network of existing customers in the mortgage industry that could add $50 billion in transaction volume this year. We are further targeting additional networks of prospective clients within the real estate industry as a starting point that could be a meaningful driver of noninterest-bearing deposits in the next couple of quarters. As you heard, we delivered strong profitability with an ROA and ROE of 1.2% and 13.8% in the first quarter -- fourth quarter. We completed 2 successful capital transactions during the year, all while maintaining excellent credit performance. As you can imagine, we're incredibly excited about the prospects for this company in 2026 and beyond. We'll now open the line for questions. Operator: [Operator Instructions] Your first question comes from the line of Janet Lee with TD Cowen. Sun Young Lee: Good morning, everyone. And congrats, Sam, on your new role. So if I were to, obviously, if I look at net interest income guide and expense, it's very good positive operating leverage for 2026 and 2025 was also a good year for fee income. If I were to look at 2026, is there a good level of expectations that you could set for fee income growth and were you're most optimistic about that fee income line? Samvir Sidhu: Sure, Janet. When you look at our noninterest income, similar to our asset businesses that we built, we have a nice portfolio of fee income businesses. And at different quarters, different businesses stepped to the forefront. In the third quarter of 2025, our venture business is stepped to the forefront, and we had outsized loan fees. If you look at our loan fee line on our 5-quarter progression, that's where we had some warrant income. This quarter, our commercial finance business stepped to the forefront, where we have a stronger commercial lease income and then also down in the other line, we had some sales on operating -- some operating leases that we have sold residuals, lease residuals at a gain. So my advice would be that while there will be different businesses that step to the forefront throughout the course of the year, on a quarterly basis, if you go back and look, we've averaged about $30 million. So from 2Q to [ Q4 ] in the average is right around $30 million. So I think that's a good place to start. And then on top of that, we now think we have some businesses that have matured that have a good full product set around them. And now we know a focus in 2026 will be how to better monetize that. Sun Young Lee: Very helpful. And for your deposit growth, obviously, the new banking team hires, I think they brought in $600 million of deposit growth in the quarter and your deposit growth of 8% to 12% for 2026. I would assume a lot of that growth is driven by the new banking team hires continuing to bring in that lower cost deposits. What level of deposit growth are you assuming from cubiX? I believe the balances on an average basis were pretty stable quarter-over-quarter. And what you're seeing on the institutional adoption of digital assets and how that's impacting the trend? Samvir Sidhu: Yes. Sure, Mark, I'll jump in and take that. I think, Janet, conservatively, we're not assuming that there's any major contribution from our digital assets balances there. While I think you're right, we could see potential increased market activity if there's sort of legislation that comes into the forefront. However, it's not something we're counting on. So deposit growth that you see there and sort of our guidance that Mark walked through is really going to be driven by the core commercial bank. And I think that's really one of the highlights of this organization. There are potential levers that could be pulled or frankly, maybe it's another way of saying is there are potential embedded upside that could be there if we continue to see sort of brought me to the network and sort of increased activity. But to that point, you touched on the $600 million in the quarter. We also talked about the $2 billion of growth for the year. But I think Mark also touched on the $675 million on average plus or minus throughout 2025 of remix that we did. If you put that all together, our $2 billion on a percentage basis was industry-leading in 2025. We would have more than doubled that had we just not remix and grown the balance sheet. And I think that really shows the diversified power across the organization. It's not just the '23 and '24, then the next year, the '25 team. The core bank is delivering -- is continuing to deliver great strength to the organization. And I think given the investments we made, we focused on the -- highlighting the return on those investments with the '23 and '24 teams. But really, I think that the commercial bank is firing on all cylinders. And as we continue to flex our payments expertise, you heard me highlight it in my prepared remarks that we could also see lifts in deposits related to traditional payment verticals that would be operating on the cubiX platform. Operator: Your next question comes from the line of Steve Moss. Stephen Moss: Sam, Mark, nice quarter here. And maybe just starting -- going back to the teams you're looking to hire this upcoming year. I think, Sam, you kind of touched on part of it at least, that with looking to hire additional real estate teams, I think is what I heard, they were a little static for me. But just kind of curious, are they new verticals or just additive to existing verticals? And then kind of with the $50 billion in transaction volumes you touched on, Sam, just kind of curious as to how we could translate that to deposits? Samvir Sidhu: Sure. So I'll tackle those, and let me know if I miss anything. So firstly, on future teams, I think was your first part of your question. Again, it's -- we're in discussions with half a dozen teams. It's difficult to sort of say where we'll land out. We do think it's a question of a little bit of bottoms-up as well as top-down. So top-down strategically, we think about different strategic areas that we'd like to be in that we aren't in today or we're already in a decentralized way, and it might be better to sort of centralize these and strengthen our overall go-to market. And then from a bottoms-up perspective, we have inbounds that kind of come from teams. So that's actually where a lot of our teams came from 2025, and we have to sort of prioritize and think about investments and align those for '26. So we'll continue to keep you posted. The real focus is continuing on the low-cost deposit gathering in '26. And as you can imagine, the hiring we do this year will really be for next year. The hiring we did last year is going to start picking up by the middle of this year. And I think we're really excited about that based on the pipeline that we're seeing and the momentum that we're seeing. So that was the first part of your question. Can you remind me the second part, the last part? Stephen Moss: Yes. On the $50 billion transaction volume you mentioned, just kind of how do you think about that in terms of deposits? Samvir Sidhu: Sure. So the projected sort of up to $50 billion of payment volume is related to existing customers. So today, it's really sort of helping customers do business on our operating platform, on advanced payments rails and strengthening our relationship with those customers and also strengthening their -- the effectiveness of the way that they sort of currently operate and use our platform. I also mentioned that we'll be looking to new verticals. I think that's also something that we did some hiring for last year, and we're also continuing to align with hiring this year. We're just trying to bring on networks from more traditional verticals -- and as you can appreciate, payments, deposits typically will be low to no cost to the organization and that's really going to be our focus. And our goal, I think you heard me say this, we had $500 million of non-digital asset cubiX related deposit growth in '25. We hope that's the floor for this year, which would continue to increase our noninterest-bearing deposit percentages of overall deposits. Stephen Moss: Okay. Appreciate that. And then just on the loan growth guide here. I just wanted to -- you had a really strong year for loan growth. It sounds like the pipeline is strong as well. Just kind of wondering kind of what the puts and takes are for your expectations around loan growth here, where you see potentially the best opportunities and maybe if there's some upside to the number here. Mark McCollom: Yes, sure, I'll take that. Again, when you go back and look over the last couple of quarters, Steve, what you've seen is it different groups step to the forefront. Commercial real estate was strong this quarter. Health care was a leader last quarter. We have a lot of room on commercial real estate relative to our peers to be able to add that selectively if the credit is right. And so I would just say that there's no one particular segment that we're more bullish about than the rest. We just think that each group will continue to have its moments, probably to shine in 2026 as we saw in 2025. And there's obviously -- that's an annual guide. First quarters are typically slow, across the entire industry. Second and third quarters tend to ramp up. And -- but we feel really good about the full year guidance. Operator: Your next question comes from the line of Kelly Motta with KBW. Kelly Motta: Nice quarter. I guess with your expense guidance for next year, as you noted, it allows for some decent positive operating leverage. Just wondering if that factors in any of this like additional team pipeline hiring, which presumably over time will drive stronger revenues, but comes with higher expenses. So part one of the expense question. And then part two, what's embedded in terms of professional fees, which presumably also should come down as you work through the right quarter? Mark McCollom: Yes. You bet, Kelly. On the first question, yes, our expense guide assumes that we're going to continue investing in teams. And that's part of why we put a specific slide in the deck highlighting our operational excellence initiative, where we're going to continue to find ways to be able to pay for that ongoing flywheel of recruitment of those new teams. And then on the second question on professional services, yes, we've been signaling to you folks for a couple of quarters, that we would expect to see that number come down. We've been right around that sort of $12.5 million to $13.5 million in that line item. We are starting to see some of that decline occur actually in the fourth quarter related to some of the build-out of our risk infrastructure. But in that professional service fee as legal expenses, and we highlighted that in the fourth quarter, we had what we think are more unique costs that should not continue of $1.9 million related to some of those 2025 teams that we've onboarded. Kelly Motta: Got it. That's really helpful. And maybe circling back to the opportunity for cubiX. It seems like it's a nice -- you're positioning yourself as premier payments driven bank. And it looks like there's a good opportunity from industries outside the digital asset space. I think escrow makes sense. But maybe you could just provide us with a couple of use case examples of how you see that fitting in with your existing client base as an opportunity ahead? Samvir Sidhu: Yes. Sure, Kelly. I appreciate that. And I think that on the slide, we had highlighted a couple of them. I think the first 2 we mentioned were sort of mortgage finance, which is, as you can appreciate, existing business, then we also touched on sort of more broadly in the retail industry. And yes, you talked about title. But really, it's not just sort of title and escrow, it's also sort of broadly thinking about the closings of commercial real estate transactions and how we could sort of help and facilitate our customers and their partners. And we're seeing really good traction up there. And as you can appreciate, would be less tech-savvy industries, builds take longer, but the stickiness is even stronger. And so we are really excited about this. And frankly, because these would be new customer relationships, the first part, sort of like say, on mortgage finance, it really helps you strengthen and deepen your existing relationships, helps you broaden customers around the edges, but de novo industries are really exciting for us. Operator: Your next question comes from the line with Brian Wilczynski from Morgan Stanley. Brian Wilczynski: I was wondering if you could speak to the resiliency of the cubiX platform in light of some of the volatility in cryptocurrency prices that we saw in the fourth quarter. I understand the volatility does often drive trading activity. But can you just speak to what else drove the relative stability in cubiX-related deposits in the fourth quarter despite some of the volatility we saw in the market? Samvir Sidhu: Yes. So I think that you hit the nail on the head. I think that changes in prices actually mean increased volatility, just like you see in traditional markets with volatility trading-related type traditional players, and it's a similar in the digital asset ecosystem. So on days of the highest amount of volatility, you may see the highest amounts of network activity and balances. And I think that's really speaks to that. So say our spot balances were $100 million below the average on 12/31 on 9/30, they were $100 million above the Q3 average. And we've always said they operate sort of within a plus or minus -- generally operate within a plus or minus 10% type thresholds. And so to put in perspective, while New Year's Eve and New Year's Day was on a Thursday, last Thursday, as an example, we were at $4.4 billion in balances and based upon market activity that was occurring over the prior week or so, which all ends up going through our balance sheet through multiple customers and exchanges and custodians and market makers. So -- and then over the last couple of days, a little bit less than the sort of the average that you're seeing there. So I think that that's really the power. But to sort of step back, we've seen balances dramatically increase since Q4 of last year, and then we saw another step function in -- beginning of Q3 with the passing of GENIUS and then maintaining a new band within that higher step function. And I think that's really how we see the strength of this platform is as we continue to strengthen product offerings as we continue to enable more payment rails for our existing customers as we continue to bring on more traditional players. We'll -- our goal is to sort of see a new floor to sort of operate within that sort of payment spend. Brian Wilczynski: That's really helpful color. Earlier in the call when you were talking about the 2026 priorities, one of the things that you've talked about was deepening relationships with the existing client base, adding additional products and services. I was wondering if you could just give us a few examples of some of the key focus areas that you have additional products and capabilities you're adding and how that translates into deeper relationships with cubiX? Samvir Sidhu: Yes, sure. So I think that we -- I talked about new payment rails. That's obviously incredibly important. And I think that what we're also looking to do is consider not all of our -- so to put it in perspective, not all of our customers use all the payment rails that we offer. Secondly, while we're the on-off-ramp to the digital asset ecosystem from fiat to digital asset ecosystem, we're not always the on-off ramp for our customers on to the sort of the fiat rails as well. And then there's sort of bespoke sort of market-specific and in many cases, sort of trade secret specific type functionality that clients ask for from us that we also sort of enable. So we are continuing within each major customer, we're sort of very focused on building and strengthening our relationship with them. And frankly, what we're doing is we're helping them to run their business more effectively. And as you can appreciate, a lot of our customers have been very focused on driving sort of regulatory clarity, no pun intended as well as sort of legislation. And they're also very focused on product and to sort of be very, very effective on product, they need us and sort of the traditional fiat rails to sort of help them with that. So there's lot of activity going on, especially sort of beginning in sort of Q3, Q4 of last year. Operator: Your next question comes from the line of Peter Winter with D.A. Davidson. Peter Winter: I wanted to start with credit quality. Obviously, it's been very good. It's low nonperforming loans relative to peers, but there was a $15 million increase in C&I and $2 million in multifamily. Just could you provide some details around the increase and maybe give an update on the credit outlook? Mark McCollom: Peter. Yes, I would say that our credit quality was, as you pointed out, starting from a very, very low base. So it doesn't take many deals to actually move the needle for us. On the nonperforming side, I mean, it was largely one transaction, about a $10 million, $11 million credit. It is currently under agreement, and we're hoping to have either a restructuring or a resolution of that asset in the first quarter. But I would continue to say that when you look back, we had 2 quarters, 3Q and 4Q that were extraordinarily low in terms of NPA and NPL ratios. So I think what you see here in the fourth quarter is certainly not unusual and still puts us feeling really good about overall credit quality. Peter Winter: And the multifamily, was that New York City rent-controlled property? Just curious around that. Mark McCollom: I don't have the stats to know specifically what it was because as you pointed out, it was a $2 million credit. So I'm not sure if that came from primarily rent-regulated multifamily or just our broader multifamily, which is the majority of our multifamily is in sort of a 4-state region around the Mid-Atlantic. Peter Winter: Right. And then if I could just ask the benefit, I believe, from the deferred loan fees ends this quarter, what's a good starting point for the first quarter margin? And maybe talk about how you think about the trajectory of the margin this year? Mark McCollom: Yes, sure. If you go back to the second quarter of '25 and kind of project forward from there, I think that's kind of a good place to start. Second quarter margin was 3.7%. And we had just a little bit of -- about half of a month of accretion in the second quarter. But with some of the deposit remix that we've done, I think that kind of 3.25%, 3.27% level might be a good place to start and then build from there throughout 2026. Yes. One other thing I would add is that in the first quarter here, I mean, we are modestly obviously, asset sensitive. And so we did see a couple of bp decline linked quarter from 3Q to 4Q. But I think somewhere around that 3.25% plus or minus a couple of basis points would be a good place to start from and then build out from there. Operator: Your next question comes from the line of Tyler Cacciatori from Stephens Inc. Tyler Cacciatori: This is Tyler on for Matt Breese. Most of my questions have already been answered, but I guess just starting on cubiX and I appreciate a lot of the color you've provided there. Can you just provide us some context on the size of the customer base in that business? Samvir Sidhu: Tyler, Sam here. So we have hundreds of customers that are -- that operate within that industry. And I think one of the things that I mentioned a couple of quarters ago is there's no real material change to our customer base because we actually are the market leader. We are around the edges, adding for existing customers, some of their counterparties -- edge counterparties that are already on the network. And then we're also adding sort of new traditional finance nodes, which are less active as sort of the more digital asset first type customers. So we're broadening the network with some of those players who connect to a lot of our existing customers. We don't drive huge deposit balances, but they tremendously strengthen both the breadth, the quality and the stickiness of the network. Tyler Cacciatori: And then if you could just update us on the regulatory order and where you stand in terms of items that need to be addressed there? Samvir Sidhu: Yes, sure. So as of the end of the year, we are substantially done with our plan and I'm excited to say that in 2026, our focus is to put this behind us. So one of the things kind of just building off of what I just talked about with cubiX and the network. Frankly, the work is now a massive competitive advantage and the moat is, frankly, as a result of this is as big as the benefit of the network effects. Operator: Your next question comes from the line of David Bishop with HOVD Group LLC. Kyle Gierman: This is Kyle Gierman on for Dave Bishop, and congratulations, Sam, on the transition. Most of my questions have already been answered, but I was wondering if you could provide some color on the yields at which new loans were originated and add to the books this quarter and also your current read on the competition in your lending markets? Mark McCollom: Yes. Yes, I'll take the first one and then Sam can comment on competition or markets. For new loan originations, principally, we're a commercial bank, so I'll just focus on the commercial yields. We are going to be anywhere between 225 and 275 basis points over Fed funds or SOFR depending on the business line. A couple of our business lines might approach 300 basis points, but the majority of new originations are between 225 and 275 basis points over cost of funds. Samvir Sidhu: Yes. And just in terms of competition, what I would just say is that I think you can see on the loan growth side, but not only for the quarter. But also for the year that there's just a broad base of diversified loan growth across a number of commercial verticals. So the benefit we have is that as both sort of supply and demand dynamics in each of those verticals change, we're able to lean in. And in some quarters, you'll have health care stepping up a little bit more in other quarters, you'll have mortgage warehouse refinance activity step up. So generally, we're seeing a good, diversified durable loan growth. As you can appreciate, in '25, generally the broad-based industry saw a bit of pricing pressure. But as you saw from sort of our NII growth and sort of Mark's comments related to margin, we continue to see the benefit. There was a great chart that the team kind of pulled together on the driving down of the delta between our interest bearing cost deposits relative to our peer group relative versus -- from end of '22 versus where we are today. And that's really a much bigger driver than sort of changes on loan yields and competition. Operator: Your next question comes from the line of Harold Goetsch with B. Riley Securities. Harold Goetsch: Great quarter and great year. Just wanted to ask a couple of quick questions back to cubiX just for more general information. When you just -- it's a great slide on Slide 8 and that you for that. I just wanted to know if the addition of instant payment platform, real-time payments and FedNow, are those payment rails cannibalizing the traditional wire and ACH business? Or is most of these new capabilities incremental to volumes? Or -- that's my first question. Samvir Sidhu: Yes, sure. Right now, we're sort of seeing an additional incremental to sort of more traditional rails. So it's not necessarily sort of a big tectonic shift. But there are different ways that some of our customers like to utilize different channels, both for them as well as their counterparties. And we're helping them think about sort of also sort of next-gen type ways to sort of utilize pushes and pulls within our network as well as sort of outside and sort of bringing in new dollars as well. So there's a lot of interesting things that are happening in the industry, and we continue to see evolution we really are at the forefront of advancing many of these technologies because we haven't established existing tech forward payment focused customer base. Harold Goetsch: And when you use a terminal large or massive competitive management in this platform now. How would you describe that competitive advantage? Is it a -- is the barrier to entry now? Is it network effects that you're generating before anybody else just try to start a new platform, they were like a -- or like, for example, is this a narrow window to innovate like this? And now that you're up and running, you're garnering a lot of network effects that prevent others from trying something similar? What are the sources? Or how would you describe the competitive advantages? Samvir Sidhu: Sure. So it absolutely is sort of a barrier to entry and the way that we sort of see the strengthening of that mode is sort of like you talked about what the network effect is. As you can appreciate in '24 and early '25, we were heads down and sort of making sure that we were focused on making sure we satisfied sort of regulatory requirements. And now at this point in time, we're really importantly focused on broadening the way that these guys and our customers do business. So to answer your question is that flywheel of network effect just keeps getting stronger and stronger, which creates a lot more stickiness. And then you also just think about it operationally. Operationally, the volume that we are sort of operating under is really at levels of category 3, category 4 type banks and institutions. So when you think about the competition and then you add in sort of the risk and compliance book that we talked about that we've sort of invested a tremendous amount of people process and technology on. You put all that together, the types of institutions that could even compete, you can count on one hand with us and then how many of those are actually focused in the space, et cetera, it's very de minimis. And I think that's really the interesting position that we're in. We're more confident in our market position today than we were 6 months ago. Harold Goetsch: Great. And I got one quick follow-up around -- on you leading the AI efforts. Can you give us like a couple of anecdotes on how AI is making processes more efficient, saving money, improving underwriting, let me know. Samvir Sidhu: Yes, sure. So we, and frankly, the banking industry has been slow to discuss AI because there's actually, as you can understand, a monumental amount of work that you need to do behind the scenes to really get going. So we started our journey with like AI governance, training. We did a lot of data transformation. We are advanced in sort of fully digital onboarding for very complex commercial clients. Now as we sort of look forward, we're focused on full complete loan deposit automated onboarding. We're looking to build an AI layer on top of our CRM. We touched on credit. We're automating sort of CAM draft creation and underwriting support. We are working on sort of risk and compliance automation. And then in parallel to that, we're also in the process of building a workflow orchestration layer to conduct all of this across the bank. So only then are you able to deploy AI agents across your operating platform. That's really where you transform the bank and the way that we work internally, our team members work and then also the way that we do business and really transform the way our customers see it. So right now, today, how the work is sort of siloed where we're doing sort of AI and agentic work gets used for micro use cases, which is nice, but not really transformational. Tomorrow, it's going to be across the overall bank, and it's really going to differentiate us and agents working all the time versus working on 2-hour projects to kind of help advance a specific use case, which is nice to have, but not really needed to transform the way that we do business. And that's really sort of where we are in our journey. So hopefully, that gives you a little bit of color. And if we get to the -- to sort of our initial sort of Phase 2, end state, it's really going to transform the way that we do business. And my guess is also potentially just given in the size of our organization relative to much larger complex organizations. While they may have much bigger budgets, they don't have the operational flexibility and visibility that we have. Operator: There are no further questions at this time. I will now turn the call back to Sam Sidhu, CEO, for closing remarks. Samvir Sidhu: Thank you to everyone for your continued interest and support of Customers Bancorp. We appreciate you being a part of the incredible franchise we're building, and we're excited about 2026. Thank you, and have a great day and great weekend. Operator: This concludes today's call. Thank you for attending. You may now disconnect.