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Operator: Welcome to the SLM Corporation Fourth Quarter and Full Year 2025 Earnings Conference Call. At this time, all participants have been placed on a listen-only mode. The floor will be open for your questions following the prepared remarks. We ask that you pick up your handset for best sound quality. Lastly, if you should require operator assistance, please press 0. I would now like to turn the call over to Kate deLacy, Senior Director and Head of Investor Relations. Please go ahead. Thank you, Laurie. Kate deLacy: Good evening, and welcome to SLM Corporation's Fourth Quarter and Full Year 2025 Earnings Call. It is my pleasure to be here today with Jonathan Witter, our CEO, Peter Graham, our CFO, and Elizabeth Brinoff, Managing Vice President of Strategic Finance. Operator: After the prepared remarks, we will open the call for questions. Kate deLacy: Before we begin, keep in mind our discussion will contain predictions, expectations, and forward-looking statements. Actual results in the future may be materially different from those discussed here due to a variety of factors. Listeners should refer to the discussion of those factors in the company's forward 10-Q and other filings with the SEC. For SLM Corporation, these factors include, among others, results of operations, financial conditions, and/or cash flows, as well as any potential impacts of various external factors on our business. Additionally, this discussion and the earnings presentation include non-GAAP financial information, including non-GAAP delinquencies, including strategic partnerships and repayments, non-GAAP reserve rates, including strategic partnership warehouse loans, and non-GAAP NCOs as a percentage of average loans in repayment. All non-GAAP financial information should be considered as supplemental to, not a substitute for or superior to, the financial measure calculated in accordance with GAAP. The company believes that these non-GAAP financial measures provide users of our financial information with useful supplemental information that enables a better comparison of the company's performance across periods. There are many limitations related to the use of these non-GAAP financial measures. And their nearest GAAP equivalent. For example, the company's descriptions of non-GAAP financial measures may differ from the non-measures used by other companies. For descriptions of the non-GAAP financial information included herein and reconciliation to the most directly comparable GAAP measures, please refer to the appendix to the earnings presentation beginning at Slide 13. We undertake no obligation to update or revise any prediction expectations or forward-looking statements including non-GAAP forward-looking statements. To reflect events or circumstances that occur after today Thursday, January 22, 2026. Thank you. And now I'll turn the call over to Jonathan Witter. Thank you, Kate and Chloe. Good evening, everyone. Jonathan Witter: Thank you for joining us to discuss SLM Corporation's fourth quarter and full year 2025 results. I'm pleased to report on a successful year and discuss our strong outlook for 2026. Overall, the private student lending sector remains robust and is positioned for further success. College enrollment and specifically enrollment trends for many of our largest Tier one schools are up. Indicating students and parents continue to see the value of higher education. Our cosigner rates for new originations have also increased. Indicating parents and loved ones are willing to co-invest in the education for their students. Recognizing that some recent graduates are feeling the impact of current economic uncertainty and technological change, unemployment rates for recent graduates are still comparatively low and most are finding gainful employment within six months of graduation. As AI transforms the professional landscape, we believe education will be even more important as students acquire the skills necessary to remain competitive in the future. Undoubtedly, schools and programs will evolve creating new areas of study to meet those needs. We look forward to supporting our school partners and students throughout this evolution. We are excited about the opportunity created by the recent federal student lending reforms. These changes should reduce the likelihood of students and families taking on unsustainable levels of student debt. These reforms also create the opportunity for us to help more students and families. We believe that when fully phased in, PlusReform could contribute an estimated $5 billion in annual originations for SLM Corporation, representing approximately 70% originations growth over 2025. In 2025, SLM Corporation delivered our inaugural private credit strategic partnership. This innovative first-of-its-kind agreement combines the more predictable earnings profile of our bank, with the capital efficiency and risk transfer benefits of our loan sale program. We believe the economic value of this partnership is comparable or superior to other funding models. This arrangement includes no clawbacks, and the supplemental fee which represents the smallest portion of the overall economics, is tied to clear reasonably achievable return thresholds. In addition to the strategic progress, we also delivered well against our guidance for the year. GAAP diluted EPS in the fourth quarter was $1.12 and our full year GAAP diluted EPS was $3.46 compared to $2.68 in 2024. Private education loan originations for the 2025 were $1.02 billion and for the full year, we originated $7.4 billion of private education loans, 6% over 2024 and at the higher end of our revised full year guidance. Net charge-offs for our private education loan portfolio were $98 million in the 2025, $346 million for the full year representing 2.15% of average private education loans in repayment. Which is down four basis points from the full year of 2024. Peter Graham will now take you through some additional highlights. Peter? Peter Graham: Thank you, Jonathan. Good evening, everyone. We continued our capital return strategy in the fourth quarter. Repurchasing 3.8 million shares for $106 million for a total of 12.8 million shares $373 million over the full year 2025. Since January 1, 2020, we've reduced the shares outstanding by over 55% at an average price of $16.93. Our prior share repurchase authorization was nearing completion, and tonight, we are announcing a new two-year $500 million authorization. Our net interest margin was 5.21% for the quarter. 29 basis points higher than the prior year period and 5.24% for the full year. Up five basis points year over year. These results demonstrate the effectiveness of our asset and liability management strategies, which delivered NIM in the low to mid 5% range. In the 2025, we reported a $19 million negative provision for credit losses. Largely driven by the release of reserves tied to the $1 billion seasoned loan portfolio sale, the selection of a portion of the 2025 peak season originations for sale to the KKR strategic partnership. In our investor forum last month, we noted that as our updated strategy begins to scale, key performance metrics would begin to shift. As part of our evolve strategy, we are no longer exclusively selling portions of our seasoned loan portfolio. For the first time, we are also selling newly originated loans. This will change the composition of our bank-owned loan portfolio. Additionally, we are selecting each quarter a representative portion of new originations and warehousing them for sale in the subsequent quarter. As a result, we expect a portion of our new originations each quarter to be designated as held for sale. As many of our credit metrics are calculated using only loans held for investment, or include a portion of newly originated loans as part of their calculation. This change in loan sale strategy has begun to influence a number of reported metrics. To support your analysis and ensure transparency, we have added an appendix beginning on Page 13 of the earnings presentation furnished with our release this evening. Outlining how these metrics have begun to shift. And providing the clarity needed to establish refresh baselines for forward-looking models. Importantly, the shift in these metrics is primarily driven by calculation mechanics rather than a change in the underlying performance of the loans in our portfolio. It's important to note certain information referenced tonight and provided in the earnings presentation includes non-GAAP metrics. We believe we're useful to understanding the comparative performance of our portfolio. A reconciliation of the non-GAAP to GAAP metrics can be found in the appendix to the earnings presentation on Pages 18 and 19. With that foundation in place, we can turn to the discussion of our credit metrics. The total allowance as a percentage of private education loan exposure which we refer to as the reserve rate, was 6% at the 2025. Up from 5.93% in the previous quarter and 5.83% at the 2024. As shown on Page 15 of the earnings presentation, when adjusting for the change in loan sales strategy, the non-GAAP reserve rate would have been 5.92%. Net charge-offs our private education loan portfolio in the 2025 were 2.42% of average loans in repayment. Compared to 2.38% in the year-ago quarter. As shown on Page 16 of our earnings presentation, when adjusting for the change in loan sales strategy, the non-GAAP net charge-off rate would have been 2.4%. Private education loans delinquent thirty days or more represent 4% of loans in repayment as of the end of the year. Unchanged from the third quarter and up from 3.7% at the 2024. Adjusting for the change in loan sales strategy, the non-GAAP delinquency rate would have been 3.88% as shown on Page 17 of the presentation. Over the 2025, we saw an increase in early-stage delinquencies. Prompting questions whether that was a precursor to higher charge-offs. As we noted then and continue to believe now, volatility in early-stage delinquency is not necessarily a reliable indicator of future net charge-offs. As shown on Page 10 of the earnings presentation, an analysis of the relationship between annualized thirty-day plus delinquency and net charge-off rates shows a 12 percentage point improvement in the LINK ratio since 2022. Demonstrating the diminishing connection between the two metrics. We believe this is driven at least in part by improvements in our collections effectiveness. Moreover, late-stage delinquencies and roll rates have remained stable consistent with our expectation that most early-stage delinquencies self-cure. As discussed for several quarters, our expanded loan modification volumes are nearing the point of being fully seasoned. And we will begin to see borrowers whose loans were modified under the expanded loss mitigation programs at the 2023. Exiting these programs throughout 2026. While longer-term performance will become clearer throughout the upcoming year, we continue to be pleased by the results we are seeing from borrowers currently enrolled in these programs. As you can see on Page 11 of the earnings presentation, more than 80% of these borrowers successfully complete their first six payments. Additionally, close to 75% of borrowers who are enrolled in a loan modification during the 2023 are current at the 2025. Representing over twenty-four months of positive payment. This performance is consistent with what we are seeing in other modification cohorts. Non-interest expenses for the full year were $659 million compared to $642 million in 2024, a modest 2.6% increase year over year. And below the midpoint of our guidance. We're pleased with this outcome which reflects our disciplined expense management, continued focus on efficiency. This discipline enabled us to deliver an efficiency ratio of 33.2%. In 2025. And finally, our liquidity and capital positions are solid. We ended the quarter with liquidity of 18.6% of total assets. At the end of the fourth quarter, total risk-based capital was 12.4%, and common equity Tier one capital was 11.1%. We believe we are well-positioned to grow our business and continue to return capital to shareholders. I'll now turn the call back to Jonathan Witter. Jonathan Witter: Thanks, Peter. Let me conclude with a discussion of our 2026 guidance. And provide some additional context on potential future trends. 2026 presents an exciting opportunity for our company to serve more students and families. The second half of the year, we expect that the first wave of students subject to the new plus caps will begin their undergraduate and graduate journeys. This impact will be relatively smaller in the first year of phase-in. Nonetheless, we expect full year 2026 private education loan origination growth of 12% to 14%. We believe this is an incredibly attractive opportunity for our company and we need to invest ahead of the anticipated volume. As such, expected non-interest expenses for the full year of 2026 will be between $750 million and $780 million. Driving this year-over-year increase are three factors. Approximately 20% is growth associated with cost increases tied to normal market conditions. Approximately 40% of the increase reflects one-time investments in product enhancements, refined credit models, and other strategic enablers. And the remainder stems from higher marketing and acquisition costs required to capture the additional Plus-related volume. We do not expect this level of year-over-year expense growth to continue. In 2027, we expect the rate of operating expense growth to be roughly half that of 2026. As the cost of growing volume is offset by efficiency gains and the sunsetting of one-time investments. Assuming our volume estimates are correct, we anticipate that we will improve our efficiency ratio each year with the goal of being back in the low 30s no later than 2030. Given the strategic and financial attractiveness of our private credit partnership business, we expect to grow that business in 2026. As a result, we anticipate private education loan portfolio growth to be flat to slightly negative year over year. Beyond 2026, we expect to maintain an appropriately sized bank that continues to serve as a strategic growth engine, a funding risk mitigant, and a healthy competitive alternative to our private credit partnerships. Accordingly, after 2026, we expect to grow the bank portfolio gradually by roughly one to two percentage points per year until reaching a steady state annual growth rate in the 30% to 40% of our private student lending originations will flow through strategic partnerships with additional balance sheet growth managed through seasoned portfolio loan sales. We expect net charge-offs for our total loan portfolio will be between $345 million and $385 million. As shown on Page 16 of our presentation, we believe this is consistent with a stable credit outlook. Let me conclude with a discussion of full year diluted earnings per common share which we expect to be between $2.7 and $2.8 in 2026. This range reflects the deliberate choices we made to launch the strategic partnership in 2025, and invest aggressively to capture the plus opportunity. While 2026 is a critical year in our strategic journey, I'm even more excited about what comes after. While we cannot predict the future macroeconomics or other changes. If the plus TAM materializes as we have predicted, we would expect to see EPS acceleration beginning in 2027 with high teens to low 20% growth. Beyond 2027, we expect our EPS growth to remain elevated for several years as the Plus opportunity is fully realized, and our strategic partnership business grows. In closing, we are excited about our company's future and the opportunities ahead. We believe students will continue to seek access to higher education to obtain the skills necessary to compete in the future. That plus reform will open the door for SLM Corporation to compete for and win business with an exciting new group of customers. Creating meaningful upside for future originations, And then our private credit strategic partnerships business will give us a capital-efficient and risk-balanced way to fund growth while building more predictable and recurring earnings streams. Taken together, we believe these dynamics should translate to very attractive value creation opportunities for the company, and for our investors. With that, Peter? Go ahead and open up the call for some questions. Operator: The floor is now open for questions. Again, we ask that you pick up your handset when posing your questions. Our first question comes from Caroline Latta with Bank of America. Line is open. Caroline Latta: Hi. Can you talk about how you guys think about the postponement of wage garnishment and treasury offset will impact the performance of in-school and private student loans? Jonathan Witter: Yeah. Sure, Caroline. I'm happy to. First of all, I think it's important to remind folks that while many of our customers have federal loans, most federal loan customers do not have SLM Corporation private student loans. And I think in general and we've talked on past calls about just the difference in performance and impacts that we've been seeing as the federal program has gone through various stages of its evolution. In general, I think for any customers who have federal loans, who are severely delinquent, and I think our estimates suggest that number is quite small. The postponement is obviously a net benefit. I don't think we would expect that to have a significant impact on our business just given the difference in customer basis. Caroline Latta: Okay. Thanks. And then a quick follow-up one. You guys highlighted the $5 billion origination or opportunity from the Grad PLUS. Which is driving some of the origination growth year over year. Given those changes come into effect in July, how should we think about modeling 1H versus 2H growth? Peter Graham: Yes. I think we've talked on prior calls about kind of the staging of this. If you think about it, it is new freshmen in the undergrad class and new to graduate school for graduate programs, you know, beginning in the fall academic period. And so you know, think about that in the context of a four-year program as, like, one-fourth of the volume and you know, grad programs can be some a little shorter and some a little longer than that. So we're expecting the sort of the incremental plus volume this year to be relatively modest and that's included in our guidance on growth for this year. And we expect that to step up measurably as we move through the next two to three years until it gets to kind of a steady state. Caroline Latta: Okay. Thank you. Giuliano Bologna: Mhmm. Operator: We'll take our next question from Giuliano Bologna with Compass Point. Your line is open. Giuliano Bologna: Hi. Peter Graham: Good evening. And a first question perspective, when I think about the partnerships and the loan sales in 2026, is there a rough sense of where the volumes are likely to shake out for both or even some relative context? Jonathan Witter: Obviously, they'll have a pretty big impact on where the number shakes out for the year. I'm just curious how that looks versus the investor forum numbers. Peter Graham: Yes. So recall that the agreement for this first strategic partnership is a commitment a minimum commitment of $2 billion of new originations. Roughly time to the academic year. So we designated a portion of our 2025 peak season originations as held for sale at the December. And we will that will be part of our sale in the first quarter as part of the new originations flow. Portion of that commitment. Going forward, each month we'll be selecting representative sample of originations that occur. And be designating that for sale in the partnership. I think Rough Justice, think about that as like 30% of originations. And so there will be some seasonality as we go through this year in sales of new originations to the partnership just because it's tied to our actual origination pattern. So the highest amount sold of the new originations will be tied to kind of our traditional peak season period. And then in regards to season portfolio sales, I would say that's the approach to that will be similar to what we've employed historically, which is the size and timing of those will be dependent on kind of our capital needs and sort of marketplace conditions. So no real change in that regard. Giuliano Bologna: That is very helpful. Hopefully, not too convoluted a question, but there's a fairly decent impact from the HFS book on balance sheet. And kind of what that balance will look like. Is it fair to assume that at least in 2026, it will probably be similar to where you are now in terms of balance? Or should we expect that to roll up throughout the year as things accelerate? And is there a reference of how big that HFS book will probably be Yes. This year and how big it'll end up being because it drives some decent NIM even while sitting there from an average balance perspective. Peter Graham: Yes. So, you think about it as and I mentioned this in my prepared remarks, we're going to select loans each month we'll warehouse them at the end of a quarter and then have a subsequent takeout transaction for sale into partnership trust. Structure in the subsequent quarters. So that absolute amount of held for sale in the balance sheet will vary each quarter depending on the origination profile in that quarter. For instance, the fourth quarter will be the largest, so there will be a selection of sort of fall peak season originations and the second quarter will be the lowest because that's traditionally our lowest origination quarter of the year. Giuliano Bologna: That is helpful. Then I realize there's obviously, the increased loan sales also changed the portfolio mix. In near term. And you guys have it very well in the appendix slides. Should we expect a little bit of change in just the seasoning of the portfolio because you've had excess sales in '25, you're selling a fair amount in '26 as well. But change the seasoning and kind of roll through repayment? Over the next few years? Or is that not a or should looking down the wrong path in terms of the materiality of that? Peter Graham: Yes. I think at the margins, Will, I think the larger impact will be the fact that a portion of our new originations are going to be going off book. At originations. So that'll tend to cause a slower sort of replenishment of the overall season book and it'll gradually get a little more seasoned than what has been. But I think that's kind of at the margins. I don't think it's going be a dramatic shift. Giuliano Bologna: That's very helpful. I appreciate the time and I will jump back in the queue. Okay. Thank you. Operator: We'll move next to Terry Ma with Barclays. Your line is open. Terry, you may need to check the mute function on your device. Terry Ma: Oh, hey. Sorry about that hopping in between calls. So I appreciate some of the color you gave on non-interest expense. Earlier on the call. But like if I look at the range for this year, it is obviously still quite a step up than what you guys had last year. And then even the post '26 kind of growth rate that you indicated is kind of higher than what you've seen historically. Can you kind of help us think about how you measure, the ROI of those kind of investment dollars? Yes, Terry. Jonathan Witter: Probably a couple of different levels to that conversation. First, I think it is important to start with why we are stepping up the investment opportunity. And we've said it a couple of times, This represents, in our mind, sort of the clearest opportunity to have really significant TAM growth up to 70% over the course of the next couple of years. Again, assuming the analysis and the estimates that we put together are meaningful. So I think it's important to start with this is not to be cliche, but really as close to a once-in-a-lifetime opportunity yeah, to expand a business as I think we're gonna see in our private student lending space. I think if you model through what is the impact when fully realized of a 70% increase in originations. Heck for the sake of conservatorship, cut it to 50% increase. It is a really meaningful increase in earnings potential and market cap. And so I think you have to start there and understand that that is the mental model that we as a management team bring to this investment opportunity. We have and I think have always had and this has been demonstrated I think by our strong efficiency ratio performance over the last couple of years. Really good governance around, for example, how we do return measurement on marketing spend, how we do return measurement on sort of new product innovation and development. And I think investors should rest assured that we are bringing that very same discipline to bear in this opportunity. I think what's important to recognize and maybe one of the source of disconnect is, you know, for a whole myriad of reasons, in particular, we do not expect our marketing to be as effective or as efficient in year one of this sort of opportunity as it will likely be in years two, years three and sort of beyond. And if you think about it, there's a whole myriad of reasons for that. We are phasing in the you know, the eligibility of the new caps. You know, so when we market in year one, depending on whether you're talking in grad or undergrad, there will only be a portion of those students who will be interested in private student loans because many will still be you know, supported by the federal program. In year one in particular, for example, there's no serialization benefit. We know it's a lot less expensive for us to get a serialized loan than a new customer than to acquire a new customer. And I haven't even started, Terry, to talk about just it takes a little bit of time and enrollment season or two to really fully optimize all of your various both digital and traditional marketing channels. And so we don't view that as a permanent impairment to our efficiencies. But I think we do bring a slightly different view to how you stand up a marketing program for, let's say, new medical students than what has been the primary part of our business over the last several years, which has been serving disproportionately undergrads. So we're excited about it. We think it is again in service of a really fabulous market opportunity. We hope you all agree that market opportunity is right in front of us. And we feel like we're bringing great discipline to how we're thinking about that spend. Peter Graham: I think the other thing I would add there is just context around efficiency. Like we have a very good efficiency rate ratio now, even at the midpoint of the range we've guided to for for for 2026. We're kind of still in the high 30s. And I think on a relative basis compared to others in in this space, that's a really efficient operation. And we've said over the coming years, we're going to drive that back down to low 30s. So look, I think that's an additional context. That's important. Terry Ma: Got it. That's helpful color. Terry Ma: And then I guess like maybe just a follow-up on credit. Your percentage of loans in extended grace ticked up meaningfully I think that's pretty consistent with the June wave exiting regular grace. But as we kind of think about credit for 2026 and just the guidance range that you gave, like any color on like your confidence level because I think you also have a way or exiting mod in December. Like as we look out into twenty sixth, I think by all measures, it is still a pretty kind of tough job environment for kind of new grads. So kind of maybe help us think about what's kind of embedded in your charge off assumption range for the year and your level of confidence? Thank you. Peter Graham: Yes, sure. I'll take the mod piece and then then Jonathan, you can maybe recap some of your comments around the overall environment. Sure. On the loan mods, we've been tracking now for some time and talking about successful performance in making payments. And there's an additional slide in the deck that sort of highlights that. I think the from my perspective, thinking about kind of the 2023 cohort of, you know, mod enrollments The fact that 75% of them at the end of the year are current is another really strong indicator of success. And again, we'll see how that sort of moves through the year in terms of people graduating out. And stepping back into their contractual obligations. But we feel good that we've designed a well-functioning program at met a it's met a need of a borrower in stress. And we feel like the positive payment habits that have been demonstrated over now twenty-four months in that cohort are a powerful indicator of their likelihood of success as they come out this year. And all of that's baked into the range that we've given for net charge-offs for 2026. Jonathan Witter: Yes. And Terry, maybe if I step back and give a little bit more context I think there's clearly been a whole series of pretty high catching stories that have come out in the past months about of AI and impact on the job market and so forth. I think the data that we see from a number of different sources tells perhaps a little bit more of a balanced story. And there is no doubt that unemployment rates for new college grads are slightly elevated today. There is no doubt that it is taking a little bit longer for new college grads to find jobs. To put that in context, if you look at the monthly unemployment data for new college grads, you see typically a spike in unemployment over the summer and then a normalization period And we are sitting here today based on December 25 data you know, at effectively the same unemployment rate that we would have seen, again, for new college grads in November '23 or '24. Yes, so it is a slightly slower ramp to sort of full employment normalization But it is measured in sort of a month, month and a half delta if you look at those rates. Not something that is more substantial. I think it's important also to kind of put that in the broader context and I've raised on a couple of calls or said this on a couple of calls. This is a pattern that we are well used to. We know for many years in this business the single greatest point of financial stress on average for our customers is going to be when they're going through this transition from school to full-time employment. It's why we invest disproportionately in the programs that we have to help customers during that time and to give them sort of the flexibility and whether that's programs like you mentioned, Grace, that's potentially loan modifications for the small number who need that or other programs that we may have we feel like we are really well set up to do that. By the way, this is also a time where our 90% plus cosigner rate is critically important. And we know both numerically and we know anecdotally from our surveys, parents, loved ones expect to support their students during this time of transition. And that's a great answer for the student. That's also a great answer for us and for our shareholders. And so when you put all that together, no CEO of a credit-oriented company is ever gonna be dismissive of credit. We take it seriously and watch it like a hawk. But I think what we are seeing in the patterns sort of fits the comments that I've made and is certainly all baked into the that we have just provided you. Giuliano Bologna: Great. Thank you. Yes. Operator: We'll move next to Jon Arfstrom with RBC Capital Markets. Your line is open. Peter Graham: Thanks. Good afternoon. Giuliano Bologna: Good afternoon. Hey, Peter Graham: Question for you, Jonathan. Your comments on the EPS outlook I guess, obviously, the market can be pretty short-term focused and that initial reaction was pretty negative to the new model on your stock. But you framed up the strong EPS growth potential for '27. I think you'd mentioned high teens to low 20s potential for '27. In your prepared comments, Do you feel like you have high visibility on that for 2027? And does the visibility become a little more blurred beyond 2027? Or is it pretty clear to you in terms of what that runway could be? Caroline Latta: Yes, Jon. Jonathan Witter: I think the way that I would answer that is there are really a couple of things that in my mind have a disproportionate impact on our stock. Or on our performance. Obviously, broad macroeconomic environment and the impact that that has on credit you know, I'm not sure I or any other bank or consumer finance CEO is going to feel comfortable looking out more than kind of a twelve-month timeframe. But if you kind of look at the rest of our model I think it really comes down to do we realize the TAM opportunity, you know, that is in front of us? Are we successful at regaining the kind of efficiency ratio that Peter and I have both now talked about. And a little bit a choice we get to make, which is how which do we want to grow our bank balance sheet versus fund that business in other ways. I think we have done more disciplined work than probably many. And as as I can imagine on really understanding the TAM opportunity. And that's not to say that there is not risk there and that there won't be competition. But I think we understand what the market opportunity is going to be. And I think you know, we feel like it is a, you know, it is a real opportunity for us moving forward. I think, you know, I would say our expense management discipline speaks for itself. And I think, again, we get to make the decisions about the right way to business with the growth of our our bank balance sheet. And I think when you put those things together, we can't overlook the other uncertainties in our model, but I think those are all things that one can look at and assign their own sort of likelihood of success to. And I think those are really kind of the major drivers of our confidence in some of the comments that we've made about 2027 and beyond. Peter Graham: Okay, fair enough. Thank you very much. Operator: We'll move next to Melissa Weddle with JPMorgan. Kate deLacy: Melissa on for Richard Shane this today. Operator: Appreciate you taking our questions. First one would be around gain on sale margin. Kate deLacy: That looked like it came down a little bit versus prior sales that we've seen earlier this year. If you transition to sort of more of a combo approach to spot loan and transfer to strategic partners, how should we be thinking about that gain on sale margin and any volatility that we could see quarter to quarter in that Peter Graham: Yeah. I think that it's that's a good question. I think if you look at sort of a longer history of our execution on on these seasoned portfolio sales. Do you see a broader distribution than than what you've seen in the current year. I'd say over a longer period of time, if you kind of throw out the highest the highest ratios and throw out the lowest gain on sale ratios, you'd probably be kind of in a somewhere one zero six, one zero seven ish on average. In that context. I think there's also a timing within the year component to those sales. I think if you go back and look at the sort of quarterly sort of history of our portfolio sales. Those that are done in the first quarter tend to be at a higher premium than those that are done in the fourth quarter. For a variety of a variety of reasons. And so look, the portfolio sale that we did in the fourth quarter here was in the context of a broader strategic partnership but it also was part of a transaction that had a great deal of scrutiny around true sale and things being done at fair value. So it's well supported by sort of statistics on the portfolio itself and the environment in the fourth quarter. Operator: Thanks for that. Kate deLacy: I have one more follow-up question for you. And this is around the share repurchase authorization announced today. Operator: The time period on that was twenty-four months. The question is, given the investment you intend to make in the platform, Kate deLacy: in this next year in 2026, should we be thinking about that repurchase deployment possibly being a little bit back end loaded in 2027? Thank you. Peter Graham: Yeah. I think we've we've demonstrated over the last few years that we're going to be pretty disciplined and programmatic around share buyback. And we intend to operate that way with regard to this new authorization that we've been granted. We've got very strong capital at the bank and a strong earnings profile. We tend to set in place programs that will have kind of a targeted amount of buying and be in the market every day that the market is open. And then a bias towards buying more shares on days when the stock price is trending down and less on days when the stock price is trending up. That served us well in terms of deploying the last you know, authorization that we have and we intend to kind of continue to operate in that manner going forward. Giuliano Bologna: Thanks very much. Operator: And this concludes the Q and A portion of today's call. I would now like to turn the floor over to Mr. Jonathan Witter for closing remarks. Jonathan Witter: Chloe, thank you, and thank you for everyone who joined call tonight. Obviously, Peter and I on behalf of the entire company are proud and happy to talk to you about our 2025 performance. But I think even more importantly, hope you walk away tonight with a real sense of sort of how strongly we feel about our strategic positioning and what that means for 2026 and beyond. As always, the IR team is here to be helpful to you in whatever way they can. And we hope everyone has a great rest of the January and a great weekend. And thank you again for your time this evening. I'll now turn it over to Kate for some concluding business. Kate deLacy: Thanks, Jonathan. Thank you all for your time and questions today. A replay of this call and the presentation will be available on the Investors page at salliemaine.com. If you have any further questions, feel free to contact me directly. This concludes today's call. Operator: Thank you. This concludes today's SLM Corporation Fourth Quarter and Full Year 2025 Earnings Conference Call and Webcast. Please disconnect your line at this time, and have a wonderful evening.
Operator: Good day, everyone, and welcome to Intuitive Surgical, Inc.'s 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. You will then hear a message advising your hand is raised. To withdraw your question, simply press star 11 again. Please note this conference is being recorded. Now it's my pleasure to turn the call over to the Vice President of Investor Relations, Dan Connolly. Daniel Connally: Good afternoon, and welcome to Intuitive's fourth quarter earnings conference call. Joining me today are Dave Rosa, our CEO; and Jamie Samath, our CFO. Before we begin, I would like to remind you that comments on today's call may contain forward-looking statements. Actual results may differ materially from those expressed or implied as a result of certain risks and uncertainties. These risks and uncertainties are described in our Securities and Exchange Commission filings, including our most recent 10-K filed on January 31, 2025, and Form 10-Q filed on October 22, 2025. Our SEC filings can be found through our website at intuitive.com or at the SEC's website. Investors are cautioned not to place undue reliance on such forward-looking statements. Please note that this conference call will be available for audio replay on our website in the Events section under our Investor Relations page. We have posted today's press release and supplementary financial data tables to our website. Our format for this afternoon's earnings conference call is as follows: Dave will review business and operational highlights. Jamie will provide a review of our financial results and procedure highlights. I will review clinical highlights and discuss our updated financial outlook for 2026. And finally, we will host a question-and-answer session. With that, I will turn it over to Dave. David Rosa: Good afternoon, and thank you for joining us. I'll begin with summarizing our performance in 2025 and sharing our perspective as we enter 2026. 2025 was a strong year for Intuitive, driven by multispecialty da Vinci procedure growth across the globe, increasing adoption of da Vinci 5 and higher utilization across our 3 platforms. Physicians used our systems to treat more than 3.1 million patients in the year. Since the first procedure in 1997, more than 20 million patients have been treated using Intuitive platforms. While meaningful progress has been made in advancing minimally invasive care, we continue to believe we are in the early stages of this journey. We started 2025 with 4 strategic priorities: first, focusing on the full launch of da Vinci 5, its regional clearances and follow-on feature releases; second, pursuing increased adoption for our focused procedures by country through training, commercial activities and market access efforts; third, driving continued progress in building industrial scale, product quality and manufacturing optimization; and finally, focusing on excellence and availability of our digital tools. I was pleased with our progress across these priorities. In 2025, da Vinci procedures increased approximately 18% with multiport procedures growing 17% and single-port procedures growing 87%, combined with 51% Ion procedure growth, total procedures grew 19% for the year. In the U.S., da Vinci procedures increased 15% to more than 2 million, with notable contributions from general surgery procedures, including after-hours use. Internationally, da Vinci procedures increased by 23% to over 1.1 million. The growth rates were 21% in Europe, 24% in Asia and 27% in rest of world markets. As a result, procedures outside the U.S. accounted for roughly 35% of our global procedures, reflecting clinical demand, improved market access, broad training initiatives and supportive economics. Going forward, we will continue to invest in market access activities and local evidence generation to meet our customers' clinical and economic objectives. In 2025, global system utilization increased 3% across our da Vinci platforms. Multiport grew 3%; single-port, 29% and Ion, 9%. Turning to capital. We placed 1,721 da Vinci systems in 2025, including 870 da Vinci 5 systems and 107 SP systems and 195 Ion systems. Demand for da Vinci 5 strengthened throughout the year with customers responding to broader availability as we scaled manufacturing and increasing capability through subsequent software and product releases. In the U.S., we saw robust demand for system upgrades and dual-console systems, reflecting customer interest in standardization, training and mentoring. In the second half of the year, we launched da Vinci 5 in Europe, the U.K. and Japan. For the year, we placed 58 da Vinci 5 systems outside the U.S., mostly in Europe, and we are pleased with feedback from these early adopters. In 2025, we began offering refurbished da Vinci Xi systems as an integral part of our system strategy and placed 42 XiR systems in the year. Looking ahead, we believe there is a sizable long-term opportunity for our da Vinci XiR system and related economic programs to expand access to da Vinci surgery internationally and in U.S. ambulatory surgery centers. Financially, revenue grew 21% year-over-year to $10.1 billion. Operating margins of 37% reflected our deliberate investments in R&D and manufacturing scale as well as the impacts of tariffs and newer platform mix, cost efficiency initiatives helped to partially offset these pressures. Turning to our da Vinci platforms. Customer feedback remains positive as da Vinci 5 continues to expand to new indications and geographies. Surgeons highlight the benefits of greater autonomy and enhanced efficiency, reflected in the higher utilization trends we're seeing relative to Xi. Improved vision, Force Feedback capabilities and ongoing UI enhancements have also supported broad interest in da Vinci 5. We are excited to fully launch our Force Feedback instruments and work with customers to establish the clinical impact of Force Feedback at scale. This month, we received FDA clearance for several cardiac procedures on da Vinci 5 using non-Force Feedback instruments. Given the complexity of minimally invasive cardiac surgery, we are planning a measured rollout to support training, education and adoption. We believe deeply that patients requiring cardiac surgery can benefit from a minimally invasive approach with da Vinci and look forward to actively supporting our customers through these procedures. Over the past year, we released 2 software updates that improve surgeon awareness in the console, supported better intraoperative decision-making and established the foundation for future remote updates. In 2026, da Vinci 5 capabilities will continue to grow as we introduce additional products and features. My Intuitive+, our digital subscription package offered with da Vinci 5 includes simulation, telecollaboration and case insights and is designed to help customers understand their surgical performance, collaborate in real time and receive personalized training recommendations. Adoption of our Telepresence capabilities continues to increase, supported by recent software changes that enable surgeon-initiated scheduling. Surgeons are now able to more easily tap into the collective knowledge of the da Vinci community through real-time case observation, collaboration and mentoring. Increasingly, we are hearing from IDN executives that they value the ability to connect flagship hospitals within their broader network to provide consistent high-quality care to more patients. Our single-port platform continued to build operating and clinical momentum in 2025. Procedures grew 87%, driven by high rates of growth in Korea and the U.S. with accretive early growth in Europe, Japan and Taiwan. Our installed base increased by 39% to 377 systems. Since clearance in 2018, we have methodically added indications and capabilities to the platform. In Q4, we received 510(k) clearance for several additional indications, including nipple-sparing mastectomy, inguinal hernia repair, cholecystectomy and appendectomy. For NSM in particular, we plan a measured rollout to support education, training and adoption in 2026 and beyond. Feedback on our single-port stapler during its initial launch has been very positive and moving into broad launch this quarter, will support deeper penetration in thoracic and colorectal procedures. We have additional regulatory submissions planned for 2026, and we'll update you on our progress throughout the year. Turning to Ion. Worldwide procedures grew 51% to just over 144,000. Since FDA clearance in 2019, physicians have performed over 325,000 Ion procedures with a global installed base approaching 1,000 systems. In 2026, we remain focused on growing utilization of existing domestic systems and ensuring excellent early results in the international markets. We are committed to expanding capabilities of Ion, including our efforts in ROSE, our rapid on-site tissue evaluation technology and the integration of endobronchial ultrasound. We believe Ion with these capabilities will help minimize the time from detection to treatment as we work to improve the survival rate of lung cancer patients. As we enter 2026, our company priorities are as follows: first, the global expansion of our platforms, digital feature releases and ecosystem enhancements; second, increased adoption for our focused procedures by country through training, commercial activities and market access efforts; third, building industrial scale, product quality and manufacturing optimization; and finally, advancing innovation to reach more patients in current and new disease states. With that, I'll turn the time over to Jamie to take you through our business and finances in greater detail. Jamie Samath: Good afternoon. I will describe our performance on a non-GAAP or pro forma basis, and I will also summarize our GAAP results later in my remarks. A reconciliation between our pro forma and GAAP results is available on our website. To facilitate a deepening of understanding of the trends within our Ion business, we have added disclosures to the data tables posted on our website. All references to total procedures and their related growth rates include da Vinci and Ion procedures taken together. Q4 and 2025 revenue procedures and system placements are in line with our preliminary press release on January 14. I will briefly review full year 2025 performance before describing our Q4 results in greater detail. 2025 financial performance was strong. Total procedures grew 19% and total revenue grew 21%. Despite the impact of tariffs, pro forma operating margin improved approximately 70 basis points to 37% for the year. Given the strong financial performance, 2025 pro forma EPS increased 22%, marking the third consecutive year of pro forma EPS growth above 20%. Consistent with our financial objectives for 2024, we saw a significant increase in free cash flow to $2.5 billion, up from free cash flow of $1.3 billion in 2024, driven by increased profitability and lower capital expenditures. During the year, we repurchased $2.3 billion of Intuitive's stock at an average price of $478 per share. Turning to Q4. Total procedure growth was 18%, driven by general surgery in the U.S. and broad-based growth in OUS markets. In quarter 4, revenue grew 19% to $2.87 billion with recurring revenue higher by 20% to $2.3 billion, accounting for 81% of total revenue. On a constant currency basis, revenue growth was 18%. Pro forma operating margin was 37%, which included an impact of approximately 95 basis points from tariffs and a $70 million contribution to the Intuitive Foundation. The strength of our financial results reflected continuing global expansion and procedure adoption of our da Vinci 5, Ion and SP platforms. For our da Vinci business, procedures grew 17%, the installed base of da Vinci systems increased by 12% to just over 11,100 systems and average system utilization increased by 4%. For our Ion platform, we continue to see robust clinical growth with procedures increasing 44%, the installed base up by 24% to just under 1,000 systems and average system utilization increasing by 11%. In the U.S., total procedures increased 16%, reflecting 15% growth in da Vinci procedures and 41% growth in Ion procedures. da Vinci procedures performed after hours, a proxy for acute care, increased by 35% in Q4, primarily driven by cholecystectomy and appendectomy procedures and reflects our support for customers who are expanding access to da Vinci surgery. da Vinci utilization in the U.S. increased 3% in Q4, driven by continued adoption of da Vinci 5, where customers are leveraging the system's efficiency advantages to increase cases performed per day. Over the past few years, our customers have increased their efforts to distribute surgeries across different sites of care from hospitals to hospital outpatient departments to ambulatory surgery centers or ASCs. Minimally invasive surgery has helped enable this shift. As this occurs, we have increased our efforts to expand our footprint in ASCs, which we expect to be a multiyear effort. Our initiative currently leverages our XiR system and its associated ecosystem with economic and capital acquisition offerings we believe are well suited to meet the clinical and financial needs of this environment. Not all ASCs run at the same volume, but with the same mix of procedures and we have started our efforts focused on higher-volume ASCs that can sustain a robotic program. Approximately 70% of the ASC procedure opportunity is in ASCs affiliated with our existing IDN customers where a number of surgeons are already da Vinci trained. In addition, we actively support customers that upgrade to da Vinci 5 in their efforts to slide their existing Xi to the HOPD or ASC setting. Outside the U.S., in quarter 4, total procedures grew 22% and on a day-adjusted basis, total OUS procedure growth was 23%. da Vinci procedures grew 21% in OUS markets, reflecting strong results in Canada, India, Korea and distributor markets and solid growth in Germany, the U.K., Italy, Spain and Taiwan. Consistent with the last quarter, procedure growth in Japan was a little lower than our expectations, reflecting lower capital placements over the last several quarters. The Japanese Ministry of Health, Labour and Welfare is currently in the final stages of evaluating granting reimbursement for additional robotic procedures starting in June of 2026. We will provide an update on the outcome on our next earnings call. Taking OUS markets combined, benign general surgery procedures increased 27%, driven by cholecystectomy and hernia repair. Globally, we continue to see strong procedure growth for our SP platform at 78% for Q4 with strength in Korea and continuing strong early-stage growth in Europe, Japan and Taiwan. In the U.S., SP average system utilization accelerated, growing 21% as compared to quarter 4 of last year. We also see encouraging initial growth in thoracic procedures following clearance in 2024 and positive customer feedback on the limited launch of our SP stapler. As a result of our clinical performance, total I&A revenue in quarter 4 grew 17% to $1.7 billion, relatively consistent with overall procedure growth. da Vinci I&A revenue per procedure was approximately $1,850 compared to $1,860 last year, primarily driven by customer ordering patterns. We also continue to see downward pressure from lower bariatric procedures and higher cholecystectomy procedures, offset by higher SP procedures and da Vinci 5-specific I&A. For our Ion platform, I&A revenue per procedure was approximately $2,200, relatively consistent with prior periods. Turning to capital performance and starting with our da Vinci business, we placed 532 da Vinci systems in quarter 4, an 8% increase from the 493 systems placed in the same quarter last year. 303 of the 532 placements were da Vinci 5, including 43 in OUS markets following recent clearances in Europe and Japan. The installed base of da Vinci systems is now 1,232 systems, used by over 10,000 surgeons since the launch of da Vinci 5. We saw 146 trade-in transactions in Q4, up from 62 a year ago, primarily driven by U.S. customers upgrading to da Vinci 5. In the U.S., we placed 304 systems, up from 204 -- 284 last year driven by adoption of da Vinci 5. Outside the U.S., we placed 228 systems compared to 209 last year. OUS placements included 118 in Europe, 40 in Japan and 17 in China compared to 89, 43 and 20, respectively, last year. We continue to see government budget challenges in Japan and the U.K. and robotic competition in China intensified in Q4, where we saw provincial tenders express preference for local suppliers and lower pricing impacting our win ratio in the quarter. Within the 532 da Vinci placements, we placed 35 SP systems in Q4, higher than the 30 systems last year, driven primarily by OUS markets. For our Ion platform, we placed 42 systems in Q4 compared to 69 systems last year, including 6 systems placed in OUS markets. Lower Ion placements in the U.S. continue to reflect a joint focus with our customers on increasing utilization in the U.S. increased by 11% in Q4. Given our capital performance, quarter 4 systems revenue grew 20% to $786 million. For our da Vinci business, leasing represented 47% of da Vinci placements, as compared to 54% last quarter and 45% last year, driven by the mix of customers who prefer to purchase. However, over time, we continue to expect the proportion of systems placed under operating lease arrangements to increase, primarily driven by OUS customers. da Vinci leasing revenue increased 34%, reflecting a 15% expansion of the installed base under operating lease arrangements and a 13% increase in lease revenue per system driven by a higher mix of da Vinci 5 systems. The average selling price for purchased da Vinci systems was $1.68 million in Q4 as compared to $1.6 million last year, driven by a higher mix of da Vinci 5 systems and a higher mix of dual-console systems, partially offset by higher trade-ins. Lease buyout revenue was $39 million as compared to $22 million last quarter and $28 million last year. Quarter 4 service revenue increased 21% to $422 million, reflecting an increase of the da Vinci installed base of 12% and the Ion installed base of 24%. Service revenue per system for our da Vinci installed base increased 7% year-over-year, primarily reflecting a higher mix of da Vinci 5 systems. Turning now to the rest of the P&L. Pro forma gross margin for the quarter was 67.8%, down from 69.5% in Q4 of last year. The year-over-year decline reflects a 95-basis-point impact from tariffs, higher facility costs, a greater mix of lower-margin da Vinci 5 and Ion revenue and higher service costs related to da Vinci 5, partially offset by product cost reductions and purchase component savings. Quarter 4 pro forma operating expenses increased 16% year-over-year driven by a $70 million donation to the Intuitive Foundation, increased head count, higher variable compensation costs and increased facility costs, partially offset by lower legal expenses. We added approximately 200 employees during the quarter, primarily in our core commercial and engineering functions. The increased donation to the Intuitive Foundation as compared to the $45 million donated in quarter 4 of last year reflects our decision to make a multiyear donation given the impact of new U.S. tax rules effective in 2026. With respect to our plans to go direct in Italy, Spain and Portugal, we currently expect to close by the end of Q1, resulting in the transfer of approximately 250 employees. Pro forma other income was $86 million for the quarter as compared to $93 million last quarter, reflecting lower interest income. Our pro forma effective tax rate for quarter 4 was 20.6%, slightly below our expectations, driven by $11 million in net discrete benefits primarily related to releases of tax reserves due to statute of limitation expirations and other various adjustments to our tax reserves. Pro forma net income for the fourth quarter was $914 million, compared with $805 million last year. Pro forma earnings per share was $2.53 per share as compared to $2.21 per share in quarter 4 of last year. Now turning to our GAAP results. GAAP net income for the quarter was $795 million or $2.21 per share compared to $686 million or $1.88 per share in Q4 of last year. The differences between our pro forma and GAAP results are outlined and quantified on our website. We ended the year with $9 billion in cash and investments, up from $8.4 billion last quarter driven primarily by cash from operations, partially offset by stock repurchases of $201 million and capital expenditures of $155 million. With that, I'll turn it over to Dan to discuss recent clinical publications and our outlook for 2026. Daniel Connally: Thank you, Jamie. Turning to the clinical side of our business. I'd like to share with you data from recent studies that we found to be notable. In addition to the specific data highlighted on this call, we encourage you to consider the wide body of evidence detailing these topics and others in published scientific studies over the years. This past November, Dr. Antonio Gangemi of ALMA MATER STUDIORUM, Universita di Bologna in Bologna, Italy, along with co-authors published, the CONVERSION Study: Open Conversion Risk in Robotic vs Laparoscopic Surgery-A 20-Year Meta-analysis in the annals of surgery. Through a meta-analysis of literature from 30 different countries, the study compared conversion rates to open surgery for da Vinci and laparoscopic procedures, including abdominal wall and inguinal hernia repairs, gastrectomy, cholecystectomy and rectal resections. The study included over 200,000 patients treated with da Vinci and over 1.3 million patients treated laparoscopically. The results demonstrated that patients undergoing robotic-assisted surgery were approximately 50% less likely to experience a conversion to open surgery than patients undergoing a laparoscopic procedure, with similar results across randomized controlled studies, prospective studies and retrospective study types. The authors hypothesized that technical advantages of robotic-assisted systems, specifically wristed instruments with 7 degrees of freedom, 3D high-definition visualization and physiological tremor filtration were potential explanatory factors for the results. The authors concluded "This meta analysis, which spans over 20 years of peer-reviewed literature and includes 14 oncological and nononcological surgeries across general surgery and related specialties suggests that robotic-assisted surgery offers a reduced risk of open conversion compared to laparoscopy. These findings may inform decision-makers considering the adoption of robotic-assisted surgery in general surgery and associated specialties." This past November, Dr. Nadia Henriksen from Bispebjerg Hospital in Copenhagen, Denmark published Procedural Costs of Robot-Assisted and Laparoscopic Ventral and Incisional Hernia Repair. A Propensity-Score Matched Nationwide Database Study in the Journal of Abdominal Wall Surgery. Using data from the Danish Hernia Database, which includes all hernia repairs performed in Denmark, the authors compared subjects undergoing elective primary ventral hernia repair or incisional hernia repair via the robotic-assisted approach or the laparoscopic approach from January 2017 to December 2022. After 1:1 propensity score matching with 554 patients in each of the robotic-assisted and laparoscopic arms, study results showed a significantly shorter length of stay for robotic-assisted procedures at 0.5 days versus 1.2 days for the laparoscopic group as well as a 44% reduction in the readmission rate for robotic-assisted procedures compared to the laparoscopic group. Comparing costs, the mean total perioperative cost of robotic-assisted procedures was significantly lower than laparoscopic procedures with a EUR 660 difference in total costs between approaches. For robotic primary ventral hernia repair, multivariate regression analysis further confirmed independent association with decreased overall costs. The authors concluded "While the cost of the robotic surgical equipment surpassed that of conventional laparoscopy, it is offset by the need of more expensive meshes and tacker devices and higher readmission rates following the laparoscopic approach. This nationwide database study showed that for primary ventral hernias, the mean procedural costs of a robot-assisted and laparoscopic repair are comparable, but for incisional hernia repairs the mean procedural cost is decreased with a robot-assisted approach." I will now turn to our financial outlook for 2026. Starting with da Vinci procedures. As detailed in our announcement earlier this month, 2025 total da Vinci procedures grew approximately 18% year-over-year to more than 3.1 million procedures performed worldwide. For 2026, we anticipate full year da Vinci procedure growth within a range of 13% and 15%. We anticipate primary growth drivers in 2026 to be generally consistent with those in 2025, including general surgery in the U.S. and procedures outside of urology internationally. This range considers the potential impact of changes to ACA premium subsidies and Medicaid funding on hospital and patient behavior in the U.S.; capital pressure in parts of Europe related to macroeconomic impact and shifting governmental priorities; China tender volumes and competitive intensity in that market; recent capital challenges in Japan, how long those persist in 2026 and any related impact on procedures and new pharmaceutical products for obesity management. Turning to gross profit. In 2025, our pro forma gross profit margin was 67.6%. In 2026, we expect our pro forma gross profit margin to be within the range of 67% and 68% of net revenue. This year, we forecast an impact from tariffs of 1.2% of net revenue, plus or minus 10 basis points. Other factors impacting the projected pro forma gross profit margin guidance include faster growth of newer products in da Vinci 5 and Ion, modest incremental depreciation from recent facility expansion and the impact from higher da Vinci system upgrades, partially offset by cost reductions. Our actual gross profit margin will vary quarter-to-quarter depending largely on product, regional and trade-in mix and pricing. Turning to operating expenses. In 2025, our pro forma operating expenses grew 12%. In 2026, we expect pro forma operating expense growth to be within a range of 11% and 15% due to higher spending in support of advancing early-stage R&D programs as well as incremental expenses associated with our distributor acquisition. We estimate noncash stock compensation expense between $890 million and $920 million. We forecast other income, which is comprised mostly of interest income, to total between $355 million and $375 million. At this time, given our expectation that capital expenditures will return to more normalized levels, we are no longer providing specific capital expenditure guidance. With regard to income tax, in 2025, our pro forma income tax rate was approximately 21%. As we look forward, we estimate our 2026 pro forma income tax rate to be within a range of 22% and 23% of pretax income. That concludes our prepared remarks. We will now open the call to your questions. Operator: [Operator Instructions] One moment for our first question, please. It comes from the line of Travis Steed with Bank of America. Travis Steed: First, I wanted to ask about the FDA approval for the cardiac non-Force Feedback instruments. Just trying to get a little more color on what that is and what it opens up. When I was looking at your 2026 priorities that you mentioned you added new disease states. So if you could elaborate on that, if that's cardiac or there's more there? David Rosa: Sure. Travis, thank you for the question. I'll start maybe with some framing around cardiac and the work we're doing, and then Jamie can follow up a bit. And so you know, we've been supporting cardiac surgery for decades and have a good understanding of what cardiac programs need to do to be successful and have great patient outcomes. And so there are some foundational aspects that we're working on today. Those include the clearances on the platform, on dV5 in certain geographies, we just received the U.S. clearance, we're working through approval in Europe and several other countries. Part of those indications as well will include Force Feedback instruments. And so cardiac surgery is a wide variety of procedures with a wide variety of tasks. And we do think that Force Feedback can have some benefit in certain parts of certain procedures. And so the initial clearance here, I think incorporates our entire portfolio of non-Force Feedback instruments and has value today for cardiac procedures. And again, we'll work to add Force Feedback in time through the regulatory pathway. We are also developing training pathways to support. It's a unique pathway through to learn the cardiac robotic surgery business, if you will, for minimally invasive approaches with da Vinci. And so we're investing there. We are developing cardiac-specific instrumentation, including Force Feedback, some accessories and tuning some of the digital tools we have, those will be multiyear efforts to bring all of those to the market. And then finally worked with surgical societies. It's an important aspect of, I think, doing this well for training and other parts that they are helping to develop. And so that lays this kind of foundation, if you will, for the beginning -- for this cardiac journey that we're on, particularly with dV5. And so maybe, Jamie... Jamie Samath: Yes. Travis, I'll just give some numbers maybe for grounding. So in '25 globally, there were about 17,000 cardiac procedures performed, that's on Si and Xi. That business has been growing for multiples of years but obviously, from a small base. The growth in recent years, including '25 was accretive to the corporate average. While obviously, the cardiac TAM is really quite large, when we do our clinical analysis, when we look at where cardiac is cleared for da Vinci 5, which currently is now the U.S. and Korea, we think the opportunity from a da Vinci 5 perspective or a robotic perspective is about 160,000 procedures per year. And obviously, that has the opportunity to expand if and as we add additional geographies. Travis Steed: Great. That's really helpful. And you've talked a lot on advanced imaging. Just curious how you think about incorporating these additional advanced imaging features into the robotic ecosystem? Did you leverage the existing hardware? Or is there a new hardware? How do you think about recognizing the value of the -- that you're providing to customers? Is it just deeper penetration? Or is there a potential for new revenue streams? Just want to try to understand like how some of this imaging stuff could come into the business in a more detailed way. David Rosa: Yes, Travis, some of the advanced imaging capabilities that we've talked about are additional molecules that we're working on, and those are long time lines that will add to the fluorescence imaging capability of the system. Those molecules will have revenue streams attached to them. We recently have talked about kind of a form of hyperspectral imaging that shows tissue oxygenation. That is going to be a capability of the system that requires some new software and some tuning of some of our hardware. All of those are pointed at trying to give more information to the surgeon and to the system where we're able to add perhaps some AI layers to it, but really with the intent of improving -- ultimately improving outcomes, be it in prostate cancer or ureteral injuries or perhaps in areas of surgery where perfusion, which is where the tissue oxygenation is pointed, can make a difference in outcomes. Operator: One moment for our first question, please. And it comes from the line of Larry Biegelsen with Wells Fargo. Larry Biegelsen: I wanted to start with the ASC commentary. Dave, I'd love to hear you expand on your comments about expanding your footprint in ASCs. How large is the ASC opportunity for your focused procedures today? And what are those key procedures moving to the ASC? And what do you need to do to unlock the opportunity? And I did have one follow-on. David Rosa: Yes. Maybe, Larry, I'll start, just kind of -- I always try to start with the problem we're solving or what the customer needs are. And I'm going to start there and then Jamie can jump in on some of the numbers here. If I -- when I meet with ASC leaders and when they're wanting to say, I want to establish a soft tissue program within one or more of our ASCs, really what they're looking for are repeatable, high-quality clinical outcomes, technology systems that work every day and operating infrastructure, training, supply chain, reprocessing, those sorts of things that is routine and easily accessible. And all of that has to fit into an economic structure that works for the reimbursement levels of that particular ASC. And so when I look at what we have in our current portfolio of systems, including now XiR, the broader ecosystem of all the other products in training and services, that is well positioned to serve the needs that we're hearing from our customers. The procedures that are generally within that environment are the ones that you know, cholecystectomy, hernia repairs, benign GYN. It oftentimes is the lower-acuity procedures where the volume and the repeatability can be managed in the ASC environment. Jamie Samath: I'd just say, Larry, in terms of numbers today, it's a relatively small proportion of U.S. procedures done, but we do see it growing at an accretive rate. I think those trends have been talked about just broadly. Most of our commentary today reflects what we've heard from customers. I think that in part reflects desire of payers to take advantage of the lower reimbursement in the ASC setting. And for us now, with the launch of da Vinci 5, the trade-in cycle has commenced, and we get the Xi back and we can refurbish them. We think the XiR in combination with our instrument portfolio is well positioned for that setting as procedures grow in ASCs. Larry Biegelsen: That's super helpful. Jamie, how should we think about utilization in 2026 and system ASPs in 2026 after we saw strong growth in 2025? Do the refurbished Xis put some downward pressure on the ASPs and the move into the ASCs maybe put some downward pressure on utilization? Jamie Samath: Yes. I'd just say, if you look at the last couple of quarters, in each case, we saw overall da Vinci utilization grow 4%. We think that's a healthy level, but we're not ready to predict what that will be in '26. For the presence that we already have in ASCs because we've been focused primarily with our existing IDN customers and we've looked for programs that have strong soft tissue surgery volumes that can support a robotics program, the existing utilization that we have in ASCs is actually pretty good. And I think economically, then, obviously, that works for them. On system ASPs, I'm not going to predict what the overall '26 direction will be. Obviously, we don't guide capital. I'd just say you should expect a higher da Vinci 5 mix in '26 versus '25. That reflects, of course, the fact that we have, in part, new geographies cleared with da Vinci 5. You should also expect a higher mix of XiR, that's going to be ASPs that are quite a bit below where Xi is today, but we haven't said yet what the XiR price range is likely to be, and I would expect higher trade-ins. And so there's a set of offsetting mix dynamics there that, frankly, we'll let you model. I'd just also say in terms of system ASPs, of course, that is only on systems purchased, which roughly is about half of the system placements today. Operator: One moment for our next question. And it comes from the line of Robbie Marcus with JPMorgan. Robert Marcus: Congratulations again on a great quarter. Jamie, you touched on this a little bit, but I was hoping you could give a little more color into the gross margin and OpEx assumptions. There's obviously a lot of moving pieces under the hood, wondering if you could tease out some of them as we think about how XiR ramps and impacts positively or negatively margins and trade-ins. And then what's assumed at the high and the low end of the OpEx expense? And I have a follow-up. Jamie Samath: Yes. With respect to gross margin, there's actually a number of dynamics. You have the higher trade-ins that we just described. You have a higher mix of da Vinci 5 that's not yet at target product costs. The procedure guidance is reflected in that gross margin range. We also have had for a couple of years now, kind of post-COVID recovery, a number of product cost reduction efforts that had a growing impact within what you see in gross margin. In '25, you saw the impact of all the new facilities with incremental depreciation of facility costs, and that starts to -- start to get leveraged in '26. And so there's a set of offsetting dynamics there in gross margin, the kind of net to the guidance that we provided, which effectively is flattish. I would highlight again, we have 120 basis points of tariffs reflected in the '26 guidance that was about 65 basis points in '25. So an incremental 50-ish basis points from tariffs. With respect to XiR, like I said, we expect the pricing to be lower than currently what you pay for a new Xi, but the margins are relatively healthy on XiR. Robert Marcus: Great. Appreciate that. And a quick follow-up. You mentioned increased pricing competition in China. I saw there were a new reimbursement program put out, some helps favor local competition. I was wondering if you could just comment on how you think about your position in China and your ability to continue to win there. And also, if you have any update on the latest tender. David Rosa: Yes. I might start. So just to answer that question specifically, around the local robotic competitors that are in China, many -- as you know, many of the architectures are very similar to Xi. And over time, there are instances where they may be favored by home provinces. And certainly, over the past several quarters, the number of robotic companies in China have been increasing. And as a result, what you see is that pricing has become even more intense as tenders are published and competed for. So given that sort of environment, you look at how are we competing, and that's with an Xi system. We're manufacturing it locally. We have a very strong team in China. And so feel very good about how we're positioned with our system, our team, a broader ecosystem to compete in China with those local robotic companies that are increasingly coming to market. And we believe we can do so at a price point that is healthy for them and healthy for us and can do -- and can effectively compete on price where we want to and where it matters. Jamie Samath: Robbie, I'd just add. There's about 273 systems left in the current quota. And I would just say, as we said in the prepared remarks, the tender win ratio was lower in Q4. If you look at 2025 as a whole, it was slightly higher than the prior year. And obviously, as Dave described our ability to compete. I think I missed, Robbie, your question on OpEx. So I would just say in the 11% to 15% range, it does reflect the impact of going direct in Italy, Spain and Portugal but the range mostly is in relation to the procedure range. Operator: Our next question comes from the line of Rick Wise with Stifel. Frederick Wise: Dave, I was reflecting on your comment, your words, if I'm quoting you accurately, you said you still see Intuitive as being in the early stages of your journey. I mean that's similar language I've heard from Intuitive for years. And I was reflecting on it in the context of a slide you posted during the JPMorgan conference a couple of weeks ago. About 9 million procedures in direct line of sight. I went back and looked at '24 and you all said 7 million at the time. That's nearly a 30% increase in procedures in direct line of sight. And I just wondered -- I'm guessing maybe the cardiac opportunity, is that part of it? Is it the ambulatory surgery opportunity? Is it something instrument specific? Just -- I was hoping you would just reflect on that with me and us and maybe unpack that a little bit. David Rosa: Thank you for the question. And maybe I'll comment on the early part of the journey, at least as I meant it with my words, and then Dan and Jamie can jump in. When I think about the journey with the ultimate destination, really improving outcomes substantially, eliminating complications to the extent that we possibly can. And you choose a procedure today and there's still variability. There are still poor outcomes for a given set of patients even in the very best of hands with the very best of technology. And so that's when I think about the journey, it's the journey of impacting patients meaningfully and more than we even have today. With respect to the line-of-sight procedures and the growth and how that has increased over the years, maybe I'll look to Dan. Daniel Connally: Yes, Rick, 2024, 7 million; '25, 8 million; '26, 9 million. I'd say primarily strengthening clinical validation and supportive economics and benign procedures kind of the largest impact, also saw a modest impact from additional procedure clearances like nipple-sparing mastectomy of SP in the U.S. And then lastly, contributing as well kind of demographic impact from an aging population. So generally consistent with prior increases and the factors underneath that generally consistent as well. Frederick Wise: Okay. And just a quick follow-up. Dave, you also highlighted digital subscription. And I'm just not sure if I've personally, maybe I've missed it, heard that language, it sounds like a positive economic factor and something potentially incremental. Again, could you just expand on your comments and what it might mean to the growth outlook or adoption of da Vinci 5, et cetera? Jamie Samath: Yes, I'll take that, Rick. So David was referring to MIA+, which comes with da Vinci 5, it incorporates Telepresence, integrated skill simulation and case insights. When we launched da Vinci 5, that package came with 1-year free use for customers. We actually did a significant software update in Q2 of last year. And so we extended that free period for customers. Technically, what happened when we did that was a portion of the system purchase price got carved out of systems revenue and deferred and put into service revenue over time, it's just the way the accounting rules work. Come Q2-ish of '26, then customers now have the opportunity to renew for that subscription package where they'll now have to pay. And in the end, then the value that surgeons and the customers are experiencing with that package would determine both what is the renewal rate and what is the ASP that we realize. With respect to the case insights portion of that package, we've got good early customer feedback. I think we have some work to do to continue to refine and enhance the capability there. And I think we see long-term value in what that could ultimately do. It also has quite a bit of synergy with Force Feedback, which has not been in full supply. And so as we get that into full supply later this year, you then get to kind of see the impact of Force more clearly in the case insights reporting that gets done. And so there is then some invoicing that we'll do for customers that renew and that starts to get reflected in revenue. Operator: Our next question comes from the line of David Roman with Goldman Sachs. David Roman: I wanted to maybe come back to SP, and it seems like the second half of 2025 represented at least in the U.S., the potential of putting in place the dynamics you need to really see an inflection in growth in both SP placements as well as associated procedures. As you kind of look at the portfolio and indications you have entering 2026, is there anything left either from a technology standpoint, maybe a vessel sealer that you think would be necessary to really unlock the opportunity? And how you're thinking about the SP strategy now that you have a more full portfolio of instruments as well as indications? And I have one follow-up. Daniel Connally: Thanks, David. It's Dan. I think, broadly, very encouraged by the response to the technology and the procedure growth rates that we've seen here recently. Looking to continue to build the platform internationally, we're still relatively early, Europe, Japan and Taiwan. And then in the U.S. with recent clearances, colorectal, thoracic and NSM indications as well. You mentioned on instrumentation, we do need to continue development of the vessel sealer device, add that clearance and then add stapler clearances globally. I think we're encouraged by the early feedback from initial launch on SP stapler in thoracic and colorectal and excited to bring that forward more fully. And I'd say, over time, we've also got the opportunity to take SP to additional geographies as well. David Roman: Okay. And then maybe on the guidance, I think you talked about reflecting some of the risk around macro pressures, whether those are hospital purchasing on Medicaid cuts or potential changes in utilization associated with the exchange subsidies expiring. Maybe could you just help us understand how you saw these dynamics play out through the back half of 2025? I know, in Q3, you talked about the potential of some pull forward of procedure volumes, what you saw kind of exiting the year and how you're kind of observing trends here early in January. Daniel Connally: Yes. No specific comment on kind of early trend in January, but I'd say over Q4, do not have any evidence either way from an impact, but we haven't heard that from customers at all. I know we spoke about that potentially in Q3 related to some intra-quarter dynamics there, but have not heard that from customers more broadly recently. Operator: And our last question comes from the line of Patrick Wood with Morgan Stanley. Patrick Wood: Beautiful. I guess, conceptually, thinking medium term into the future, how do you guys think about new form factors and cost competition? We've talked about lower acuity cases and going down. Is the solution here in your mind, like a lower-end form factor? Or do we stick with refurbished systems? Or is it the case that you think you can get to the point where speed and innovation is getting us faster than LAP with a lower cost curve than LAP and that's the solution to the lower acuity. So is it a lower form factor? Or is it getting the tech to the point where automation and speed is just better than LAP anyway? David Rosa: Yes. It's an interesting question. And I will turn it back around to the problem to be solved. And I think it varies depending on where you look. And so if you're in a complex cancer procedure where you're trying to move the needle on, let's say, cancer margins, it's going to require a different solution set than if you're looking for routine use in an ambulatory setting that is working on a very different set of procedures. And so I think we don't have enough time to look through each one of those areas where customers are trying to work in particular. If we focus on, let's say, the ASC setting, I'd go back to what we described before and say, what is required there is great clinical outcomes, routine use, repeatable use, reliability, those parts, the needs there that exist, I think, are really well served by the existing ecosystem that we have today. Can it be optimized through new platform development or some other tweaks within the ecosystem? Maybe. We'd have to go see and see what that looks like. But today, I think what we have can serve the complex portion of the procedures customers are trying to do as well as these lower acuity, higher volume ones. Jamie Samath: Patrick, I'd just add that I think segmentation can be important depending on the IDN and you can segment by using dV5 across a broad set of procedures that can do cancer and whatever other procedures that are done in the hospital. But you can also segment by a HOPD or by an ASC. And where we are today, we have the portfolio to do that. I think we have confidence in that. Of course, things change over time, and I think that's part of our strat planning, and we wouldn't comment on how we might further develop that just yet. David Rosa: Okay. That was our last question. Thank you for the questions. In closing, we continue to believe there's a substantial and durable opportunity to fundamentally improve surgery and acute interventions. Our teams continue to work closely with hospitals, physicians and care teams in pursuit of what our customers have termed the Quintuple Aim, better and more predictable patient outcomes, better experiences for patients, better experiences for their care teams, lower total cost of care and finally, increased access to care. We believe value creation in surgery and acute care is foundationally human. It flows from respect for and understanding of patients and care teams and their needs and their environment. At Intuitive, we envision a future of care that is less invasive and profoundly better, where diseases are identified earlier and treated quickly so patients can get back to what matters most. Thank you for your support on this extraordinary journey. We look forward to talking with you again in 3 months. Operator: And this concludes today's conference. Thank you all for participating, and you may now disconnect.
Operator: Good day. Welcome to the East West Bancorp's Fourth Quarter 2025 Earnings Call. Participants will be in a listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Adrienne Atkinson, Director of Investor Relations. Please go ahead. Adrienne Atkinson: Thank you, operator. Good afternoon. Thank you everyone for joining us to review East West Bancorp's Fourth Quarter and full year 2025 financial results. With me are Dominic Ng, Chairman and Chief Executive Officer, Christopher Del Moral-Niles, Chief Financial Officer, and Irene Oh, our Chief Risk Officer. This call is being recorded and will be available on our Investor Relations website. The slide deck referenced during this call is available on our Investor Relations site. Management may make projections or other forward-looking statements which may differ materially from the actual results due to a number of risks and uncertainties. Management may discuss non-GAAP financial measures. For a more detailed description of the risk factors, and the reconciliation of GAAP to non-GAAP financial measures, please refer to our filings with the Securities and Exchange Commission, including the Form 8-Ks filed today. I will now turn the call over to Dominic. Dominic Ng: Thank you, Adrienne. 2025 was another record-breaking year for East West Bancorp, Inc. Highlights include new full-year record levels for multiple categories including revenue, net interest income, fees, non-interest income, earnings per share, loans, and deposits. Again, every one of the above-mentioned categories reached record levels. The strength of our financial results reflects how our business model is designed to deliver meaningful values to clients, especially during periods of uncertainty when our ability to navigate challenging landscapes matters most. We grew end-of-period deposits by 6% year-over-year with significant traction in both non-interest-bearing and time deposits. We also grew end-of-period loans by 6% with growth in C&I and residential mortgage lending leading the way. 2025 was also another consecutive year of record fee income driven in part by consistent sales execution across all of our fee-based businesses. This balance sheet growth combined with our fee income growth and ability to grow our customer base have collectively strengthened the durability of our business model and delivered substantial returns for shareholders. As a result, in 2025, we reported tangible book value per share growth of 17% and generated a 17% return on tangible common equity. I am also pleased to announce our Board declared a $0.20 increase to the quarterly dividend up to $0.80 per share or 33%. We remain committed to disciplined capital management and delivery of top-tier returns for shareholders via prudent growth, moving efficiency, and robust risk management. Now let me turn it to Chris for more details on the balance sheet and income statement. Christopher Del Moral-Niles: Thank you, Dominic. Let me start with deposits on Slide four. East West Bancorp, Inc. continued to differentiate itself via core deposit growth in 2025. This deposit growth allowed us to fund our full-year loan growth while also bolstering our balance sheet liquidity. In 2025, we prioritized deposit growth through a dedicated business checking campaign that delivered strong results. We plan to maintain this focused strategy in 2026 to further expand our deposit base. During the fourth quarter, DDA levels improved by 1% to 25% of total deposits and inflection points. In 2026, we expect continued strong core customer deposit growth. Turning to loans on Slide five. East West Bancorp, Inc. grew end-of-period loans in line with our prior guidance. And total average loans by 4% for the year. Also within our guidance range led by C&I growth. C&I growth in Q4 was driven primarily by new relationships and with encouraging growth across many sectors. Our pipeline suggests that C&I will continue to lead our growth in lending for 2026. Residential mortgage also had a good quarter in the fourth quarter. And the pipelines there remain full going into the first quarter. We expect residential mortgage to be a consistent contributor to our growth at its current pace. Looking ahead, we expect total loan growth to be in the range of 5% to 7% for the year. Driven by continued strength in C&I and residential mortgage production. Leading to an increasingly diversified and balanced loan portfolio. Switching now to net interest income and margin trends. On Slide six. Fourth quarter net interest income was $658 million reflecting the benefit of our short-term liability sensitivity over the near term, in a quarter with two interest rate cuts, balance sheet growth, and favorable deposit mix shifts. We continue to proactively reduce our deposit costs driving period-end cost of deposits down a further 23 basis points quarter over quarter. Looking back to the start of this cutting cycle, we have lowered our interest-bearing deposit costs by 105 basis points against the backdrop of 175 basis points Fed cuts in their target rates. Achieving a down cycle beta of 0.6 while growing our total deposit base by nearly $4 billion over the course of the year. Looking ahead to 2026, we expect net interest income growth to be in the range of 5% to 7% aligned with and driven by our expected balance sheet growth. Outweighing our modestly otherwise asset-sensitive position. Our outlook assumes three cuts of 75 basis points occurring over the course of 2026, resulting in a gradually steepening yield curve as implied by the year-end forwards. Moving on to fees on Slide seven. In 2025, fee income grew by a robust 12%. As Dominic mentioned, we achieved record fee income levels in 2025. Our performance over the past year was driven by sustained quality execution across wealth management, derivatives, foreign exchange, deposit fees, and lending fees. Our continued investments in our global treasury group have yielded strong traction in treasury management activity. Wealth management fee growth over the past year was supported by the hires of financial consultants and licensed bankers to capitalize on opportunities in the marketplace. Ongoing hiring is further reflected in our 2026 outlooks, along with incremental fees, and some expense growth. East West Bancorp, Inc. has been consistently growing fee income at double digits and we remain focused on driving similar growth as we look into 2026. Now let me turn to expenses on Slide eight. East West Bancorp, Inc. continues to deliver industry-leading efficiency. The fourth quarter efficiency ratio was 34.5%. In 2025, total operating non-expense grew 7.5% as we invested in the expertise, systems, and technology necessary to support our continued and ongoing growth. As we look forward to 2026, we total operating non-interest expense is expected to grow in the range of seven to 9%, as we continue to further our investments in the strategic priorities which continue to develop the pace. With that, let me turn the call over to Irene. Irene Oh: Thank you, Chris, and good afternoon to all on the call. On Slide nine, you can see our asset quality metrics, we continue to broadly outperform the industry. We recorded net charge-offs of eight basis points or $12 million in the fourth quarter and 11 basis points or $60 million for the full year of 2025. We recorded a provision for credit losses of $30 million for the fourth quarter compared with $36 million for the third quarter. Non-performing assets remained broadly stable at 26 basis points of total assets as of 12/31/2025. Criticized loans declined quarter over quarter to 2.01% compared with 2.14% as of 09/30/2025, reflecting declines in criticized loans for really all major loan categories. The absolute level of problem loans continues to remain at low levels that we believe are very manageable. We continue to be vigilant and proactive in managing any credit risk. Currently, we are projecting that full-year 2026 net charge-offs will be in the range of twenty basis to thirty basis points. As seen on Slide 10, we increased the allowance for credit losses during the fourth quarter from RMB791 million to RMB810 million or maintaining the 1.42% we believe our loan portfolio is appropriately reserved as of 12/31/2025. Turning to Slide 11. East West Bancorp, Inc.'s regulatory capital ratios remain well in excess of regulatory requirements for well-capitalized institutions and well above regional bank averages. East West Bancorp, Inc.'s Common Equity Tier one capital ratio stands at a robust 15.1% while our tangible common equity ratio stands at 10.5%. Our Board of Directors has declared a first quarter 2026 common stock dividend of $0.80 per share, a 33% increase to the dividend. The dividend will be payable on February 17, to stockholders of record on February 2. I'll now turn it back to Chris to share a few comments on our outlook for the full year. Chris? Christopher Del Moral-Niles: Thank you, Irene. Respect to our guidance, I previously mentioned, our outlook assumes modest economic growth and about 50 basis points of rate cuts. As implied by the year-end yield curve. We expect end-of-period loan growth to be in the range of 5% to 7% with continued relative strength in both C&I and residential mortgage lending. We expect net interest income to grow in the range of 5% to 7% also. Driven by the above-referenced balance sheet growth. We aspire to grow fee income at a faster pace than the overall balance sheet growth. Total operating expenses are expected to increase in the range of seven to 9% year over year driven primarily by headcount additions, IT-related expenditures, and partially offset by expected lower deposit account costs. We expect full-year net charge-offs, as Irene mentioned, in the range of 20 to 30 basis points and our effective tax rate to land between 22-23%. With that, I'll now open the call up for questions. Operator? Operator: Thank you. We will now begin the question and answer session. For any additional questions you may reenter the queue. And your first question today will come from Ebrahim Poonawala with Bank of America. Please go ahead. Ebrahim Poonawala: Good afternoon, Ebrahim. Good afternoon. So I guess first question just in terms of loan growth, I guess the guidance makes sense. When we look at year over year, I think the expectation is 2026 growth could be better for the economy, for the industry on lending than 2025. We think about East West Bancorp, Inc., I would think you should do much better in terms of loan growth this year versus last. Like is there a reason why I'm missing something? Or are you deliberately trying to manage the pace of growth when you think about just the overall balance sheet? Christopher Del Moral-Niles: Let me take a first stab at that since I see Dominic smiling across the table. I'll let him chime in as well. I think we had a really strong fourth quarter and we saw really great traction in C&I, in particular, in the fourth quarter. The reality is we know that's somewhat seasonal and we saw a really nice fourth quarter last year. Then we saw a soft first half to some extent this year 2025. And so we want to make sure we're thinking about the trends that we're seeing the customer activity that we expect, and that reporting forward numbers that we know we can hit with good reason. So I think there's a bit of recognizing the pattern that we saw last year and men's understanding that might repeat itself in 2026 even though I think you're right, things are set up to be a little more or a little less erratic perhaps in 2026 than they were in 2025. Dominic Ng: Well, let us all reflect back in year 2025. I would think that during the first quarter, not a whole lot of people would expect that this year turn out to be such a pretty good year. Because there was a lot of volatility of what the economy is going to be like and what are the changes that may be happening but it all worked out fine. In 2026, right now it's looking pretty good. You are absolutely right that there should be momentum that makes us even having a stronger loan growth opportunity for the remainder of the year. However, we just never know exactly what's going to happen throughout the year due to whatever changes that may come. My view is very simple. Good time, bad time, East West Bancorp, Inc. always outperformed the others. So if things going really well, you would if you see that maybe the average is actually as a growth percentage higher than our outlook. Then the likelihood East West Bancorp, Inc. actually doing better than what we projected here very high. On the other hand, if the economy turn out to be what we expected, and we probably may not even be able to get to this number. But rest assured we're going to be doing better. Than our peers. So I'm much more focusing on making sure that we stay as a high performing bank and relatively speaking, compared with whether with our peers, or the entire banking industry, And that's something sort of is a given from a East West Bancorp, Inc. position in terms of what we wanted to do and what we want to achieve So but in terms of projecting economy, sometimes hard for us to do. Ebrahim Poonawala: That's helpful and makes sense. I guess maybe another question. Just when you look at the expense growth number, just remind us, I know you're building out sort of the asset management and fee capabilities. But when you think about the top two or three areas where the bank spending today, is it hiring, opening new branches, compliance and tech? Give us a sense of where these investments are going and how we should think about those driving future growth? Christopher Del Moral-Niles: Sure. We are certainly budgeting a higher degree of expense growth in technology writ large. But specifically data processing, software, computer expenses. Along with that, we have a higher level of growth in some consulting costs, and that's the largest growth category. But along with that as you correctly mentioned, we're hiring we're hiring for wealth and we're hiring for commercial banking and we're hiring for technology and we're hiring for risk management. All of those areas will be the second sort of biggest bucket. And of course, comp is our biggest bucket overall. But if I draw your attention to Slide 80, Vadim, and you'll look at the last four years, I think East West Bancorp, Inc. has put up a pretty strong track record over the last four years. And alongside that very strong earnings and balance sheet track record, has come a 10% CAGR in expenses, But I don't think our shareholders mind because all of those expenses have gone to support even stronger total returns. Ebrahim Poonawala: Got it. Thank you. Operator: The next question will come from David Rochester with Cantor Fitzgerald. Please go ahead. David Rochester: Good afternoon, Dave. Yes. How are doing? Just wanted to touch base on the fee income trends for '26. I know you mentioned those would grow faster than that 5% to 7%. For the balance sheet. Last year, you did something around 12% growth. Is there any reason why that should slow this year given the investments in the business you're making? And you're launching the FX platform, you just talked about wealth and other things. It seems like that should all help the growth rate this year, maybe even boost it a little bit versus last year. Just want to get your thoughts on all that. Christopher Del Moral-Niles: Yes. And that's why I think I try to say and maybe I didn't come across clearly, we aspire to continuing the double-digit trajectory. I think if you look at Page seven, the four-year CAGR there has been 10%. And we would like to aspire to continue to deliver that type of revenue growth on the fee income side. David Rochester: Great. And then just on the loan growth, think you mentioned recently seeing some of your CRE customers getting more interested and getting more active and you actually grew that fairly decently this year in mid-single-digit range, is probably stronger than what you thought this time last year. You think there's an opportunity to grow more in CRE this year? I think I'll jump in for Dominic I think what he said on the call about a year a quarter ago, 1.5 ago, was if we saw rates come down into the sort of short end with a low to mid-three handle we would probably start to see traction pick up in commercial real estate. We're approaching that level essentially now and expect hit that lower bound over the course of this year. So our broad expectation is yes, we'll see pickup overall in commercial real estate But with that, what I think Dominic has emphasized to the team is where we are picking our partners is with folks that we have established long-term business relationships with. Where we know they're savvy operators and we know they're looking at the markets with the benefit of years and years of experience. And we think that will be the right place for us to play. Dominic Ng: The market is there for us. And but East West Bancorp, Inc. has a very very strong discipline of our overall asset liability management and also concentration allocation etcetera. So what we looked at it is that at this moment, while we in a very, very comfortable position with our CRE concentration, We're nowhere even remotely close to that level that we need to have high alert. However, we always understand that the ideal situation for the bank to have high-quality growth is have a very balanced growth from multiple categories. Which is C&I, CRE, residential mortgages, all growing in balance. In that standpoint, on one hand, I expect that there's a likely good likelihood the market will be there. For us to originate a lot more CRE loans We tend to be a little bit more selective. In making sure that we put our allocation primary to our long-term sustainable clientele. So with that, we are not out there aggressively chasing just growing loan for the sake of growing loans. David Rochester: Yes. Appreciate that. Maybe just one last one. On the TCE ratio and talked about this a lot just in terms of where it is now, you're at 10.5%. Continues to grow. You had a very nice dividend increase there. So I know that cuts into it a little bit, but it still seems like returns and your expected balance sheet growth could ultimately end up pushing that to 11% and beyond. What are your thoughts on allowing that to continue to grow? And is there any new range that we should look for as to how you're thinking about where that should trend? Thanks. Christopher Del Moral-Niles: As pointed out on our guidance page on slide 12, we remain committed to delivering top quartile returns alongside best-in-class efficiency and we think our capital levels are part of what attracts customers to East West Bancorp, Inc. and allows us to deliver the timely effective service that we offer our clients. In a way that things can't. We think that capital supports that initiative. And we're very proud of having one of the strongest levels of capital of any bank in the industry. Which we think will sustain us particularly if there's continued volatility uncertain times ahead. David Rochester: All right, great. Thanks guys. Operator: The next question will come from Casey Haire with Autonomous Research. Please go ahead. Casey Haire: Hey, Good afternoon. Thanks. Good afternoon, guys. Happy New Year. So I had a question on deposits cost. So the 60% deposit beta just wanted some color on where you think that can trend throughout 2026? Christopher Del Moral-Niles: Well, think we've been very disciplined about reacting very quickly to changes in the market rates, but specifically to Fed rates. So I think we've got that process very well oiled now and moves very efficiently. So we'll continue to make those changes. Obviously, rates continue to grind lower, our incremental ability to do that at higher levels becomes more challenging. So what we've guided is we're very comfortable that we our betas will exceed 0.5 and we're very happy to deliver 0.6 so far. Casey Haire: Got you. Okay. And then Irene, a question for you on the credit. So the the charge off guide for $26 bumped up a little bit. I'm just wondering what's driving that. There was very little migration NPAs very low. It feels pretty good. I'm just wondering why maybe '25 was just a very good year. I'm just wondering what you're seeing to bump up the charge off guide? Irene Oh: For 2017? Yes, great question. So if you look at charge offs for the quarter and then for the full year, the absolute level versus pretty low, right? And even if you compare to last year, we are 26 basis points, 11 basis points, 26 basis points Historically, these are low levels. With the guidance for 2026, although the absolute levels of credit, the metrics are all in great shape. Quite honestly. There are and there are no systemic issues that we see. From time to time, individual credits can turn and the charge off costs guidance simply reflects that. Casey Haire: Got you. Thank you. Operator: The next question comes from David Chiaverini with Jefferies. Please go ahead. David Chiaverini: Afternoon, David. Hi. How's it going, Chris? Thanks for taking the question. So wanted to ask about the net interest margin, the outlook there. You mentioned about how the near-term liability sensitivity has benefited you. How should we think about your positioning as we kind of get into 2026? Christopher Del Moral-Niles: Sure. We broadly remain an overall asset-sensitive bank. That has been said. We've been focused on growing dollar NII and we believe we'll offset the expected downdraft effects of declining rates with balance sheet growth over the course of the year. That should allow us to deliver a growing dollar NII as you look over the course of the year. Great. Quarter number we think will be continued consistent deposit repricing activity. David Chiaverini: Great. Thanks for that. And on the deposit side, you mentioned about and we saw in the numbers the non-interest-bearing deposit growth was strong in the fourth quarter. Can you talk about what drove that and if that could be sustainable in coming quarters? Christopher Del Moral-Niles: Yes. So a shout out to our retail team in particular, but also to our commercial team There was an increased emphasis and focus on driving core commercial DDA balance activity throughout the year, starting really towards the end of the second the first quarter and continuing over subsequent three quarters. With outstanding results here accumulating in the fourth quarter. And so that focus on that driving business checking account relationships continue to build momentum and steam both in our retail channels and our commercial relationship manager channels over the course of the year and drove the result that you're seeing. We have and continue to drive focus on that and that will be a key priority for 2026. And we think it will be something that will deliver additional value particularly a declining rate context. David Chiaverini: Great. Thank you. The next question will come from Bernard Von Gazzicchi with Deutsche Bank. Please go ahead. Bernard Von Gazzicchi: Hi, Bernard. Hi, good afternoon. So just on you've been dynamically hedging for the outlook and rates materially reduced the cash flow hedge headwinds. What was the headwind in full year 2025 and what are you expecting in full year 2026? Christopher Del Moral-Niles: The headwind for the quarter was $2 million Keep in mind rates came down over the course of the year. So we started at was more than $20 million at one point in time per quarter and it came down to $2 million in the fourth quarter. And I think what we have indicated previously was essentially the hedges we have on today are in the money today. And so we are now in a position where we expect to have those be tailwinds as we look forward into the into 2026. Addition to the fact that we expect more rate cuts to come. Bernard Von Gazzicchi: We've got about $1 billion of risk swap at roughly like a $3.7 $3.8 level. And those will be those are in the money today. Bernard Von Gazzicchi: Great. And just as a follow-up, as you get closer to the $100 billion asset threshold for category four, where are you in your progress to fulfill the requirements with processes and expenses needed how does that change in the threshold is increased as regulators have been pointing to? Christopher Del Moral-Niles: Sure. We've been focused on making the investments in the technology and the staffing we need to be successful for our customers today And we always looked at $100 billion as being somewhere down the road. And so the investments that we're making, the expenses that we're talking about, the computer software, the consulting services, the data processing solutions the efforts, those are all to maximize the opportunity we see to work with our clients today and deliver value. And so we don't think there's anything about that that changes over the near term, certainly 2026. But we look forward to what we expect will be some reconsideration of those thresholds. And we look forward to the opportunity to continue to grow and meet the needs of our customers over the long term. Bernard Von Gazzicchi: Great. Thanks for taking my questions. Operator: The next question will come from David Smith with Truist Securities. Please go ahead. David Smith: On fee growth, I know that you all have been opportunistic at times in recent years about pursuing some inorganic tuck in deals. To bolster different parts of the fee growth engine. I'm just wondering, given how strong capital levels are today, are there any areas where you're contemplating some sort of partnership or other kind of inorganic deal to boost the growth? Where might that come from? What areas are of interest for you right now? Thank you. Embedded in our trajectory our projected expense trends, is hiring and organic growth that will support and supplement our fee expectations as it's laid out. But in addition to that, yes, we have looked and continue to look for opportunities that are inorganic to bolster that growth and supplement that so that we have a better reach of either services platforms, geographies or talent to deliver even more value to our customers. And we'll continue to look for those opportunities. As you correctly point out, capital is not the constraint. But as I think for those of you that have been around the story for long, the constraint really is Irene and Dominic sense of where value is. And the relative cost of buy versus build And when you're building and delivering 10% organic, it's a high bar for something that makes sense. That you have to go spend a big premium for. And so I think we'll be very thoughtful about that. But we have the flexibility we have the optionality we have the capital We're attracting the hires and we're growing the fees all at the same time. David Smith: Thank you. And then just specifically then, I wonder if you could give us an update on any plans on how blockchain or cryptocurrency might fit into your business helping clients with cross border money movements or anything along those lines? Dominic Ng: I think at this point in United States, when it comes to blockchain, that clearly can expedite payment, trade and so forth. We really haven't seen from a banks and clients, because it's not like something that we can just do on our own. Without some sort of like collaboration with another corresponding bank and so forth. I think at this point it's still a little bit too early. And we'll continue to watching and the progress on these technology and we'll adjust accordingly. And that's something that what East West Bancorp, Inc. would always do which is while being prudent, but stay agile. David Smith: Thank you. Operator: The next question will come from Gary Tenner with D. A. Davidson. Please go ahead. Emma Hassan: This is Emma Hassan on for Gary. Good afternoon. The strong loan growth across all segments this quarter was really nice to see. What are you seeing in terms of general sentiment out there? Is the are the GDP numbers translating into client sentiments? Or Christopher Del Moral-Niles: I think it's been interesting here seeing the volatility in the marketplace. And recognizing that while the economy obviously impacts everything about banking, What's perhaps very clear about East West Bancorp, Inc. is what impacts East West Bancorp, Inc. is how we work with each of our clients. And so while the economy is a great backdrop for continued positive momentum in some sectors, The credit for our loan growth and the credit for our progress and the credit for our fee growth comes down to RMs working with individual clients, delivering individual solutions to help them nimbly and agilely navigate the landscape that we've seen over the course of the last year. And so to Dominic's earlier comments, while the economy matters, what matters more is that we're working really closely with the clients to stay one step ahead of the competition and meet their needs. Emma Hassan: Alright. That is fair. And I heard you talk about, hiring this year. Is there any sort of numbers you can give around terms of hiring goals this year? Like revenue per users or anything? Christopher Del Moral-Niles: Well, I think I would draw you back to page eight, and I would just note that, you know, year over year, our expense guidance is 7% to 9%. But if you look at year over year 2025, we grew compensation by 12%. Obviously, the focus on our growth is hiring talented people can help drive our business in the right direction. And that continues to be a focus. Emma Hassan: Alright. Thank you for taking my questions. Operator: The next question will come from Janet Leigh with TD Cowen. Please go ahead. Janet Leigh: Hey, good afternoon, Janet. Afternoon. Apologies if this is covered already. In terms of your hiring plans, I guess that's part of the expansion of your business plan. Is there any plan to more aggressively move to other cities or other port cities other than California? Christopher Del Moral-Niles: I think we continuously look at opportunities to diversify our branch network in positive ways. We continue to look for the right people and the right talent to help us drive that. I think we'll be talent driven more than putting pins on a map driven. So far, that's worked really well and allowed us to focus on making sure we concentrate our presence places where people expect us to be with talent that can meet those needs and that will continue to be a driving focus for us. But we see other markets for growth We know there are pockets of opportunity for us. And we are looking at both organic and inorganic ways could tap into those. Dominic Ng: I think on the commercial banking side, we made some in fact, it's not just last year. I think for the last several years, we made quite a few hires in Texas, and New York And so we'll continue to look at these other regions that we already have a presence and to look at opportunities to grow it even further. Janet Leigh: Got it. Thanks for the color. And for your allowance for loan loss, the reserve ratio, does gone up quite a bit over the past three years while you're credit trends have obviously been very resilient and I think credit size levels have also been going down. At what point would you be comfortable kind of environment would that be where you feel more comfortable maybe lowering down reserve levels a bit because it really doesn't look like the underlying credit warrants I will point out that it's completely flat on a percentage basis quarter over quarter. Irene Oh: Got it. As you know, right, with the CECL allowance model, and the methodology that we in other organizations also have to use A lot of it is based on kind of the assumptions and the macroeconomic factors. We use a multi-scenario model and continue to honestly, that's going to be the largest driver of where the allowance is going. Right? Modeling and understanding about what's happening quarter over quarter. There wasn't really that much change. We use Moody's models as those scenarios. And there hasn't been that much change, but I think it is a little bit your comments are fair. Maybe there is a little bit kind of a forward cast of this versus where the charge offs and the credit quality is as you noted, it's continues to be very strong. I would also say the allowance is kind of like capital. Right? It's an extra cushion for us and buffer for us in general. Janet Leigh: Got it. Thank you. Christopher Del Moral-Niles: That hasn't been said as we say it. Allowance is perfectly appropriate at year end. Operator: The next question will come from Jared Shaw with Barclays. Please go ahead. John Rao: Hi, this is John Rao on for Jared. Hey, John. Afternoon. Most of my good afternoon. Most of my questions have been asked and answered. But just thinking about the rate sensitivity positioning, it looks like the floating rate portion of securities has been going down the last few quarters. There any target level for that or has it just been what you've been adding has been more fixed rate lately? Christopher Del Moral-Niles: We've seen more relative value in the fixed rate side and given the anticipation of a few more rate cuts coming. It's seems to be prudent to sort of lean on that side of the securities purchases. It's worked out for us so far. John Rao: Okay, great. Thanks for that. And then just on lending spreads overall, how have those been trending? Know you're pretty selective on the client base that you you work with, but just overall competitive levels and pricing trends in your market? Yes. Broadly speaking, we've seen some compression. And so if you'd asked us where would that be, over the course of the last year, we probably saw things broadly compress. Approaching something on the order of about a quarter of a percentage point. Don't know where that's going from here. But we think we've seen a lot of that competitive pressure come to four and we're working with it. It seems to be holding at least relative to the term sheets we're sending out now. Somewhat comparable to what we saw in the fourth quarter. So I can tell you there's been incremental compression over the last thirty, sixty days. But clearly, it's been compressing relative to what it was a year ago. John Rao: Okay, great. Thank you. Operator: The next question will come from Chris McGratty with KBW. Please go ahead. Chris O'Connell: Good afternoon, Chris. This is Chris O'Connell filling in for Chris McGratty. All right. It's still Chris. It's okay. Yes, exactly. I was just hoping to circle back to the capital discussion. Obviously, you guys remain in a very strong position. And had a big increase in the dividend this quarter. But capital levels continue to grow. And the buyback was a little bit lighter than the last quarter. Just was hoping to get thoughts around kind of the pace of buyback and opportunistically using it going forward? Dominic Ng: Yes. Our buyback will be always opportunistic. So from our perspective is that when the price is right, we do more. And we always been able to do buyback in an opportunistic way that create a lot more value for our shareholders. And we'll continue to do that practice, because there's not 's no urgency for us to have to do anything simply because as you just noticed that we just announced this return of tangible common equity at 17%. And so at this kind of capital level, and we also by the way by making this meaningful size increase of dividend So we are doing what we need to do. But we also always look at the potential opportunity out there whether it's a market that allow a meaningful organic growth or a market that allow some unusual grid fit inorganic growth opportunities And we look at it as that it's just very, very good in that position that we have all these flexibility. That we can pull trigger at the right time in the right way. So that's why we are not in any kind of sort of urgent situation that we have to sort of like announced some big buyback and so forth, because we really are not in kind of position. Like many others. Chris O'Connell: Got it. Thank you. And then I was hoping to just dive into the commentary on the margin. The near-term liability sensitivity versus broader asset-sensitive position. I think you had talked a little bit about last quarter about the near-term liability sensitive position. Just being kind of a timing issue with the pace of deposit rate repricing. Guess, the setup into the early part of the year Does that imply, given the rate movement this quarter, that the margin could head in a similar upward direction kind of early next year? And then of trend down modestly after that? Christopher Del Moral-Niles: I think we've seen some of the benefit already of the December rate cut. The December numbers. Some of it will continue to bleed through into January, but don't think anyone's really expecting much more to happen this quarter. So it will probably balance and wash itself out in Q1. And then when we see the next rig cut, we would assume we'll see an immediate lift in that next thirty to forty-five day period. And then sort of revert back to the broad asset-sensitive profile. So again, we think the reality is over the course of sixty days, lag, probably $2 million a month 25 basis point cut. As a negative impact. But the reality is in that first thirty to forty-five days, it ends up being a short term Chris O'Connell: Great. Very helpful. That's all I had. Thank you. Operator: This concludes our question and answer session. I would like to turn the back over to Dominic Ng for any closing remarks. Dominic Ng: I just want to say thank you for all of you joining our call today and we are looking forward to speaking with you in April. Thank you. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Good afternoon, everyone. Welcome to Associated Banc-Corp's Fourth Quarter 2025 Earnings Conference Call. My name is Vaughn, and I will be your operator today. At this time, all participants are in a listen-only mode. We will be conducting a question and answer session at the end of this conference. Copies of the slides that will be referenced during today's call are available on the company's website at investor.associatedbank.com. As a reminder, this conference call is being recorded. As outlined on Slide two, during the course of the discussion today, management may make statements that constitute projections, expectations, beliefs, or similar forward-looking statements. Associated's actual results could differ materially from the results anticipated or projected in any such forward-looking statements. Additional detailed information concerning the important factors that could cause Associated's actual results to differ materially from the information discussed today is readily available on the SEC website in the Risk Factors section of Associated's most recent Form 10-Ks and subsequent SEC filings. These factors are incorporated herein by reference. For a reconciliation of the non-GAAP financial measures to the GAAP financial measures mentioned in this conference call, please refer to Pages 33 and 34 of the slide presentation and to pages 10 and 11 of the press release financial tables. Following today's presentation, instructions will be given for the question and answer session. At this time, I would like to turn the conference over to Andy Harmening, President and CEO, for opening remarks. Please go ahead, sir. Andrew Harmening: Yes. Thank you for the introduction and good afternoon. Welcome to our fourth quarter earnings call. This is Andy Harmening. I am joined once again by our Chief Financial Officer, Derek Meyer, and our Chief Credit Officer, Pat Ahern. I'll start off with some highlights from the fourth quarter and 2025 as a whole. From there, Derek will cover the income statement and capital trends, and Pat will provide an update on credit. 2025 was a pivotal year for Associated Banc-Corp. In March, we marked the completion of all major investments from Phase two of our strategic plan. Those investments gave us strong momentum throughout 2025, and they positioned us for additional momentum in 2026 and beyond. We are growing and deepening our customer base organically and taking share in major metropolitan markets. We delivered our strongest year for organic household growth since we began tracking a decade ago. Net growth in all four quarters of 2025. We're growing and remixing our balance sheet simultaneously. In 2025, we added over $1.2 billion in relationship C&I loan growth, while steadily reducing our low-yielding, low-relationship value resi mortgage loan balances. On the liability side, we added nearly $1 billion in core customer deposits during the year. And we're driving stronger profitability. Over each of the last three quarters, we set a company record for net interest income. We also saw strength in several fee income categories in the back half of the year. This enhanced revenue profile combined with expense discipline and solid credit performance helped us deliver the strongest net income in our company's history in 2025. To further enhance and accelerate our organic growth momentum, we announced an agreement to acquire American National Corporation in December. The transaction is financially attractive, but importantly, it also enables us to expand our organic growth prospects by providing entry into the vibrant Omaha market with the number two market deposit share and strengthening our position in the Twin Cities market where we already have momentum. We believe that Associated and American National are a natural cultural fit, and we look forward to welcoming American National employees and customers to Associated later this year. Further underscoring our commitment to organic growth, we're planning several additional investments in 2026 to accelerate momentum in multiple strategic growth markets, including the Twin Cities, Omaha, Kansas City, and Dallas. Our expectation is to maintain a growth and profitability focus while simultaneously managing our low-risk profile. Credit discipline remains foundational to our strategy, and our growth centers on high-quality commercial relationships and prime super-prime consumer borrowers. We continue to manage our existing portfolios proactively to stay on top of any emerging risks. As we look into 2026, Associated Banc-Corp's momentum continues to build. We're excited about the future of this company and look forward to providing additional updates along the way. With that, I'd like to walk through our financial highlights on Slide four. We reported earnings of $0.80 per share in Q4 and $2.77 per share for the full year. Total loans grew by another 1% versus the prior quarter and 5% versus 2024. C&I has continued to be a primary growth driver for us throughout the year. Grew C&I loans another 2% in Q4 and added $1.2 billion in C&I balances for the year. On the funding side, core deposits grew by nearly $700 million versus Q3 and nearly $1 billion versus Q4 of last year. Point to point, this represented a 3.5% growth rate, but on a quarterly average basis, core customer deposits were 5% higher in 2025, versus 2024. Shifting to the income statement. Q4 net interest income of $310 million set another record for the strongest quarterly NII in company history, and our NII was up 15% for the year. After posting strong quarterly non-interest income of $81 million in Q3, we posted another strong quarter of $79 million in Q4. Capital markets, wealth fees, and card fees all grew in the fourth quarter, and on an adjusted basis, total non-interest income grew by 9% versus 2024. Total non-interest expense of $219 million increased $3 million from the prior quarter. Delivering positive operating leverage remains a primary objective as we execute our plan. On the credit front, we remain pleased with asset quality trends. In Q4, our criticized loans decreased, and our non-accruals dipped to 32 basis points of total loans. Net charge-offs decreased to just three basis points for the quarter and 12 basis points for the full year. And finally, our return on average tangible common equity increased steadily throughout the year, finishing over 15% in Q4. On Slide five, we want to take a moment to highlight how our strategic investments since '21 have transformed our return profile. First, after investing in talented RMs in major metropolitan markets across our footprint, we've grown C&I loans by over 50% since 2020. With pipelines remaining strong, and a few more non-competes set to roll off between now and the end of Q1, we expect our momentum to carry through 2026 in both commercial lending and deposit acquisition. As we continue to add relationship C&I loans to the books, they're replacing lower-yielding non-relationship resi mortgage balances as they roll off. Since 2020, we've worked down our concentration of mortgage loans by over 10 percentage points. This ongoing mix shift is contributing to enhanced profitability. In 2025, we posted three consecutive quarters of record NII, and a NIM north of 3% for the year, 50 basis points higher than 2020. While we've invested significantly to transform the growth profile of the bank, we've remained disciplined on the credit front, and our net charge-off rate has remained below our medium-term target of 35 basis points. We've also managed our expense base in a disciplined way to support revenue expansion, positive operating leverage, and enhanced profitability. As a result, our adjusted efficiency ratio decreased by over 700 basis points from 2020 to 2025, and our ROTCE increased to 13.6% in 2025. In 2025, our ROTCE climbed above 15%. So as you can see, our strategic from Phase one and two are having a meaningful impact on the strength and return profile of our company. We believe the momentum from these investments will carry well into 2026. With that said, we also see additional opportunities to incrementally build on our momentum in 2026. On Slide six, we've already proven through our strategic plan that we can grow in major metro markets like Milwaukee and Chicago. The investments we've made to bolster market leadership, add talented RMs, enhance our value proposition for consumers and small businesses, and amplify our brand presence are having a clear impact. Over the course of the past two years combined, we've driven double-digit deposit growth, double-digit C&I loan growth, and household growth that's outpaced population growth in both markets. Milwaukee and Chicago are great markets for us, and we see plenty of additional growth opportunities in those markets going forward. But we also see opportunities to double down and duplicate our success in several other attractive metropolitan areas with strong growth characteristics. In the Twin Cities, we already have a solid retail presence, and we've built a very strong commercial team under the guidance of our Head of Corporate Banking, Phil Trier, and our new Market President, Mike Labens. We're also planning to move into our new regional headquarters in the heart of Downtown Minneapolis in March. The acquisition of American National is expected to deepen our presence in that market, giving us a top 10 pro forma deposit market share. The American National deal also gives us entry into the attractive market. With stronger population growth and median household characteristics in both the Midwest and national averages. Our number two pro forma deposit market share gives us scale. And our product set and marketing engine provide meaningful opportunities to both deepen and grow relationships post-close. On the commercial side, we've added a small team in Kansas City in March. That's a market our management team knows well. We brought in a talented, experienced group of bankers who had the tools to hit the ground running. In fact, the team is off to such a strong start that we see opportunities to double down and drive additional momentum there. Dallas is also a market our management team knows well. Associated has had a CRE office in the market for roughly a decade. But we now see an opportunity to replicate the success we've had in Kansas City with the addition of C&I presence in the Lone Star State. Moving to Slide seven, we're going to accelerate organic growth in these major metropolitan markets through two categories of investment in 2026. First, we've created a best-in-class value proposition for our customers with a combination of digital and product upgrades. We've had success growing and deepening primary checking households through acquisition-focused marketing. In 2026, we're doubling down on the success to accelerate household growth in major metropolitan markets. Specifically, we're planning to increase acquisition-focused marketing spend in The Twin Cities and Omaha by over 100% between the two markets combined. The total marketing acquisition spend across all markets will increase by 25%. Through these actions, we're confident we can deliver stronger household growth in our major metro markets in 2026 and 2027, which we expect will translate to stronger household growth for the bank overall. As we grow primary checking households across the bank, this drives additional deposit growth. It also brings additional fee income. On the commercial side, we've invested significantly in recent years to hire talented RMs who can gather relationship loans and deposits across our footprint as we look to remix both sides of our balance sheet. This remix is already well underway. Since 2020, C&I loans are up 50%, or over $4 billion. To build on this momentum, we're announcing another wave of selective RM hires in the Twin Cities, Kansas City, and Dallas, where we see attractive growth opportunities. We expect to add approximately five more RMs in the Twin Cities, two in Kansas City, and four in Dallas, which equates to a 10% increase in all overall RMs bank-wide. We expect these actions to help us drive approximately $1.2 billion of relationship C&I growth across the total bank in 2026. In 2027 and beyond, we expect to continue adding talented RMs to drive sustainable, high-quality commercial growth. On Slide eight, we highlight our quarterly loan trends through Q4. Total loans grew by 1% on both an average and a period-end basis in Q4. As expected, C&I led the way with over $200 million in balances during the quarter. Auto balances grew by another $65 million in Q4 as we have continued to selectively add high-quality balances to our book. Total period-end CRE balances dipped by $88 million versus Q3 due to elevated payoff activity. We expect elevated CRE payoff activity to linger in the coming quarters. On Slide nine, we show an annual view of loan trends. In this broader view, you can clearly see the growth and remix story that has been in progress since 2021. We've decreased our concentration of low-yielding non-customer resi mortgages and diversified into higher quality, higher return categories like C&I and auto. We've also grown total loans by nearly 30% over this time without abandoning our disciplined approach to credit. In 2025, total loan growth was once again led by C&I, where we achieved our $1.2 billion growth target for the year. With pipelines remaining strong, additional lift expected as our last few non-competes roll off, we expect continued momentum in C&I into 2026. As such, we expect C&I loan growth of 9% to 10% in 2026. At the top of the house, we expect total bank loan growth of 5% to 6% for the year. Both growth figures are stand on a standalone basis excluding the impact of American National. Shifting to Slide 10, we added nearly $700 million in core customer deposits in Q4 after adding over $600 million in Q3. In Q4, our growth was once again spread across most categories, with customer CDs being the only category that decreased. This core deposit growth enabled us to work down our wholesale funding balances by one in Q4, including a $161 million decrease in brokered CDs. On Slide 11, we show a broader annual view of deposit trends. We've consistently grown our deposit base on an annual basis, and after adding $1.2 billion in core customer deposits in 2024, we added another $1 billion in 2025. On a percentage basis, period-end core customer deposits grew 3.5% relative to 2024. This number was influenced by seasonal flows in a couple larger accounts that impacted balance flows at the tail end of 2025. That being said, core customer deposits still grew by 5% on a quarterly average basis from 2024 to 2025. As we look to 2026, we're bullish on our ability to drive incremental core customer deposit growth thanks to the best-in-class consumer value proposition, household growth momentum supported by increased marketing acquisition spend in growth markets, and significant momentum in our commercial deposit gathering capabilities. As such, we expect core customer deposits to grow by 5% to 6% for the year, excluding the impact of the American National acquisition. With that, I'll pass it to Derek to discuss our income statement and capital trends. Derek Meyer: Thanks, Andy. I'll start with yield trends on Slide 12. Within the major asset categories, the yields of our largely floating rate CRE and commercial books decreased by 24 basis points and 27 basis points respectively. Auto and investment yields also saw slight decreases. These decreases were modestly offset by a slight uptick in the yield for a largely fixed rate resi mortgage book. Total interest-bearing deposit costs decreased by 17 basis points in Q4 and are down 49 basis points since Q4 of last year. In Q4, total earning asset yields decreased 16 basis points to 5.34%, total interest-bearing liabilities decreased one basis point to 2.82%. Moving to Slide 13, third quarter net interest income of $310 million increased $5 million versus the prior quarter and $40 million versus the fourth versus 2024. Our net interest margin increased two basis points to 3.06 for the quarter. As compared to the same period a year ago, our NIM increased 25 basis points. In 2026, we expect to drive net interest income growth between 5.5% and 6.5%. This forecast assumes two Fed rate cuts in 2026 and excludes any impact from the American National acquisition. On Slide 14, we provided a reminder of the steps we've taken to put ourselves in a more neutral interest rate position and protect against rate changes and other external factors. We're maintaining repricing flexibility by keeping our funding obligations short. We'll protect in our variable rate loan portfolio by maintaining received fixed swap balances of approximately $2.45 billion, and we build a $3.1 billion fixed rate auto book with low prepayment risk. While we're still modestly asset sensitive, a down 100 ramp scenario represents less than a 1% impact to our NII as of Q4. We expect to maintain this relatively neutral position going forward. Moving to Slide 15, total investment security balances grew to $9.3 billion in Q4. Our securities plus cash to total assets ratio climbed to 24.3% to the end of the year, but we continue to target a range of 22% to 24% for this ratio. Slide 16 highlights our non-interest income trends for the quarter. After posting $81 million in non-interest income in Q3, we followed that up with another strong quarter in Q4. Total non-interest income of $79 million was down $2 million from the prior quarter but was up $8 million from our adjusted Q4 2024 number. Our strong Q4 was supported by additional growth in wealth management fees, card-based fees, and capital markets. As we continue to grow our customer base and deepen relationships across the bank, those trends are beginning to flow through in our core fee businesses. While quarterly results in an area like capital markets can be lumpy, we're confident in our ability to drive non-interest income higher over time. As such, we expect non-interest income to grow by 4% to 5% in 2026, excluding any potential impacts from the American National acquisition. Moving to slide 17, Q4 expenses came in at $219 million, two percent higher than the prior quarter. The quarterly increase was primarily driven by a $3 million increase in equipment expense along with a $1 million increase in variable comp expense and $1 million of severance as we continue to execute against our strategic plan and set ourselves up for a productive 2026. These increases were partially offset by a $3 million decrease in FDIC assessment expense, following another adjustment to the special assessment and a $1 million decrease in overall personnel expense. Throughout the year, we continue to invest in the growth of our franchise. Delivering positive operating leverage has remained the top priority along the way. After steadily decreasing over the course of the year, the efficiency ratio held at 55% in Q4. In 2026, our expense philosophy remains the same as it has each year since Andy arrived. We're going to invest in the future growth of the company while finding ways to offset these investments with cost reductions in other areas. With this in mind, we expect total non-interest expense growth of 3% in 2026, excluding the impact of the American National acquisition. On Slide 18, capital ratios increased across the board once again in Q4. Our TCE ratio increased to 8.29%, up 11 basis points versus Q3 and 47 basis points versus 2024. Our CET1 ratio increased to 10.49%, a 16 basis point increase relative to the prior quarter and a 48 basis point increase versus the same period a year ago. We've also seen consistent expansion of our tangible book value per share, with Q4 coming in above $22 per share. This represents a $0.65 increase versus Q3 and a $2.3 increase versus the same period a year ago. I'll now turn it over to our Chief Credit Officer, Pat Ahern, to provide an update on credit quality. Patrick Ahern: Thanks, Derek. I'll start with an allowance update on Slide 19. Our CECL forward-looking assumptions utilize the Moody's November 2025 baseline forecast. This forecast remains consistent with a resilient economy despite the higher interest rate environment. It contains continuing rate cuts in early 2026, slower but positive GDP growth rates, a cooling labor market, continued elevated levels of inflation, and continued monitoring of ongoing market developments and tariff negotiations. In Q4, our ACLL increased by $5 million to $419 million. This increase was primarily driven by commercial and business lending, which largely stemmed from a combination of loan growth plus normal movement within risk rating categories. Our ACL ratio remained largely flat throughout the year in 2025. In Q4, the ratio increased one basis point from the prior quarter to 1.35%. On slide 20, we continue to review our portfolios closely amidst ongoing macro uncertainty. But we continue to see solid performance in Q4. Total delinquencies ticked up slightly versus the prior quarter to $61 million but were down $19 million versus 2024. We remain comfortable with the benign delinquency trends we've seen over the past several quarters. Total criticized loans decreased by $165 million versus the prior quarter, with decreases in all three major components of the metric. The decrease in Q4 reflects continued resolutions with some of these stress credits with liquidity present in the market in terms of both payoffs and loan re-margin. We remain confident there hasn't been a material shift in the credit profile of the portfolio that would result in a corresponding risk of loss. Non-accrual balances decreased to $100 million in Q4, down $6 million versus Q2, down $23 million from the same period a year ago. Finally, we booked just $2 million in net charge-offs during the quarter. In total, net charge-offs for the year represented just 12 basis points of average loans. We also added a modest provision of $7 million during the quarter. As we shift our focus to 2026, our team remains vigilant in reviewing our portfolios and staying in regular contact with customers to stay ahead of any emerging risks. We also remain diligent in monitoring credit stressors in the macro economy to ensure current underwriting reflects the impact of ongoing inflation pressures, shifting labor markets, tariffs, and other economic concerns. In addition, we continue to maintain specific attention to the effects of elevated interest rates on the portfolio, including ongoing interest rate sensitivity analysis bank-wide. We expect any future provision adjustments will reflect changes to risk rates, economic conditions, loan volumes, and other indications of credit quality. With that, I will now pass it back to Andy for closing remarks. Andrew Harmening: Thank you, Pat. In summary, we're very pleased with the strong organic growth momentum and the record-setting financial results we delivered as a company in 2025. We're entering 2026 with stronger profitability, better capital generation, and discipline on credit and expenses. With that said, we feel like our growth story is just beginning to emerge at Associated Banc-Corp. In 2026, we expect continued organic growth tailwinds from our prior investments in RMs, products, and marketing, but we also intend to accelerate our momentum through the American National acquisition and another wave of investments to double down in major metropolitan growth markets across the footprint. We look forward to providing additional updates along the way. And with that, we'll open it up for questions. Operator: Thank you. We will now be conducting a question and answer session. Our first question comes from Daniel Tamayo with Raymond James. Please proceed. Daniel Tamayo: Good afternoon, everybody. First thing, I guess on the net interest income guidance given it's excluding American National, I'm just going to try and see what you can say about that on an all-in basis. So just curious if there's anything you can give us in terms of thoughts around how that net interest income line might look including American National, whether it's from a purchase accounting perspective or balance sheet. I know we talked about potential balance sheet actions post-close. Just trying to get to kind of an all-in number there. Andrew Harmening: Yes. Daniel, we don't have a lot of updates on that. On the financial end of that. Obviously, we're going through the approval process, and we're hopeful to close in the second quarter and integrate in the third quarter. What I will tell you is what we've realized very clearly is the franchises are very well aligned. From a strategic standpoint, from a product and go-to-market standpoint. That matters just in trying to validate what our initial payback period was, which was 2.25 years. So we're feeling more bullish, we're on track. With our plan on the integration plan. And what we're seeing is continued opportunity in both of their major metropolitan markets, both in Omaha where we know we can bring some capabilities but they already have a very good presence and very good growth pattern. And in Minneapolis, where there'll be additional additions to customer-based conversations that make us believe that we can grow on top of that. What we haven't done is really projected any of that upside growth we have. So we don't have transaction is pretty logical to us internally, but we don't have an update. From a financial side. We'll have to wait. Till we get approval and get to maybe legal day one and the next quarter to give up. A little clear view there. Daniel Tamayo: Okay. Thanks, Andy. Maybe something that might be a little bit easier to talk about then on the investments that you really clearly laid out there in terms of the four cities where you're going to be investing in 2026, including a couple of new cities. Can you provide any kind of color around the from a quantitative perspective, what that may look like including kind of pace and just trying to think through how this could affect the pace of expense growth as the year moves on? Thanks. Andrew Harmening: Yes. I mean, we've given the expense target, expense growth target at 3% and just as in every other year, we've made some hard decisions on where to cut costs to invest. The expectation is that these investments we get asked sometimes the question is how do you believe that you have sustainability in your earnings? And the way that you get sustainability is you do something on the consumer side and commercial side, but you also you show that you've been able to do that in legacy major metropolitan markets. We have that in Chicago and we have that in Milwaukee and we're able to show that. You get into markets that grow a little faster, it's the same it's the same game plan. And so from an expense standpoint, the significant increase in marketing expense for Omaha is not going to come until we get systems conversion because for logical reasons. In Minneapolis, we have momentum there right now. So we'll start in that market throughout probably end of first quarter, second quarter, third quarter with regards to RMs, we want them on the ground right now. So we have we have outlined where we're going to make our hires there. I expect half of those hires to happen in the first quarter. In fact, two of them started this week. So we're not waiting for that to occur. Really what this does for us, it gives a clear, it gives us a clear path on how we're going to be able to maintain our gross structure, our balance sheet remix, which as you know drives our profitability profile. Daniel Tamayo: Okay, great. And just I guess lastly following up on that, would you say there's at least some benefit in the loan on the loan side and deposit side. In guidance from these hires that are happening in 2026 or is that mostly a '27 and beyond story? Andrew Harmening: Well, what we saw in Kansas City when we did a team lift out is significant loan growth in the first twelve months. So it is in our numbers, it is in our forecast. And we believe that it will lead to additional growth of what we would have had previously. And we've again given the guidance that we believe that we'll grow another $1.2 billion roughly in C&I growth, loan growth in 2026 and the path that we see is really clear. And it's fun to talk about what you might get from the new people, but remember that we have expiring non-solicitations every quarter. And in case you're wondering if we've lost momentum, would tell you our pipeline December 2025 is 43% higher than it was in December 2024. So we think this is a replicable model. And the exciting thing for us is we've proven we can compete in major metropolitan markets. Milwaukee and Chicago. Now we've proven it in Kansas City. And so the idea of getting into Omaha, the idea of expanding again in Kansas City and the idea of moving into Dallas where we had have already begun interviews with some very, very talented commercial lenders. It gives us a bit of confidence heading into the year. Daniel Tamayo: Great. Well, thank you for all that color, Andy. Andrew Harmening: Yes. Thank you. Operator: Our next question comes from Scott Siefers with Piper Sandler. You may proceed with your question. Scott Siefers: Good afternoon, guys. Let's see. So Andy, really great to see that strong C&I growth expected next year. And I think you sort of hit on all the reasons there. Also kind of feels like some of the targeted reductions are beginning to fade a little more as a headwind. I guess just in your view maybe where are we with regard to some of those pieces of portfolio that have been kind of drag dynamics for the last few quarters? Andrew Harmening: Scott, I'm not totally following you. Scott Siefers: Well, you said some of the whether it's residential real estate, these areas that have been sort of headwind, have been net drags, where are we if like, whether you wanna go No. Thank you. Yeah. Yeah. Andrew Harmening: I think the resi will continue to run off at a pretty similar pace. I think it was down just over Derek, I think just over $250 million decrease in 2025. We see that as a good thing. In fact, that pace, if it expanded, wouldn't bother me a bit. And so it's allowing us to do is really get our sea legs under us on the C&I side by having one of the slower amortization markets in recorded history. So it is shrinking by nature and those are low margin and what we think is happening, what we don't think is happening, we know what's happening is, it just allows us to slowly expand our margin each quarter as that's running off. And we're getting the commercial loans, but we're also getting the deposits. So our deposit production is up and heading into 2026 frankly I think the deposit should be a very good story for us. Whether that be because of household growth, the launching of a new vertical in second quarter, the fact that our new RMs are getting deposits at a faster pace, that we've had double-digit HSA growth and we're expanding into higher growth major metropolitan markets. When you take all that together, I see that Scott as the full piece, but the resi will be continue to be a drag for years to come on that. Frankly, we see a path to replace that and still have strong loan growth. And I think probably the story that's really going to merge nicely for us is the deposit growth. In 2026. Scott Siefers: Perfect. Okay. Thank you for that. And then, Derek, I know you had suggested in your prepared remarks, the capital markets line, those revenues can be lumpy. I guess I sort of remember last quarter thinking that it was that line specifically was elevated and might have to come back down. But just looking, it's been over $9 million a quarter for three of the last five quarters. Are you thinking, is this just a new level? I'm mean, I'm guessing from what I can sort of intuit into the guidance, you're thinking maybe comes back down. But is there any specific reason to believe that could come back down or is that just a level of conservatism baked in your guidance? How are you thinking of those things? Andrew Harmening: Scott, I'm going to let Derek ask that because you asked him, but the first answer is yes, it is repeatable. Derek Meyer: Yes, I think the point Scott, you were right last quarter, we were thrilled at how strong capital markets was in our fees overall. When you look at wealth and you look across the board. And I think we're we built the our go forward plan, our growth plan for relationship banking and this should be one of the line items that we benefit from. I think probably before we get very aggressive in guidance on it, we want a more durable pattern that we model into our forecasting. We do see it developing very strongly with the production dynamics we see in the pipeline growth. And we'll be happy to share that and get more and more confident with the level of granularity in those forecasts going forward. But you could hear us last time, we were excited about it and didn't want to get over our skis on it and we're thrilled that it becoming more repeatable. Scott Siefers: Perfect. Okay. And actually just one super quick sticky tack one just to be ultra clear. All the guidance for 2026, that's all based off of GAAP numbers for 2025, right? In other words, reported numbers with no adjustments, right? Derek Meyer: Yes. We're trying to we had a clean year and we're giving clean guidance. Scott Siefers: Perfect. Okay, good. Thank you very much. Operator: Our next question comes from Terry McEvoy with Stephens. You may proceed with your question. Terry McEvoy: Thanks. Good afternoon, everybody. Maybe a question for Derek. When I look at the loan to deposit growth 5% to 6% and then NII up, 5.5% to 6.5% on a kind of core basis that suggests limited core margin expansion and I'm wondering what your thoughts are on the NIM ex the acquisition? And embedded in that, what are you thinking for interest-bearing deposit betas within the NII guide? Derek Meyer: Yeah. So we don't give our as you know, NIM guidance. You are correct. It implies some expansion. We've been in all of our forecast scenarios, I've been saying this for a few quarters, we typically see our NIM trickling up as a natural remix into the portfolio and that's been pretty durable. Our guidance contemplates two cuts, April and July. So then what really comes down to if you think about upside is what and I've said this before, it's still true. Is how our competitors going to behave on the deposit side. And our incremental deposit cost is going to be rational well behaved or are they going to be hot? So far, we've seen in the last two quarters things have been very rational to then a little bit hot and then somewhat rational again. So I think that range is prudent. There is and I think it's balanced. Is some upside potential. If things get really competitive on the deposit side that would put pressure on that. Terry McEvoy: Thanks, Derek. And then as a follow-up, Andy, in your prepared remarks you talked about deepening your customer base, which my impression would be your customers using more products. Could you just share some data points or where you're seeing this among your customers? Andrew Harmening: Yeah. We're seeing it in a few different ways. And I mean, there's nothing fancy to this, which is exciting. The value of a new customer is significantly above and what it was in the past. So we're acquiring more, we're growing more and the quality of the customer is good on the consumer side. On the commercial side, as we see this we see the acceleration in loan production, we're seeing the exact same thing on the deposit side where our deposit production is improving as well. That is a form of deepening. When we see the fee income and the capital markets numbers, this is exciting for us. Now we've seen it a couple quarters in a row and we're getting more confidence that our fee income is tracking to the relationship approach. So between fee income, the deposit side on the acquisition on commercial, the quality of the consumer account that is coming in from a deposit standpoint, and then the deepening on the mass affluent. And then we believe that the upstreaming that we've just launched a new product set for private wealth. That has the early signs and I say early because we launched it in December. But the early signs are that our customers are appreciating kind of the more you bring, more you get and they're bringing more. So we believe that that will continue and when you bring more deposits, then we've seen an uptick in the dollars of investment dollars that we're adding. Year over year. So deepening in darn near every way I would I could go on and on, I won't bore you, but then when you get in a commercial customer, we have one of the top HSA groups in the country, top 15, we have a very high percentage of the time they're doing business with us on HSA which then adds a lot of consumers and guess what when those HSA consumers get to us, start to bank with us. So the cross referral and collaboration is what we've built ourselves for and that's working. So it's not always just deepening commercial within commercial. Sometimes it is commercial into private wealth, sometimes it's commercial to HSA, sometimes it is from the consumer back over to commercial. So that's what I would say, Terry. I know it's a long answer, but it's an exciting sustainable piece for us right now. Terry McEvoy: Thanks. That's great color and thanks for taking my questions. Andrew Harmening: Thank you. Operator: Our next question comes from Chris McGratty with KBW. You may proceed with your question. Andrew Leishner: Hey, how's it going? This is Andrew Leishner on for Chris McGratty. Alrighty. Just on capital, you're towards the higher end of your CET1 range at 10.5 and you're starting to create capital back at a faster clip as your return profile continues to improve. Can you provide your thoughts on the potential consideration of buybacks or should we should we continue to expect capital be reserved for growth? Thanks. Andrew Harmening: Yes, that's a great question. The number one goal for us is to invest in our business and find a way to drive our profitability profile. We've been able to continue to do that. As we continue to grow that capital base, what it does is it gives us options. And so today, what I would say is, and I hope you hear it very, very clearly from us, our number one priority is organic growth. We're in the middle of a deal and our main priority of that is execution and with that then organic growth. So if we execute on those two things, it should open the door on profitability. It should open the door on ROTCE expansion, margin expansion, capital accretion. And really what a great position that puts us in to make decisions at that point. On what to do with the money, the dollars and the capital. But today, I want to be very clear. Our goal is organic growth. Andrew Leishner: Okay, great. Thank you. And then just on credit, metrics were all really strong this quarter, low charge-offs, NPLs and criticized both lower. But can you provide any potential color on any portfolio verticals or geographies that are more stressed or causing more concern right now? Thanks. Patrick Ahern: Yes. Thankfully right now we don't have anything that kind of sticks out. We're continuing to watch what's going on in the economy. We're kind of working through the real estate stuff that started in the pandemic and there really hasn't been any new issues there. So it's just kind of watching everything across the board as it sits right now. Andrew Harmening: In fact, the pay downs in CRE we saw as a good sign. It took projects that have been completed and went to the permanent market. So to us, that actually was more of a sign of a health than a concern. Had those lingered on and not been refinanced, that would have been a growing concern. But the fact that we saw frankly a few $100 million in paydowns in the quarter in CRE, we saw as a big positive. Andrew Leishner: Okay. Thank you. Andrew Harmening: Thank you. Operator: The next question comes from Jon Arfstrom with RBC Capital. You may proceed with your question. Jon Arfstrom: Hey, thanks. Good afternoon. A couple of questions here on deposits. Don't know if it's Slide 11 or Slide 32, but how do you expect the deposit mix to change over time as the RMs gain some traction and I'm assuming treasury is part of this. Just kind of curious more what you think Slide 32 could look like in a year? And then Derek, you referenced some seasonal flows just how material is that so we can kind of understand what flowed out? Derek Meyer: So typically the second half of the year you see much more seasonality flowing into our all of our non-maturity deposit buckets. And so you saw a lot of growth in those. It's similar to last year, some of it's acquisition, but a lot of that is also just seasonal flows. It helps our margin. And with RMs those happen with C&I focus and relationship focus. Those are the same buckets you on the commercial side where you see growth in the long run? So obviously that's not the CD bucket which we have a which has grown over the last few years is mostly comes from the consumer side. So that's how I think about things going forward is more in the non-maturity bucket. And that's also where we see some of the seasonality. I'm not sure if that answers it, that's should give you a sense of it. John, I would say generally speaking I don't have a specific forecasted number because we haven't forecasted this publicly. But part of the strategy was that we were leaking house and customers by 1% to 2% a year for an extremely long period of time. We did that again the first year I got here then we moved towards zero. Then we moved towards 1% growth, then we moved to 1.4% growth. What you're doing is acquiring non-interest bearing and interest-bearing demand accounts. And so we celebrate being at 1.5% roughly 1.4% last year. But if you net that out over the four or five years, it's pretty close to 0% growth. So now we're evolving that trend. We've switched that trend around. And so we're getting we're focusing on getting to 2% and that will have that will all over time have meaningful growth in what our deposit mix is in a positive way. We're doing the same thing on commercial by focusing on RMs and focusing on full relationships. So I'd expect demand deposit accounts on the commercial side to improve as well. And the deposit vertical that we're launching next quarter on title is going to be one that has a pretty positive margin view on it as well. And think that will get started in $100 to $200 million in growth this year and then continue on from there. So our expectation is that by going to market the way we are by growing households both on the consumer small business and commercial side, we'll start to see a shift towards demand deposit accounts, which over time will be a good thing. For the company. Jon Arfstrom: Okay. Good. That's very helpful. That's what I was getting. The other one I wanted to ask about, which is kind of random, but on Slide six, you show your Chicago growth in deposits and C&I. And you don't talk about that very much. I'm just curious. It's a real success story, but I'm curious on your outlook and opportunity in Chicago and maybe if you're willing to size Chicago for us, think that would be helpful as well. Thank you. Andrew Harmening: Size it in terms of what the size of portfolio is in Chicago? Jon Arfstrom: Yep. Yep. Andrew Harmening: Yeah. We haven't gotten into disclosing at that level. We'll think about what is the most helpful way to disclose that in the past in the future. But John, really for us, what we wanted to show here very clearly, because we've heard the question is why is this sustainable? And can you grow in major metropolitan markets. And so, the message is clearly that we can and we are and these are legacy markets and we're doubling down and getting into that are even faster growth and we have talent either in those markets already or adding that. Today, I don't have a breakout for the size of that. We'll talk about getting into more detail. But I think for the purposes of this page, the message was that this is a sustainable model. In fact, we're entering the year in a substantially different situation than we were in 2025. So if you look at what's really happening is we have sustained growth in Chicago and Milwaukee. However, we didn't going into 2025, we didn't exist in Kansas City. Now we've already shown that we can have significant growth there. You can see that in the $1.2 billion in growth that we've had in C&I. We would not have that if we hadn't added on in that market. And so the messages of one of sustained ability to sustain growth in those spaces, but we haven't really broken out specific dollar amounts for those markets. Jon Arfstrom: Yeah. I'm just curious because that was it's a legacy market for you and that's a big growth number. So but I appreciate what you're saying. So thank you. Andrew Harmening: Yes. And John, by the way, just so you're not scared of that growth market because we've all heard the comment of it's growing like a weed or if it looks like it's growing like a weed, it probably is. We just add a bunch of people. And we got really good people. And so for us, the good news on this front and Phil Trier and John Utes have really put a lot of energy into the recruiting path. And it turns out when you hire good folks and they know each other and they bring a friend. And so we've been able to recruit in these markets quite effectively and that's really one of the reasons behind the growth is the increase in quality RMs. In Chicago, in Milwaukee, Twin Cities, Kansas City, soon to be Dallas. So what I think you could take away from that is we've picked the right people and it's leading to growth. Jon Arfstrom: Alright. Thank you very much. Operator: Thank you. At this time, there are no further questions. This now concludes our question and answer session. I would like to turn the floor back over to Andy Harmening for closing comments. Andrew Harmening: Yes. First, I'd just like to thank everyone that joined today. We're really pleased on how we're exiting 2025 and we're even more excited about what's in store for us for 2026. We look forward to sharing that whether that be on the quarterly call or one-on-ones. Thank you. Have a great night. Operator: Ladies and gentlemen, thank you for your participation. This concludes today's conference. Please disconnect your lines and have a wonderful day.
Jeff Norris: Good day, and thank you for standing by. Welcome to the Capital One Financial Corporation Q4 2025 Earnings Call. Please be advised that today's conference is being recorded. After the speakers' presentation, there will be a question and answer session. To ask a question, please press 11 on your telephone, and wait for your name to be announced. To withdraw your I would now like to hand the conference over to your speaker today, Jeff Norris, senior vice president of finance, Please go ahead. Thanks very much, Josh, and welcome, everyone. To access the live webcast of the call, please go to the Investors section of Capital One Financial Corporation's website at capitalone.com. A copy of the earnings presentation, press release, and financial supplement can also be found in the Investors section of Capital One Financial Corporation's website, capitalone.com, by selecting Financials and then Quarterly Earnings Release. With me this evening are Mr. Richard Fairbank, Capital One Financial Corporation's Chairman and Chief Executive Officer, and Mr. Andrew Young, Capital One Financial Corporation's Chief Financial Officer. Rich and Andrew are going to walk you through this presentation that summarizes our fourth quarter 2025 results. Please note that this presentation may contain forward-looking statements. Information regarding Capital One Financial Corporation's financial performance and any forward-looking statements contained in today's discussion and the materials speak only as of the particular date or dates indicated in the materials. Capital One Financial Corporation does not undertake any obligation to update or revise any of this information whether as a result of new information, future events, or otherwise. Numerous factors could cause our actual results to differ materially from those described in forward-looking statements. For more information on these factors, please see the section titled Forward-Looking Information in the earnings release presentation and the Risk Factors section of our annual and quarterly reports accessible at Capital One Financial Corporation's website and filed with the SEC. With that, I'll turn the call over to Mr. Young. Andrew? Andrew Young: Thanks, Jeff, and good afternoon, everyone. Let me begin by saying that we are incredibly excited to announce that we entered into a definitive agreement to acquire Brex. Rich will talk more about the Brex acquisition in a moment. I'll start tonight's presentation by covering the highlights of our fourth quarter results on Slide three. In the fourth quarter, Capital One Financial Corporation earned $2.1 billion or $3.26 per diluted common share. For the full year, Capital One Financial Corporation earned $2.5 billion or $4.3 per share. We completed the sale of the $8.8 billion Discover home loans portfolio in the quarter. After refining our preliminary purchase accounting estimates, the proceeds resulted in a net gain on sale of $483 million as reported in the results for discontinued operations. You can find the revised Discover purchase consideration walk and amortization schedules in the appendix of tonight's presentation. Net of the home loan sales, and the other adjusting items, fourth quarter earnings per share were $3.86. Full year adjusted earnings per share were $19.61. We also had two notable items in the quarter: $200 million of accelerated philanthropy contributions and $37 million of pension termination expense. Relative to the prior quarter, fourth quarter revenue increased about 1% and noninterest expense increased 13%. Pre-provision earnings declined 12% or 10% net of adjustments. Our provision for credit losses was $4.1 billion in the quarter, an increase of about $1.4 billion relative to the third quarter. The increase was driven by an allowance build of $302 million in the quarter, versus last quarter's release, as well as a $360 million increase in net charge-offs. Turning to Slide four, I'll now cover the allowance in greater detail. The $302 million allowance build in the quarter brought the allowance balance to $23.4 billion. Our total portfolio coverage ratio decreased five basis points and now stands at 5.16%. I'll cover the drivers of the changes in allowance and coverage ratio by segment on Slide five. In our domestic card segment, our coverage ratio declined by 11 basis points and now stands at 7.17%. The $335 million allowance build was largely driven by loan growth in the quarter. The allowance balance in our consumer banking segment was largely flat at $1.9 billion. Growth in the auto business was largely offset by continued observed credit favorability. The coverage ratio ended the quarter at 2.23%, three basis points lower than the prior quarter. And finally, in our Commercial Banking segment, we released $47 million of allowance. The allowance release was largely driven by charge-offs in the quarter. The commercial banking coverage ratio declined six basis points and now stands at 1.63%. Turning to Page six, I'll now discuss liquidity. Total liquidity reserves ended the fourth quarter at about $144 billion, up modestly from the prior quarter. Our preliminary average liquidity coverage ratio increased to 173% in the quarter driven by higher average cash and lower net outflows. Turning to page seven, I'll cover our net interest margin. Our fourth quarter net interest margin was 8.26%, 10 basis points lower than the prior quarter. The decline was driven by lower asset yields and a higher cash balance as the impact of the sale of the Discover Home Loans portfolio more than offset the typical seasonal decline in cash. Turning to Slide eight, I will end by discussing our capital position. Our common equity Tier one capital ratio ended the quarter at 14.3%, approximately 10 basis points lower than the prior quarter. Quarterly earnings were more than offset by $2.5 billion in share repurchases and the increase in risk-weighted assets. With that, I will turn the call over to Rich. Rich? Richard Fairbank: Thanks, Andrew. Slide 10 shows fourth quarter results in our credit card business. Credit card segment results are largely a function of our domestic card results and trends, which are shown on slide 11. In the fourth quarter, the combined domestic card business posted steady top-line growth, strong margins, and stable credit. Year-over-year purchase volume growth for the quarter was 39% driven primarily, of course, by the addition of Discover purchase volume. Excluding Discover, year-over-year purchase volume growth was about 6.2%. Ending loan balances increased 69% year-over-year also largely as a result of adding Discover card loans. Excluding Discover, ending loans grew about 3.3% year-over-year. While competitive intensity remains high, we continue to see good traction across our legacy card business, with stronger growth results in our heavy spender franchise at the top of the marketplace. The legacy Discover card loans continued to contract slightly and will likely continue to face near-term growth headwinds due to Discover's prior credit policy cutbacks and some trimming around the edges that we're doing. We continue to see good opportunities to grow the Discover card business on the other side of our tech integration where we can implement growth expansions powered by our unique technology and underwriting. Revenue was up 58% from 2024 largely driven by the addition of Discover revenue. Excluding Discover, year-over-year revenue growth was about 6.2% driven by underlying growth in purchase volume and loans. Revenue margin for the quarter was steady at 17.3%. The domestic card charge-off rate for the fourth quarter was 4.93%, up 30 basis points from the prior quarter and down 113 basis points from a year ago. Our domestic card delinquency rate was 3.99%, up 10 basis points from the prior quarter and down 54 basis points from a year ago. On a sequential quarter basis, both our charge-offs and delinquencies moved in line with normal seasonality. Our credit metrics appear to be settling out after almost a year of steady improvement. Domestic card noninterest expense was up 60% compared to 2024 reflecting a full quarter of combined operations and purchase accounting operate amortization. Operating expense and marketing both increased year-over-year. Total company marketing expense in the quarter was about $1.9 billion, up 41% year-over-year. Our choices in domestic card are the biggest driver of total company marketing. Compared to 2024, domestic card marketing in the quarter included the addition of Discover marketing, higher media spend, and increased investment in premium benefits and differentiated customer experiences. Our marketing continues to deliver strong new account originations and to build an enduring franchise with heavy spenders at the top of the market. Slide 12 shows fourth quarter results in our consumer banking business. Global payment network transaction volume for the quarter was about $175 billion. Auto originations were up 8% from the prior year quarter. Increased competitor activity in the quarter drove a slowdown in our originations growth. We continue to be in a strong position to pursue resilient growth in the current marketplace. Consumer banking, ending loan balances, increased $6.7 billion or about 9% year-over-year. Average loans were also up 9%. Compared to the year-ago quarter, ending and average consumer deposits grew about 33% driven largely by the addition of Discover deposits. Looking through the Discover impact, our digital-first national consumer banking business continues to grow and gain traction. Consumer banking revenue for the quarter was up about 36% year-over-year driven predominantly by the full quarter of Discover operations as well as Discover revenue synergies and growth in auto loans. Noninterest expense was up about 48% compared to 2024, driven largely by the full quarter of Discover as well as higher marketing to drive growth in our national consumer banking business, increased auto originations, and continued technology investments. The auto charge-off rate for the quarter was 1.82%, down 50 basis points year-over-year and up 28 basis points from the third quarter, in line with seasonality. Auto charge-offs have been stable near pre-pandemic levels for the past year. The auto delinquency rate increased seasonally in the quarter, up 24 basis points to 5.23%. On a year-over-year basis, our auto delinquencies improved by 72 basis points. Slide 13 shows fourth quarter results for our commercial banking business. Compared to the linked quarter, both ending and average loan balances were flat. Ending deposits were up about 4% from the linked quarter. Average deposits were up 5%. The commercial banking annualized net charge-off rate for the fourth quarter increased 22 basis points from the sequential quarter to 0.43%. The commercial criticized performing loan rate was 4.68%, down 45 basis points compared to the linked quarter. The criticized nonperforming loan rate was down three basis points to 1.36%. In closing, fourth quarter results continued to reflect solid top-line growth and strong and stable credit performance. Continuing capital generation and our strong balance sheet powered increased share repurchases of $2.5 billion in the quarter. And we made expected progress on Discover integration and synergies in the quarter. We remain on track to deliver the expected synergies. 2025 was a seminal year for Capital One Financial Corporation. In addition to delivering strong performance across our businesses, we completed the acquisition of Discover, a singular transaction that's delivering near-term synergies and unlocking significant strategic opportunity and upside over the long term. Our 2025 performance was enabled by years of strategic preparation and our choice to consistently invest to sustain long-term growth and returns. And these same choices put us in a strong position going forward as we enter 2026. I'm struck by the number and quality of the opportunities we have before us. We've been investing in many of our opportunities for years, like building our heavy spender franchise with consumers and small businesses at the top of the credit card marketplace, building a national franchise of primary banking relationships in our retail bank business, and building a modern technology and data infrastructure. And as we continue to build on foundational tech investments to migrate up the tech stack, we're generating new growth opportunities like Capital One Travel, Capital One Shopping, and Auto Navigator. Our tech stack was built from the outset working backwards from the AI revolution, and we are now building AI solutions across our businesses. Many of our opportunities are enhanced by the Discover acquisition, which of course also brings the new opportunity to grow and scale our own global payments network. To capitalize on these opportunities at this special moment, we need to make significant and sustained investments. And we are leaning into them. Tonight, I'm excited to announce our agreement to acquire Brex for a combination of stock and cash totaling $5.15 billion. We've included slides in the earnings presentation appendix that summarize key aspects of the transaction. Brex is a pioneer in the dynamically changing business payment space with industry-leading technology and world-class talent. Acquiring Brex accelerates a journey we've been on since our founding days, the quest to build a banking and payments company that's positioned to win where the world is going. The transaction will create purchase accounting impacts that we'll need to help investors navigate. Importantly, we expect Brex to have no impact on the Discover integration or expected synergies. And the total consideration for the Brex acquisition is around 3.5% of Capital One Financial Corporation's market capitalization. It doesn't change the expected pace or magnitude of our quarterly share repurchases. And perhaps most importantly, we still expect our earnings power on the other side of the Discover integration to be consistent with what we expected at the time we announced the Discover deal, inclusive of Brex. And now we'll be happy to answer your questions. Jeff? Jeff Norris: Thanks, Rich. We'll now start the Q and A session. As a courtesy to other investors and analysts who may wish to ask a question, please limit yourself to one question plus a single follow-up. If you have follow-up questions after the Q and A session, you can get in touch with the investor relations team, and we'll be available to answer them for you. Josh, please start the Q and A session. Operator: Thank you. Press 11 on your telephone and wait for your name to be announced. To withdraw your question, please press 11 again. And our first question comes from Sanjay Sakhrani with KBW. You may proceed. Sanjay Sakhrani: Thank you. I wanted to talk a little bit about the Brex acquisition first. Rich, could you just talk a little bit about the strategic value of adding this capability? I see how it could really enhance sort of your platform in the small business space, especially with the network. But maybe you could just talk a little bit about how you see it coming together over time. Richard Fairbank: Yes, thank you. Let me just, kinda pull up here and talk about the opportunity and Brex holistically. Acquiring Brex builds on and accelerates a journey we've been on since our founding days. It is the quest to build a banking and payments company that's positioned to win where the world is going. We were the original fintech years before that term was coined. And we grew by carefully choosing businesses with attractive industry structures that are at the heart of consumers' financial lives, and also that we're ripe for transformation by technology and data. As a result, we aren't in all the businesses that other banks are in. We have focused on a select set of businesses that have relevant scale in the competitive marketplace and which fit together synergistically. A central part of that envelope of activities has been payments. From the founding of the company, we have believed that payments will be the tip of the spear in the transformation of banking and financial services. Over time, we built a payments company encompassing credit cards and banking across consumers and businesses and recently added one of the nation's only payment networks. Business payments have been a growing part of our strategy and investment agenda. We have built the nation's third-largest small business credit card franchise, and we have been investing to grow our small business bank. Our announcement today represents an important step change towards our business payments destination in a broader marketplace that we believe is ripe for reinvention. Let's talk about what's happening in the business payments marketplace. The credit card is an important piece of a bigger customer need. For decades, businesses of all sizes have faced chronic pain points when dealing with payments. Including collecting hundreds or thousands of invoices, deciphering what payment vehicles or platforms to use, dealing with approvals, expense budgets, spending policies, booking travel, and tracking employee T&E spending. And after all of that, businesses need to reconcile and connect all these transactions with accounting and reporting systems. It's often manual, error-prone, and very time-consuming. I don't know a single business owner who went into business because they were really passionate about managing the complexity of spending and payments. Solutions and tools to help businesses address these issues have been piecemeal. Banks offer business credit cards and bill pay features. Software companies offer accounts payable and expense management tools. While these solutions are valuable, they only address pieces of the pain and are not integrated or comprehensive. Many are built on legacy technology. The pain points remain. And so does the opportunity to provide a truly integrated modern solution. Brex was the pioneer of that modern solution. In 2017, Brex invented the integrated combination of business credit cards, spend management software, and banking together in a single platform. They totally changed the game by delivering breakthrough experiences like customizable credit card limits and controls, automated expense receipt capture, real-time blocks for out-of-policy spend, reconciling spend data with internal budgeting, catching payment fraud and errors by matching invoice data to purchase orders, and enabling businesses to close their books effortlessly through real-time ERP integrations. Brex has grown rapidly with companies from startups to large enterprises. Some of the world's most tech-forward companies use Brex today, including Anthropic, Robin Hood, TikTok, Coinbase, Scale AI, Toast, CrowdStrike, Cloudflare, and DoorDash. Brex's heritage began with tech companies, but their solutions are equally valuable to all companies. Over the last two years, 60% of their originations have been to non-tech companies. Business cards represent approximately $2 trillion in purchase volume split roughly between corporate liability, where the business entity is responsible for making payments on the card, and personal liability, where the small business owner is personally responsible for making payments on the card. And that latter space, the personal liability card, is where we primarily play today. Collectively, this business card market is growing at about 9% annually as business payments continue the secular migration from cash and checks to digital payments. And companies like Brex have grown even faster. Brex is taking share from banks and software providers alike. The integrated platform solution they pioneered redefines and expands the market opportunity beyond credit cards to business payments, banking, and spend management software. Brex has been a beacon for us, and we have admired them from afar. As we've gotten closer, we've been even more struck by what they have built. The Brex team has amazing talent. They built a full modern tech stack from the bottom up. Their card and banking businesses run on an in-house fully modern core. They're 100% in the cloud. While most fintechs we've seen through the years leverage third-party technology solutions to get there faster, Brex has taken the more difficult and rarest of journeys for a fintech. They've invested in a modern technology infrastructure and data ecosystem that's built to last. And it powers remarkable capabilities. On the shoulders of their technology investments, Brex was able to rapidly develop and launch innovative solutions for a wide range of customers from startups to large businesses with complex international needs. For example, Brex's technology enables them to issue business credit cards in local currencies in over 50 countries. This automated platform is the foundation for AI solutions on top of Brex has built and deployed their own in-house AI agents for expense management and audit. And are on the way to procurement payments, and accounting agents. Brex has grown from a startup into a thriving business with hundreds of millions of dollars in revenue and tens of thousands of customers. As we got to know this company, we kept asking ourselves, how on earth did a startup pull off building a full tech stack from the bottom up? Brex has made the right choices, the hard choices, to put themselves in a strong position to grow and win in the marketplace and to sustain success over the long term. Along the way, they realized that their exceptional growth opportunity was limited only by their scale and resources. And that brought the two of us together. Several Capital One Financial Corporation strengths and capabilities are on the bull's eye of what Brex needs to fully capitalize on the growth opportunity. We have a compelling and ubiquitous brand. Brex has found that when they can get in the door with a potential customer, their success rate is impressive. We believe that our brand and our customer scale will open many more doors. Also, we can immediately leverage our marketing machine bringing massive data scale, targeting models, extensive channels, and a large customer base to enhance the flow of prospects. And Capital One Financial Corporation's balance sheet, which is primarily funded by federally insured retail deposits, is yet another enabler of growth, returns, and resilience for Brex. And finally, we can bring additional investment capacity in marketing, sales force expansion, engineering, and AI. The striking thing is most of these benefits from Capital One Financial Corporation can be brought right away post-close and do not need to wait for fuller integration down the road. So we believe we can accelerate Brex's growth almost from day one. As we integrate over time, there is more value to capture, much of it coming from what Brex can bring to us. Brex brings exactly what Capital One Financial Corporation needs to accelerate what we've been building. Brex opens up the opportunity in the corporate liability part of the marketplace, where our presence is currently much smaller than it is in the personal liability space. Additionally, Capital One Financial Corporation can leverage Brex's spend management tools to broaden and enhance our offerings for our existing personal liability card customers. And for our small business bank, which has been mostly a local offering in our branch footprint, Brex gives us the capabilities to unlock a national small business banking opportunity. Brex can also help to propel another important growth business at Capital One Financial Corporation, which is our travel business. Our travel portal is already on a strong growth trajectory powered largely by our massive consumer franchise. As we integrate Brex and its spend management platform with our travel portal, businesses will be able to manage their corporate travel expenditures, payments, and travel policies directly on the Capital One Financial Corporation travel portal. This will open up the opportunity to grow business travel revenues as well as consumer travel. Beyond the remarkably compatible technology and vision of where the world is going, we've also found amazing cultural alignment. We are both founder-led companies with a heritage of innovation and entrepreneurship. We've both disrupted the status quo to reimagine markets and drive transformation. And our strategic choices along the way have been guided by strikingly similar core tenets. To invest to sustain growth and returns over the long term. To work backward, from where the world is going, to build from the bottom of the tech stack up, and to search the world to find and hire great people. And give them a chance to be great. Pulling Way Up, Acquiring and joining forces to win in the business payments marketplace. Fits squarely into our more than three-decade quest to build a banking and payments company that's positioned to win where the world is going. It's a hand-in-glove fit, will accelerate and enhance a path that we were already on, propelling us to the frontier of business payments. Capital One Financial Corporation and Brex have been on separate paths working toward the same business payments destination. An integrated platform that combines business payments, spend management, and banking powered by a modern tech stack that's built for and powered by AI. Combining our businesses and capabilities onto one shared path will accelerate the journey for both of us. Thank you. Sanjay Sakhrani: Thank you, Rich. That was very interesting and I appreciate it. Maybe just a follow-up question on the 10% credit card cap topic. Obviously, the industry has been quite vocal about the explicit and unintended consequences of it. I'm just curious to hear your view and if you've had any discussions with the administration on the issue. Richard Fairbank: We appreciate the energy to help consumers with affordability on many aspects of their spending. Let's talk about credit cards. Let me start by saying that we have built a company focused on providing Americans with products that are simple to understand and are accessible. All of our banking products have no minimum balance requirements and no fees, including no overdraft fees. And we offer many credit cards with no annual fees. The credit card industry is intensely competitive. As thousands of banks and credit unions compete directly based on product pricing and other features. Putting a price control in place, such as the proposed rate cap, would not make credit more affordable. It would make credit much less available for consumers up and down the credit spectrum. This is far more than a subprime issue. This would happen because we and the industry would be compelled to immediately slash credit lines, restrict accounts, and limit new originations to a very small subset of consumers. And consumers are the backbone of the American economy. 70% of GDP is driven by consumer spend and $6 trillion of that spending is on credit cards. A material contraction in available credit would likely cause shocks throughout the economy as the lack of credit would result in greatly reduced consumer spending and would likely bring on a recession. And let's not forget about the impact on businesses beyond lost sales. Other parts of the economy beyond banks are highly dependent on card programs, from retailers to airlines to hotels. In addition, credit cards are many consumers' initial entry point into building a credit history. A reduction in available credit could significantly impact their ability to get auto loans, mortgages, and other forms of credit. And for many consumers, a credit card is their only access to credit. So while we can't predict what will happen next, we feel strongly that a cap on interest rates would catalyze a number of unintended consequences. Next question. Operator: And our next question comes from Erika Najarian with UBS. You may proceed. Erika Najarian: Rich, pulling up again, another point of discussion that was heavily debated in the past few weeks has been the Credit Card Competition Act. And given your acquisition of Discover, and what the opportunity set could be, maybe help us think through what you think the consequences could be of passing CCCA. And also, maybe the broader question is, as we think about the strategic imperatives over the next year or two, where would you put increasing global acceptance? Richard Fairbank: So Erika, interchange has been around for a long time because part of a well-established payments ecosystem in the United States that benefits both retailers and consumers alike. We believe that there is substantial competition in the payments industry already. With banks like Capital One Financial Corporation taking a big portion of its interchange revenue and giving it to the consumer in the form of rewards. And that then stimulates consumer spending and the ecosystem thrives. So pulling up, we believe this is a system that is working well. I think government intervention in this marketplace in this manner may have unintended consequences that could harm market participants, including consumers. Could you ask again your global acceptance question, Erika? Erika Najarian: Yes. So I guess I'm asking where on your strategic imperatives would increasing global acceptance rank as investors were thinking that if CCCA goes through, that given that you have a Discover network that you potentially could be a beneficiary as a second network on the card, but of course, the limitation currently would be global acceptance. Richard Fairbank: So, Erika, as you know, we have talked about since we announced the Discover deal. The network is a crown jewel in that acquisition. And you know, when we looked at every strategic opportunity to leverage the network, every single one of them we found to capitalize on those opportunities had the same exact shared path. And that shared path was to raise international acceptance and to build the network brand. And so, that is a path that we are already going down that path. It's a long journey to build acceptance all over the world. And along the way, we are to use a phrase we always use internally, we're sloping the work. To put the highest emphasis on the places that Americans travel. So we believe that this and so there's so many different types of opportunities that we have that all sort of need that same double set of solutions, and that's why we're investing in that. And that's And I'm struck, it's rare in business where every single thing that you hope to be down the road has the same shared path to get there. So it's why we're really leaning pretty hard into this network opportunity. Next question, please. Operator: Our next question comes from Ryan Nash with Goldman Sachs. Ryan Nash: Hey. Good evening, Rich. Richard Fairbank: Hey, Ryan. Ryan Nash: So maybe putting aside all the macro stuff, we've spent the last few quarters talking about investing in the business. And can you maybe just talk a little bit about whether the acceleration that you've been speaking of has made its way into the results yet? What are some of the areas? And I guess given the fears of rising efficiency, you maybe just talk about whether or not you can manage at around these levels over the medium terms fully understand that I could differ over any individual quarter? Thank you. Richard Fairbank: So Ryan, yeah, let me just pull up for a moment and reflect on your comment and your question about our investments, just to kind of reset the table here. As a result of years of strategic preparation, we have a wealth of opportunities today that put us in an advantageous position to grow and win in the marketplace as it continues to change at a breathtaking pace. And these investment areas, you know, that include Discover, and as we just talked about, leaning into international acceptance and building the network brand. We, of course, continue as we have for many years, to lean into the premium credit card space. And there is just so much opportunity in building a franchise of heavy spenders. I do want to comment there that it's very clear that the biggest players in that space are leaning even harder into that. And they're investing. And so we are doing so as well. I think the flip side of all that investment is it's gonna be, you know, a higher hill for maybe other competitors to climb, but we're climbing that hill and seeing a lot of traction. In fact, our growth in our credit card business and purchase volume, the highest growth is at the very top of the market. In retail banking, for years, we've been building a national retail bank organically. We're the only major bank building such that doing that organically, that requires a lot of investment in marketing. And now with the Discover acquisition, we have continued opportunity in that space, and we're leaning pretty much even harder there. As AI continues to transform the world, we, of course, are investing in AI and being on the top of the tech stack. That we built, AI has a really, I think, special high leverage at a company like Capital One Financial Corporation. And in fact, as we have moved up the tech stack, we're investing in opportunities that sit on the tech stack, like Capital One Shopping, Auto Navigator, our travel business. And now with Brex, we have a chance to massively accelerate and advance our journey with corporate liability, personal liability, the small business bank, as we talked about earlier. So, let me go back to your question about efficiency ratio. In recent quarters, we've talked about these opportunities. And we have indicated that collectively, these investments will put upward pressure on the efficiency ratio in the near term, and we continue to lean into those. With the acquisition of Brex now, we have additional investments, and those investments we are making are directly in service of driving growth. But it's also the case that we already had dollars set aside for pursuing this market organically, which will be replaced by the Brex investment. So there is some offset there, and we've also tightened up in some other areas. So but the net effect of all these investments across Capital One Financial Corporation in pursuit of opportunities that collectively are really as good as I've seen in my journey of founding Capital One Financial Corporation and being there for all these years. The net effect will be some upward pressure on the efficiency ratio in the near term. Now importantly, we still expect our earnings power on the other side of the Discover integration to be consistent with what we expected at the time we announced the Discover deal, inclusive of Brex. Next question, please. Operator: Our next question comes from Terry Ma with Barclays. You may proceed. Terry Ma: Maybe a question for Rich. Credit card delinquencies are now down year over year, thirteen, fourteen months in a row. There is consumer stimulus in the form of tax refunds this spring. You re-highlighted some of the comments you made around the loan growth brownout. Maybe just help us tie all that together and just kinda talk about how you think about the outlook for consumer health and growth at Capital One Financial Corporation? And any color you can provide on how long the brownout will kind of persist for? Thank you. Richard Fairbank: Okay. Great. Let me actually start with the brownout. So the brownout that we flagged in prior earnings calls, just to remind ourselves what's driving that. Is, first of all, following Discover's credit expansion, this in twin in the '22 kind of time frame. You know, they ran into some issues. So Discover dialed back their origination programs by a fair amount toward the 2023 and continued to run it at a scaled-back level. As a result, they've had some pretty darn good credit, but the flip side of that is they put a whole bunch of vintages in place that are just smaller than prior vintages were, and that just has an extended impact on the growth in so that's kind of factor number one. We also, as we and you know, this is not surprising that we find this, but as we look over Discover's shoulders at their credit policy, and things that are now being implemented fully on still on the Discover system. We are doing some trimming on the margins of their origination in areas, particularly around higher balance revolvers. Which as we've said for way more than a decade, that's an area that we probably relative to the industry are more trying to avoid. So there's been some trimming around the edges that we're adding on top of their dial-back that they did that collectively leads to this brownout that we flag. Now that is everything we're talking about is temporary in nature. And the thing that will change that trajectory is getting on the other side of the tech integration of Discover into Capital One Financial Corporation because now when Discover is entirely on our platforms, and we're able to leverage all of our data credit policies, the marketing machine of Capital One Financial Corporation connected to the technology and everything else. We look forward to being able to resume growth. We've already identified a bunch of growth opportunities that are natural for Discover's really quite remarkable brand and business position. So we look forward to that on the other side. So that's the brownout, but that will continue until card integration is done. Let me turn to your other question on the health of the consumer. The US consumer and the overall macro economy remain resilient. The unemployment rate inched up in 2025, but remains pretty low by historical standards. Layoffs and new unemployment claims are low and stable. Wages are still growing in real terms and consumer spending remains robust. Debt servicing burdens remain stable and close to pre-pandemic levels. Because of the budget bill implemented last summer, consumers will see larger tax refunds this year than last year. Tax withholdings will also be lower in 2026. I'll come back in a moment to tax refunds. But let me keep going for a moment. But I do think we're still in a period of elevated economic uncertainty. You know, inflation remains above the Fed's target. Job creation slowed significantly in 2025. Some consumers are feeling pressure from the cumulative effects of price inflation, higher interest rates. And many of those relying on the Affordable Care Act for their health insurance will see their premiums going higher quite sharply in some cases. And so I think these uncertainties will hang over the economy and hang over the choices that consumers make. Let me make a comment before I turn to our individual portfolio, just to comment on tax refunds. Tax refunds are an important driver of the seasonal improvements in delinquent payments that we see around March and April of each year. In both card and auto. In 2026, the total amount of tax refunds is expected to be higher than in 2025 because some of the tax cuts in the big beautiful bill last summer were made effective retroactively to the start of 2025. Tax withholdings will also be lower in 2026. So all else equal, higher tax refunds will likely be a good guy for consumer credit. Especially and I think this is a really important point, especially when they are higher than consumers expect. But we believe that this will probably be a one-time benefit because tax withholdings will be lower in 2026, so we won't see another round of higher refunds in 2027. And I think consumers will set their expectations, hopefully not counting on too big refund coming in 2027. So I think we're looking at a one-time effect that is our view there. Let me turn to our own portfolio we talked about the improvement in our charge-off rate. It's steadily improved really through most of 2025. And, in fact, in the fourth quarter, was 113 basis points lower than a year ago. And our front book of new originations continues to perform well. As we look ahead, delinquencies remain the leading indicator of credit performance. Our card delinquencies improved steadily beginning in 2024 all the way through 2025. But we've now seen two quarters in which they've moved more or less in line with normal seasonality. This has been true both in our legacy domestic card portfolio and for Discover. And it suggests that credit is settling out after almost a year of steady improvement. In auto, our credit performance has been strong and stable over the past year with losses back near pre-pandemic levels. But I think auto is also both auto and card are benefited by choices we made several years ago to normalize for the great inflation in credit scores that I think has been a surprise to the industry. But pulling way up, we think the health of the overall macro economy and of the US consumer, you know, it's really in a pretty good place. And as a result, we continue to lean into our growth opportunities. Next question, please. Operator: Our next question comes from John Pancari with Evercore. May proceed. John Pancari: Good afternoon. If you could provide some additional detail just around the financial impacts of the Brex deal. You know, could you possibly some details on the tangible book dilution and earnings accretion and maybe book value earn back? From the transaction? And then just separately, totally understand the merits of the transaction and the commercial capability, you know, addition to your product suite that it provides. But anything just around the timing, like, why now pursue the deal, at this point just given the ongoing, you know, effort around the Discover integration? Thanks. Andrew Young: Hey, John. Why don't I first take your question about the metrics? Given the relative size of Brex to Capital One Financial Corporation, we don't intend to provide additional metrics. You know, we're providing the purchase price and the associated balance sheet marks and integration costs. As we're intending to break those out. Our financial statements over the coming quarters. So we're providing our current estimates now and we'll provide revised marks and the quarterly amortization schedule after close. And then I'll turn it to Rich to talk about your second question. Richard Fairbank: Yeah. Thank you, John. To your question of why now, obviously, not long ago, we did the Discover deal. And we are, you know, well down the path of what I think is a very successful integration. We very carefully looked at the impact that doing a deal like this might have on the resources and anything related to the Discover acquisition, we took a very close look at that because obviously that's just a paramount priority doing that acquisition well. And it turns out that the for the most part, the business areas that are impacted in this integration are different from the ones primarily in the Discover integration. Obviously, Discover one was really about pulling consumer business together. This is about pulling a business-related businesses together. So, we look long and hard at this from a resources point of view, and we concluded that we think we can do both of these in parallel and we're very comfortable about that. Then the other aspect is sort of financially I talked a little bit earlier. We will lean in just in terms of sort of ongoing investment we will lean into the growth opportunity for Brex. That's an important reason that Capital One Financial Corporation it's important value that Capital One Financial Corporation could add in the near term. Relative to sort of where they were on a stand-alone basis. So a synergy that can happen be created right away. Even without the full integration. It does financially, it does offset some spending that we were otherwise doing, investing in similar kinds of solutions at Capital One Financial Corporation. And also, you know, around the company, we really just, you know, managing things tightly so that we're in a so that as we've talked about for the last few quarters, we're in the same position that we were before relative to the earnings power coming out the other side of the Discover integration. So even as we lean more into the Brex investment, our view of the earnings power out the other side is the same view that we've had all along. Next question, please. Operator: Our next question comes from Richard Shane with JPMorgan. Richard Shane: Look, one of the unique facets of Capital One Financial Corporation, I think this is the seventh acquisition I can name. You have a management team that has a very long-term vision in terms of how you build this business. Rich, when we think about your target efficiency ratios, and sort of that 2027 guide, there's always something to invest in with Capital One Financial Corporation. And that's part of the secret sauce here. Do you think that that efficiency ratio will be because you grow the revenues into it, or do you actually think we will see a peak in expenses that will recede? Richard Fairbank: Well, thank you, Rick. You know, I think just pulling up for a moment on our philosophy and maybe distinguish it from I think a number of banks as they drive efficiency, first and foremost, do it by really trying to dial back and manage expenses, extremely tightly. We try to manage expenses very carefully too, but our efficiency journey, which we've said is an important part of the value proposition for Capital One Financial Corporation, for investors. Is first and foremost, the engine of that is growth. Revenue growth. And so what we have done since the founding of the company is to absolutely focus on where are the structurally good opportunities in the marketplace make sure that we understand where the not good opportunities are and avoid those even if other banks are chasing them. But then where we see the good structural opportunities, we work backwards from how can we capitalize on those. And one of the terms that I've used, you probably remember, Rick, is to have a growth platform. And acquisitions that we have tended to do have been acquisitions of growth platforms to enable us to build a business and so that we don't have to go from sort of zero to one in a sense. We can start, you know, a bit beyond that and then really leverage opportunity. And this acquisition of Brex is a classic case of that. It is right in the heart of our business strategy as a company which is all about, you know, payments. For both consumers and businesses. It is a growth platform which interestingly, there's way as I talked about, we can we have things that we bring that can enhance Brex's growth significantly and early on. And then Brex actually brings things that can strengthen our growth platforms across small business card, our small business bank, and our travel business. So we are, in many ways, the company that does invest. We've been investing since the founding of the company. But always, it is these are things that have gone along with that. From the founding days, we built a rigorous horizontal accounting framework to rigorously measure before, during, and after investments to see that they actually pay off. We're extremely focused on net present value. We despite announcing this acquisition today, we are built as an organic growth company. So if I pull up on all of those, you know, we are what I've been sharing with investors over the last, you know, number of quarters. Is to say on a calibration across decades of building Capital One Financial Corporation. I see more opportunities which will drive future revenues than I've seen, you know, in some ways ever. But certainly the number and diversity of those. Why are they there? Because we built a technology platform from the bottom of the tech stack up. And as we go to the top of the platform, we are in a position to capitalize on opportunities that I think other companies would not be. Along the way, as these opportunities manifest, we have chosen to lean into investing. Which, as I have said, in the near term, that pressures efficiency ratio. But while we don't give specific efficiency ratio guidance, all of these investments are in service, of driving future revenue growth, which is the engine for efficiency ratio improvement and value creation. In the long term. Next question, please. Richard Shane: Yeah. You still there, Rick? Go ahead. Operator: Rick has left the stage. Operator: Our next question comes from Mihir Bhatia with Bank of America. Mihir Bhatia: I was wondering if you could provide us with an update on how the debit transition to Discover is going. Any learnings from that process as you think about which and when to transition the credit portfolios? And also just related to that, any initial thoughts on if there's an opportunity to move Brex cards? Over to Discover? Thank you. Richard Fairbank: Yes. Mihir, as we shared the announcement of the deal, we are moving all of our debit business to the Discover debit network to take full advantage of the synergies that come from vertical integration. We've been migrating our debit card holders to the Discover network since August, and we are now nearly complete with our conversion. You're starting to see that network synergies in our reported results, and you will see more of those results as we complete the debit conversion. On the credit card side, we plan to do a lot of testing. And by the middle of this year, we will be able to originate Capital One Financial Corporation credit cards on the Discover network. Early next year, we will be able to move some existing credit cards to the Discover network. Now longer term, we will work on building Discover's international acceptance and strengthening the network brand. Which will, you know, open the doors for us to have an opportunity to move more business over there. You asked about the learnings. We are really pleased with what we've seen in the conversion in terms of the smoothness of the conversion, the customer take-up on the debit cards, and really pretty much all aspects of this have gone as well or maybe a little better than we had expected. But we know that choices to move cards and everything along with that is a really important strategic choice and a very, very important thing from a customer experience point of view, which is why we have a big testing agenda in the near term and why we also are working so hard to make sure that we continue to raise the international acceptance and also create a lot of technology-based solutions to make it easier for consumers to move their cards. Next question, please. Operator: Our next question comes from Moshe Orenbuch with TD Cowen. Moshe Orenbuch: Great. Thanks. I've got, like, one sort of housekeeping type thing and then a follow-up. The housekeeping question, Andrew, I appreciate that Brexit small relative to Capital One Financial Corporation, but could you size for us the size of the small business card portfolio at Capital One Financial Corporation, the small business banking, and perhaps maybe revenues from the travel portal that, you know, you would expect to, you know, affect, if you will, by, know, through the Brex Brex acquisition. Andrew Young: Yeah, Moshe, I appreciate the interest there, but those just aren't metrics that we break out in our reporting, and we're not intending to do so at this point either. Richard Fairbank: You know, just to, Moshe, just to sort of generally give you as I mentioned earlier, small business card portfolio is number three purchase volume on the personal liability in the personal liability marketplace. Our small business bank is still mostly a local bank that was built on the shoulders of the local banks that we bought, which are in about 18% of the US. We have strategically for quite a while, Moshe, felt that the tremendously success building of our national retail bank. And that there's a parallel opportunity to go national and build our small business digital for small business bank, you know, leveraging the capabilities that we now have in the small business space. But what we have lacked in many ways is the business tech platform on which to build that. We didn't have enough scale in our small business bank business to we didn't feel that we had the scale to build the sort of tech stack fully necessary for that. But that comes along with the Brex acquisition. So it gives us a chance now to have shoulders to stand on to accelerate the growth of small business bank. Moshe Orenbuch: Great. Thanks. And, you know, Rich, you had talked about, you know, the broad number of opportunities. Could you just talk a little bit about how both of acquisition and the Brex acquisition might change kind of the priorities? And where you know, what are the just talk a little bit about what the highest priorities in the those investment opportunities are? Thanks. Richard Fairbank: Discover and Brex both expand the number of opportunities. And, you know, we already had a pretty good list of opportunities that it was not an accident. We had the opportunities we've had at Legacy Capital One Financial Corporation because we were working backwards from those opportunities for years as part of the benefit of transforming our technology platform. So along came Discover and that brings, you know, the network opportunity, but also the network investments that we've talked about. And along comes Brex, and that brings the very near in growth opportunities, but the investments required that go along with that. So this is but with respect to opportunities that we have listed that I listed earlier, each of those on a stand-alone basis. Our standard is, Moshe, you know, is this a value creation opportunity? And we look at the horizontal economics of this. We say, what is the payoff down the road, and what does it take to get there? And so on. And the other ones I've listed, we are very compelled by those opportunities and are continuing to pursue them. The opportunity at the top of the market even got an extra. The national retail bank, which benefit from the Discover deal. The emerging businesses of Capital One Shopping, Auto Navigator on the auto side, our travel business. These are businesses that on a stand-alone basis, we are very compelled by the opportunity. So what we are working to do is to, you know, to try to really manage the company efficiently even as we pursue a large list of opportunities. But we are, you know, these opportunities are opportunities that are, you know, opportunities in a particular moment. And that's why we're investing quite a bit to pursue them. Next question, please. Operator: Our next question comes from Don Fandetti with Wells Fargo. Don Fandetti: Hi, good evening. Rich, as I look around at the card end, industry, I mean, it just seems like every big bank is trying to grow market share. Leaning in regionals, fintechs. I was just curious, how you think this plays out if the industry is going to remain disciplined? And do you think you can grow your card loans in that type of environment? Or, you know, could you consider sorta zagging and slowing things down a little? Richard Fairbank: Thanks, Don. You know, I think it is pretty much a certainty that every time the economy's in a pretty good place, the card industry will have more competition, and that competition is really coming from the big players. That competition is coming from fintechs. And it is striking how much the card players are leaning into things. You can see it by turning on TV and see the advertisements that are being made. You can look at the products that people are refreshing. At the very top of the market and, you know, you can look at some of the, you know, early spend bonuses and other things going on. So it is clear that the existing players and the fintechs, coming from the side all believe that there is a good opportunity here. But I wanna give you, Don, a calibration that I share with you from thirty-some years of building Capital One Financial Corporation. I feel this is a rational marketplace. It is, you know, it's definitely striking to see how much competitors are leaning in, but when I look at the choices they're making, when I look at the thing I fear the most is reckless credit. I don't see that. I think that this is a market with opportunity for someone like Capital One Financial Corporation. But we have our eyes open with respect to the competition. I think the investment the table stakes of investment, to your point, I think are higher than they might be at other times. But all of that notwithstanding, I really believe this is a good marketplace. And we are leaning in to capture the opportunities. Don Fandetti: Thank you. Next question. Oh, I'm sorry. Go ahead. I'm all set. Operator: Next question, please. Operator: Our next question comes from Jeffrey Adelson with Morgan Stanley. You may proceed. Jeffrey Adelson: Hey. Good evening, Rich. Appreciate all the color on the acquisition. I'm also just curious how you're thinking about specific benefits and synergies here commercial banking franchise. I mean, is this as you start to bring everything under one roof for your business customers, is this really something that could meaningfully accelerate your growth of lending and deposits within that segment, as you maybe attract more of those customers or just you're able to do more for those customers under one roof over time? Richard Fairbank: Mhmm. So yes, let me Jeff, I really appreciate that question. I can't remember an acquisition we've done in our history that has had so many connection points to our own business model and the ability to lift so many different parts of the company. And you mentioned one that, you know, I didn't even list in my list, which was a benefit to the commercial business. But we have a treasury management business. Like all major commercial banks do. And, you know, there's a lot of technology that goes into treasury management products. Our TM team has looked closely at this extraordinary tech stack that Brex has built and believes that there is an opportunity over time to build on that tech stack. I didn't mention it because I think it's gonna be a down-the-road kind of thing. There's gonna be two really kind of pull together an integrated treasury management capability is that's that was just less of a close-in opportunity. But you know, you've seen you've seen me talk over the years. How many times do I talk about building a tech stack from the bottom of the tech stack up? That is what we've done at Capital One Financial Corporation. It is a very long and lonely journey to do it. Most companies build from the top of the tech stack down. But the benefits are multiplicative. When you have a tech stack that is modern right from the core and moving up from there. What's extraordinary here is that on the business side of the house, we are bringing in a modern tech stack that has the ability to lift not only business cards, but also all aspects of the business side of Capital One Financial Corporation. We've spent so much of our time collectively with investors talking about the consumer side of the house. That's a different tech stack. I mean, well, there's a lot of shared aspects about it, but, you know, a consumer core is a different thing than commercial. And so I think that Brex is really bringing an opportunity to take some of our activities, particularly those that were lower scale at Capital One Financial Corporation, and have the opportunity to accelerate their journey. Your next question. Question, please. Operator: Our next question comes from John Hecht with Jefferies. Afternoon. Thanks very much for taking my questions. First one is, you guys have always, you know, gone after a barbell strategy where you're going after, you know, super prime and prime on one side and, you know, the non-prime on the other. You've generally had a mix in a specific range, but I'm wondering whether it's credit card or auto now. Do you guy are you leaning into any cohorts in that in that way or leaning away from? And is or is the mix expected to be relatively stable here? Richard Fairbank: John, thanks for your question. The barbell term I think, was in many ways sort of an investor term over the years to try to, from afar, sort of characterize what they saw at Capital One Financial Corporation because we had clearly, you know, pioneered how to safely lend to mainstream America. Including the subprime, and, also, that we always were pushing right at the top of the market going after heavy spenders. I don't think it ever was as much of a barbell as sort of urban legend would have it. But I do wanna say even way before the Discover acquisition, we were a full spectrum lender including a significant player right in the middle of the market in prime. The one thing that differentiated our strategy in PRIME from others is that we were more cautious on the prime revolver, especially the more high balance revolver. And so we have always played just a little more cautiously in that space. But we have played the credit spectrum, and in fact, we want to with our customers, for example, our mainstream America customers to grow them, to graduate them, and move them up to being ultimately heavy spenders. When Discover joined Capital One Financial Corporation, as we said, this is striking. While Capital One Financial Corporation has been a full spectrum lender, Discover has been a very specialized and focused player more in the prime part of the marketplace. We've now studied their underwriting. We think they underwrite very safely. We are trimming around the edges with our we have a little less appetite for the higher balance revolver than they and the industry do. So that's some of the brownout we've talked about. But Discover is, you know, will fit right in with our full spectrum strategy. I do wanna make a comment on the auto side. We are absolutely at full spectrum player on the auto side. And in fact, one of the, you know, biggest players in the industry. In subprime. In near prime, and in prime. John Hecht: Okay. And then quick follow-up question. Thanks very much for that detail there. Andrew, I'm wondering given the forward curve and then yield, the timing of quarter end and days and quarter, and tax the the the kinda tax refund situation. You know, can you just give us, your perspective on kind of the cadence of seasonality and how it might affect NIM? Or is or can we look to the past as a good indication of that? Andrew Young: Yeah, John. As you said, there's seasonal effects that in most quarters actually impact NIM. So I'll touch on that, and then I'll just talk a bit more structurally about our level of NIM. So looking ahead to the first quarter, you know, there are two seasonal effects. One, two fewer days in the quarter, which is roughly, I think, 18 basis points or so of a headwind to that quarterly rate. And then the second is we are likely to have higher levels of lower-yielding cash, because average cash levels just tend to be elevated in Q1 as a result of pay down of seasonal loan balances. We have the added effect this year of the cash proceeds from the home loan sale that are unlikely to come all the way down in the immediate term, you know, with respect to the tax effect, we'll have to see how consumers behave to Rich's earlier comments. So I think that's a little bit more of a wild card. Then more structurally, I'll point to a couple of things. You know? One is deposit pricing often lags as fed funds move. So we could see brief periods of pressure after Fed moves if we were to see them in the coming quarters. But over time, given the relatively neutral position of our balance sheet, that largely corrects itself. And then the only other thing that is gonna impact the ambient level of NIM would just be the relative growth in different asset classes over time impacting balance sheet mix. But other than that, I don't really foresee any structural things impacting the balance sheet. So it really will be much more of a seasonal effect as we look ahead to the coming quarters. Wonderful. Next question, please. Operator: Next question comes from Robert Wildhack with Autonomous Research. You may proceed. Robert Wildhack: Rich, you mentioned a couple times earlier that Brexit's growth opportunity standalone was limited by scale. Can you just expand on that a little bit more? Were they lacking scale maybe on the lending side of things or more on the technology side or somewhere else? And then do you see, as the more attractive growth opportunity for Brex with some of the larger enterprise clients, a number of whom you listed earlier or more in the SMB space? Thanks. Richard Fairbank: Thank you, Robert. So let's talk about Brex. For a minute. Almost all rapidly growing startups are constrained on investment dollars. And Brex built an amazing company and has big aspirations for what they can be. Achieving those aspirations requires a lot of dollars and also, you know, a lot of other capabilities as well. And, you know, I think as I've gotten to know Pedro Franceschi, their amazing founder CEO, and Ben Gammel, their president, and the extraordinary team that they have, it's very clear that they know they have a tiger by the tail. And I think, you know, they know they had opportunities to go raise more capital. And they certainly weren't at all looking to go sell a company. But I think what captivated them about the unique opportunity of Capital One Financial Corporation is that we, as a tech company, ourselves, you know, with a modern tech stack, and the entrepreneurial heritage of having been an original fintech that we could be a unique opportunity to bring a lot more resources and capabilities to them while still enabling their dream to stay alive and the entrepreneurial spirit, that sometimes, you know, when one thinks about large companies, might otherwise be hard to maintain. But I think they were pretty excited about the ability to have our brand. To open doors all over the place. And not just open the doors, but also just, you know, for people to know that they're part of one of the biggest banks in America. The sophisticated marketing machine, the balance sheet of the bank, and the capacity to invest in sales and in marketing and engineering and AI. I think it really was an opportunity in their mind to accelerate the growth while still very much keeping the dream that is Brex alive. And, again, I think that's something that's uniquely possible by pulling these two entrepreneurial companies together. With respect to the customer base, I am really struck at let's just pull way up and savor a couple of things. First of all, most times when one looks at a business, in a marketplace, you kinda say, well, who would have a need for something like this? The answer is just about every company in America, if not the world, has a need for this because every company has, you know, payables, expenses, and they gotta manage all of the complexity of the ecosystem on the payment side of the business. And so and it's a need that has not been really filled in the marketplace with an integrated solution. So it starts with wow. This thing could be could be attractive to small companies all the way to really large ones. So, if you look at their journey, their journey was one of, in fact, over time, tapping into those. They started with startups, startup tech companies. They built an incredible brand. And, you know, I think their customer base includes like, a third of tech companies. Kind of thing. I don't that's not a statement I'm fully grounded, but let's just say they've had tremendous success with startups. But they also on top of this amazing tech stack that they have built, we're able to build a lot more capabilities that then made their product attractive to middle-market companies and, in fact, pretty large middle-market companies. And companies that have business all over the world and their employees traveling all over the world. So I believe that they are set up for success with small companies, with medium-sized companies, and in fact, pretty large ones. Because their solution spans the needs of that broader range of customers. And the elegance and simplicity of the solution make it something that small and large can implement. Next question, please. Operator: And our final question comes from Saul Martinez with HSBC. May proceed. Saul Martinez: Wanted to follow-up on John Pancari's question. And I get that the deal is modest in size, and you don't wanna give some of the financial metrics. But you know, 80% of the purchase price is allocated to goodwill. That's not a trivial amount on a $5 billion deal. And I suspect Brex is not profitable. And you can correct me if that is the wrong assumption. To use here. You do have $950 million of transaction costs and incremental investments. Is it fair to say then that the deal at least initially will be EPS dilutive, intangible book dilutive, if even at a modest amount. And, obviously, overall, you know, value accretive to Capital One Financial Corporation. Richard Fairbank: So Saul, in isolation, Brex will result in earnings dilution initially. As we're buying a business with a growth rate that is multiples of industry growth rates. We believe this growth dynamic will lead to significant accretion over time. Saul Martinez: Okay. Alright. Fair enough. And then I guess just to follow-up here is you mentioned you expect to change in the expected pace of your quarterly share repurchases, which was $2.5 billion. Is that I mean, is that a fair assumption? Or is that is it fair to think that that's sort of a decent cadence for buybacks at least, you know, at least as we stand here today. Andrew Young: So let me clarify the language a bit, which is we're saying that the Brex transaction itself will take down our capital by, I think, a little more than 40 basis points. So a meaningful amount, but certainly not enough to influence our thinking about near-term repurchases. So the point we were making is it's just not going to alter our approach to repurchases. And so, you know, we last quarter that our long-term needs 11%, given our current capital position. You saw this quarter we accelerated our returns upping the repurchases to the $2.5 billion you cited increased our dividend 33% to $0.80. So with respect then to the pace of future buybacks, we're really gonna look at a variety of things, just current and projected capital levels and our balance sheet growth opportunities, the economy, the regulatory environment. And it's not just a point estimate for those variables. We're going to think about a range of outcomes around them. Given all of that, we have healthy capital levels. We've got $14 billion of remaining authorization, and we've got flexibility under SCB. So we're gonna take all of those things into consideration and manage our repurchases accordingly. But the Brex transaction itself is just not influencing our thinking about that plan base. Jeff Norris: Well, that concludes our Q and A session this evening. I want to thank everybody for joining us on the conference call. And for your continuing interest in Capital One Financial Corporation. Have a great evening. Operator: Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.
Desiree: Ladies and gentlemen, thank you for standing by. My name is Desiree, and I will be your conference operator today. At this time, I would like to welcome everyone to the Business First Bancshares Q4 2025 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question again, I would now like to turn the conference over to Matt Feeley. You may begin. Matt Feeley: Good afternoon, and thank you all for joining. Earlier today, we issued our fourth quarter 2025 earnings press release, a copy of which is available on our website along with the slide presentation that we will reference during today's call. Please refer to Slide three of our presentation, which includes our Safe Harbor statements regarding forward statements and the use of non-GAAP financial measures. For those of you joining by phone, please note the slide presentation is available on our website at www.b1bank.com. Please also note our Safe Harbor statements are available on Page six of our earnings press release that was filed with the SEC today. All comments made during today's call are subject to the Safe statements in our slide presentation and earnings release. I'm joined this afternoon by Business First Bank's Chairman and CEO, Jude Melville, Chief Financial Officer, Greg Robertson, Chief Banking Officer, Philip Jordan, and President of B1 Bank, Jerry Vasquez. The presentation, we'll be happy to address any questions you may have. And with that, I'll turn the call over to you, Jude. Jude Melville: Okay. Thanks, Matt. Good afternoon, everybody. We thank you all for being with us today. I'd like to begin our conversation with a brief high-level review of the work our team accomplished in 2025, which turned out to be, in my opinion, one of the most meaningful and positive years our franchise has experienced. I'll start with a few of the non-financial highlights. While I don't contribute much to the short-term modeling that this call invariably centers around, they are what enables future opportunity and therefore representative of the most important work that we do. Over the course of 2025, we conducted two major core conversions and implemented a number of software platforms designed to prepare us for managing at this and future scale. We continue to develop multiple internal divisions focused on preventing and mitigating fraud, internal loan review, audit, and various capabilities, contributing to both our ability to operate safely and maintenance of a positive regulatory relationship. Continued our practice of incrementally evolving our footprint, closing three banking centers and opening one. We made big strides developing our correspondent banking initiative into a significant part of the bank, contributing meaningful non-interest income, growing the client base to over 175 community banks. We announced and then at the turn of the year closed the acquisition of Progressive Bank in North Louisiana. And this may sound out of place on the call such as this, but we learned some lessons while working through credit issues for the first time in a number of years. Things that will ultimately make us better providers and managers of credit in the future. And for the fifth year in a row, we were one of the winners of the American Bankers Best Banks to Work For Award, voted on by employees, and therefore one of my favorite awards to win. These non-financial accomplishments are important, and I'm proud of them. But they, of course, aren't alone sufficient. 2025 was also a year of accomplishment from a balance sheet perspective. Over the past twelve months, we bolstered our capital ratios with tangible common equity increasing by 90 basis points and consolidated CET1 capital increasing 50 basis points year over year. We grew tangible book value 17.3%. We have as balanced a balance sheet as we have ever had, with limited concentrations in any lending category and significant geographic diversification. Grew loans and deposits in tandem, particularly in the fourth quarter as we got through the bigger non-financial projects. Returned with more focus to production. We began purchasing shares back for the first time in almost six years and positioned ourselves to have that tool as a viable option in the future. And we increased our common stock dividend for the seventh year in a row. Now we recognize that all this non-financial and balance sheet activity needs to lead up to something else, something tangible. Over the course of 2025, we delivered strong P&L improvement beyond what we or the analysts forecasted. We grew ROA beyond our stated 1% goal to a 1.06 core ROA for the year and a 1.16 core ROA in the fourth quarter. We delivered a 14% increase in EPS over the course of the year, and in the fourth quarter a 20% year-over-year improvement. We grew our full-year core margin beyond our stated goals of 3.5 to 3.63. And we held non-interest expense growth relatively flat while growing revenue, generating positive operating leverage, posting a sub-sixty efficiency ratio in the fourth quarter. In sum, we are turning the investments we've made over the past few years into momentum, which leads me to believe that even though 2025 was a pivotal year for B1, 2026 will be even more fruitful. With our major systems implementations behind us, we will focus more on optimizing the systems, which will lead to greater efficiencies. With a healthy footprint in place, we will focus less on expanding it and more on deepening it. By the way, over the past few weeks, we were pleased to begin to take advantage of some of the in the Houston market by recruiting John Hiney, formerly Veritex, to be our new market leader and he's already been able to add a couple of impressive bankers to the foundational team we have in place. Finally, we will focus less in 2026 on embarking upon new major projects and more on daily execution. We have a good team, we're in good markets, and we're focused on the right things. Sustainable ROA, tangible book value accretion, EPS enhancement, non-interest revenue giving us greater revenue optionality, and non-interest expense discipline leading to continued efficiency ratio improvement. It's an exciting time and we look forward to discussing it further over the course of the call. I thank you all again for your attention, and I'll turn it over to Greg. Greg Robertson: Thank you, Jude, and good afternoon, everyone. As always, I'll spend a few minutes reviewing our results and then discuss our updated outlook before we open up to Q&A. Fourth quarter GAAP net income and EPS available to common shareholders was $21 million, $0.71 per share, and included $2.2 million in merger and core conversion-related expense, $995,000 loss on former bank premises, and a $35,000 gain on sale of securities. Excluding these non-core items, non-GAAP core net income and EPS available to common shareholders was $23.5 million and $0.79 per share. From our perspective, fourth quarter results marked another quarter of strong financial performance, generating, as Jude mentioned, a 1.16% core ROA with our core efficiency ratio falling to 59.7% for the quarter. A notable impact during the fourth quarter included continuing meaningful contribution from our correspondent banking group. Also, as Jude mentioned, we added several new slides to our earnings presentation. I'll start on Slide 24, a new overview slide from our loan portfolio. Total loans held for investment increased $168.4 million or 11.1% annualized on a linked quarter basis. The higher than expected loan growth was driven by overall improved demand and a slowing in pay down and payoffs. Specifically, new and renewed loan production of approximately $500 million during the fourth quarter compares to a slower scheduled and non-scheduled paydowns and payoffs of $332 million. Recall, in the previous quarter, we experienced a slight decrease in net loan production, which was a result of $395 million in paydowns and payoffs only offset by $368 million new and renewed loan dilution during the third quarter. On a linked quarter basis, owner-occupied CRE loans increased $76 million or 28% annualized, while non-owner-occupied CRE loans increased $77 million or 23.9% annualized. Based on unpaid principal balances, Texas-based loans slightly declined from 39% as of 12/31/2025. We expect that percentage of the Texas loans to further decline with the closing of Progressive Bank to approximately 36% in the first quarter. Moving back to Slide 16, total deposits increased $191.7 million, mostly due to a net increase in interest-bearing deposits of $236.2 million on a linked quarter basis, somewhat offset by a net decrease in non-interest-bearing deposits of $44.5 million from the prior quarter. The increase in interest-bearing deposits was largely driven by $105 million in public funds and $60.8 million in commercial money market accounts. We do expect somewhat of an outflow of the public funds markets during the first quarter consistently with prior year's Q1 seasonality. Moving to the margin, our GAAP reported fourth quarter net interest margin increased three basis points linked quarter to 3.71%, while the non-GAAP core net interest margin, excluding purchase accounting accretion, increased one basis point from 3.63% to 3.64% for the quarter ended in December. The margin performance during the quarter was driven by elevated loan discount accretion due to a single large acquired loan paying off sooner than we expected. Loan discount accretion during the quarter was elevated at $1.4 million, including the addition of Progressive, we expect quarterly accretion in 2026 of approximately $1.8 million. On a linked quarter basis, cost of total deposits decreased 15 basis points, while total loan yields decreased 13 basis points. Core loan yields, excluding loan discount accretion for the fourth quarter, was 6.78%, down 15 basis points from the prior quarter. The total cost of deposits for the month ended December was 2.44%, which compared to the weighted average of the fourth quarter of 2.51%. We're pleased with our ability to hold the line of new loan yields during the quarter with a weighted average new and renewed loan yield of 6.97% for the fourth quarter. However, with the interest rate cuts we experienced during the fourth quarter, we did start seeing some pressure from overall loan pricing. I'd like to take a moment to explain some of the movement in the margin during the fourth quarter. We recognized $1 million of interest income reversal for a nonaccrual loan. This translated to about five basis points in the fourth quarter net interest margin. That is to say, had we not recognized this accrual reversal, our Q4 margin would have been five basis points higher. It is of note, until we find resolution on that credit that was primarily responsible for the income adjustment, we would expect this somewhat of a drag to remain. We are pleased with our ability to manage funding costs for the quarter with the weighted average rate of all new interest-bearing deposit accounts during December of 3.51%, down from September's weighted average rate of new interest-bearing deposit accounts of 3.66%. I'd like to make a note of a few takeaways on Slide 22 in our investor deck, as we continue to see 45% to 55% of overall deposit betas achievable regarding any future rate cuts. I would also like to point out the overall core CD balance retention rate was about 83% during the fourth quarter. That statistic reflects our team's continued focus on maintaining and retaining core deposit relationships. Our baseline assumption is that we do not receive any further rate cuts in 2026. We have worked hard to manage our balance sheet to a relatively neutral position, and we believe we can achieve modest margin improvement in a slightly down rate environment. Lastly, on the topic of net interest margin, I'd like to mention a new slide we created and added to the quarterly slide presentation. Slide 20 is a combination of two prior slides and shows our GAAP and core net interest margin in the context of the volatility in the Fed funds rate since 2020. We're proud of our ability over the years to maintain the margin with a relatively tight range. This slide also shows our ability to hold the line on overall loan yields in a declining rate environment while managing funding costs downward. Moving on to the income statement, GAAP non-interest expense was $52.4 million and included $1.4 million acquisition-related expense and $796,000 conversion-related expense. Core net interest expense for the fourth quarter of $50.2 million was up slightly from the prior quarter, but we do expect an increase in Q1 in the Q1 core expense base primarily due to the closing of the Progressive acquisition and timing of various first quarter annual expense resets. As a reminder, we should begin to recognize the impact of Progressive's cost saves post-conversion, which should occur in the third quarter of this year. Fourth quarter GAAP and core non-interest income was about $12.2 million and $13.2 million respectively. GAAP results did include a $35,000 gain on sales securities and a $995,000 loss on former bank premises. Core non-interest income results for the fourth quarter were better than we expected primarily due to swap fee revenue, which was about $1 million higher than expected. Also included in core non-interest income was a $312,000 gain on OREO. We expect near-term quarterly non-interest income to be in the mid to high $13 million range, which includes a $1 million quarterly contribution from the Progressive Bank acquisition closed on January 1. Lastly, I'd like to provide some context to the credit migration during the fourth quarter. Total loans past due thirty days or more excluding non-accruals as a percentage of total loans held for investment increased from 27 basis points to 64 at December 31. The ratio of nonperforming loans compared to loans held for investment increased 42 basis points to 1.24% at December 31, while the ratio of nonperforming assets compared to total assets increased 26 basis points to 1.09 compared to the linked quarter. The increases in the nonperforming loans and assets ratio over the linked quarter were largely attributable to the deterioration of a single $25.8 million commercial real estate relationship. With that, that will conclude my prepared remarks, and I'll hand it back over to Jude so he can wrap up the conversation. Jude Melville: Okay. Thanks, Greg. I just want to take one moment to welcome our new former Progressive Bank shareholders and employees as well as your listening. Excited about that partnership and I feel like everything that we've worked on thus far is ahead of schedule in terms of, you know, from our getting the approvals that we needed to get to close it to all the social integration work that we've already done and enjoyed over the past couple of weeks. Being able to spend time with a number of other employees and the former board members. And really excited about incorporating that into our already existing strong North Louisiana franchise. It's an important part of our footprint, an important part of the state. And I look forward to continuing to make a significant contribution to the economy in our role as a community bank in that area. So with that, I'd be happy to turn it over to the question and answer period. Do our best to answer any questions you might have. Desiree: Thank you. We will now begin the question and answer session. If you have dialed in and would like to ask a question, please press 1 on your telephone keypad to raise your hand and join the queue. If you are called upon to ask your question and are listening via speakerphone in your device, please pick up your handset to ensure that your phone is not on mute when asking your question. We do request for today's session that you please limit to one question and two follow-up questions only. Thank you. And our first question comes from the line of Matthew Olney with Stephens. Your line is open. Matthew Olney: Appreciate you guys taking my question. Wanna start on the loan growth front. Sounds like the paydowns that have been a challenge over the last few quarters weren't as much of a challenge this quarter. Any more color you can add to that? As far as the fourth quarter growth? And then the outlook for organic loan growth from here? Greg Robertson: I think, Matt, this is Greg. You're right. Think we did have a great quarter. I think some of that was just a little bit of pent-up demand that we've been working on for a while. The bankers did a good job of landing it. And then just a little bit of downshift in the payoffs. That we've seen kinda created that really great quarter. Far as going forward, we still feel very comfortable with the mid-single-digit loan growth throughout the balance of 2026. Matthew Olney: And Greg, just to follow-up on that comment, does the mid-single digits, does that imply a more balanced view of the paydowns that have kind of ebbed and flowed throughout '25? Or any commentary kinda what that assumes with the paydowns? Greg Robertson: Yeah, that's a more balanced view, be a good way of putting it. If you think about kinda coming out of the if you roll back the clock to quarters where we were producing extremely high loan growth, double-digit to almost 20% annualized loan growth quarters. Two, three years ago. I think we're unwinding out of that. And so having a more reasonable loan growth expectation might be a little bit easier to achieve without the headwinds from the payoffs. Matthew Olney: Okay. That's helpful, Greg. And then Matt, I would Yeah. Hey, Matt. This is a little more color on the loan growth in fourth quarters. It was nice to see that it was kind of led by Southwest Louisiana and North Louisiana. We've worked hard to build a footprint that's diversified. And you think about that first from a credit perspective, but you also to think about diversification from a production standpoint. It's interesting to track that over time, and certainly wanna give those areas their due for so much to the strong quarter on the production side. And Texas is an important investment for us and will continue to be. And, you know, we're hovering around 40% of our exposure there. Is a good healthy number. But that doesn't mean that there aren't a lot of good things happening in Louisiana as well. A lot of investments up and down the Mississippi River and Meta making the major investment up in North Louisiana and so it's nice to see some of that paying off in terms of increased demand. And we look forward to a balanced production throughout our footprint over the next couple of years. Matthew Olney: Okay. Great. Thank you for that, Jude. And then I guess shifting over to the credit side, any more details you can disclose behind that relationship that went to nonperforming? What drove the downgrade? And it looks like it had pretty decent sized loan. Where does that loan rank among your larger relationships you have with the bank? And then, Jude, I think you mentioned in the prepared remarks, there were some lessons learned when it comes to credits. Didn't know if that was speaking to this specific credit or just more broadly. If you could just expand on that. Thanks. Greg Robertson: Yeah. Matt, the credit that we identified was it's commercial real estate, medical facility in the Houston area. And we've been really dealing it's been we've been dealing with it for the balance of the year. Got real close to resolution on it. We feel like we've marked it down to where the loss from here on out would be immaterial at this point. But we just have moved that forward. And I don't know that there's anything more to say about it than that. We've just been working with it for a while, and thought we had a real resolution in hand, and it kinda kept dragging on. So we decided to do the prudent thing and move it over. Jude Melville: Where does that rank of size wise? Size wise, I would say that's one of our larger if not one of the largest single commercial real estate exposures. I think it's the largest single that's for which we hold the exposure on our books. As you know, we try to actively participate exposures, particularly when they get to the 20, 25 million level, and certainly at this level, at anything above this level. So, yeah. It's one of the larger ones. And yeah, if you think about lessons learned or things to continue to work I do think the biggest lesson banking is just concentration risk and exposure risk. You can do everything right, they're gonna be there's gonna be something that happens to a certain number of credits. And if you look at banks that have failed or just been in serious trouble over the past fifteen years, generally it comes down to a relatively small number of outsized credits. And so one of the reasons that our metrics have moved around a little bit more than we would like, they've been more volatile, is because the loans that we've had something happen on have been slightly bigger. And so not necessarily representative of the entire portfolio. It just feels worse when it hits the when it hits the different stages of the life cycle of a credit that you're working through. So I think a reinforcement of the idea that we wanna even as we continue to grow, we want to keep our individual loan exposures to manageable levels. And then we also wanna make sure that on our concentrations from an industry perspective or a geography perspective, that we don't get too over-reliant upon any one particular type of loan. I think, and these are just generic We've had a long period here where we haven't had to really run many credit issues through any kind of process. And so just as we kind of remember how to do that, if you will, there gonna be lessons learned about how aggressive you are when you see warning signs. How you do from a monitoring standpoint along the way, and not so much with this particular credit as much as just general things that I think whatever stumbles we've had credit wise over the past twelve, fifteen months, we'll will benefit us as we continue to make credit decisions along the way and continue to refine our processes as we continue to get bigger. Matthew Olney: You, guys. Appreciate all the color. I'll step back. Jude Melville: Thank you, Matt. Thanks, Matt. Desiree: Our next question comes from the line of Michael Rose with Raymond James. Your line is open. Michael Rose: Hey, good afternoon, guys. Thanks for taking my questions. Hey, Jude, you mentioned in the prepared remarks that the focus this year is going to be more so on daily execution versus any sort of major projects. I don't want to put any words in your mouth, but I might take that to mean or someone might take that to mean that maybe additional M&A opportunities may not be in the cards. Obviously, you've been fairly acquisitive here lately, but just wanted to get a better sense of, you know, kind of what that comment means. And maybe if you can remind us on some of the projects that you've recently completed and maybe just what that daily execution would mean. I know there's a lot in there, but, hopefully, you can provide some context. Thanks. Jude Melville: Yes, sir. I appreciate you asking that, actually. Know, we had a busy year, busy number of years. But in particular this year, in addition to consummating an act or integrating an acquisition in Dallas and then consummating an acquisition in North Louisiana. We also did a lot of process improvement internally and although and we've talked about on these calls a few times, a number of projects that we took on that are technology-related. So we only did we convert another bank, Oakwood, over the course of the year, we actually converted ourselves to a new platform on Nucor. Platform which is a two-year project and involved pretty much everybody in the bank. So it's a big deal and we also had three or four others, you know, five or six in total implementations, which you know, does take a certain amount of bandwidth and takes a certain amount of energy and the things that we felt like we needed to do to be able to manage and run more effectively at $9 billion in size over two states and a significant geography. Versus what we could manage and run when we knew everybody follow our all the employees and most of the clients. Is that team had the relationships with you? As you scale, you need better processes. So we and you want better visibility into numbers and managing by those things, including pricing software, you know, as we're thinking about credit exposure, thinking in a more sophisticated way about kind of profitability that incremental client adds to the bank's overall profitability is something that we're better at than we were before because of some of these implementations. So what I meant in my comments was we don't really, although we'll always be incrementally upgrading and incrementally adding, we don't have any implementations that in the aggregate will be as substantial as we had last year, and we'll focus more this year on making sure that we're maximizing the output from the implementation process last year. So it's one thing to do it, it's another to then use it in an optimal manner. And so we wanna focus on making sure that we're actually making better decisions because of the data that we have. We want to make sure that we're providing better client service because of the systems that we've invested in. And we wanna make sure that our employees' efficiency and happiness around doing their job is enhanced. And that we believe involves taking a little bit of a breath and just making sure that we're maximizing the investments we've already made. On the M&A front, yet we're not prioritizing seeking another M&A alternative now. We've made a number of really what we believe to be really good investments and partners throughout the years. And we're beginning to see, believe we have the opportunity now to demonstrate why those good partners not only give us greater opportunity over time and diversified our risk, but also have been good financial partners, leading to increased profitability. And sometimes, you know, the way you can really demonstrate that is to pause the M&A for a second and kinda let the good things percolate and catch up with you. So we saw significant improvement in ROA over the course of 2024. Excuse me, 2025. And I shared with you last time that we intended to be over a 1.2 ROA. Last half of this year, 2026. And so that's become more of a focus for us. Than seeking to expand. We wanna deepen the relationships that we have, which will in turn lead to greater profitability. Which leads to greater tangible book value, which should lead to an enhanced share price. And that gives you more optionality for M&A down the road. And so we're kind of at that point where we believe we've made a number of investments over the years. And we to be able to demonstrate what we know, which is that they were good investments that we've done well. And wanna be able to prove that out a little bit through increased financial performance. Before we take on other initiatives. So gonna execute. We're gonna work on the investments that we've made, and we're gonna be good bankers day to day. And that will translate into increased profitability that that'll be sustainable and that will give us more optionality to embark upon future projects down the road. Michael Rose: Appreciate the comprehensive answer. Maybe just following up on one of those aspects on the capital front. It was good to see buyback announcement you guys execute on it. How should we think about that going forward? You guys are trading at about 1.2x. Tangible. The earn back on the buyback is, I would characterize, fairly attractive. Capital is really going to start to appear once the deals are fully integrated and the cost stays realized. Should we think about you guys at least in the near term, as kind of a regular way buyer just given where you are? You know, just trying to frame up the capital discussion. Thanks. Jude Melville: That's a great question. And obviously, something we're talking about at the board level. We'll continue to talk about. We were able to buy back about 150,000 shares in the fourth quarter, and what proved to be attractive prices 24.7 kind of range. And those were more in the $110 to 115 ROA range or tangible book value multiple range. I think we certainly I would certainly agree with your characterization of one hundred twenty. Still being a reasonable and even cheap price. And over the course of the year, we'll we have more optionality on what we do with capital than we did last year. Last year, we had more than we had the year before because we've been building up those capital levels. So we will definitely continue to look for opportunities on a quarterly basis. I don't see us just setting it and letting it go and saying we're gonna buy back this number of shares no matter what. We wanna we do wanna be pick and choose when the right moments are, but certainly, would think over the long run, anything below one and twenty would be an attractive price. You wanna add anything, Greg? Greg Robertson: No. I'm correct. One thing I'd add, Michael, is that when you think about Q1, we're gonna take a little bit of a step back in tangible book on a per share basis with progressive closing. It would be an effective kind of slightly higher multiple right now than just 120. There's something we're thinking about when we evaluate buybacks. Michael Rose: Perfect. Got it. At the outset, they said keep it to two follow-up questions, I'm going to use that one. Just as we kind of think about hiring from here in the opportunity set, just given some of the dislocation, you mentioned John Hiney was hired as new Houston Market President. You just frame up what you see as kind of the opportunity to hire? I think we've heard mixed messages from some banks are being fairly aggressive. Some are saying, like, take a wait and see approach. Just wanted to see how we should think about the opportunity set for you guys. Or is it just more opportunistic? Making a kind of a full court press here. Thanks. Jude Melville: Yes. Think the answer actually is probably similar to the answer I just gave you on stock buybacks. Right? I think it's kind of a we're prepared to hire and would like to hire if they're the right people. We don't feel any need to hit our in order to hit our profitability targets and our growth targets, we don't necessarily have to hire to do that. But we do know that there are good people out there and they're living in a more disruptive world than they were a year ago. And we know we also are a different bank than we were a year, two years, and three years ago in terms of our capabilities, which also means in terms of our attractiveness as an employer. So why not continue to have conversations. I would expect that we will add another two or three in Houston. Over the next couple months as we've got some conversations and would like to bring those to fruition. And beyond that, it'll really be on a case by case basis. We don't have to hire every banker in the world to do what we wanna do in terms of financial performance. Just need to hire the right bankers, and so we'll focus on evaluating that on a case by case basis as the opportunities arise. But I do think there will be opportunities, and we will be thoughtful about the one reason we can't afford to be a little less aggressive on M&A is that we believe that in our footprint, organic growth is going to be possible. And part of that is growing with our current staff, but part of that is incrementally adding some additional team members. Teammates. And so for the near future, we believe that's a more likely and profitable use of our capital than M&A. Michael Rose: Thanks, Mark. Desiree: Next question comes from the line of Feddie Strickland with Hovde Group. Your line is open. Feddie Strickland: Just wanted to start on the DDAs. I understand the public flows have an impact here, but I do still think they're down a little bit year over year. Can you talk through maybe what the opportunity might be kind of grow those on a year over year basis trying to account for some of the seasonality in this public funds flows? Greg Robertson: I think good question. I think what we still see some migration from some of those non-bearing accounts to interest-bearing. So not a huge piece of that business is actual account. We're losing accounts. I think it's more of migration. That has slowed over the course of 2025. With the addition of our Progressive Bank partnership, they have a nice amount of their deposit base is non-interest bearing. So we should get some lift from that in the first quarter. We still have plans to continue to focus on elevating deposit gathering through treasury and non-interest bearing sources. So it's something that we are looking at in 'twenty six as a big part of our plan of operation. But there has been some movement. Feddie Strickland: Got it. That's really helpful. And just wanted to step back into the feed. Appreciate the guidance there. But obviously, the star of the show was the swap fees, and you saw a brokerage commission fees, I think, up a little bit as well. What's kind of the level of opportunity in each of those areas? And I guess, contributions from SSW and the FIG group as well? Greg Robertson: Yes, see opportunity in 2026 for that to continue to expand. I think it's gonna be like we've kind of really messaged for the last few quarters that it will be a bumpy upward sloping trajectory though. Just like this last quarter was with the swap fees being outsized. I think we're excited about is the continued integration and of our SBA group, Waterstone, out of the Houston area. There's some opportunity we feel like in that to continue to grow not only with our bankers becoming more with SBA production, just the rate environment with SBA lending becoming economically more stable with a lower rate environment. So we're excited about that. I think also, we think the SSW group and the brokerage piece of our business. So to speak. We do continue to see it scaling. We've been investing over the last few years in more talent in that area, and I think we'll continue to invest. So we do look at upside for that. So I think noninterest income is a as a whole, we feel like that will be in the mid to upper $13 million per quarter with the addition of Progressive Group. So we're comfortable understanding that it may be rocky going upward, but think the trajectory is still we're excited about that upward slope. Feddie Strickland: And one more, if I could squeeze it in, on the loan growth and the growth in general coming from Southwest and Southeast Louisiana. Jude, I think you touched on that a little bit. Earlier on. But just curious, I mean, is it going to be a more balanced pace of growth you feel like going forward that it's going to be sort of evenly balanced between Southern Louisiana and the Texas markets? Or is it just going to kind of differ from quarter to quarter depending on what's in the pipeline? I'm just curious whether that's a deliberate part of the strategy or that's just kind of how it shook out this quarter? Jude Melville: Well, the deliberate part the strategy was building the footprint that we knew that not every market had to hit every moment in order to move forward. And delivering up building a footprint that didn't rely upon one market to carry the load. All the time. You know, I do think just based on demographics and differentials between economies, that there's more upward growth opportunity in Dallas and Houston, as just they're just faster growing. Cities, and we have enough of a footprint in both. We'll be able to take advantage of that. But we've got a good core consistent growth in most of the Louisiana markets. In a quarter in which one of our larger markets slowed down a little bit for whatever reason that is. Dallas was slower this quarter. Then we'll have our more consistent markets across Louisiana there to give us some more predictability as we try to forecast out from a balance sheet perspective over time. Yes, I guess the answer to your question is, we specifically say we need to grow Southwest Louisiana and North Louisiana faster in the fourth quarter than the other markets? No. But we did specifically, try to build or put show up the footprint in which we could have different parts of the footprint experiencing greater success different times, which hopefully over time leads to a good consistent moderate growth pace for the bank as a whole. Greg Robertson: Yeah, I think if you think about 2025 as a whole, had both North Louisiana and Southwest Louisiana grow over $100 million in loans and deposits each. And, you know, we're excited about Southwest Louisiana now has over $2 billion in deposits. Which is a large part of our deposit base and an important part of that. North Louisiana with that kind of growth as well, a $100 million in deposits. They are now over $1 billion or approaching $1 billion in deposits with the addition of our progressive partners. Will be approaching $2 billion. So we're excited about those areas and as I said, the Southwest Louisiana, Dallas comparison is an intriguing one because one of the thesis behind the construction of our footprint was that not only with different areas produced differently at different times, but that we could be a little more thoughtful about funding generation versus loan generation depending upon what type of market. So as Greg mentioned, the Southwest Louisiana has been able to be more aggressive on deposits over the past two or three years. Probably because we knew we had growth in the Dallas loan environment. And so Dallas is actually our largest market, as measured by loan volume. And in Southwest Louisiana, it might be our largest market based on deposit volume. They've both been able to be slightly more aggressive because the other supports the other. So it's a symbiotic relationship, and I know a lot of banks over time have talked about the rural versus the urban mix of their footprint and trying to get the best of both worlds. I think we have some real world examples of where that's working. Which is again, I think bodes well for the future. Jerry Vasquez: Yeah, I'd like to add one thing. Really pops. This is Jerry, by the way. Yeah. Jerry, I'd ask you to hear your Betty. Just an important part of this is I wanna call out a lot of this growth is coming from adding new clients. It's not just legacy client base. It's tenured strong, bankers in our footprint. New bankers bringing in new clients, is accounting for quite a bit of that growth, which is really nice to see. In these markets that we've got such strength within. Greg Robertson: Yeah. And so this is still to understand also. Obviously, we're excited with the addition of John and the horsepower that he's gonna bring to the Houston market. But in North Louisiana, we're excited, the progressive addition and the opportunity, as Jude talked about, in '26, deepening our existing relationships, Progressive being a deep in those relationships with a bigger balance sheet. Feddie Strickland: Perfect. Thanks for all the additional color, guys. Jude Melville: Thanks, Feddie. Desiree: Next question comes from the line of Gary Tenner with D. A. Davidson. Your line is open. Gary Tenner: Thanks. Good afternoon. So my questions have largely been answered, but I wanted to just ask about the swap business again. As you think about that business, if and when we get to more of a steady state rate environment, how you see that business kind of trending in that sort of environment? Greg Robertson: Yeah. Think one of the things that the rate environment could provide some challenges, but I think as we continue to scale and understand our philosophy around pricing and fixed rate loan pricing with long duration. We would like to and I think our bankers are becoming accustomed to taking some of those rate bets off the table with longer duration deals. So I think as we continue to integrate that process, and it's a very new process within our bank being only a little over a year old. But I think as we integrate that process with our bankers and our new banks and they understand that we would like to manage that rate risk a longer maturity fixed rate loans. Through the swap vehicle. I think that gives us even in a rate environment that may be more challenging than what it has been, more opportunity. Jude Melville: Yeah. So that's a good point. It's not just about the economic opportunity for the seed generation. It's also an opportunity to offer the client more options even while we put ourselves in a better place to manage our interest rate risk. You know, it's important one reason we added that chart that Matt described earlier, believe, or maybe it was Craig that described earlier, chart showing the pretty consistent NIM over time was we don't believe that we should be taking significant interest rate risk, and we manage only the bank's entire balance sheet, but our investment portfolio, in particular, we manage it for cash flow as consistent predictable cash flow as opposed to yield. And think we've had good results, not trying to guess on rates since so this enables us to give the client what they might want in terms of longer-term predictability of rates, but still enables us to have more flexibility in the construction of our alcove posture. I would also say although certainly the lower rates mean that maybe less swap activity, more SBA activity. The other dynamic for us is that we don't just do these things for ourselves. For our own clients, but we also do them for other banks. And so with the swap product, we are just now I think just yesterday in fact, closed one for one of our first ones for the client of another bank. Another institution in our community bank network. Over the end of last year, we actually closed a couple swaps for other banks, not for their clients, but for their own balance sheet sheets. And so as we were able to discuss with and educate our banker partners on the opportunities to provide more optionality to their clients. I would think that we would continue to see success growing the volume of swaps. Even if it ends up faster rate of growth off our balance sheet as opposed to with our direct clients. Gary Tenner: Great, thank you. Jude Melville: I was going to say real quick on the correspondent banking our biggest opportunity, we have about a little over 175, 180 clients. And with most of them, we just do probably just one thing, I mean, for the vast majority. And so part of our biggest opportunity there that we've been working on is having more of a unified sales approach so that we can actually increase the share of wallet. If you will, and have multiple provide multiple opportunities. So most of the folks that we've done SBA with, we haven't done swaps with and vice versa or the other products that we offer our largest one, actually, and our original one was through our affiliate SSW. Manages other banks' investment portfolios. We have a $6 billion to $7 billion in assets under management, and being able to cross sell the different products that we've been working on adding to our tool set. Think it's the biggest opportunity that we have regardless of the demographic or economic changes in the environment. Desiree: And our last question comes from the line of Christopher Marinac with Janney Montgomery Scott. Your line is open. Christopher Marinac: Hey, thanks for taking the questions this afternoon. I wanted to go back to the reserve. What should be the reserve ratio over time? Just looking at kind of annualized losses this quarter, last quarter, and just thinking the three point five, four-year average life, should the reserve be higher over time even if we included the discount you have on the deck. Greg Robertson: Yeah. I think that's a great question, Chris. I think what we talk about internally is continuing to move that reserve to 1% or higher. I think the charge-offs that we had in this quarter took it down a few basis points. But I think internally, we're reserving at a rate of one twenty on every new loan we make. So over time, we would like that to be above 1%. I think that's our intentions as well. And especially when you add the credit marks in there, I think we're currently all in about one zero six like we show in the deck, and that'll continue to move up with the closing of the Progressive transaction. Christopher Marinac: Got it. And should annualized losses be somewhere kind of in the mid-teens or 20 or you have a thought about that? Greg Robertson: Yeah, would think those would be somewhere in the lower teens to mid-teens. Next year. I think, 10 to 12 basis points of annualized losses. Is what we're kinda thinking. We ended up the year at about 19 basis points. And so we've kinda as we work through some of those NPLs, we've identified paths to move those off with minimal to no loss. So it's a matter of time unwinding some of those. Jude Melville: We took some losses on them last year. Yep. And have some specific reserves as well. There could be a bit of a drag in terms of the actual recoveries. So gross, to Greg's point, is maybe in the mid-teens, net kind of lower. To low double digits. Annualized. Chris, I think the days of us operating in the four to five basis points of charge-offs that's going to be tough going forward. Think it's just for the industry as a whole. Christopher Marinac: Sure. Greg Robertson: Yep. Christopher Marinac: Great. And the last question just has to do with kind of efficiency goals over time. If you look at expenses to assets, you've made a little bit of progress in the last year. Obviously, you've got integrating with Progressive, but just in the big picture, do you think we'll see more leverage going through the platform this next twelve to eighteen months? Greg Robertson: Yeah. I think our plan is to continue to improve operating leverage. Think as we as Jude mentioned, we're moving toward being able to have a run rate of fourth quarter of 120 run rate. I think if that's achieved, then I think that thing gets close to 60. On an annualized basis. And then, you'll probably start seeing on a monthly basis, into the fifties post integration of Progressive. Here and there as we continue to prove improve performance and earnings throughout the balance of the second half of the year. As we get into 2027, we would expect that our goal is to have that into the 50s. And I think there's once you kinda achieve those third quarter, fourth quarter twenty six ROA targets that we've been talking about, then there's a pretty natural glide path into the 50s. I think that we feel like it's very achievable. And necessary. Christopher Marinac: Great. You again, guys. Appreciate taking the time. Jude Melville: Thanks, Chris. Thank you. Desiree: That concludes the question and answer session. I would like to turn the call back over to Jude Melville for closing remarks. Jude Melville: Okay. Well, thanks again, everybody, joining us. I realize you have choices to make on your time and your attention, and I appreciate you spending this hour with us. Very pleased with the quarter and how we ended the year and it matched up well with our expectations of building momentum over the course of the year. And I look forward to seeing that momentum continue in 2026. So thank you all again, and hope you have a great end of the week. Desiree: Ladies and gentlemen, that concludes today's call. Thank you all for joining in. You may now disconnect.
Operator: Good afternoon, and welcome to the Alcoa Corporation Fourth Quarter and Full Year 2025 Earnings Presentation and Conference Call. All participants will be in listen-only mode. Should you need assistance, after today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then 1 on your touchtone phone. Please note this event is being recorded. I would now like to turn the conference over to Louis Langlois, Senior Vice President of Treasury and Capital Markets. Please go ahead. Louis Langlois: Thank you, and good day, everyone. I'm joined today by William Oplinger, Alcoa Corporation President and Chief Executive Officer, and Molly Beerman, Executive Vice President and Chief Financial Officer. We will take your questions after comments by Bill and Molly. As a reminder, today's discussion will contain forward-looking statements relating to future events and expectations that are subject to various assumptions and caveats. Factors that may cause the company's actual results to differ materially from these statements are included in today's presentation and our SEC filings. In addition, we have included some non-GAAP financial measures in this presentation. For historical non-GAAP financial measures, reconciliations to the most directly comparable GAAP financial measures can be found in the appendix to today's presentation. We have not presented quantitative reconciliations of certain forward-looking non-GAAP financial measures for reasons noted on this slide. Any reference in our discussion today to EBITDA means adjusted EBITDA. Finally, as previously announced, the earnings press release and slide presentation are available on our website. Now I'd like to turn over the call to Bill. William Oplinger: Thank you, Louis, and welcome to our fourth quarter 2025 earnings conference call. Today, we'll review our strong fourth quarter results, discuss our markets, and review the progress we've made on strategic initiatives. Let me begin with safety. Across all operations, our teams mobilized to strengthen fatality risk management at the frontline. Our safety incident rates remained stable in the fourth quarter with fewer significant incidents in 2025. For the full year 2025, both our DART and all injuries rates improved compared to 2024, evidence of our continued progress in building a safer workplace. In the fourth quarter, we delivered strong operational performance and stability, achieving annual production records at five of our smelters and one refinery. This includes achieving a remarkable sixteen consecutive years of increased production at our Dechambault smelter in Canada, along with eight consecutive years of record performance at our Mosjøen smelter in Norway. These additional tons contributed meaningfully to our bottom line as we delivered robust financial performance and cash generation in the quarter, which Molly will discuss in more detail. We also improved our shipping performance in the fourth quarter across both segments, with the higher aluminum shipments enabling us to deliver strong primary aluminum prices to the bottom line. The restart of the San Ciprian smelter is progressing well, with approximately 65% of the capacity in operation at the end of 2025. We continue to expect that the restart will be completed in 2026 as previously communicated. We moved forward on strategic initiatives in the fourth quarter. To name a few, we progressed negotiations on monetizing a transformation site in the U.S. and are expecting to reach an agreement in 2026. As we have discussed before, we are not simply monetizing former operating sites as land sales. We are working closely with developers to maximize value. We have multiple sites under discussion now. In November, ELYSIS announced the successful startup of its 450 kA inert anode cell. This represents a major milestone for the ELYSIS R&D program and a defining moment in the transition toward large-scale, low-carbon aluminum production. The design cell is part of a multiyear R&D program focused on developing inert anode technology at commercial scale. We also advanced our Western Australia mine approvals by progressing our responses from the public comment period and continuing to work with stakeholders. We still anticipate ministerial approvals by year-end 2026 in line with the timeline previously shared at Investor Day. In summary, Alcoa closed the fourth quarter with strong operational and financial performance, supported by improved safety results and record production across multiple assets. Our momentum continues with progress on the company's strategic initiatives, aimed at creating further value in 2026. Now I'll turn it over to Molly to take us through the financial results. Molly Beerman: Thank you, Bill. Revenue increased 15% sequentially to $3.4 billion. In the alumina segment, third-party revenue increased 3% as higher shipments of both bauxite and alumina more than offset lower alumina prices. In the aluminum segment, third-party revenue increased 21% on an increase in average realized third-party price and higher shipments across the segment. Fourth quarter net income attributable to Alcoa was $226 million versus the prior quarter of $232 million, with earnings per share down slightly to $0.85 per share. When you look at the GAAP income statement for the fourth quarter, there are several notable items. First, research and development expenses are negative $11 million in the fourth quarter. Beginning in 2025, Norway's CO2 compensation scheme included a requirement for recipients to spend 40% of the compensation received on emission reduction and energy efficiency measures. During the fourth quarter, Alcoa met the requirements and recognized $25 million as a reduction of the related R&D expenses. These impacts within EBITDA will not recur in the first quarter of 2026. Second, below EBITDA, we recorded a non-cash charge of $144 million to impair goodwill in the Alumina segment, primarily related to a 1994 acquisition. We perform an annual goodwill impairment assessment, and current alumina prices do not support this valuation. There is no goodwill remaining after this charge, and it is considered a special item. Third, interest expense is lower in the fourth quarter. This reflects a benefit of $23 million related to recognition of capitalized interest on certain capital expenditures from prior periods. Last, we recorded a tax benefit of $133 million from the reversal of a valuation on deferred tax assets in Brazil, mainly due to improved profitability at the Alumar refinery. Changes in our discrete tax items such as this are consistently reflected as special items. On an adjusted basis, net income attributable to Alcoa was $335 million, or $1.26 per share, excluding net special items of $109 million. Notable special items include the goodwill impairment charge of $144 million, a mark-to-market loss of $70 million on the Ma'aden shares, partially offset by $133 million from the tax valuation allowance reversal. Adjusted EBITDA was $546 million. Let's look at the key drivers of EBITDA. The sequential increase in adjusted EBITDA of $276 million is primarily due to higher metal prices, driven by increases in both the LME and the Midwest premium. The Alumina segment adjusted EBITDA decreased $36 million, primarily due to lower alumina prices, partially offset by higher shipping volume of both bauxite and alumina and the non-recurrence of adjustments to asset retirement obligations recorded in the third quarter. The Aluminum segment adjusted EBITDA increased $213 million, primarily due to higher metal prices, lower alumina costs, as well as the recognition of CO2 compensation in Spain and Norway. These impacts were partially offset by increased tariff costs based on higher LME and higher production costs. Outside the segments, other corporate costs decreased, and intersegment eliminations changed favorably, primarily due to a lower average alumina price requiring less inventory profit elimination. Moving on to cash flow activities for the fourth quarter and the full year 2025. We ended December with a strong cash balance of $1.6 billion. In the fourth quarter, we used cash from improved earnings and the release of working capital to repay the remaining $141 million of the 2027 notes and to fund sequentially higher capital expenditures. This reflects the strength of our aluminum portfolio and our ability to deliver elevated metal prices to the bottom line. Recall that we received $150 million of cash when the Ma'aden transaction closed in mid-2025 to cover taxes and fees. We have not yet received the final capital gains tax invoice; we now expect that payment to occur in 2026. As typical, capital expenditures and environmental and ARO payments are our largest uses of cash in 2025. Now let's cover the key financial metrics for the fourth quarter and full year. In 2025, the company delivered improved performance on key cash flow and return on equity metrics and closed the year with a strengthened balance sheet. Return on equity for the year was 16.4%, the highest since 2022. During the year, we returned $105 million to stockholders through our $0.10 per share quarterly dividend. Free cash flow, including net non-controlling interest contributions, was $594 million for the year, including fourth quarter free cash flow of $294 million. The reduction in working capital contributed significantly to free cash flow generation in the fourth quarter, with days working capital decreasing sequentially by fifteen days to a level similar to 2024. We finished the year at $1.5 billion of adjusted net debt, reaching the high end of our target range of $1 billion to $1.5 billion. While this is an important achievement reflecting strong financial performance, it is important to reinforce that our goal is not only to reach this range but to remain within it through the cycles. We have historically consumed cash in the first quarter, mainly due to increases in working capital. We will be mindful of the cash position in 2026 as we continue with disciplined execution of our capital allocation framework, prioritizing debt repayment and evaluating opportunities to create additional value for our stockholders. Now let's turn to the outlook. For the full year 2026 outlook, we expect alumina production to range between 9.7 million and 9.9 million tons and shipments to range between 11.8 and 12.0 million tons. The decrease in shipments reflects lower sales of externally sourced alumina to satisfy certain customer commitments and lower alumina trading volumes. The aluminum segment production is expected to range between 2.4 million and 2.6 million tons, and shipments are expected to range between 2.6 million and 2.8 million tons, both increasing primarily from the San Ciprian smelter restart. In EBITDA items outside the segment, we expect transformation costs to be $100 million, increased from last year primarily due to the inclusion of Kwinana holding costs for the full year in 2026. Other corporate expense will increase to approximately $160 million. Below EBITDA, we expect depreciation of approximately $630 million. Non-operating pension and OPEB expense is expected to be up slightly to $35 million. Interest expense is expected to approximate $140 million. For cash flow impacts, we expect 2026 pension and OPEB required cash funding to be slightly lower compared to 2025, around $60 million. The majority of that spend is for the U.S. OPEB plan. Our capital returns to stockholders will continue to be aligned with our capital allocation framework. Our capital expenditure estimate is $750 million, with $675 million in sustaining and $75 million in return-seeking. The sustaining capital increase is $97 million over 2025, primarily due to a $65 million increase related to upcoming mine moves in Australia, as well as higher spend on impoundments and anode bake furnace rebuilds. At our Investor Day last October, we indicated the potential to pursue government support for some of our capital spending that would reduce our overall CapEx. That work is progressing well, but we do not yet have confirmations to share. Net payments on prior year's income taxes are expected to be approximately $230 million, including our estimate for the Ma'aden capital gains tax. Environmental and ARO spending is expected to increase in 2026 to approximately $325 million, primarily due to progress on the Kwinana site remediation. We do not provide guidance on full-year cash restructuring charges. For 2026 at the segment level, in alumina, we expect performance to be unfavorable by approximately $30 million due to typical first-quarter impacts from the beginning of maintenance cycles and lower shipping volumes, along with lower price and volume from bauxite offtake and supply agreements. In the aluminum segment, we expect performance to be unfavorable by $70 million due to the non-recurrence of Spain and Norway CO2 compensation credits recorded in the fourth quarter, as well as additional operating costs associated with the restart of the San Ciprian smelter. Alumina cost in the aluminum segment is expected to be favorable by approximately $40 million. Below EBITDA, within other expenses, 2025 included unfavorable foreign currency impacts of $20 million that may not recur. Based on last week's pricing, we expect the 2026 operational tax expense to approximate $65 to $75 million. Our sensitivities have been updated for our view of 2026. Please see the appendix. Now I'll turn it back to Bill. William Oplinger: Thanks, Molly. Let's begin with the alumina industry dynamics. FOB Western Australia alumina prices remained within a narrow range and ended the year slightly lower than the third quarter average, continuing to pressure higher-cost refineries. On the supply side, we have not seen large-scale curtailments announced to date. The Chinese government's continued emphasis on the orderly operation of the alumina industry, as stated in the NDRC's December policy statement, combined with refineries' efforts to maintain stable production through annual contract negotiations, has extended steady supply conditions and discouraged large-scale curtailments. However, current pricing levels continue to put pressure on about 60% of China refineries. Smelter may continue pressuring prices. However, anticipated smelting capacity growth, primarily in Indonesia, could provide some demand support over 2026. Turning to bauxite, prices remained relatively stable throughout the fourth quarter amid limited spot activity. However, despite strong demand, we have observed lower prices to start the year with supplies increasing in Guinea as restarted capacity from suspended licenses comes to market. Despite near-term market pressures, we remain confident in the long-term fundamentals of the alumina industry. Alcoa is exceptionally well-positioned to navigate market volatility thanks to our low-cost mining and refining portfolio and our strong operational performance. And beyond our cost advantage, Alcoa's ability to provide value to customers through quality product and reliability enables us to secure long-term supply contracts with premiums above index pricing, highlighting Alcoa's position as the alumina supplier of choice for long-term partnerships. Moving to aluminum, LME prices increased 8% sequentially in the fourth quarter and recently reached $3,200 per metric ton as strong underlying fundamentals, including constrained supply and high demand projections, continue in the market. This was further supported by the broader base metals rally, led by copper, geopolitical uncertainty, and macroeconomic tailwinds. We also observed funds substantially increasing their long position in aluminum over this period. 2025 ended with positive momentum for aluminum, as inventories measured in days of consumption fell to their lowest year-end level in at least fifteen years. On the demand side, we continued to see meaningful strength in the packaging and electrical sectors. Going into 2026, Indonesia is emerging as a major aluminum producer, with analysts forecasting approximately 700,000 metric tons of new production. However, recently announced disruptions in Iceland and Mozambique could remove over 550,000 metric tons from the market in 2026, almost offsetting the expected additions from Indonesia and limiting net global supply growth. China remains near its 45 million metric tons cap, which we continue to believe will be maintained. On 2026 demand, we anticipate continued growth globally, including in North America and Europe, which will remain in substantial deficits. Alcoa's overall order book remains strong for value-added product sales, though regional and segment-specific dynamics vary. In North America, rod demand for electrical sectors is exceptionally strong, while slab orders are steady and supported by robust packaging markets. Automotive slab demand has been temporarily affected by the 2026. Billet demand is currently flat but showing early signs of improvement driven by reshoring. Foundry demand, however, remains challenged as tariffs pressure auto OEM profitability and supply chains. In Europe, rod continues to outperform, with demand consistently exceeding supply capacity. Packaging demand is strong but faces growing competition from Chinese imports displaced by U.S. tariffs. Automotive-related slab demand remains weak, with no recovery expected in 2026 due to low EV platform orders and uncertainty around new programs. Billet demand is soft across all segments, further impacted by a slowdown in construction activity. Foundry demand is also low, with extended customer shutdowns. In aluminum, Alcoa is uniquely positioned to benefit from globally constrained supply and selling into high-premium regions. In the fourth quarter, regional premiums strengthened across the board, supported by robust fundamentals, U.S. tariffs, supply disruptions, and anticipation of Europe's carbon border adjustment mechanisms scheme, or CBAM. In North America, the Midwest premium rose sharply, providing a significant benefit to Alcoa given our U.S. production. Importantly, the higher Midwest premium fully offset tariff costs on shipments from Canada to the U.S. And I'll remind everyone of the four smelters still operating in the U.S. Alcoa owns two, giving us an advantage as the Midwest premium continues to increase. In Europe, the Rotterdam regional premium increased in the fourth quarter, partially due to demand front-loading ahead of CBAM's implementation in January 2026. CBAM implementation is expected to deliver a net benefit to Alcoa in 2026 because the anticipated increase in the Rotterdam premium should more than offset our incremental carbon emissions costs. Under CBAM, foreign importers to Europe must purchase CBAM certificates to compensate for their carbon emissions. This increase in costs reflects the need for Europe, an aluminum deficit region, to price imports high enough to attract marginal foreign producers that must now purchase CBAM certificates. Industry analysts estimate that CBAM could add roughly $40 per metric ton to the Rotterdam premium in 2026, and we believe some of this uplift was already included into 2025. While CBAM certificates affect foreign importers, domestic European producers do not purchase CBAM credits and instead experience cost changes through the emissions trading system framework, or ETS, which sets the carbon cost for all domestic producers. Current free allowances under that program will be fully phased out by 2034, pushing carbon costs of domestic producers higher. However, Alcoa's European smelters are advantaged when compared to higher-emitting producers due to their lower Scope 1 direct emissions, driven by modern pot technology and strong operational stability. This makes our cost increase comparatively lower than competitors. Overall, based on our internal analysis, we expect CBAM to generate a net positive impact of approximately $10 per metric ton in 2026, with the uplift in the Rotterdam premium outweighing our carbon cost increases. We will reconfirm this estimate as actual CBAM dynamics materialize. Additionally, the European Commission's December update strengthened CBAM by closing key circumvention risks, such as scrap loopholes and inclusion of downstream products. We continue engaging with the commission to ensure the mechanism functions as intended. In summary, our strong operating footprint in both North America and Europe provides a benefit to Alcoa from both U.S. tariffs and CBAM implementation. To conclude, in the fourth quarter, Alcoa delivered strong operational stability, highlighted by annual production records across five smelters and one refinery, robust financial results, and net cash generation. We advanced key actions to improve the competitiveness of our operations and further strengthen the company for long-term success. Looking ahead, our focus remains on safety, stability, and operational excellence while continuing to advance strategic initiatives. We are well-positioned to continue creating value in 2026, capitalizing on robust market fundamentals. We will maintain a disciplined capital allocation as we evaluate opportunities. With that, let's open the floor for questions. Operator? Please begin with the Q&A session. Operator: We will now begin the question and answer session. Before pressing the keys. Our first question today is from Nick Giles with B. Riley. Please go ahead. Nick Giles: Thank you, operator, and good afternoon, everyone. My first question was really when compared to the initial guidance, 2025 aluminum production in shipments did come in below initial expectations. And obviously, you've made a lot of progress at certain assets here more recently. But if we take a step back, what ultimately gives you the confidence that 2026 is attainable? And could this be a year of upward revisions rather than downward? Thank you. William Oplinger: Thanks, Nick. I think the 2026 guidance is very much attainable. It's going to be based on how some of the restarts around the system go. We're in the process of restarting San Ciprian. We're still working on the restart of Saint Louis. And overall, as you mentioned, we had extremely strong production at five of the smelters around the world. And we're confident that we can continue that progress that we had in 2025. Nick Giles: Bill, that's good to hear. I appreciate that. My second question was Atlantic Alumina received a fairly sizable and other parties related to increasing alumina and gallium production. So I was hoping to get your perspective on one, domestic supply of alumina. Is this something that Alcoa would ever be interested in? And then the second part on the gallium side, I didn't don't think I heard any updates on the potential project in WA didn't know if there was anything any color you could provide there? Thank you. William Oplinger: So as far as the first part of the question, alumina is largely fungible. And therefore, our two sites in the U.S. would certainly consider a U.S.-based supply of alumina as long as it cut down on transportation costs. So if that excess capacity comes online, we will certainly look at opportunities to use it in the U.S. As far as our gallium project is going, we're making progress. We're continuing to work with the three governments to ensure that we can build a really strong gallium plant at the end of wage drop. And so we are making progress on the project and are moving forward. Nick Giles: Bill, I really appreciate the update and to you and the team, continue best of luck. Thanks. Operator: The next question is from Carlos De Alba with Morgan Stanley. Please go ahead. Carlos De Alba: Good afternoon, Bill and Molly. My first question is regarding the alumina profitability. Clearly, are under pressure, maybe at the bottom, depending on how things play out. But the profitability for that business unit or that segment for you guys has come down. Based on the guidance, probably it's going to be breakeven. Give or take. So what I mean, can you talk about what the plans are to potentially come out with initiatives to reduce cost if possible, improve productivity, efficiencies and just to enhance the profitability of that segment? William Oplinger: So I'll address it. And if, Molly, if you want to add anything. Clearly, we understand where we are in the cycle alumina. And we've shown in the past, Carlos, that we can get pretty aggressive around costs. Now what we won't do this time around is really put any of our plants in jeopardy for the future. And we have a low-cost position on the cost curve. And there are other plants around the world, specifically in China, who are much higher on the cost curve. So they will be under pressure. Their margins will be under significant pressure at these levels. Carlos De Alba: Alright. Thank you for that, Bill. And then maybe on the idle sites or monetization of idle sites, could you provide maybe a little bit more color? We're expecting something to be announced maybe by the end of last year or the first quarter. It seems now that progress has been made, but more to be expected to be done concluded in the first half of the year. Any additional color that you can provide in addition to your comments? Is it one side, two sides? Anything that you can help us with? Obviously, it's a very important aspect of the company. Molly Beerman: Yes. Thanks for the question, Carlos. The negotiation for the primary site that we're working on now, it's taking longer because it is not a simple land sale. This particular negotiation could involve a multi-year payment stream as well as some value-sharing structures. We're going to take our time and get this right, make sure we get the most value, so that's the slight extension on the timing there. We are continuing to progress several other sites. You know, we have 10 priority sites in total. To meet our target of $500 million to $1 billion over the next five years. Carlos De Alba: Thank you, Marie. Good luck. Thank you. William Oplinger: Thanks, Carlos. Operator: The next question is from Katja Jancic with BMO Capital Markets. Please go ahead. Katja Jancic: Can you provide the update on the current status of Alumar smelter? William Oplinger: Yes. The Alumar smelter had a setback again in the fourth quarter. We would anticipate that the production level in the first quarter will be very similar to what we had in the fourth quarter. The issue that we had in the fourth quarter was really initiated by a series of power interruptions that occurred. The stability of that plant is not in a position where it was able to absorb those changes in power. But we do anticipate that the first quarter should not be materially different than the fourth. Molly Beerman: I'll just add that we did reach profitability at the smelter in the second half of the year, and again, the production change will not be significantly different sequentially. And in '20, we'll continue the stabilization efforts there and work on our cost improvement programs. Katja Jancic: And then maybe shifting to San Ciprian, given the current alumina and aluminum environment, if the operation would be at full capacity, would the operation generate, would the EBITDA be positive? Molly Beerman: For the smelter, we will reach profitability after we complete the restart, and that is still on track for 2026. The pricing is very favorable there. We are still working on our overall program for the complex, and I can give you an update on our EBITDA guidance for '26 for the combined smelter and refinery. So we have an EBITDA loss of approximately $75 to $100 million, the majority of that is the refinery. Our free cash flow consumption will be approximately $100 to $130 million, and that includes refinery CapEx of about $50 million. We are making some working capital improvements across the sites. We have the benefit of that as well. We are still progressing on our plan to reach cash neutrality in 2027. 2026, as we indicated during our investor day, commentary will be challenged though with the numbers that I just gave you. In Spain, we do not record the CO2 compensation until it is earned, and recall there's a three-year clawback. So we will have cash receipts of about $85 million coming in the '27 for our '26 production. So that's why we still have confidence that by the '27, we will have reached our neutrality goal. We will have smelter profitability, we'll have the CO2 payment coming in, and that will completely cover refinery losses at that point. Katja Jancic: Perfect, thank you. Operator: The next question is from Daniel Major with UBS. Please go ahead. Mr. Major, your line is open on our end, perhaps it's muted on yours. Moving on, the next question is from Glyn Lawcock with Baron Joey. Please go ahead. Glyn Lawcock: Happy New Year, Bill and Molly. Mentioned in today's release a back-to-back mine move in WA. Could you just sort of maybe talk a little bit to that? When does that start to do you have to submit your permit request for that second mine move? And how should I think about that relative to the one that's currently underway? Thanks. Molly Beerman: Glyn, we'll probably have to recheck that. I don't believe we said back-to-back on the mine moves in today's release. William Oplinger: And if we were to give you an update, Glyn, on the current mine move, we're progressing well. We are we've responded to the submissions that were in the public comment period. We still anticipate the EPA making the recommendation by the end of the first half. And we still anticipate having our permits by 2026. Glyn Lawcock: Okay. That's great. And then maybe just I don't know if you've mentioned it, but just the Canada tariff exemption. I mean, how long is a piece of string, but just any updates on discussions there? Or is it still something too hard to call? William Oplinger: I think it's very hard to call with all the geopolitical changes that are going on around the world, Glyn. It's difficult to say whether there will be a Canadian exemption. The Midwest premium obviously has risen to cover the total tariff expense. As a company, we're probably spending over $1 billion in gross tariff expense on an annual basis, but the Midwest premium is high enough to cover that. So the tariffs in their entirety are getting passed on to customers at this point. Glyn Lawcock: Okay. Thanks very much. Operator: The next question is from Lawson Winder with Bank of America. Please go ahead. Lawson Winder: Thank you very much, operator. And good evening, Bill and Molly. Appreciate you taking the question. Could I ask about the productivity improvements at Alumina that you cited driving the higher production? Which kind of jumped out just because of Corona being down. Is that better utilization? Are you getting some higher third-party bauxite? Are there other factors that are driving that? Molly Beerman: Lawson, I would say most of that is just simply because the teams there are really applying every technical resource to continue to improve productivity with the low bauxite grade. We are not seeing improvements in the grade. The teams just continue to do a great job of increasing production. William Oplinger: So if you go around the system, and some of this relates to 2025 going into 2026, the Alumar refinery is running extremely well. And we're seeing great production out of the Alumar refinery. The San Ciprian refinery is held at around 2,001 tons per day. And there's a variety of different reasons for why we're holding it at $2,100 a day. It doesn't make in this price environment, it doesn't make any sense to ramp it up any higher. And then if you go to WA, both Pinjarra and Wagerup had good years. We think that they're going to have better years in 2026. And they are reacting well to the lower bauxite grade, and we believe that they will outperform in 2026. Lawson Winder: Okay. Thank you for that color. And could I also get your thoughts on capital return? So congratulations on achieving a net debt level below the $1.5 billion target. You suggested that that might rise or the net debt might rise back above the $1.5 billion target in Q1. I mean TBD. But then thinking beyond Q1, how does that net debt level factor into your thinking around potential buybacks? I mean, is there a certain comfort level below the $1.5 billion that that might put capital return back on the table? Or for 2026, should we maybe think about net continued debt repayment and then potential investment opportunities in growth for the business rather than capital return? Molly Beerman: So we did just get under the target at $1.46 billion. So again, as we said in our comments, our goal is not only to stay with to get to the range, but to stay within it throughout our cycles. And as we mentioned, we're going to consume cash in the first quarter that will be related to both working capital and tax payments. We do expect to generate cash across 2026. And that will be used for additional debt repayments. Recall we still have $219 million on our 2028 notes. We will expect to have excess cash to compete between shareholder returns and value-creating growth opportunities. William Oplinger: If I would just add to that, it all starts with a rock-solid balance sheet. And we are now within our target range. But a fundamental belief on our part is that one of the strengths of our company is that we need to have a fortress balance sheet, and we're within the range. Beyond that, we have the sustaining capital that we'll spend to sustain the cash flow that we get from the operations. And then as Molly said extremely well, it's going to be a mix between returns to shareholders and growth. Lawson Winder: Okay. Thank you for that. Operator: The next question is from Timna Tanners with Wells Fargo. Please go ahead. Timna Tanners: Yes. Hey, good evening. I wanted to ask, obviously, given the step change in aluminum prices, if you have any updated thoughts on volumes, especially in the U.S. and Europe. So the president Trump's mandate was to increase production. That was the design of believe, of the tariffs, and there hasn't been much. So is there from the Trump administration? Any new thoughts on work? And then of course in Europe, the CBAM mentioned is for prices, but also could be encouraging of domestic volumes. So your thoughts on volumes would be great. William Oplinger: Yes. So there's four smelters in the U.S. We own two of them. Massena is running flat out. And as you saw, we just re-signed a long-term power contract at Massena that gets us ten more years plus an option for another ten. So very exciting that we can have competitive green power in Massena. But they don't have any further capacity available to them. In Warrick, we have a line that is idle currently. The issue with restarting that line in Warrick is number one, it's expensive. It will cost us about $100 million. And depending on the availability of key lead time on key production items, for instance, transformers and things like that, it could take up to a couple of years to restart that smelter. That line at the smelter. So it's at this point unlikely that we would restart the fourth line. I can't speak for anybody else in the U.S., Timna, and what they're doing. If we then look at Europe, I think that incremental $40 that we talk about in the Rotterdam premium is highly unlikely to incent anyone to restart capacity in Europe. In Europe, it all comes down to as it does anywhere around the world, is energy. And what are energy prices doing? And last time I looked, energy is not getting significantly cheaper in Europe anytime soon. Timna Tanners: Okay. Helpful. If I could just one more on Spain circling back. If I recall from the Investor Day, you talked about a timeframe where you'd be free to exit the country given your existing framework. Can you remind us when that is? William Oplinger: So we will have largely fulfilled the viability agreement by 2027. Timna Tanners: Okay, great. Thank you. William Oplinger: Thanks, Timna. Operator: The next question is from Lachlan Shaw with UBS. Please go ahead. Lachlan Shaw: Bill and Molly, thanks very much for the update. Just a couple from me. So firstly, I just wanted to dig a little more into the section 232 kind of tariff pace. Can I ask in a scenario where there is a preferential rate agreed at some point, what is your expectation for how the Midwest premium might react? In theory, William Oplinger: the Midwest premium, if there were preferential tariff between Canada and the U.S., in theory, the Midwest premium should not fall. And the reason why that is, is if all the metal from Canada were to continue to come into the U.S. on a preferential tariff, you still need to incent metal to come from outside of North America. And so in theory, that should not fall. Now I keep reiterating in theory, it will it's hard to determine what the sentiment would look like, but we believe that the marginal tons still come from outside of North America. Lachlan Shaw: Got it. That's helpful. Thank you. My second question, so you just gave a bit of a color there in terms of the existing portfolio and potential optionality to restart? But if I sort of step back look at the aluminum market, roll forward a year or two, trade seems likely to be tightening. When you look at the options around restarting versus buying versus building, I mean, how are you seeing those sorts of trends right now? What sort of seems relatively more or less attractive in terms of if you were to pursue a growth agenda? Thanks very much. William Oplinger: It really depends on what product line that you're looking at. So remember that we have three different product lines, bauxite, alumina, and aluminum. At this point, we do not have greenfield expansion plans for aluminum, and we've not found anywhere around the world that provides a sufficiently low energy price for sufficient returns on a greenfield plant at this point. In the case of refining and bauxite, very similar. Refining capital costs are still fairly high. And certainly at today's prices, it makes it difficult for a greenfield expansion. Now with that said, we do have brownfield opportunities to potentially grow in both mining, refining, and smelting. But at this point, we don't have significant greenfield plans going forward. Operator: The next question is from William Chapman Peterson with JPMorgan. Please go ahead. William Chapman Peterson: Hi, good afternoon. Thanks for taking my question and nice job on the quarterly execution. I might have missed it, but can you quantify the impact the EBITDA impact from San Ciprian restart specifically in the first quarter? Molly Beerman: It was part of the San Ciprian guide down that we gave. 50 of that related to the CO2 compensation not repeating, and the other 20 is related to San Ciprian. William Chapman Peterson: Yeah, okay. Yeah, thanks for that. I thought it was about 15 to $20 million. So that's helpful. And then the second question, I guess on the Western Australia mine approvals, I guess, is there any key milestones before the ministerial approvals by 2026? Any particular deliverables from your side or actions to be taken? Anything notable to call off in the public comment period? Just trying to get a sense of what happens between now and the end of the year. William Oplinger: So the public comment period was extensive, and we received close to 60,000 comments. We've responded to all of those comments. The next major milestone in the process is that we should have a recommendation from the EPA at the end of the first half and then have ministerial approvals by the end of the year. William Chapman Peterson: Great. Thanks for the color. Operator: The next question is from John Tumazos with John Tumazos Very Independent Research. Please go ahead. John Tumazos: Thank you very much. I'm following up on the earlier question. What would be the earliest timetable for a greenfield analysis smelter? Assuming that the technology is progressing? And if you were to build a smelter, would the scale resemble some of the large Asian smelters such as Vedanta's 1.6 million ton smelter? William Oplinger: So, John, the earliest that we would implement at ELYSIS is not until after 2030. So we will not be implementing any ELYSIS technology between now and 2030. Can't speak for our partners. They may do something, but you'd have to talk to them. As far as a competitive global greenfield smelter, there really are only a few technology providers around. One is the Chinese, and the other is The Emirates. They typically come in sizes of around 500 to 600,000 tons. So you can scale from that between five hundred and six hundred thousand. But if a new greenfield were to come online, I would anticipate it to be in that size range. John Tumazos: Bill, when you use the word implement, is that groundbreaking or completion? William Oplinger: That's groundbreaking. So we're not looking to do anything with ELYSIS this decade yet. And we would do groundbreaking. If we do an ELYSIS smelter, and I say if because there's still a lot of water to go under the bridge as far as research and development analysis. But if we were to do that, it would be groundbreaking post-2030. John Tumazos: Thank you very much. William Oplinger: Thanks, John. Operator: The next question is from Daniel Major with UBS. Please go ahead. Daniel Major: Hi. Can you hear me okay this time? William Oplinger: Yes. Yes. Yes. We can, Dan. Daniel Major: Great. Yes, sorry about that. So yes, a couple of questions. Just first, following up specifically on the CO2 compensation accounting and the accrual in the fourth quarter. I think North accrues through the P&L during the year with their CO2 compensation and then has a cash adjustment in 4Q. Is this a recurring item, so next 4Q 2026 you would also book through the P&L essentially one-off recognition of the CO2 compensation? And would it be around the same quantum this time next year? Molly Beerman: Yeah, Dan, in the past, we accrued full CO2 compensation. However, when the government applied the conditional portion, we had to go through and apply for our projects and spend that would qualify on those carbon and emission measures. So we just received that feedback, and it allowed us to take a position on some of the R&D that we had spent. So we took that credit. I expect going forward, we will make those decisions more regularly because we now have feedback on our group of projects that have qualified. That's why we indicated it will not recur to the same level in '26. Daniel Major: Right. So it doesn't reflect an annual fourth-quarter recognition. It's just this year and won't recur at any point in the future? As far as you said. Molly Beerman: It won't recur as kind of a call-out item. It will be more regular coming into '26. We actually, with the projects that we submitted, some of them are CapEx, and then we had a piece of R&D. The CapEx was more forward-looking, so that will apply in the future. We can use those credits against CapEx. This year, we used it against R&D because we had qualifying expenditures in the current year. You can also carry over those conditional credits, so it may not be exactly the same amount every year. It really does depend on your qualifying spend in the year. Daniel Major: Okay. And so just follow-up on this topic. I don't believe you highlighted it in the Q3 outlook as a one-off. Does that mean it's kind of an incremental positive relative to what you guided? Molly Beerman: We didn't call it out because we honestly thought it would be a bit less than what we ended up qualifying for. So we had, I would say, the majority of it, maybe half of it in the outlook. Embedded and we didn't discuss it. But we ended up with more qualifying expenditures than we had expected. Daniel Major: Got it. Okay. Thanks for clarifying that. And then, yes, just a second one, if I may, a follow-up on the commentary you made around the legacy site you've got in negotiation. And expect to close in 2026. Can you give us any sense of how much of the guided proceeds might be from that divestment? Molly Beerman: Going to hold on that we close the deal. Again, arrangements are a bit more complicated than what we're used to working on in the past, and they come in installments, so we're going to hold that news until we get there. Daniel Major: All right, thanks. Operator: This concludes our question and answer session. I would like to turn the conference back over to Mr. Oplinger for any closing remarks. William Oplinger: Thank you for joining our call. Molly and I look forward to sharing further progress when we speak again in April. And that concludes the call. Thank you. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Thank you for standing by, and welcome to Intel Corporation's Fourth Quarter 2025 Earnings Conference Call. At this time, participants are in listen only mode. After the speakers' presentation, there will be a question and answer session. To ask a question during this session, you'll need to press star 11 on your telephone. If your question has been answered and you'd like to remove yourself from the queue, simply press star 11 again. As a reminder, today's program is being recorded. And now I'd like to introduce your host for today's program, Mr. John Pitzer, Senior Vice President, Investor Relations. Please go ahead, sir. John Pitzer: Thank you, Jonathan, and good afternoon to everyone joining us today. By now, you should have received a copy of the Q4 earnings release and earnings presentation, both of which are available on our investor website, intc.com. For those joining us online today, the earnings presentation is also available in our webcast window. I am joined today by our CEO, Lip-Bu Tan; and our CFO, David Zinsner. Lip-Bu will open with comments on our fourth quarter results as well as provide an update on the progress we are making on our strategic priorities. Dave will then discuss our overall financial results, including first quarter guidance, before we transition to answer your questions. Before we begin, please note that today's discussion does contain forward-looking statements based on the environment as we currently see it, and as such, are subject to various risks and uncertainties. It also contains references to non-GAAP financial measures that we believe provide useful information to our investors. Our earnings release, most recent annual report on Form 10-K and other filings with the SEC provide more information on specific risk factors that could cause actual results to differ materially from our expectations. They also provide additional information on our non-GAAP financial measures including reconciliations where appropriate to our corresponding GAAP financial measures. With that, let me turn things over to Lip-Bu. Lip-Bu Tan: Thank you, John, and thank you all for joining us today. 2025 was a year of solid progress. Over the last 10 months, we established the foundation for new Intel, a more focus and execution-driven company. We simplify our organization and greatly reduce bureaucracy to improve efficiency and accelerate decision-making. We also recruited new leaders from the outside and empower key leaders from within. We strengthened our balance sheet, forged strong new partnership and deepened relationship with existing as well as new customers. I'm encouraged by my conversation with our customers and partners around the world. I'm hearing a clear, consistent message. They see the progress we are making, they want Intel at the table as they navigate their own transformations. The opportunity in front of us is meaningful and significant. The era of artificial intelligence is driving unprecedented demand for semiconductor across the entire compute landscapes from AI accelerated and traditional data centers into the network and enterprise domains all the way out to client and edge devices. Rapid deployment of AI workloads across this diverse environment will require heterogeneous silicon solution, leveraging CPU, embedded NPUs, discrete and integrated GPU, ASICs and XPUs. In addition, we will need to see innovation in the software stack along with new emerging technologies like photonics, memory interfaces, interconnect and quantum to name just a few. The breadth of our IP and know-how across silicon design, system level integration, wafer manufacturing and advanced packaging uniquely position us to capitalize on these AI-driven trends, capture sustainable profitable growth. This will not happen overnight, and our execution needs to continue to improve. While we will stay humble as we address the work ahead and we will never be satisfied. Our Q4 was another positive step forward. Revenue, gross margin and EPS were all above our guidance. We delivered these results despite supply constraints, which meaningfully limited our ability to capture all of the strengths in our underwriting markets. We are working aggressively to address this and better support our customers' needs going forward. Looking ahead for 2026. We will continue to position Intel to capture the significant growth opportunity AI presents across all our businesses. We will do this by strengthening our client franchise, advancing our data center, AI accelerator and ASICs strategies and continue to build trusted U.S. foundry. Let me start with our core x86 franchise, which remains the most widely deployed compute architecture in the world. The deployment of AI is only amplifying the importance of x86 from orchestration and control planes to inference edge workloads and agentic AI. In our Client Computing Group, we strengthened our position in both consumer and enterprise notebooks with our Core Ultra Series 3 lineup, formerly known as Panther Lake. And build on our most advanced Intel 18A manufacturing process. We committed to deliver our first Series 3 SKU by the end of 2025, and we exceeded that commitment by delivering our first 3 SKUs. While we still have work to do, I'm encouraged by the steady progress on our Intel 18A use, and Naga and his team remain laser-focused on additional improvements as they ramp Series 3 into the high volume needed to meet strong customer demand. Our client momentum was on full display at CES earlier this month, where we formally launched Series 3 with our OEM partners, powering over 200 notebook designs Series 3 will be the most broadly adopted and globally available AI PC platform we have ever delivered. Along with our next-generation Nova Lake coming at the end of 2026, we now have a client road map that combines best-in-class performance with cost-optimized solutions giving me confidence that we are on the path to fortify market share and profitability in both notebooks and desktops over the next several years. In addition, PC become an important part of the AI infrastructure. The surge in AI workloads is driving massive demand for data centers, but cloud capacity alone cannot meet the scale of inference needed especially in the power constrained environment. This accelerating the push toward hybrid AI, splitting workloads between cloud and client which offers clear advantages in performance, cost and control. We are working closely with ecosystem partners to seamlessly enable hybrid AI, and we are encouraged by the opportunity to grow the installed base and accelerate the refresh rates over time. Let me now turn to DCAI to support our AI objectives, I believe that our traditional server and accelerated road maps must advance together. To reinforce the alignment, I centralize our data center and AI businesses under Kevork, ensuring tight coordination across CPUs, GPUs and platform strategy. Demand for traditional servers continues to be very strong, and we are focused on ramping available capacity to support the meaningful uptick we are seeing including partnering with key customers to support their needs beyond 2026. The continuing proliferation and diversification of AI workloads is placing significant capacity constraints on traditional and new hardware infrastructure, reinforcing the growing and essential role CPUs play in the AI era. This is and will continue to benefit the ongoing ramp of Granite Rapids as well as our mainstream products, Sapphire and Emerald Rapids. We have also made decisive changes to simplify our server road map focusing resources on the 16-channel Diamond Rapids and areas to accelerate the introduction of Coral Rapids, where we can. With Coral Rapids, we will also reintroduce multi-threading back into our data center road map. We also continue to work closely with NVIDIA to build a custom Xeon fully integrated with their NVLink technology to bring best-in-class x86 performance to AI host nodes. Over the last several quarters, we have been developing a broad AI and accelerated strategy that we plan to refine in the coming months. This will include innovative options to integrate our x86 CPU with fixed function and programmable accelerator IP. Our focus is on the emerging wave of AI workloads, reasoning models, agentic and physical AI and inference at scale, where we believe Intel can truly disrupt and differentiate. Our long-term ambition is clear to rebuild Intel as a compute platform of choice for the next era of AI-driven computing, grounded in world-class engineering and accelerated road map, and a renewed culture of execution. We are also building momentum in ASICs as customers seek purpose-built silicon for AI, networking, cloud workloads. Our combination of design services, IP building blocks, and manufacturing capabilities position Intel well to resolve specialized problems at scale. This is not a new area for us, although this is one that I'm committing significantly more focused resources and investment dollars, including leveraging my own experience at Cadence Design supporting and growing this market. Finally, we remain focused on the long-term objective of building a world-class wafer and advanced packaging foundry anchored in trust, consistency, and execution. As I have said before, building a foundry business will take time and considerable effort and resources. While still early in our journey, we have hit some earlier important milestones worth highlighting. We are now shipping our first products built on Intel 18A, the most advanced semiconductor process developed and manufactured on U.S. soil. As stated earlier, yields continue to improve steadily as we work to ramp the supply needed to meet strong customer demand. In addition, Intel 18AP continue to progress well. and we are engaging with internal and external customers on this note, delivering our 1.0 PDK at the end of the last year. Intel 14A development remains on track. We have taken meaningful steps to simplify our process flow and improve our rate of performance and yield improvement. We are developing a comprehensive IP portfolio on Intel 14A, and we continue to improve our design enablement approach. Importantly, our PDK are now viewed by customers as industry standard. Engagements with potential external customers on Intel 14A are active. We believe customers will begin to make firm supplier decision starting in the second half of this year and extending into the first half of 2027. We also have the opportunity to provide strong differentiation in advanced packaging, particularly with EMIB and EMIB-T. We are focusing on improving quality and yield to support customer desire for ramps beginning in second half of 2026. In closing, as I reflect on 2025, I'm proud of the resilient commitment our team has demonstrated. We exit the year with a stronger foundation and clearer road map for 2026 and beyond. The opportunity ahead is meaningful and significant as AI-driven computing expands all the markets we serve. But I'm also mindful of the challenges ahead of us and transparent about the areas that we are doing well and areas we need to improve. In the short term, I'm disappointed that we are not able to fully meet the demand in our markets. My team and I are working tirelessly to drive efficiency and more output from our fabs. While yields are in line with our internal plans, they are still below what I want them to be. Accelerating yield improvement will be important lever in 2026 as we look to better support our customers. As I said earlier, we are on the multiyear journey. It will take time in resolve, but my team and I are committed to rebuilding this iconic American company and increasing the long-term value for our shareholders. I would like to thank my team for their hard work over the course of the last 10 months. I look forward to updating you on our progress as we continue this journey together, including hosting an Investor Day in the second half of this year at our headquarters in Santa Clara. Let me now turn it over to Dave to walk through our financials and business trends in more detail. David Zinsner: Thank you, Lip-Bu. We remain encouraged by the fundamental drivers of demand across our core markets. Fourth quarter revenue was $13.7 billion at the high end of the range we provided in October. We experienced strong growth across all our businesses, benefiting from the AI infrastructure build-out with AI PC, traditional server and networking revenue, all up double digits sequentially and year-over-year. Q4 marks the fifth consecutive quarter of revenue above our guidance even as we navigate industry-wide supply constraints for our key products. Non-GAAP gross margin came in at 37.9%, approximately 140 basis points ahead of guidance on higher revenue and lower inventory reserves, partially offset by increased mix of outsourced client products and the early ramp of Intel 18A to support the launch of Core Ultra Series 3 codenamed Panther Lake. We delivered fourth quarter non-GAAP earnings per share of $0.15 versus our guidance of $0.08 and driven by higher revenue, stronger gross margins and continued spending discipline. Q4 operating cash flow was $4.3 billion with gross CapEx of $4 billion in the quarter and positive adjusted free cash flow of $2.2 billion. NVIDIA's $5 billion investment closed in Q4 as expected. For the full year, revenue was $52.9 billion, down slightly year-over-year due to constraints across our own manufacturing network and with external suppliers which limited growth, especially in the second half. Full year non-GAAP gross margin was 36.7% up 70 basis points on reduced period charges. Full year non-GAAP EPS was $0.42, up $0.55 year-over-year on lower period charges and improved operating leverage. Specifically, non-GAAP OpEx of $16.5 billion was down 15% versus 2024 as we executed actions to reduce complexity and bureaucracy in the business and drive improved execution. For the full year, we generated $9.7 billion in cash from operations and made $17.7 billion of gross capital investments with capital offsets of approximately $6.5 billion. Although adjusted free cash flow was minus $1.6 billion in 2025, we produced $3.1 billion in the second half as cash from operations more than doubled half-on-half. We exit 2025 with $37.4 billion of cash and short-term investments, bolstered by further monetization of Mobileye, the completion of our stake sale of Altera to Silver Lake, accelerated funding from the U.S. government and investments by the SoftBank Group and NVIDIA. In addition, we repaid $3.7 billion of debt. Looking back, 2025 marked an important year of progress against our key priorities, even as we know we have more work ahead. Internally, we reorganized and rightsized the team to become customer-centric and engineering-focused while shoring up our balance sheet to give us more flexibility to pursue our goals. We've navigated a market that has shifted from tariff-driven uncertainty in the first half to an intense AI-driven demand environment constrained by supply in the second half. 2025 demonstrated the staying power of the x86 ecosystem across client and data center, and the importance of our manufacturing assets as we launched Core Ultra Series 3 on Intel 18A, the most advanced process fully developed and manufactured in the United States. Both create a firm foundation on which to build the new Intel. Moving to segment results. Intel Products' Q4 revenue was $12.9 billion, up 2% sequentially. CCG revenue was down 4% quarter-over-quarter even as AI PC units grew 16%, and DCAI was up 15%, reflecting strong demand for traditional server compute. These results reflect our efforts to balance our constrained supply with strong data center demand while maintaining support for our client OEM partners. Where possible, we're prioritizing our internal wafer supply to data center and leveraging an increased mix of externally sourced wafers in clients. CCG revenue was $8.2 billion and in line with our expectations. We estimate the client consumption TAM was greater than 290 million units in 2025, marking 2 straight years of growth of the post-COVID bottom in 2023 and the fastest TAM growth since 2021. Within the quarter, CCG launched 3 SKUs of Series 3 ahead of our expectations of one. Performance reviews have been extremely favorable, with up to 27 hours of battery life, a 70% gen-on-gen improvement in graphics and performance on industry standard benchmarks that is 50% to 100% better than peers. DCAI revenue was $4.7 billion, up 15% sequentially, above expectations and the fastest sequential growth this decade. Revenue would have been meaningfully higher if we had more supply. While the market continues to benefit from more power-efficient CPUs, stimulating a refresh cycle, all indicators point to the growing and essential role CPUs will play within hyperscale and enterprise AI data centers as inference-driven AI usage expands. The world is shifting from human-prompted requests to persistent and recursive commands driven by computer-to-computer interactions. The CPU central function coordinating this traffic will drive not only traditional server refresh, but new demand that grows the installed base. In addition, due to the networking demand for the AI infrastructure build-out, our custom ASIC business grew more than 50% in 2025, 26% sequentially and reached an annualized revenue run rate greater than $1 billion in Q4. This strength provides our ASIC team a solid base to pursue a $100 billion TAM opportunity. Operating profit for Intel Products was $3.5 billion, 27% of revenue and down approximately $200 million quarter-over-quarter on an increased mix of outsourced products and seasonally higher operating expenses. Intel Foundry delivered revenue of $4.5 billion, up 6.4% sequentially on increased EUV wafer mix. EUV wafer revenue grew from less than 1% of wafers out in 2023 to greater than 10% in 2025. External foundry revenue was $222 million in the quarter driven by projects with the U.S. government and the deconsolidation of Altera. Intel Foundry operating loss in Q4 was $2.5 billion and $188 million worse quarter-over-quarter driven by the early ramp of Intel 18A. Within the quarter, Intel Foundry met key 18A and 14A milestones. With the official launch of Core Ultra Series 3, Intel Foundry is the only semiconductor manufacturer in the world shipping gate-all-around transistors with backside power for revenue. These advanced wafers are rolling off our production lines in Oregon and Arizona here in the United States. Finally, our continued progress on Intel 14A demonstrates our commitment to research and develop the world's most important technology on U.S. soil. Turning to All Other. Revenue came in at $574 million and was down 42% sequentially due to the Q3 25 deconsolidation of Altera. The primary components of All Other in Q4 were Mobileye and IMS. Collectively, the category delivered an operating loss of $8 million. I'm pleased with the early momentum at Altera as an independent company with a new leadership team. Their industry-leading programmable fabric, developer productivity-driven software tools, and a large installed base positions them well to drive long-term value creation. Now turning to guidance. During the second half of 2025, we supported strong demand for our products with intra-quarter wafer production and inventory on hand. As we enter 2026, our buffer inventory is depleted and the mix shift in wafers towards servers, which began in Q3 will not come out of fab until late Q1 '26. As a result, and as we stated last quarter, our internal supply constraints are most acute in Q1. In light of these dynamics, we are forecasting a Q1 revenue range of $11.7 billion to $12.7 billion. The midpoint of $12.2 billion reflects a lower end of seasonal Q1. Within the Intel Products, we forecast a more pronounced revenue decline in CCG than in DCAI as we continue to prioritize internal supply to our server end markets. We expect Intel Foundry revenue up double digits quarter-over-quarter, helped by continued mix shift to EUV wafers and Intel 18A pricing. At the midpoint of $12.2 billion, we forecast a gross margin of approximately 34.5% with a tax rate of 11% and breakeven EPS, all on a non-GAAP basis. Gross margin is down sequentially due to lower revenue, increased 18A volumes and product mix. Let me take a few moments to provide some color for your full year 2026 model. First, from a revenue perspective, we expect our factory network to improve available supply beginning in Q2 and for each of the remaining quarters in 2026. Within the server market, customer feedback and our own market intelligence points to the likelihood of a strong year of growth for DCAI. Finally, client CPU inventory is lean, and there is excitement for Series 3. In contrast, over the last several months, industry-wide supply for key components like DRAM, NAND and substrates has come under increasing pressure due to intense demand to support the rapid expansion of AI infrastructure. Rising component pricing is a dynamic we continue to watch closely, especially relative to the client market and could limit our revenue opportunity this year. For OpEx, we target 2026 operating expenses of $16 billion. We expect noncontrolling interest or NCI to net to approximately $325 million in Q1 and be approximately $1.2 billion for the year on a GAAP basis. NCI is expected to grow meaningfully again in fiscal 2027. Our share count is forecast to be 5.1 billion shares in Q1 and grow in line with our stock-based compensation going forward. As we think about our capital expenditures for 2026, we're working to balance our ability to drive capital efficiencies with our need to respond to the demand signals we're receiving. Previously, we said CapEx would be down, but are now planning for a range of flat to down slightly and for expenditures to be more weighted to the first half. As a reminder, CapEx in 2026 would be to support demand in 2027 and beyond. We expect to generate positive adjusted free cash flow for the full year, and we're planning to retire all $2.5 billion of maturities as they come due this year. I'll wrap up by saying that Q4 was another solid quarter to mark our fifth consecutive quarter of overdelivering to our guide. We exit 2025 increasingly confident in the long-term sustainability of the end markets we serve. We believe our improved balance sheet, thanks in part to the trust of our strategic partners, combined with the strong talent we have will enable us to meaningfully participate in the next wave of computing as the industry pushes for returns on their AI investments. I look forward to providing you, our shareholders, an update on what this future means to you at our Analyst Day later this year. With that, I'll turn it over to John to start the Q&A. John Pitzer: [Operator Instructions] With that, Jonathan, can we please take the first question? Operator: Certainly. And our first question for today comes from the line of Ross Seymore from Deutsche Bank. Ross Seymore: I guess the first one is 2 quick parts. It's both on supply. In the short term, are the yield improvements and the other actions you're taking sufficient to address just typical seasonality throughout the year given that usually the first quarter would be the low point on revenues? And then perhaps more importantly, longer term on the supply side, you guys seem more confident in your 14A, your 18A, the customer engagements, your internal road map, when would you decide to loosen up the reins on the CapEx side of things so that you could address structurally higher demand going forward with more internal supply? David Zinsner: Thanks, Ross, for the question. So on the short-term supply, certainly, improving yields and throughput are a great driver of supply increases. In fact, it's got a great ROI to it because it doesn't require any incremental capital. So that's what Lip-Bu and I are actively working on to improve and we're reasonably confident that there's a good trajectory there. That said, when you look at CapEx, it's a little bit more nuanced than just it's going to be flat to slightly down. It's actually down significantly in space. So we're spending a lot less in space. We think we have a good footprint in terms of cleanroom. And what we're devoting more of our dollars to is tool. So we are ramping up tool spending quite a bit in '26 relative to '25 to address this supply shortfall as well. And in fact, every quarter, we're seeing kind of wafer start increases pretty much across the board across Intel 7, Intel 3 and 18A. So all 3 of them every quarter improve and get better to address the supply. Like I said, we think we -- things will certainly improve in 2Q but we won't be completely out of the woods here. But as we progress through the year, we think things will get better and better. Do you want me to take the 14A thing or? Yes. On 14A, Lip-Bu has been very direct with us on all of this. He does not want to spend on capacity on 14A, only spend on the kind of TD spend or R&D spend associated with 14A even in the fab until we have customers secured. We've talked about, the likelihood is, our customers on 14A their window to secure or for us to secure them will be in the back half of this year and in the first half of next year. And so once visibility improves there, we'll start to unlock the spend on 14A. Lip-Bu Tan: I can just add a little bit more. I think on the yield improvement, which we see in the 7%, 8% yield improvement per month. I think it's more in focus in the variation, make sure that we can be more consistent delivery and also the defect density at the end so that we can ship quality wafer to the customer. So I think all those are very important for our PC client, Panther Lake and then also for the 18A and 14A development. So I think, all in all, I see improvement, but still not quite to the industry-leading standard yet. John Pitzer: Ross, do you have a quick follow-up? Ross Seymore: Yes, I do. The gross margin side, Dave, you gave some puts and takes for the full year on a bunch of different metrics but you didn't mention gross margin. How should we think about that? And forgive me, the 40% to 60% incremental, I know you guys give kind of -- you can drive a truck through. So anything perhaps just a little more precision directionally, it would be helpful. David Zinsner: I'm not even sure the math is that good on this, this time around. When you look at Q1, the gross margin decline in Q1, there's 2 main components. Obviously, revenue coming down with a largely fixed cost business is going to affect gross margins. But the other piece of it is Panther Lake, while the cost structure improves from Q4 to Q1, it's still dilutive to the corporate average, and it's a bigger percentage of the mix. So it actually has a relatively negative impact on gross margin. So that's partly why we're guiding down. There's some mixed things going on as well. I think as we progress through the year, the 2 things should benefit us. One, we improve our supply, ergo, that should improve our revenue picture. On top of that, Panther Lake's cost structure gets better and better. Look, we talked about the incremental improvement every month, we're going to see in yields. We're working on the throughput as well. So those 2 things combined, that should help in terms of cost structure and make this more of an accretive product to us as opposed to a diluted product. And I think that will be a lot of what is the story around gross margins for the year. There's still mix and mix can go in any different direction depending on how things play out. But what we're largely focused on for the kind of the next 12 months is driving the cost structure of these products that we're building to improve the margins. We know that 34.5% is by no means an acceptable level of gross margins. And we're actively working it, first to get it to 40% and then once we get it there, we'll move to a new target. Operator: And our next question comes from the line of Tim Arcuri from UBS. Timothy Arcuri: Dave, I'm wondering in the guidance, you're guiding to $12.2 billion, but I'm wondering if you can kind of pro forma that for us like if you could meet all the demand, what would the kind of unconstrained guidance be for March? David Zinsner: Yes. It's a squishy figure to figure out, Tim, but I would tell you that if you look at kind of that $12.2 billion relative to the $13.7 billion we posted in the fourth quarter, and look at normal seasonality. It's in the range of seasonal but it's at the low end of that range of seasonal. We'd be well above seasonal if we had all the revenue or supply, I should say, to hit the revenue. John Pitzer: Tim, do you have a follow-up? Timothy Arcuri: I do, thanks. Lip-Bu, there's obviously a lot of excitement about your foundry business. It sounds like we might get a few customer announcements maybe in the second half. But I just wanted to ask you, what do you define as like success in that business? I think prior to you arriving, the mantra was sort of to be #2 -- the #2 foundry player by 2030. If you look at most of the forecast for that #2 player at somewhere in the range of like $30 billion and revenue up by that time. Is this still kind of a reasonable bogey that you're shooting for? And like what do you consider as a successful outcome for that? Lip-Bu Tan: Yes. Thanks. Good question. So I think we are determined to commit to drive the world-class foundry business. So I think, first of all, on the 14A, I think we clearly, development is on track. We like what we see. And we simplify the whole process flow. Most important is kind of building up the IP portfolio so that we can serve the customer. Some of the IP is very critical in order to serve the customer. The other part is on the yield and improvement. We see a trend of improvement, and we also see the valuations getting better. I think in the long run, I think clearly, we are kind of anticipating the -- we have heavy engaging in some of the key customers. We think that the second half of this year, they're going to indicate to us what kind of capacity firm commitment so that we can deploy the capacity CapEx to really build that. So I think all in all, I think it's a service business, We really built a trust and the consistency we're able to deliver. And then we have the PDK on the 14A first quarter, 0.5. And then we're starting to engage with customers with the key products that they want to run with us. So I think all in process. I think in the second half of this year, we were able to have the commitment that we can really drive the scale of the operation. David Zinsner: Another early indicator, I think, of success in the foundry is going to be advanced packaging. And we'll start to see that revenue come in even before we start to see meaningful wafer revenue. And I think as I was talking to investors over the past kind of 12 to 18 months, I was thinking that those opportunities would be measured in hundreds of millions of dollars and wafer opportunities would be measured in billions. I'd say some of the early customer engagements suggest that we'll be well north of $1 billion on many of these opportunities for advanced packaging. So they're way more exciting than even I had expected. And it's because we have really good technology there that's very differentiated and supports AI in a way that is particularly special. Lip-Bu Tan: I think the EMIB-T, I think, is a very big differentiator for us. And then clearly, we have a couple of customers willing to even prepay the subscript -- because [ subscript ] is very big supply shortage and then they're willing to share with us. That means that show the commitment they are going to be working with us. Operator: And our next question comes from the line of Joe Moore from Morgan Stanley. Joseph Moore: Yes. I wonder if you could talk about server prospects. You sort of talked about some of the challenges of Diamond Rapids not having symmetric multi-threading and Copper Rapids is going to be important. Can you give us a time frame on Copper Rapids and sort of what's your expectation for the potential for market share puts and takes as you wait for that to come? Lip-Bu Tan: Yes, good question. So I think, first of all, I would centralize the data center and AI under Kevork that I hire in to help us to build that. He already built the team and then include some of the -- recruit some of the talent on board. I think the more important right now, we are laser-focused in 16 channels Diamond Rapids and we simplify the product road map. And then the other part is accelerate the introduction of Coral Rapids. And Coral Rapids will have the reintroduced the multi-thread into our data center workforce. So I think overall, we are very positive. The team is in place now. The road map is very clear, and we are very decisive for doing that. and are laser focus on the Diamond Rapids 16-channel and also accelerate the Coral Rapids introduction. John Pitzer: Joe, you have a quick follow-up? Joseph Moore: Yes, sure. And just in terms of the mix for the rest of the year, are you able to move wafers towards data center away from PC? Is that something that you're thinking about and just -- it seems like the constraints are at their worst point in Q1 and get better, but I assume you're still constrained beyond that. Are you able to move the mix towards data center? David Zinsner: We're absolutely constrained, Joe. So what we're doing within client we're focusing on the mid- and high end and not as focused on the low end. And then to the extent we have excess, we're pushing all of that into the data center space to meet that customer demand. And I think you'll see some share adjustments based on that because our primary focus is to our main customers. And obviously, we have important customers in the data center side. We have important OEM customers on both data center and client and that needs to be our priority to get the limited supply we have to those customers. Operator: And our next question comes from the line of Ben Reitzes from Melius. Benjamin Reitzes: My first question is about seasonality throughout the year. So Dave and Lip-Bu. I mean you're subseasonal in the first quarter, you said you'd be well above seasonal if you had the supply. So what does that imply for 2Q to 4Q? Should we model that above seasonal or are the constraints in PC so much that we shouldn't? David Zinsner: Yes, I mean, we would expect to be better than seasonal through the year if we can get the supply to where we think we can as we get into 2Q. So that's correct. John Pitzer: Ben, do you have a follow-up question? Benjamin Reitzes: Sure. I wanted to ask about, with regard to the hyperscaler situation in servers. It's -- in terms of your momentum there, is this mostly driven by hyperscaler? Or do you feel like the shortage is mostly impacting them, making you subseasonal? Or is the enterprise demand also are you seeing it there? Lip-Bu Tan: Yes. I think, let me answer that question. I think the hyperscaler is very important for us to scale the business, and I spent a lot of time with the hyperscalers. I think a couple of thing. One, clearly, message from them is the CPU actually is driving a lot of that business in terms of the different workloads that they're driving. So I think it's very encouraging to see that they are willing to commit long-term agreement. So we really prioritize their CPU deployment. So that something is very positive. And then secondly, I think they are very excited about working with us in terms of decide working on the silicon, the software and the system level engagement, and that something is also very exciting. So all in all, I think they are very strong. The workload they shared with us what they're looking at and what can we helping them. And also the ASIC design also is an opportunity for us. They also want to build some of the purpose-built silicon with the Xeon CPU included. And also, they are very interested about overall, how do you use the advanced packaging and then to make it more complete. I think overall, I think it's a great opportunity for us to work with them. Operator: And our next question comes from the line of Stacy Rasgon from Bernstein Research. Stacy Rasgon: For my first question, I wanted to dig a little bit into the segments. So I mean if I sort of run the math, like Mobileye is going to be up and the Altera foundry revenues maybe close to a couple of hundred million dollars. I mean both DCAI and client to be down pretty meaningfully. And the client's down more -- I mean maybe DCAI is down high single digits and clients' down like mid-teens. But I guess, number one, is that true? And number two, like why should data center be down so much given where the demand is and given where you're prioritizing? Like why would I expect data center units to be down? It seems like they have to be down pretty meaningfully in Q1. David Zinsner: Yes. I mean, both will be down as a function of supply. Obviously, we're shifting as much as we can over the data center to meet the high demand. But we can't completely vacate the client market. So we're trying to support both as best we can and obviously work our way out of this supply issue. I do believe that the first quarter is the trough. We will improve supply in the second quarter. And part of the challenge is that in the third and fourth quarter of '25, we lived off of supply, but we also had a reasonable chunk of fixed finished goods inventory to also work through. Unfortunately, that is now down to kind of 40% of what it was at peak levels. So we don't have that to rely on. So it's just literally hand to mouth, what we can get out of the fab and what we can get to customers is how we're managing it. John Pitzer: Stacy, do you have a follow-up question? Stacy Rasgon: I do. I mean just to push on that a little bit. I mean, you guys have your own factories, like why are you in the inventory situation that you're in? And then -- I mean, even if you look at -- I get the whole idea about finished goods versus other stuff. But I mean like you have $11.6 billion of inventory. And yet, it's not in the right place at the right time. Like how does that happen? David Zinsner: That's largely a win. I'll tell you, Stacy. I think the biggest thing is that we if you go back 6 months or so ago and looked at what the outlook was. Core count was absolutely looking like it would increase, but the units were not expected to increase. And every hyperscaler customer we talked to was signaling that. And obviously, it has rapidly increased over the third and fourth quarter. And in talking to a few of them right before this call, I got the feeling like it was going to be a story we'd feel for several years. And yes, the advantage we have is we do have our own fab so we can squeeze out supply as much as possible, which is what we're working on, but we directionally weren't managing the supply to an expectation that there would be unit increase that significantly in data center. Operator: Our next question comes from the line of Vivek Arya from Bank of America Securities. Vivek Arya: For the first one, Lip-Bu, I'm curious, when do you think Intel should start getting any credit for external foundry efforts because you mentioned that you might hear of awards in the second half of this year. I assume that you start building the capacity for that, right, sometime late this year or next year. So when do you actually start to get a decent amount of revenue from those customers? And I think you mentioned that building this business will take incremental amount of resources. So what level of external foundry revenue does Intel need to call this business a success? And when do you get that? Is it '27? Is it '28? Is it later? Lip-Bu Tan: Yes. Good question. I think first of all, I think the engagement with our potential external customer on the 14A are very active right now, a couple of key customers are working with us. We expect them to really go through the milestone basis on 0.5 PDK and then starting to look at the test chip and look at how is our yield performance. And it's going to be a process to work with them. And then I think the second half of the year, then they're starting to satisfy, then they're going to asking us, okay, now this is the particular product we're going to run with your foundry and the production. And then the indication to us and that's the time my discipline is until they have a commitment to the volume, then starting to really build and the foundry expansion so that we can meet their requirement. And then the other part parallelly, they also give us a list of IP. If it's a mobile related, you have to be low power IP that we need to have. If it is data center related, it clearly will be the performance, the connectivity, all these things that we need to really get it ready so that we can serve the -- service as a customer to meet their requirement. So it's parallelly on the IP readiness and also our yield readiness then is, I think, satisfied. Okay. Now this product. This is a volume we're going to run with you and that's how you're starting to build. So in terms of 14A, realistically in terms of, I call it, the risk production in the later part of 2027 and real production, volume production in 2028. That is similar to the same time frame as a leading foundry. David Zinsner: And I'd just say, we probably will be able to give you a lot more color around all of these things at the Analyst Day that Lip-Bu mentioned will have in the back half of the year. John Pitzer: Vivek, do you have a follow-up question? Vivek Arya: For my follow-up, I'm curious, what do you think is the server CPU TAM in 2026? How much of that is x86? How much of that is ARM? I mean if you are supply constrained, is the entire industry supply constrained? Do you think that whatever you can't supply all that market share is going to go to your x86 competitor and to everyone in the AI community that is building ARM-based servers? So like when do you think your supply -- how much does the market grow? And when do you think your server CPU supply constraints come off? David Zinsner: Okay. Maybe I'll start and you -- so I think this demand, what we're seeing is largely an x86 phenomenon because it's an upgrade cycle in a lot of ways around older networks that have to talk in some way to the AI systems and the performance is not where it needs to be. So I really view this as x86. Of course, we do have another competitor in the space, and we'll be jockeying for position from a market share perspective. I think we will make great strides on the supply as we progress through the year. So I wouldn't envision that to be the fundamental driver ultimately a market share. And it's really about products and Lip-Bu talked about getting to a 16-channel Diamond Rapids out, accelerating the introduction of Coral Rapids. Those will be the things that are most important for us as we look at market share dynamics in the coming years. Lip-Bu Tan: I think from my side, I think clearly, hyperscale and the high-end OEM, ODM is critical for us on the server side. And then we're basically working with them. Their first choice is the CPU from Intel. And that is a very clear message from them. They will try to get as much as we can give them. And then I think that's the key home driver. Operator: Our next question comes from the line of C.J. Muse from Cantor Fitzgerald. Christopher Muse: I guess to follow on Stacy's question around supply. Considering your bullish commentary and AI-led demand and how you're supply-constrained and your peers, TSMC and Samsung Taylor are aggressively slotting for equipment delivery. Do you worry that if you wait for late 2026 to place orders that the lead times then might be longer than you thought? And as part of that, why wouldn't you look to be more aggressive today? David Zinsner: Yes, maybe I don't know if this is the answer to your question, but I mean we are aggressively getting tools on Intel 710, Intel 3 18A, that is happening. And we will be increasing our wafer starts as aggressively as possible on those nodes. What we're holding back on is 14A because 14A is really linked to foundry customers, and it does not make sense to build out significant capacity there until we know that we have the customers that will accept that demand. And so that's just the discipline we're going to have. I'd say the other thing with regard to a lot of this around supply is, Lip-Bu's first focus and our short-term focus is we think we gain a lot of supply just by doing things better with our existing tools and footprint, getting yields improved, getting cycle times improved and we're aggressively working on that. And we think there's lots of opportunity to improve our supply just on those 2 things that don't require CapEx, quite honestly. And that's something that's probably more unique to us right now than to other foundries. John Pitzer: C.J., do you have a follow-up question? Christopher Muse: Yes, John. Just to hit on the press release, you talked about demonstrating technical feasibility on High NA for future HVM. And so just curious, is that something you're still contemplating for 14A? Or is that more of a 10A adoption? David Zinsner: It will be part of our 14A process. Of course, there will be different variants of 14A, but High NA is targeted at 14A. Operator: And our next question comes from the line of Harlan Sur from JPMorgan. Harlan Sur: Lip-Bu, as you look forward to 14A, you talked about engineering engagements with customers. And typically, the largest fabless semiconductor companies in the world want to run their own test chips to assess the new foundry node, and they typically wait for PDK 0.4 or 0.5 before they start their test chip designs, it looks like they can get started now on test chip design with the release of your PDK 0.5. So I guess the question is, have customers commence test chip designs or are they maybe even further along than that and customers are already running their own 14A test chips now? I mean, in order for them to make decisions on 14A in the second half, they need to be running their test chips fairly soon. So if you give us an update there. Lip-Bu Tan: Yes, good question. So I think you're absolutely correct. A couple of customers we are already engaging about the PDK 0.5 and they are looking at the test chip. And also more important is a specific product they're going to run to our fab foundry. And that one, we are working with them. And then, of course, they want to know the capacity, the pricing, those are all in the discussion right now. So that's why I mentioned the second half of this year, they're starting to satisfy, then they can starting to say, okay, now we need this volume and we need particular fab from yours to do it. And then also the other part is, do we have all the right IP to serve them? And so those are the things that we are parallelly process with their supply chain and also their design teams to work with them. So this is a very complex step and that we are very familiar, we are working in the right way. John Pitzer: Harlan, do you have a follow-up question, please? Harlan Sur: Yes. On your server portfolio, I apologize if I missed this earlier, but Clearwater Forest, right, your E-core sort of cloud workload optimized server platform that was targeted to be the first server platform to use your 18A manufacturing and ramp first half of this year. But Lip-Bu, you talked about server road map changes to focus on more performance-focused products. So is the team still supporting Clearwater Forest? Or just focusing now on Diamond Rapids? And has the team taped out or taped in your next-gen Xeon 7 Diamond Rapids products and any preliminary views on ramp timing of Diamond Rapids? Lip-Bu Tan: Yes. So answer to your question is, yes, we continue to do this and support that. And what I mentioned about focus on the 16-channel of Diamond Rapids is kind of focus on the high end of the Diamond Rapids so that we can really laser focus and really providing a differentiating competitive products. And then the other part is, as I mentioned in the past, this multi-threading is very important in terms of driving the performance. And the one that we can really come out with and it takes time to have that and we're going to have that in the Coral Rapids. Now the question mark is how can -- how much can we accelerate that -- pull in earlier, customer is really excited about that, "Lip-Bu, can you pull it up earlier?" That's why I work with Kevork and his team to see how -- what are the way we can really drive that acceleration to bring the market -- to bring the customer earlier. Operator: And our final question for today then comes from the line of Aaron Rakers from Wells Fargo. Aaron Rakers: I have 2, if I can fit them in. But on the memory side and what we're seeing in the market, I'm curious of how you guys are seeing customers react to memory. Is there a potential demand disruption in the PC market? Just any kind of curiosity on what you're seeing in that? And how impactful is memory pricing to the gross margin, given obviously, I think, stronger for longer Lunar Lake demand. Lip-Bu Tan: Yes, good question. So I think industry facing a very big challenge is the memory constraint and also the pricing. So I think we also listen to our customers, some of the bigger players and in the OEM and the bigger player in the hyperscale, they have more access into the memory locations. So we kind of hear from them. And then secondly, I think some of the smaller ones, they are really challenging to scramble to get the memory. So I think that will be very important for us, Dave and I, how to allocate and also our sales great -- in how to allocate to the right customer. We don't want to have a CPU, we sent to them, but they are missing the memory, they cannot complete the products. So we try to do it correctly and then -- that is very important to have that intelligence and then also feedback from the customer to work with us and so that we can fulfill their requirement. Dave? David Zinsner: Yes. I think on the Lunar Lake side, I think we've got what we need based on the current forecast, of course, that could always tick up, and then we would need more memory which would kind of impact gross margins. But we were relatively aggressive in terms of getting the memory early. So I feel like we're in a relatively good place there. Now that said, those margins are low because the memory is in package. So that is an impact to our gross margins as well. But I think we're largely in the place we thought we would be a quarter or 2 ago. John Pitzer: Aaron, do you have a quick follow-up? Aaron Rakers: I do, and I'll be really quick. I'm curious on the custom ASIC side, you talked about hitting $1 billion of run rate business. How do we think about the progression of that? And how broad is the customer base within that opportunity set? Lip-Bu Tan: Good question. I think Dave mentioned earlier, is a $100 billion TAM market opportunity. And we are delighted. We are already in the run rate of $1 billion. It's a robust demand and customers really excited about what we have in terms of the CPU Xeon and also the AI-related momentum. So they're more building a purpose-built silicon for AI and network and cloud. And that part, I think we continue to work on that. And also more important for them is also the advanced packaging, make that more compelling. And that's the advantage of Intel that we can do both to provide the customer delight. And so that, I think, is a good opportunity for us. With that, thank you again for joining us today. As we move forward, I remain focused on disciplined execution and deep collaboration with our customers to seize the meaningful opportunity created by AI era. While we have a lot more to do, we are confident in the foundation that we built and the progress underway. We're looking forward to provide you another update in April. Operator: Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.
Operator: Ladies and gentlemen, thank you for standing by, and welcome to Pathward Financial's First Quarter Fiscal Year 2026 Investor Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the conference call over to Darby Schoenfeld, Senior Vice President, Chief of Staff and Investor Relations. Please go ahead. Darby Schoenfeld: Thank you, operator, and welcome. With me today are Pathward Financial's CEO, Brett Pharr; and CFO, Gregory Sigrist, who will discuss our operating and financial results for the first quarter of fiscal year 2026, after which, we will take your questions. Additional information, including the earnings release, the investor presentation that accompanies our prepared remarks and supplemental slides may be found on our website at pathwardfinancial.com. As a reminder, our comments may include forward-looking statements. Those statements are subject to risks and uncertainties that could cause actual and anticipated results to differ. The company undertakes no obligation to update any forward-looking statements. Please refer to the cautionary language in the earnings release, investor presentation and in the company's filings with the Securities and Exchange Commission, including our most recent filings for additional information covering factors that could cause actual and anticipated results to differ materially from the forward-looking statements. Additionally, today, we will be discussing certain non-GAAP financial measures on this conference call. References to non-GAAP measures are only provided to assist you in understanding the company's results and performance trends, particularly in competitive analysis. Reconciliations for such non-GAAP measures are included in the earnings release and the appendix of the investor presentation. Finally, all time periods referenced are fiscal quarters and fiscal years, and all comparisons are to the prior year period unless otherwise noted. Now let me turn the call over to Brett Pharr, our CEO. Brett Pharr: Thanks, Darby, and welcome, everyone, to our earnings conference call. We kicked off the year in a position of strength. And overall, we are pleased with the financial results the team achieved in the quarter. I want to take a moment to talk about what we do, how we do it and why we believe Pathward is uniquely positioned as a leader in this space. Whether you are an investor, analyst or another member of the financial community, you likely have an understanding of how a traditional bank works. Banks take deposits from individuals or corporations, lend those deposits and move money. In this, Pathward is no different. Where we differ is how we do those things. First of all, we move money. Where we differ is we work with partners and facilitate payments through issuing sponsorship, merchant acquiring sponsorship, independent ATM sponsorship, consumer credit sponsorship and digital payments, assisting them with the moving of significant amounts of money relative to our size across the nation. In issuing sponsorship, we move money and facilitate payments via products such as prepaid cards, gift cards, loyalty cards, payroll cards and general purpose reloadable cards. With over 20 years of experience in payment facilitation, Pathward's value proposition is anchored in 4 principal pillars: Our leadership is seasoned and has deep expertise in payments and sponsorship; second, our combination of people, processes and operating structure delivers a streamline approach to banking and provides reliable and sustainable partner programs; third, we deliver partnership with a commitment that enables our partner success; and lastly, a consultative governance approach rooted in our stable risk and compliance infrastructure that helps partners manage a regulatory framework that is also complex and difficult to manage. Second, we hold deposits. Where we differ is that generally, our issuing partnerships provide Pathward with stable deposits. As one of the most mature and experienced sponsored banks, we work with our partners to help them grow scale and co-create solutions that facilitate innovation. Because of our differences, we are able to generate significant fee income, this leads us to lending. Like other banks, we lend our deposits. However, we specialize in working with businesses that for a multitude of reasons, may not be able to work with or borrow from a traditional bank. We provide lending products that help these businesses access funds they need to launch, operate and grow. In some cases, we are also working through partners to originate commercial finance loans. Pathward strengths help us deliver on our purpose of financial inclusion. Our partnerships offer financial solutions that help individuals and businesses who are underserved, underrepresented or even unbanked. Additionally, as our world grows increasingly dependent and relied upon digital-first or digital-only solutions, Pathward's role in fulfilling the needs of these individuals and companies, both expand and increases. While at a high level, we operate the same as the traditional bank. We believe it is our unique value propositions, partnerships and position in the marketplace that allows us to help a greater variety of consumers and businesses as well as generate results that we believe exceed those of a traditional bank. This is characterized by a disciplined balance sheet optimization and fee income working together to generate positive performance. Last year, our return on average assets was over 2%. Our return on average tangible equity was over 38% and roughly 40% of our revenue came from noninterest income. Our business model optimizes our long-term strategy, being the trusted platform that enables our partners to thrive. Our 2026 goals are off to a great start. As part of our commitment to the client experience, we announced the rollout of an evolved operating model last month. We firmly believe this model better aligns with our partners by supporting their growth and scalability and creating a more seamless experience. Each of the respective leaders have strong, relevant industry background and a solid commitment to Pathward's culture. We believe this decision ultimately positions our clients for greater success and revenue enablement and the company for increased innovation and growth. Building upon the progress we've made over the last few years, we believe revenue growth will come from 3 main areas during the fiscal year. It's important to note that we have prioritized areas that are not dependent on growing our balance sheet in order to grow revenue. First, we have additional capacity to optimize the balance sheet through the continued rotation from securities to loans, increasing net interest income without growing the overall asset size. As we continue to optimize, we are also looking at the yields of each asset, and we intend to continue to favor areas where we believe we have a competitive advantage to deliver a higher risk-adjusted return or optionality. This leads to the second area of revenue growth, fee income from balance sheet velocity. Our business model supports the ability to originate and sell loans, thereby generating additional revenue. By utilizing velocity for both commercial and consumer loans, our balance sheet can remain steady, while generating both interest income and noninterest income for the business. Finally, in 2025, we announced multiple contracts for products such as merchant acquiring sponsorship, which has little impact to the balance sheet that generates noninterest income. Money movement, specifically issuing sponsorship was how Pathward entered into sponsored banking and is still the core of our business. But with our partner searching for a bank that can provide multiple products outside of issuing, offering multi-thread solutions across a breadth of banking needs is an important differentiator. Finally, tax season has begun, and we are 1 step ahead with over 11% more enrolled tax offices than at this point last year. We do look forward to a number of possible benefits. First has to do with the change in tax code for 2025. We believe this change has the potential to drive more consumers into the tax preparation offices that we serve. Second, we exited last year's season with renewed agreements across all of our tax software partners. And finally, we continue to make technology improvements throughout the year for greater efficiencies when compared to years past and look forward to reaping those benefits in 2026. As an industry leader in tax-related financial products, we pride ourselves in offering one of the most comprehensive product mixes in the tax industry including products and services like refund transfers, refund advances, ERO loans and facilitating refunds on prepaid cards. We feel confident that we will be able to deliver on our goals and look forward to providing a more robust tax update next quarter. Now I'd like to turn it over to Greg, who will take you through the financials. Gregory Sigrist: Thank you, Brett. We were pleased with our results in the quarter, which were marked by solid growth in our core business, growing interest income and commercial finance with a lower provision, increasing core card and deposit fee income and flat expenses. Let me start with the sale of the consumer finance portfolio we mentioned on last quarter's call, which had an impact on several income statement line items, including an $11.9 million reduction to net interest income. This amount is largely offset by reduced provision and lower other expenses. So while optically, it appears that these income statement line items are lower year-over-year, the net impact is quite muted. Similarly, net interest margin has been reduced by this gross-up amount, while the offsetting line items were in areas that do not impact NIM. Within net interest income, Contribution from commercial finance increased $9.2 million in the quarter due to higher balances and slightly higher yields given our continued focus on optimization. Provision for credit losses was lower than last year, in part due to a recovery from a commercial finance loan that moved into nonperforming during the first quarter of last year. Given our approach to collateral management and monitoring, we are often able to work out or resolved loans that have moved into nonperforming status, recovering most, if not all, of the funds. It may take us a few quarters but this is why we focus more on annualized net charge-offs than nonperforming loan volumes. I'll highlight this because, as we have mentioned previously, this is the nature of our business and an example of why we are comfortable with our credit trends. We reported solid results and noninterest income, particularly in core card and deposit fees. If you remove the impact of servicing fees on custodial deposits, which decreased as expected by about $1 million, we saw good growth in that line. This reflects some of the new partners we announced in fiscal 2025 beginning to show up in our revenue numbers. Due to the government shutdown, we fell just shy of our goal range for secondary market revenues but we believe this is just a timing impact, and we expect to make that up in subsequent quarters. Finally, we saw a decrease in rental income due to lower balances and operating leases. However, this is largely offset in noninterest expenses in the form of lower operating lease equipment depreciation. Noninterest expenses were well managed during the quarter, coming in slightly better when compared to last year. We saw lower rate-related card processing fees, primarily due to a lower rate environment. This led to net income of $35.2 million and earnings per diluted share of $1.57, showing significant increases of 17% and 28%, respectively, when compared to last year. In addition, annualized performance metrics were also strong for the first quarter. Keeping in mind our normal seasonality with return on average assets of 1.87% and a return on average tangible equity of 26.7%, compared to 1.61% and 25.5%, respectively, during the same quarter last year. Deposits held on the company's balance sheet at December 31 totaled $6.4 billion, which is a $170 million decrease versus a year ago. This was primarily driven by having $200 million more in custodial deposits at the end of the first quarter when compared to last year. Average deposits on the company's balance sheet during the quarter were around $90 million higher than last year's quarter. Average custodial deposits during the quarter decreased slightly when compared to last year. During the quarter, we saw favorable deposit balances at multiple partners due to a strong holiday season and continued partner growth. Loans and leases at December 31 were $5 billion, compared to $4.6 billion last year. The primary driver of the increase was $531 million increase in commercial finance loans, partially offset by a $148 million decrease in consumer finance loans. Additionally, during the quarter, we originated $1.9 billion in loans with $678 million in commercial finance and $1.2 billion in consumer finance. We are quite pleased by the growth in consumer originations, which was driven in part by the new contract we announced last year. This loan production is the engine behind our balance sheet optimization strategy, which includes balance sheet velocity. Our nonperforming loans ticked up slightly when compared to last quarter. We continue to monitor loans we discussed on the prior quarter earnings call. As we indicated then, these loans are in different verticals, and we do not believe represent a systemic portfolio issue. We continue to believe that there is a path forward to resolving these loans in due course over the next several quarters. To reiterate an additional point we made last quarter, when you compare our historic NPLs to NCOs, we do not believe there's a correlation between them. As I mentioned earlier, because we take a collateralized approach to underwriting and credit management, we generally focus on our annualized net charge-offs since we have risk mitigation techniques designed to address past due and nonperforming loans built into our lending process. This quarter is a good example of what we are describing. Our total NCOs as a percentage of average loans when excluding tax services loans was 2 bps on an annualized basis. In commercial finance, our net charge-offs were actually a net recovery for the quarter, and our trailing 12-month net charge-offs are at 39 basis points. Our allowance for credit loss ratio in commercial finance was 116 basis points in the quarter, a slight improvement when compared to 118 basis points for the same quarter last year. Our liquidity remains strong with $3.7 billion available, and we're extremely pleased with our position at this point in the year. During the quarter, we repurchased approximately 652,000 shares at an average price of $72.07. This leaves 4.3 million shares still available for repurchase under the current stock repurchase program. We are increasing our fiscal year 2026 guidance to an EPS range of $8.55 to $9.05, which includes the following assumptions: no additional rate cuts during the year; an effective tax rate of 18% to 22% and expected share repurchases. This concludes our prepared remarks. Operator, please open the line for questions. Operator: [Operator Instructions] The first question comes from Tim Switzer with KBW. Timothy Switzer: The first 1 I have is on the NIM trajectory. A lot of moving parts this quarter, which makes sense. And I think you guys did a good job of laying it out. But if we think about the adjusted NIM, what is the right way to think about the jumping off point for Q2? And then how do we think about the trajectory over the course of the year within your guide, assuming no rate cuts? Gregory Sigrist: Yes. Let me give you a couple of data points first, Tim, that might help frame the conversation. I think what's given it a bit harder to look at this quarter is obviously, the gross uptick we've had on the consumer loans, which are part of that calc, even though they offset someplace else. So if you strip out all of the impact of the net income -- net interest income related to the gross HFI consumer loans, you would have had an adjusted NIM of 5.11% a year ago. Last quarter would have been 5.31%, and this quarter would have been 5.49%. So you can tell, both linked quarter and prior year where the trajectory has been up. As it relates to just interest rate sensitivity in the portfolio, though, the story remains the same, candidly. Every incremental 25 basis point overnight rate cut continues to have a very de minimis impact on us. We are still very sensitive to the middle part of the curve, which means that with the steepening we've seen over the last 4 to 6 weeks and just where the outlook is, the forward curve is on the middle part of the curve. I think that 5.31% is the launch point for the second quarter. And again, as long as the macroeconomic environment stays muted and middle part of the curve is elevated. We still have some tailwinds. So I think we're flat to up from that point. Timothy Switzer: Okay. Got it. Very helpful. And I appreciate all the color you provided on the credit outlook and the charge-offs. Are you able to quantify what that recovery was that you recorded this quarter within net charge-offs? Gregory Sigrist: No, I think you'll see the chart in the earnings release. It just has more of the aggregate number. So it's within that roll forward on the ACL, Tim. Timothy Switzer: Got you. Okay. And then another question I had, maybe a little more philosophical, but there's been a lot of discussion lately about fintechs wanting to obtain their own bank charters. I think there is a few more -- or not fintech, there are ILCs announced earlier today. And most of the discussions about in the [ BaaS ] world has been, how it could be a threat with partners no longer needing a bank sponsor. So could you respond to that? And could you also maybe outline how there might be some opportunities here, if any? Brett Pharr: Yes. So this is Brett. So I think the way you think about this is, yes, we're in a clearly a more relaxed regulatory environment as it relates to getting these charters on. It takes a lot of time to build the scale, to be able to do the kinds of things that we do, even if you've got a lot of dollars behind you. And so yes, there will be some of the happening. But I think sort of the history longer term has been people that have bought bank charters have often given them back because they realized what they had. Now that's not going to happen under current administration, but it will happen under other administrations as we look forward. We have some partners that have gotten those and then came to us and did additional transactions with us and talked about more because there's very narrow things they can do within those charters, and we can do a whole lot more. Don't forget, we have a multi-threaded approach with our partners, and that is to offer many different kinds of products. And some of these charters are not really going to allow that to happen. So a, not seeing it; b, I think it's going to be a long time before it creates any competitive pressure. And I also think these things go in cycles. And so just think about it through the cycle is the way we should think about this kind of competition. Timothy Switzer: Got it. Yes, that all makes sense. And sort of related to this, some of the fintechs going to obtain more often the custody charter are stablecoin or other digital asset companies. And Brett, you gave a great overview of the business earlier and you talked about some of the opportunities. I don't think you mentioned digital assets at all. Is that an area you guys want to play in? And what kind of role do you think part Pathward can play? Brett Pharr: Yes. So there's all kinds of things that we can do. We're already doing some things in the crypto space in terms of onboarding and offboarding the fiat currency, et cetera. To be clear, we don't hold any of those digital assets today. But we're looking at all those things. And my sort of personal view is that this is first a B2B use case and there's a lot of cool things there. And we're talking to partners and other material players about ways we can play in that space. My view right now is it will be an additional rail among many rails and we'll continue to work on that. And as our partners pull forward and as use cases come forward, we'll engage in it because it's definitely part of the future. Operator: Our next question comes from Joe Yanchunis with Raymond James. Joseph Yanchunis: SO in your prepared remarks, you talked about a lot of the new partner announcements in 2025, and it looks like they're really just started to impact the P&L. And I was wondering if you could unpack the amount of kind of embedded growth from this cohort of partners that hasn't yet shown up in your financials. Gregory Sigrist: Yes. I mean I'd be happy to. As you recall from last quarter, I mean, these kind of span the gamut from merchant acquiring, might have been an issuing [ deal or two ] in there, and one up in the credit solution space. And each of those has a different path to time to revenue. And we're obviously onboarding all the entire cohort as rapidly as we can. And then each of those programs need to build, right? But once each of those programs is launched and live, I would expect contribution to a full 12-month run rate on the card fee line to be somewhere in the middle to high single digits, and that's just based on those programs. And I think as we talked about last quarter, we are still actively working on multi-threaded approaches with many of those that we've announced, too. So that cohort alone, again, mid- to high single digits and we're seeing what we -- how we can scale from there. Brett Pharr: Yes. And Joe, this is Brett. I mean we're getting very enthusiastic about the pull-through on these partners and others were talking both existing and future. We went through a period of time where there was some crazy pricing and structures in this particular industry, and we chose to abstain. But that's long been washed out, and these things are picking up. And we've often said to you, it takes a little time for the programs to build. This quarter, you're seeing it. And we're -- there's a reason we're saying what we're saying about guidance. We're seeing it happen. And we'll continue to think about that through the rest of the year as we go on. This is an upbeat time for us, and that's why we're thinking about these partners and others who are talking about. Joseph Yanchunis: Perfect. And I'm going to get to your updated guidance in a moment. I just kind of wanted to pick up something you just said there. So you just talked about the washout of the irrational pricing and you're starting to see some normalization from partners. What does your current partner pipeline look like today? And should we expect a similar number of announcements in the calendar year or fiscal year ahead? Brett Pharr: I mean, the part -- your first part of your question is easy to answer. The pipeline has never been more full. We're very excited about it, et cetera. You don't know until they're done, right? So as we can and we kind of publicly agree to talk about it publicly, we will let you know about those things. But this is -- I mean, these kinds of things are only increasing, not decreasing. And there's been a lot of sense that has been brought into this marketplace. So we're going to get lots of swings at it, and we're winning some of those swings and we're going to keep going. So pipeline is as big as it's ever been. Joseph Yanchunis: That's great to hear. And then kind of going back to your guide, so you raised the midpoint by a pretty substantial amount. Can you help us think of the puts and takes in relation to the updated outlook? And what would need to happen for you to reach the top end versus the bottom end of the new ranges? Brett Pharr: I think part of it is we've talked about these new partners that have come on, and we're seeing the benefits. But as you begin working with a new partner, you kind of learn what's the trajectory. You have sort of a funnel of opportunity and some get to the higher end of it, some get to the lower. We are now confident on that funnel to do what we did. And so as we go through the course of the year, and we continue to monitor those new partners coming on and feel solid that it's actually going to happen is not just a hope. We'll continue to talk about where we are in that funnel. Gregory Sigrist: Yes. And I think the other thing is tax season too, right? I mean as we think about our guide, we clearly think to a multitude of different scenarios across our businesses. And I think Brett kicked through some of the positives on the tax business heading into tax season here and we're really enthusiastic about it. But I agree with Brett. I mean the 2 factors that are going to push us to the higher end of that guide. One is the timing on just the pull-through on those partners we talked about, the ones we've already announced. The other is going to be the success of the tax season. We're really enthusiastic about it. But until you get into tax season, you start to see the numbers, you've got to temper expectations a little bit, but we're really, really enthusiastic heading into it. Brett Pharr: Yes. One other thing, don't miss the secondary market income topic this time, the government shutdown slowed us down a little bit. I think this was in Greg's comments, and we expect that to come right back through because that was a temporary thing. And so we have that to look forward to as well, and that's part of what we're seeing. Gregory Sigrist: Yes. Joseph Yanchunis: So it sounds like the 2 biggest swing factors are somewhat out of your control, depending on partner ramp and the volume that goes through the tax offices. Is that fair to say? Brett Pharr: Yes. I mean I think out of our control would be more like there's a range of possibilities, and we'll continue to manage those and hope for the upper side of it. But you don't know until you know. And what we don't want to do is overcommit. Joseph Yanchunis: That's fair. And then just kind of one last one for me here. So new loan originations increased pretty meaningfully in the quarter. I understand part of that was due to some of the new relationships on the consumer side? Do you have a sense for what new originations will look like in [ 2016 ]? And should we expect kind of held for sale balances to increase in tandem with that? Or with the velocity kind of coming through the balance sheet increase just to kind of mitigate that upward movement? Gregory Sigrist: Let's unpack that a little bit. I mean, in the quarter, we certainly saw the uptick on the consumer side. And as you know, those are, by and large, largely held for sale at this point and turn pretty quick. I'm optimistic that as the existing partners ramp and scale that, that volume is going to continue to certainly on a year-over-year basis, scale versus where it was. And I think scale from what we're seeing in this quarter. So again, that's all balance sheet velocity and that will largely come through as a fee income. There's -- some of those programs do have interest income as part of them, but the majority of the economics come through is on the fee side. We haven't touched it on the commercial finance side. They also had a really good quarter on the production side. And when I think about the balance of the year, that's also a pipeline that's really full, particularly when you think across USDA, SBA, working capital, and with the balance sheet optimization work that we've been doing, for those 3 verticals, in particular, particularly USDA, it's about optionality. So I think we're really enthusiastic about that pipeline, too, and the optionality it provides us either to continue to hold on balance sheet or as we see fit kind of sell into the market and drive some secondary market revenues. But over the balance of the year, I would actually expect commercial finance to start generating numbers that are meaningful enough that we're going to start talking about them. Joseph Yanchunis: I appreciate that. And then just actually one more for me on credit. I understand that you went over in your prepared remarks, NPAs, NPL ratios ticked up, NCOs are basically 0. Is there anything that you currently see in the portfolio that you find incrementally different versus 3 months ago? Brett Pharr: No. I mean, again, these things that we have that are nonperforming loans are in various different sub-asset classes. There's no pattern system or anything like that. And we're serious about our conversation that our historical past and our belief is, there's not going to be a relationship between NCOs and nonperforming loans because we do a different kind of lending that is very much collateral managed. So I -- there's nothing in there systematic. Operator: [Operator Instructions] There are no more questions remaining at this time. I'll pass it back over to the team for closing remarks. Brett Pharr: All right. Well, thank you very much for joining today. Have a good evening. Operator: This concludes today's conference call. Thank you for your participation. You may now disconnect your lines.
Operator: Greetings, and welcome to the Third Coast Bancshares Fourth Quarter and Full Year 2025 Financial Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Natalie Hairston, Investor Relations. Thank you. You may begin. Natalie Hairston: Thank you, operator, and good morning, everyone. We appreciate you joining us for Third Coast Bancshares conference call and webcast to review our fourth quarter and full year 2025 results. With me today is Bart Caraway, Founder, Chairman, President and Chief Executive Officer; John McWhorter, Chief Financial Officer; and Audrey Spaulding, Chief Credit Officer. First, a few housekeeping items. There will be a replay of today's call, and it will be available by webcast on the Investors section of our website at ir.thirdcoast.bank. There will also be a telephonic replay available until January 29, and more information on how to access these replay features was included in yesterday's earnings release. Please note that information reported on this call speaks only as of today, January 22, 2026, and therefore, you are advised that time-sensitive information may no longer be accurate as of the time of any replay listening, or transcript reading. In addition, the comments made by management during this conference call may contain forward-looking statements within the meaning of the United States Federal Securities laws. These forward-looking statements reflect the current views of management. However, various risks, uncertainties and contingencies could cause actual results, performance, or achievements to differ materially from those expressed in the statements made by management. The listener or reader is encouraged to read the annual report on Form 10-K that was filed on March 5, 2025, to better understand those risks, uncertainties and contingencies. The comments made today will also include certain non-GAAP financial measures. Additional details and reconciliation to the most directly comparable GAAP financial measures were included in yesterday's earnings release, which can be found on the Third Coast website. Now I would like to turn the call over to Third Coast's Founder, Chairman, President and CEO, Mr. Bart Caraway. Bart? Bart Caraway: Good morning, everyone, and thank you, Natalie. I'm pleased to begin by highlighting our company's robust performance in the fourth quarter, as well as the entire year. Following my remarks, John will discuss the financials. Audrey will provide an update on our credit quality. Finally, I will discuss the progress of our merger with Keystone and share management's outlook for 2026. Our recent results demonstrated the company's commitment to growth, profitability and long-term shareholder value. This performance reaffirms our strategic priorities and highlights our ability to deliver lasting outcomes that benefit our customers, employees and stockholders. First, we saw significant growth in our balance sheet in the fourth quarter and throughout the entire year. Gross loans increased by $230 million, or 5.5% compared to the third quarter, reaching $4.39 billion. This marks a 10.8% rise compared to the previous year, surpassing our targeted run rate of 8%. Total assets mirrored this upward trend, ending the year at $5.34 billion, reflecting a 5.5% increase over the third quarter, and an 8.1% rise compared to the previous year-end. Similarly, total deposits grew by over $254 million in the fourth quarter, reaching $4.6 billion, a 5.8% increase from the third quarter, and a 7.3% rise compared to a year ago. Second, the increase in service charges and fees is noteworthy, with an approximately 24% increase over the third quarter and an impressive 55% year-over-year rise. This is due to the effectiveness of our relationship banking model and our appealing platform, which have resonated powerfully with our customers. Meanwhile, loan interest income and fees grew by about 7% compared to the previous year as we effectively expanded our overall loan portfolio through the hard work of our talented bankers. We were also able to lower our interest expense by approximately 4.2% from the third quarter and 5.2% when compared to a year ago. This was possible by dynamically pricing a portion of our deposit portfolio and capitalizing on the evolving interest rate landscape. Last but not least, we reached significant milestones. Book value and tangible book value rose to $33.47 and $32.12, respectively, reflecting a year-over-year increase of 16.8% and 17.7%. Our return on average assets remained robust, achieving an annualized 1.33% for the full year of 2025, returning a year-over-year enhancement of more than 26%, as we continue to operate efficiently and serve our customers well. Overall, our 2025 performance reflects the incredible dedication and talent of our team and underscores the effectiveness of our strategy. These achievements go beyond mere figures. They embody our vision and passion. We outpaced our peers, exceeded expectations and have set new standards for our company, all while sustaining growth and maintaining profitability to support long-term value for our stakeholders. With that, I'll turn the call over to John for the company's financial update. John? John McWhorter: Thank you, Bart, and good morning, everyone. We provided the detailed financial tables in yesterday's earnings release. So today, I'll provide some additional color around select balance sheet and profitability metrics from the fourth quarter and full year. We reported net income of $17.9 million for the fourth quarter, leading to a record total annual net income of $66.3 million, reflecting a 39% increase year-over-year. This resulted in an annual return on equity of 14%, marking a 24% increase from last year. As a result, our earnings per share exceeded expectations, reaching $1.02 per diluted share for the quarter, and totaling $3.79 for the year, representing a 36% increase from the prior year and setting a record for the company. Net interest income was $52.2 million in the fourth quarter and $195.2 million for the year, an increase of 21% from the previous year. This increase was due primarily to an increase in earning assets. Investment securities decreased $7.5 million during the fourth quarter, ending the period at $575 million. This modest decline primarily reflects normal portfolio runoff and active balance sheet management as the company continued to prioritize prudent liquidity, capital efficiency and disciplined deployment of earning assets. Deposits rose by $254 million in the fourth quarter, totaling $4.6 billion, which marks a 7.3% increase compared to the previous year. This growth maintains our loan-to-deposit ratio of 95%. Our cost of funds stood at 3.33% in the fourth quarter, reflecting a 23 basis point improvement from the third quarter, and a 50 basis point improvement from a year ago. And as Bart highlighted, we've surpassed expectations with our stable asset liability model even during a fluctuating interest rate environment. Net interest margin remained consistent at 4.10% for the quarter, exceeding expectations. This performance resulted from higher-than-expected loan fees due primarily to robust loan growth. We believe the core net interest margin was 3.90% for the quarter, up about 10 basis points from the prior quarter. That completes the financial review. At this point, I'll pass the call to Audrey for our credit quality review. Audrey Duncan: Thank you, John, and good morning, everyone. The fourth quarter and full year credit performance highlights the strength and stability of our asset quality, a result of our disciplined risk management practices and underwriting standards. Nonaccrual loans saw continued improvement for the fourth consecutive quarter, decreasing by $603,000 in the fourth quarter and $16.7 million for the full year. Loans over 90 days and still accruing totaled $11.36 million. However, subsequent to year-end, a loan totaling approximately $5.5 million was renewed and is now current. Quarter-over-quarter, nonperforming loans saw an improvement of $259,000, contributing to a total annual improvement of $6.5 million when compared to the same period last year. The ratio of nonperforming loans to total loans improved by 3 basis points from the prior quarter and improved by 21 basis points year-over-year. The allowance for credit losses represented 1% of total loans, which is a slight decline from 1.02% at the third quarter and previous year-end. Net charge-offs were 8 basis points for the year, representing a 1 basis point improvement over the same period last year. Our loan portfolio remains well diversified with allocations consistent with the previous quarter and throughout the year. Commercial and industrial loans were 43% of total loans, while construction development and land loans were 19%, owner-occupied CRE was 10%, and nonowner-occupied CRE was 16%. Overall, the quality of our assets is a key highlight. Our strategic blend of conservative credit underwriting and prudent risk management not only drives growth but also ensures long-term value for our stakeholders. With that, I'll turn the call back to Bart. Bart? Bart Caraway: Thank you, Audrey. Third Coast's history has been consistently defined by our remarkable growth as a company, which has been a key factor in our success. Throughout our journey, we have achieved several transformative milestones, including surpassing $5 billion in total assets, successfully expanding our commercial lines to corporate and specialty products, enhancing our core and treasury management solutions, and completing two securitizations in 2025. These accomplishments are a tribute to our strategic vision and well-executed decisions, solidifying our status as a high-performing public company. As we begin 2026, we are excited to build on the positive momentum generated in the fourth quarter and throughout 2025. By executing our strategic initiatives, we are confident that we will drive our company forward and continue to deliver substantial value to our shareholders. A focal point this year will be the integration of our merger with Keystone Bancshares, Inc. announced last October. Once complete, this strategic partnership will unite us as a combined $6 billion entity with 22 locations across Texas. Three locations in Austin, with its dynamic economic growth and vibrant community, serve as a perfect backdrop for Third Coast's expansion. Together, we expect to merge two culturally aligned community banks, leveraging our shared commitment to relationship banking and customer service, and reinforcing Third Coast's presence in the Texas Triangle. Looking beyond the merger, we also have set our strategic and financial outlook for 2026 including, achieving loan growth targets of $75 million to $100 million per quarter, establishing an annualized growth rate of approximately 8%, maintaining disciplined underwriting and portfolio management practices to ensure high-quality loan growth, enhancing our operational efficiency while scaling our organization for even greater success. In closing, I want to again recognize the outstanding work of the Third Coast team. Their commitments and execution have enabled us to deliver growth that differentiates us from our peers and strengthens our franchise in Texas' most dynamic markets. We remain focused on proven banking model that supports sustainable growth, strong profitability and long-term value for our shareholders. We entered the new year with confidence in our strategy and ability to continue delivering for all of our stakeholders. I'd like to now turn the call back over to the operator to begin the question-and-answer session. Operator? Operator: [Operator Instructions] Our first question comes from the line of Woody Lay with KBW. Wood Lay: I wanted to start on expenses. It looks like there was several moving parts as you called out, I think, $1.5 million of sign-on and severance costs. So could you just walk through some of the actions you took in the quarter? John McWhorter: Yes. Thanks, Woody. And there certainly was more than average noise for this quarter. So a couple of things that I might point out. On -- so the legal and professional line item had about $1 million in merger-related expenses. And we think we have another probably $5 million that we'll incur in the next couple of quarters. For salary and employee benefits, it was more in the hundreds of thousands of range as far as kind of nonrecurring type expenses. We did have a little severance. We did have some signing bonus. But having a -- paying a signing bonus is not an unusual thing for us. The other thing that I might point out is we had a little tailwind from taxes this quarter. We did purchase some tax credits and had a little more in the fourth quarter than I would expect to see going forward. So the kind of salary and benefits of maybe the excess was $500 million or so for the quarter was basically offset by the extra benefit of the taxes so that -- we were kind of thinking of operating earnings as being in that $107 million sort of range. And I saw that there were a few people out there that had us at a little bit higher number adding back on salaries. But if you think about how much we grew in the fourth quarter, we did have to hire just a lot of people to help in loan ops and other support areas throughout the bank, and we'll definitely have an increase in that line item. Wood Lay: Yes. And as you think about -- once the acquisition is closed, how do you think about additional hiring from there? Do you feel like you got most of it done in the fourth quarter? Or there's going to be more to go in 2026? Bart Caraway: Well, again, the thing that we've talked about is us being a talent magnet, and that continues, and only gets probably better as we grow. So as there is more, I guess, disruption in the markets with bankers, we get more than our proportional share of good quality bankers. Again, we're surgical and selective. But as great talent comes available and decides to move to our shop, we're going to continue to add them. And that's going to help propel our growth and continue on the trajectory that we're at. So I think what you see is no fundamental shift as much as ongoing operations as we've been doing it for the last few years. John McWhorter: Yes. And that's true on both the sales and the ops side. When we have these really big quarters, and we've talked a lot about our growth being lumpy over time. But when we have these particularly big quarters, we need to staff up in loan ops, in IT, in treasury and just any number of areas. So don't be surprised by our headcount going up when we have these big quarters. Wood Lay: Got it. And then just lastly, a follow-up on the loan growth comment you made. I think you mentioned $75 million to $100 million a quarter, which is where you have been running. But once Keystone closes, do you expect that range to increase just given the bigger balance sheet? Or is that still the right growth range of the pro forma company? Bart Caraway: I still think that's the right growth rate. So notice we've kind of bumped up the lower number a little bit just because we're seeing such good pipeline growth. I do think 2026 is going to be more favorable, if not an easier year on the production side. Plus we've -- between Keystone and some of the talent that we've onboarded, I think we're going to have a good run this year in terms of loan volume. And we'll probably have less of the headwinds of some of the big payoffs or paydowns. So I do feel like 2026 is a good year. But again, I caution everybody that it does tend to be lumpy for us. And -- so you'll see bigger quarters than others from time to time. But last year, we basically exceeded barely the target that we put out. And again, I'd see -- when you look at it year-over-year, we've been pretty consistent on what we said the growth is going to be in achieving that. Operator: Our next question comes from the line of Michael Rose with Raymond James. Michael Rose: Obviously, really strong loan deposit balance sheet growth this quarter. It looks like there was really strong growth in the C&I bucket. Just wanted to get some color there. And it does seem like you've kind of raised the level of expectations for loan growth moving higher from -- I think you were at $50 million to $100 million. So you've kind of raised that range to $75 million to $100 million. Just given the dislocation within some of your markets from M&A, the impacts of the deal and what that will bring, and just a better overall kind of loan environment as rates come down, how should we think about that $75 million to $100 million? I mean, is that kind of the base case? Is it conservative? It just seems like the momentum would be there to perhaps do a little bit better than that. Bart Caraway: Yes. I would say the base case, I mean, it's just a confluence of lots of different factors that could have an effect on it. Obviously, rates with regard to real estate loans, but it's also just -- we've got great demographics in Texas, and there's a lot of tailwinds as well. But we do -- it also depends on the sentiment of our borrowers, whether they're using more leverage or not. So what I would tell you is there's still uncertainty in the market. I feel comfortable with where we stand right now and projecting forward that we're going to hit those numbers. So I feel like that's the base case that we have, and we'll just see where it goes from there. Michael Rose: Okay. Helpful. And I'm sorry if I missed this in the prepared remarks, but obviously, the margin kind of holding flat was better than kind of what you talked about. Was there any loan fees or anything in the quarter that -- or was it just the excess growth, maybe mix shift? Just trying to get a better understanding of how we should at least think about the starting margin as we move into the first quarter. John McWhorter: Yes. We had about $1.5 million of what we think of excess loan fees. Now I know I've said that 2 or 3 quarters in a row, we had the securitizations, but they're harder to predict those big loan fees. There's nothing I'm aware of today that would be similar in the first quarter. So I would expect the margin to be back down into the 3.90% range without having those kind of onetime special -- it could be a lot of different things. It could -- for the fourth quarter, we had some big originations that had loan fees associated with them. Arrangement fees, things like that. So the fees were certainly higher than we would expect there. And the prior quarters, we had the securitization. So we'll just have to wait and see. Michael Rose: Yes, always a good thing when those come through. John McWhorter: Yes. Michael, one thing I might say is versus the third quarter, our core margin was up about 10 basis points versus the third quarter, and that was with rates down. So we were certainly happy with that. To the extent that you think rates are going down another couple of times next year, we think we're well positioned -- because remember, we have a relatively high cost of funds, which gives us a little more room to lower rates if they do go down. So we've kind of outperformed our modeling and the margins definitely behaved better over the last 3 quarters than we would have expected. Michael Rose: No, it's been really good to see. Maybe just finally for me. Obviously, the Keystone deal hopefully closes here soon. What's the appetite from here for additional M&A? There's clearly a lot of banks in Texas. However, it does seem like the environment, maybe some Goldilocks here, feels pretty good. So maybe that pushes out potential opportunities for a little bit. But just wanted to get a pulse of the market just in terms of your deals, some of the other ones that we've seen and kind of what the dynamic looks like in Texas? Bart Caraway: We're certainly focused on consummating the Keystone deal and integrating them, and we have certainly our priorities. But the M&A side for us is just ongoing part of our strategic planning. And so nothing's really changed for us. We continue to build relationships. And I think we're, again, very selective and judicious in what we look for. And -- the -- I guess, the flow of M&A will come and go. But for us, it's more about relationships and having right partnerships. And when they come along, we'll take a look at them. So at this point, I don't see any large shift in any conversations that we're having. Operator: Our next question comes from the line of Bernard Von Gizycki with Deutsche Bank. Bernard Von Gizycki: So deposit growth was very strong towards the end of the year. Did you hold any like year-end deposit campaigns like you've done in the past? Just wanted some color on what drove the growth. John McWhorter: No, Bernie, this is somewhat seasonal for us. Remember, the last couple of years, we've had a big increase in the fourth, and it would carry over to the first quarter. We actually didn't have as much this year as we've seen in the past. And this is customer dependent. It wasn't anything special that we were doing. And the customer just isn't carrying the balances that they did last year. So I'm not sure that we'll see the same thing in the first quarter. But much of the growth was temporary, I guess, you would say. Now at the same time, we're doing lots of things to grow. Core deposits. And our noninterest-bearing demand has been up nicely for 6 or 7 months in a row. And our treasury group is doing a great job, and our corporate group in bringing in those accounts. And we've been encouraged by the growth that we've seen in noninterest-bearing deposits. Bernard Von Gizycki: And then just a follow-up, maybe just on some of the expenses. I know you alluded to, I guess, some of the merger-related expenses to maybe come in about $5 million for the rest of the year. I believe the Keystone merger is expected to close by the end of 1Q. If I just think about like total expenses, whether it's the core ex the merger-related, or total, what kind of growth are you expecting for full year '26? John McWhorter: That's a good question, Bernie. I mean I do think that much of our expense growth is going to be weighted towards the beginning of the year that we need to make up for the growth that we just saw in the fourth quarter. There's a lot of people available now just from the M&A we've seen in our markets. So there's some really good people available. We have our annual salary increases and all that, that happened in the first quarter. So from our run rate today, I mean, we're probably going to be plus 5%, maybe 6% or 7%, but we still think our revenue growth is going to be quite a bit more than that. And that's the story that we've talked about for several years, or certainly since we've gone public that our revenue growth will continue to exceed our expense growth, and we think that's still true today. Bart Caraway: Yes. And we have internally kind of reinitiated or kind of rebranded our 1% initiative. And that kicking in along with -- basically we're going to realize some more efficiencies from our core conversion upcoming as well as the efficiencies we get from the growth from Keystone that some of that will offset. So it's going to be a little bit noisy for the first 6 months as we kind of work through this. But as they all come together, we do feel that we're still on par for making a good ROA for this year and making progress. Bernard Von Gizycki: No, I appreciate that. That makes sense. If I could just ask one more. Maybe just on the fee front. Obviously, the $4.3 million was a nice uptick. I think you called out the increase in the non-margin loan fees. I know some of that could be lumpy. Bart, you noted, kind of seeing the impact of clients experiencing the full benefit of the relationship model. Just any expectations on the full year, or the quarterly run rate for the rest of '26 as we think about like fees, and how they come in post the Keystone merger? John McWhorter: Yes. We're pretty optimistic on noninterest income. We have a lot of ongoing initiatives that appear to be bearing fruit and granted, the loan fees, in particular, will be kind of choppy, kind of lumpy, harder to predict. But the all-in core deposit fees, I mean, they look strong. All the swap fees, anything like that, the more volume we have, the more money we make there. So noninterest income in that $4 million range, we feel pretty good about. And I'm still kind of excluding Keystone because we don't know exactly when the closing is going to be yet. But we feel pretty comfortable with that $4 million run rate on noninterest income. Operator: Our next question comes from the line of Matt Olney with Stephens. Matt Olney: John, you mentioned the two securitizations from 2025. I think we talked previously about potentially doing another one or two in 2026. Any update just on the securitization pipeline? John McWhorter: Yes. I do think it's likely that we'll do another one this year. I think that it would look a little bit different than the ones that we've done in the past. I think it would be more likely that we would be selling assets that exist on our books into the securitization just to free up room on the concentration so that we can do more of that construction lending. The first one that we did last year was unique, I would say, that it was kind of a new customer, new deal. We added loans to the balance sheet and securitize the rest of it on a large deal. Doing something like that is probably less likely going forward. I would think that the next deal would more likely be more granular, more loans on balance sheet where we're just selling down some of the concentration. So it would actually shrink the balance sheet a little. Matt Olney: Okay. And so it sounds like, John, the net impact to the bank may not be as significant as the securitizations from last year since you wouldn't be retaining a small piece on your balance sheet. Is that fair? John McWhorter: Well, we would sell loans into the securitization. It's still likely that we would buy back the security that would be at a lower yield. So it may not affect the size of the balance sheet as much as the mix and the yield. We would potentially have some fees that would be booked day 1 that would kind of be bringing forward, fees associated with those loans since they're sold off our balance sheet, but it would be more a timing thing than anything else where we're booking the income upfront as opposed to over time if we would have kept the loans on the books. Matt Olney: Okay. All right. That's helpful. I appreciate that. And then going back to Keystone, I may have missed this from the call, but any update just on the merger applications and the time line of the deal closing? Bart Caraway: Yes. So at this point, it's going along as planned. And so we don't really have any other updates other than it's proceeding kind of on our schedule. John McWhorter: Both Third Coast and Keystone have shareholder meetings coming up for approval. I think ours is tomorrow, and Keystone's is next week and still just coming along. Matt Olney: Okay. And then just lastly for me. I think one of the capital instruments on your balance sheet that's been there for a few years is that preferred convertible instrument. Just remind me of the mechanics of that instrument, and if and when would that be converted, and at whose discretion? And then what would be the impact to capital if and when that is converted? John McWhorter: Yes. So we have the right to call it September 2027. And I think the likelihood is that we would convert it to common at that point. And the holder of the preferred could convert earlier if they wanted to. I'm not sure that anyone would at this point. It probably makes more sense to hold it. So we're a little over 1.5 years away from converting that to common. It won't affect most of our capital ratios, or earnings per share, or anything else because it's already included in all of those numbers. Matt Olney: Is it already included? I mean if it's converted to common, then I would assume it would impact the CET1 ratio at the whole company? John McWhorter: It would affect that one. Yes. So if you look at our slide deck, I think we show what the number is and what it would be if it was converted. And I think it's about 150 basis points difference to CET1. Maybe a little more than 150 basis points. Matt Olney: Okay. And if it's the common, I assume it also would benefit the tangible book value per share? John McWhorter: No, it's included in tangible book value already. Yes. So Page 12 of our slide deck shows that it's 125 basis points or so that it would add to CET1. Operator: [Operator Instructions] Our next question comes from the line of Dave Storms with Stonegate Capital Partners. David Storms: I wanted to go back to your prepared remarks where you mentioned that dynamic pricing has helped lower interest expense. How should we think about this tool going forward? And are you seeing any limits to this as you use them? Bart Caraway: Yes. So I think that's a great question. Most go ahead and picked up on. But yes, there are several factors to this. With the new system, the core system, we have better pricing tools, better ways to understand our customers. And I think we're just now been able to utilize that to, kind of, sharpen our rate structures. So I do believe that we'll have more information at hand. But at the same time, I think as rates have changed, and as John mentioned, it's actually good for us when rates change because I think we have more capability to squeeze out more of our earnings, especially on the liability side, that we feel good that we've outperformed all of our models. So I think we are well positioned for any kind of rate changes that are there. But even ongoing basis, I think a combination of the fact that we've had this initiative for having full wallet, full relationships has been very helpful in us in basically squeezing out earnings out of the -- basically the same assets. And the fact that I think we're more of a platform for our customers now, and we've got them into more products certainly helps in a number of ways. But overall, what I would say is we just continue to refine what we're doing and get better and better at it. John, I don't know if you had anything else? John McWhorter: I agree. David Storms: That's perfect. I really appreciate that color. One more for me. You mentioned that you expect NIM to maybe be more in the 3.9% range. How should we be thinking about the time line for that? Are you expecting more of a cliff, or maybe a glide path as certain portions of the portfolio roll off? John McWhorter: No, I think it would be a cliff. When I'm thinking 3.90%, I'm thinking for the quarter versus the 4.10% last quarter because the loan fees that we had in the fourth quarter were -- I mean, it is in the kind of the $1.3 million, $1.5 million range that were onetime events that added a lot to the margin. If we don't have those, the margin is just going to be lower for the entire quarter. Operator: We have no further questions at this time. Mr. Caraway, I'd like to turn the floor back over to you for closing comments. Bart Caraway: Well, thank you, Christine. And I just want to thank everybody for joining us for the phone call and the continued support of Third Coast Bancshares. We'll look forward to talking to you again next quarter. Thank you. Operator: Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.
Operator: Good day, and thank you for standing by. Welcome to the Independent Bank Corporation Fourth Quarter twenty twenty five Earnings Call. At this time, all participants are in listen only mode. After the speakers' presentation, there will be a question and answer session. To ask a question during the session, you'll need to press star 11 on your telephone. Will then hear automated message advising your hand as raised. Withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded. I would like to hand the conference over to your first speaker today, Brad Kessel, President and Chief Executive officer. Please go ahead. Brad Kessel: Good morning, and welcome to today's call. Thank you for joining us for Independent Bank Corporation's conference call and webcast to discuss the company's fourth quarter and full year 2025 results. I am Brad Kessel, President and Chief Executive Officer. And joining me is Gavin Moore, executive vice president and chief financial officer and Joel Rahn, EVP, Head of Commercial Banking. Before we begin today's call, I would like to direct you to the important information on Page two of our presentation, specifically the cautionary note regarding forward looking statements. If anyone does not already have a copy of the press release issued by us today, you can access it at the company's website, independentbank.com. The agenda for today's call will include prepared remarks followed by a question and answer session, and then closing remarks. I'm pleased to report on our fourth quarter and full year 2025 results as we advance our mission of inspiring financial independence today with tomorrow in mind. Our vision is a future where people approach their finances with confidence, clarity, and the determination to succeed. Our core values of courage, drive, integrity, people focus, and teamwork are the blueprint our employees live by. We strive to be Michigan's most people focused bank. Independent Bank Corporation reported fourth quarter two thousand twenty five net income of $18,600,000 or $0.89 per diluted share, versus net income of $18,500,000 or $0.87 per diluted share in the prior year period. For the year ended 12/31/2025, the company reported net income of $68,500,000 or $3.27 per diluted share compared to net income of $66,800,000 or $3.06 per diluted share in 2024. Highlights for the '25 include an increase in net interest income of $1,000,000, that's 2.2% over the '24. A net interest margin of 3.62%, that's eight basis points up on a linked quarter basis. A return on average assets and a return on average equity of 1.35% and 14.75% respectively. Net growth in loans of $78,000,000 or 7.4% annualized, from 09/30/2025. Net growth in total deposits less brokered deposits of $57,500,000 or 4.8% annualized. An increase in tangible common equity ratio to 8.65% and the payment of a $0.26 per share dividend in common stock on 11/14/2025. Our fourth quarter performance marked the culmination of another remarkable year with our organization excelling on all fundamentals. Over the past year, we increased tangible book value by 13.3% and delivered near record earnings. Meanwhile, our dividend payout ratio was 32% for the year as we continue to recognize the value of returns for our shareholders. During the fourth quarter, we realized continued net interest margin expansion, strong loan growth, and increased non interest income. In addition, our credit quality metrics remain positive with watch credits and non performing assets below historic averages. In anticipation of continued strong earnings, we repurchased shares and executed a tax credit transfer agreement during the fourth quarter which is expected to reduce tax obligations and enhance earnings per share. Looking ahead to 2026, our confidence is bolstered by a robust commercial loan pipeline and our ongoing strategic initiative to attract and integrate talented bankers into our organization. Moving to Page five of our presentation, deposits totaled $4,800,000,000 at 12/31/2025. An increase of $107,600,000.0 from December 31, 2024. This increase is primarily due to growth in savings and interest bearing checking reciprocal and time balances that were partially offset by decreases in noninterest bearing and brokered time deposits. On a linked quarter basis, business deposits increased by $20,400,000, retail deposits increased by $64,100,000.0 offset by a $28,600,000 decrease in municipal deposits. The deposit base is comprised of 47% retail, 37% commercial, and 16% municipal. All three portfolios are up on a year over year basis. On Page six, we have included in our presentation a historical view of our cost funds as compared to the Fed fund spot rate and the Fed effective rate. For the quarter, our total cost of funds decreased by 15 basis points to 1.67%. At this time, I'd like to turn the presentation over to Joel Rahn to share a few comments on the success we're having in growing our loan portfolios and provide an update on our credit metrics. Joel? Joel Rahn: Thank you, Brad, and good morning, everyone. On page seven, we share an update of loan activity for the quarter. We continue to experience solid loan growth in the fourth quarter with total loans growing by $78,000,000 or 7.4% annualized as Brad just referenced. For the year, we increased our loan portfolio $237,000,000 or 5.9%. Our commercial portfolio led the way with $276,000,000 or 14.2% growth. Commercial loan generation continued its strong trend in Q4 with $88,000,000 in quarterly growth or 16% annualized. Our residential mortgage portfolio grew by $7,200,000.0, and our installment loan portfolio decreased $17,000,000 for the quarter. Our strategic investment in commercial banking talent continues to supplement our loan growth. During the fourth quarter, we added an experienced banker in Metro Detroit, and in total, we have 49 bankers comprising eight commercial loan teams across our statewide footprint. During the year, we added a net of five experienced bankers to the team. Looking ahead, we believe we will continue low double digit growth of our commercial loan portfolio in 2026. Our pipeline remains solid, it's comparable to January '25. We continue to see market opportunities from regional banks in both talent and customer acquisition. They're seeing steady organic growth from existing customers. Looking at the commercial loan production activity on a year to date basis, mix of C and I lending versus investment real estate was 57% and 43%, respectively. And for our commercial portfolio, our mix is 67% C and I and 33% investment real estate. Page eight provides detail on our commercial loan portfolio concentrations. There's not been any significant shift in our portfolio over the past year with the portfolio remaining very well diversified. Our largest segment of the C and I category is manufacturing, $183,000,000 or 8.3% of the portfolio. In the investment real estate segment of the portfolio, the largest concentration is industrial at $202,000,000 or 8.8%. We outlined key credit quality metrics and trends on page nine. We continue to demonstrate strong credit quality. Total nonperforming loans were $23,100,000 or 54 basis points of total loans at quarter end, up slightly from 48 basis points at 09/30. It's worth noting that $16,500,000 of this total is one commercial development exposure that we discussed last quarter. We continue to work through the challenges of this particular project, and are appropriately reserved for any loss exposure. Past due loans totaled $7,800,000 or 18 basis points, up slightly from 12 basis points at 09/30. It's not reflected on the slide, but worth noting that we realized net charge offs of $1,600,000 or four basis points of average loans for the year. This compares to $900,000 or two basis points in 2024. At this time, I would like to turn the presentation over to Gavin for his comments including the outlook for 2026. Gavin Moore: Thank you, Joel, and good morning, everyone. I'm going to start on Page 10 of our presentation. Page 10 highlights our strong regulatory capital position. I'd like to note our tangible common equity ratio has moved back into our targeted range of 8.5% to 9.5%. Additionally, 407,113 shares of common stock were repurchased for an aggregate purchase price of $12,400,000.0 in the year 2025. Turning to page 11. Net interest income increased $3,500,000 from the year ago period. Our tax equivalent net interest margin was 3.62% during the 4Q 2025 compared to 3.45% in the 4Q 2024 and up eight basis points from the 3Q 2025. Average interest earning assets were $5,160,000,000 in the 4Q 2025 compared to $5,010,000,000 in the year ago quarter and $5,160,000,000 in the 3Q 2025. Page 12 contains a more detailed analysis of the linked quarter increase in net interest income and the net interest margin. On a linked quarter basis, our fourth quarter '25 net interest margin was positively impacted by two factors. Change in interest bearing liability mix added nine basis points and a decrease in funding cost added 13 basis points. These were offset by a change in earning asset yield and mix of 13 basis points as well as interest charged off on a commercial loan, that was negative one basis point. On page 13, we provide details on the institution's interest rate risk position. The comparative simulation analysis for the 4Q '25 and 3Q '25 calculates the change in net interest income over the next twelve months under five rate scenarios. All scenarios assume a static balance sheet. The base rate scenario applies the spot yield curve from the valuation date. Shock scenarios consider immediate, permanent, and parallel rate changes. The base case modeled NII is slightly higher during the quarter due to nine basis points of model margin expansion. The NIM benefited from mix shifts in both assets and liabilities. On the asset side, solid commercial loan growth was funded by runoff in overnight liquidity, investments in lower yielding retail loans. Funding costs benefited from growth in non maturity deposits and a decline in wholesale funding. The NIM further benefited from a reversal of excess liquidity in the 4Q 2025. DNI sensitivity position is largely unchanged for rate changes of plus and minus 200 basis points. The bank has slightly more exposure to larger rate declines minus three and four hundred and larger benefit from larger rate increases plus 300 or 400. The shift in sensitivity for larger rate moves is due to shifts in non-maturity deposit modeling primarily caused by 50 basis points of Fed cuts during the quarter. Currently, 8.3% of assets reprice in one month and 49.2% reprice in the next twelve months. Moving on to page 14. Non interest income totaled $12,000,000 in the 4Q 2025 compared to $19,100,000 in the year ago quarter and $11,900,000 in the third quarter twenty twenty five. Fourth quarter twenty twenty five net gains on mortgage loans totaled $1,400,000 compared to $1,700,000 in the fourth quarter twenty twenty four. The decrease is due to lower profit margins and lower volume of loan sales. Mortgage loan servicing net was $900,000 in the fourth quarter twenty twenty five compared to $7,800,000.0 in the prior year quarter. The change due to price was a gain of $200,000 or $0.01 per diluted share after tax in the 4Q 2025, compared to a gain of $6,500,000.0 or $0.24 per diluted share after tax in the year ago quarter. The decline in servicing revenue compared to the prior year quarter is attributed to the sale of approximately $931,000,000 of mortgage servicing rights on 01/31/2025. As detailed on page 15, noninterest expense totaled $36,100,000 in the fourth quarter twenty twenty five as compared to $37,000,000 in the year ago quarter and $34,100,000 in the 3Q 2025. Compensation expense decreased $300,000.0, primarily due to lower performance based compensation expense, lower medical related costs, and lower payroll tax expense, and higher deferred loan origination costs due to higher commercial loan production. That was partially offset by higher salary expense. Data processing costs decreased by $300,000.0 from the prior year period, primarily due in part to a reimbursement from the core provider for billing overages and other credits received. That was partially offset by smaller increases in several other solutions and onetime charges relating to special projects. Income tax expense included a $1,800,000 benefit or $0.09 per share resulting from the execution of a tax credit transfer agreement related to the purchase of $22,900,000 of energy tax credits during the three month and full year ended 12/31/2025. That's compared to no such benefit in the prior year. Gonna move on to page 18. This will summarize our initial outlook for 2026. The first column is loan growth. We anticipate loan growth in the mid single digit range, and are targeting a full year growth rate of 4.5% to 5.5%. We expect to see growth in commercial with mortgage loans remaining flat and in installment loans declining. This outlook assumes a stable Michigan economy. Next is net interest income where we are forecasting growth of seven to 8% over FY 2025. We expect the net interest margin expansion of five to seven basis points in the first quarter twenty twenty six with successive quarterly increases of three to five basis points, primarily due to decreasing yields on interest bearing liabilities that's partially offset by a decrease in earning asset yields. This forecast assumes 0.25% cuts in March 2026 and August 2026 while long term interest rates increased slightly from year end 2025 levels. A full year 2026 provision expense for allowance for credit losses of approximately 20 to 25 basis points of average portfolio loans would not be unreasonable. Moving to page 19. Related non interest income, we estimate a range of $11,300,000.0 to $12,300,000.0 quarterly. We estimate total for the year to increase three to 4% as compared to 2025. We expect mortgage loan origination volumes to decrease six to 7% and net gain on sale to be down 14 to 16% compared to the full year 2025 results. Our outlook for noninterest expense is a quarterly range of $36,000,000 to $37,000,000 with the total for the year five to 6% higher than 2025 actuals. The primary driver is an increase in compensation and employee benefits, data processing, loan and collections, and occupancy. Our outlook for income taxes is an effective rate of approximately 17% assuming the statutory federal corporate income tax rate does not change during 2026. Lastly, the board of directors authorized share repurchases of approximately 5% in 2026. Currently, we are not modeling any share repurchases in 2026. That concludes my prepared remarks, and I would now like to turn the call back over to Brad. Brad Kessel: Thanks, Gavin. We've built a strong community bank franchise, which positions us well to effectively manage through a variety of economic environments, and continue delivering strong and consistent results for our shareholders. As we move through 2026, our focus will be continuing to invest in our team, investing in and leveraging our technology while striving to be Michigan's most people focused bank. At this point, we would now like to open up the call for questions. Operator: We will now begin the question and answer session. As a reminder to ask a question, you will need to press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. First question comes from the line of Brennan Hawken of Hovde Group. Your line is now open. Brennan Hawken: Hey, good morning, everybody. Hope you're doing well. Brad Kessel: Good morning. Brennan Hawken: Let me just start off here kind of on market outlook here in Michigan. Can you just kick it off by offering your latest thoughts on the opportunity set you're seeing, particularly in Michigan given the M and A dislocation? And I guess if you added five commercial bankers in 2025, like, what what would the ambition set look like for banker ads in '26? Joel Rahn: Well, I'll take it. And Brennan, this is Joel. Good question. I would think in terms of our talent acquisition expectation, it's similar. We'll have some departures with retirements, etcetera, that we have to cover. But I think a net add of four to five bankers this year would be reasonable to expect. And in terms of opportunity in Southeast Michigan, we do think there will be opportunity there. It's just beginning. And so I think there's, you know, typically, the account side window opens first, and it can be some time before the customer feels the impact. But we're watching it closely and feel that it'll be accretive for us. Brennan Hawken: Okay. Thanks, Joel. Maybe one more for you before I step back. Just on the loan growth outlook for, I guess, 5% at the midpoint, I guess, like, typically, I think of your bank as a high single digit organic grower. So I guess just given the market opportunity you see what's pushing that range down to the mid single digit area? And and is there upside if payoffs behave a little more rationally in '26? Brad Kessel: Brennan, this is Brad. I'll jump in there, and I'd just say that over the last few years, we've actually reshaped the balance sheet. And particularly with the loan portfolios and our strategic emphasis. So of course, we've got the rundown in the investment portfolio, which has been funding our loan growth. But within the loan portfolios, the largest emphasis and where we've been investing in talent has been in Joel's group, that's the commercial banking team. And that has driven what I'd call the outsized growth rate for our company for that line of business. At the same time, we still have a very strong and robust lending talent and teams in the consumer and mortgage banking groups. Yet we're just putting less on in those categories on our balance sheet. And in fact, we forecast in '26 some shrinkage in the consumer portfolio. And that's not so much coming out of the branch channel. The shrinkage is really coming off of less originations from our indirect lending group. Which is as we've shared in the past, has always two focuses. One is marine, and the second is in RV. And we really have just not seen the same volume that we saw several years ago coming through the RV channel. The marine is still pretty good, but so when you add that all up, what ends up happening is you have double digit growth in commercial, but the lower level of net growth in mortgage and consumer get us to that somewhere mid single digit overall loan growth projected for 2026. Does that make sense? Brennan Hawken: Yeah. No. That that that's a helpful framework to view it through. I I guess just I'll sneak in one more on a related topic then. Just given how much of the loan growth has been funded by securities cash flows in the recent past, what is the outlook for that dynamic this year? Gavin Moore: Yes. So we got about a $120,000,000 of forecasted runoff in securities for 2026. And that that will fund loan growth. So we continue to intend to continue to remix that asset mix through next year. Brennan Hawken: Fantastic. Thank you for taking my questions. Joel Rahn: Thank you. Operator: Thank you. One moment for our next question. Question comes from the line of Damon DelMonte of KBW. Your line is now open. Damon DelMonte: Hey. Good morning, Hope everybody's doing well today, and thanks for taking my questions here. First one, just on the margin and the guidance provided around that. Gavin, just wondering if you could kind of walk through the cadence again for kind of what you expect here in the first quarter and then the forthcoming quarters after that? And then what were some of the drivers behind the optimism for a rising margin? Gavin Moore: Yeah. So, we're looking at five to seven basis points of expansion in Q1, and then Q2, '3, and four, we're forecasting three to five basis points of expansion each quarter. And that gets you to the overall forecast of, you know, 18 to 23 basis points on a year over year, full year basis. What's going on there is a couple things. One, just the benefit of we have two rate cuts in the forecast of March and August. We feel really good about our ability to see that 40% plus beta on the repricing down of deposits. The yield curve shape right now in terms of the forward yield curve is beneficial. The five to seven point of the curve is actually drifting a little bit higher. So we're creating we're getting some more slope in that respect. And then also, it's the continued repricing of below market assets as we go into 2026. Does that make sense, Damon? Damon DelMonte: It does. Yep. I appreciate that color. And then kind of just broader on capital management, just kinda given where capital levels are and you do have a buyback in place, just kinda wondering, I know it's not in your guidance and your forecast, but just kinda wondering what your appetite is for buybacks? And then also, you know, how how do you view the M and A landscape right now? Are there any interest in trying to pursue a merger with another company? So just kinda curious on your thoughts around that. Gavin Moore: I'll start with capital and then hand it over to Brad. I I would just say that we're really excited about the capital build and outlook for the organization. And that provides us with a tremendous amount of flexibility, and that's really what we're focused on. Obviously, the dividend is very important. We just announced a significant increase of over seven and a half percent. The board approved and we wanna continue to have a stable and growing dividend. But with that capital build, it's going to allow us the flexibility to do share repurchase when we think the price makes sense. So I just really am excited about the capital position today. Brad? Brad Kessel: Yeah. Very good, Gavin. And in regards to the M and A and M and A in the Michigan market, of course, you've got the Fifth Third Comerica which well, that's not directly impacting us. Indirectly, as it goes back to Joel's remarks, we think there's an opportunity for talent and customer acquisition. Across the state, today, we have 80 plus or minus Independent Michigan based community banks. I think we'll see consolidation at a similar pace to what we've seen historically in Michigan. And that's probably somewhere between 4-6%. Who they are, I'm not sure. Our appetite, we would be very interested depending on the specifics. And so that would include sort of strategically or geographically, how does it fit the footprint, the overall size, you know, and not wanting to maybe well, wanna be cognizant of all the other good work we've got going on organically. So I think the culture, obviously, would be very important. The metrics need to work in it. We need to materially add to EPS and at the same time, we're very respectful of not wanting to dilute our existing shareholders. So I would just step back and just say M and A for Independent is, it could very well happen but is not a requirement for us to continue the success that we've experienced historically over the years. Damon DelMonte: Great. That's excellent color. I appreciate that. That's all that I had. Thank you very much. Gavin Moore: Thanks, Damon. Operator: One moment for next question. And our next question comes from the line Nathan Race of Piper Sandler. Your line is now open. Nathan Race: Hey, guys. Good morning. Thanks for taking the questions. Gavin, just going back to the margin discussion, could you update us just in terms of how much cash flow you have coming off the bond portfolio each quarter and what the magnitude of or the amount of loans that you have that are repricing higher and what that amount looks like in terms of that yield pickup? Gavin Moore: Yeah. Give me one sec. So the bonds, the run rate for 2026 is a $120,000,000. And that's I think it's fair you could model that as pro forma or split it up equally per quarter. On the loan side... Nathan Race: Maybe to ask another question while you dig that up, Gavin. Brad, just thinking, you know, more holistically about the balance sheet composition. Just curious what the appetite is to maybe trade some of your excess capital. And, obviously, you guys are gonna be building capital at pretty strong clips just given the profitability profile. But just what the appetite is, maybe trade some regulatory capital to maybe reposition the securities book, whether it's on the AFS or HTM side of things? Brad Kessel: You know, that's a good question Nathan. And we revisit that strategy regularly. Historically, we've sort of nibbled at selective investment sales and, generally where we can earn it back within a reasonable time frame. But we've had the book. It's running off. And I'm not sure you're really gonna see Independent needing to accelerate that, taking losses, and I just that's not really in the strategy at this point. Nathan Race: Okay. I appreciate that. Maybe one more from me. Just in terms of what you're seeing or expecting from a charge off perspective, I appreciate the provision guide, and charge offs have been really well behaved over the last several quarters now. But just any thoughts maybe, Joel, in terms of any normalized expectations around charge off range going forward? Joel Rahn: Yeah. I think we see it being very similar to the past few years. We really don't see any big change in that profile. And I can't recall, Gavin, if in your guidance, if you had any specific range there. Gavin Moore: Well, we said the provisioning would be 20 to 25 basis points. And that provision's gonna be a function of more loan growth than anything. Brad Kessel: But I think the charge off history, recent history has been really, really well. And I think probably it is unrealistic to expect that indefinitely. The charge offs really today have been in the consumer loan portfolio. And the biggest driver has been quite frankly, due to a customer passing away and then getting the collateral back in and then disposing of it. But I think somewhere in our recent history, maybe a little bit higher, could be modeled on a go forward basis. Joel Rahn: Agree with that. Gavin Moore: Nathan, I I have the details for your question on cash flow repricing. Average quarterly for 2026 is gonna be about $105,000,000 at an exit rate on average of $5.50 at current speeds, CPRs. Nathan Race: And that's the commercial book or just overall, Gavin? Gavin Moore: That fully... I mean, that's the entirety of our fixed rate portfolio. So that includes mortgage. Commercial is going to run about for the year, it's about $220,000,000. My totals were off. Let me... total commercial is around $220,000,000 for the year. Nathan Race: Okay, quite substantial then. Yeah. That's all I had. I appreciate all the color, guys. Thank you. Joel Rahn: Thanks, Nathan. Operator: Thank you. One moment for our next question. And our next question comes from the line of John Rodis of Janney. Your line is now open. John Rodis: Hey, good morning guys. Gavin, just following up on the securities portfolio. You said runoff of roughly $120,000,000. Does that all... I mean, are you looking to reinvest any into the securities portfolio at this time? Or I think looking at my prior notes, I think you said sort of targeting securities portfolio, you know, 12 to 15% of assets. Is that still sort of the thought process? Gavin Moore: That is, John. And I don't think we'll get through 2026 without doing any securities purchases. John Rodis: Okay. But if you look... I know 2027's a long way away, but could you maybe hit a bottom then, I guess? Gavin Moore: Yeah. I anticipate in 2027, within 2027, we'll start to reinvest. 12 to 14% of total assets is still a target for us in terms of triggering investment purchases. So that's still the strategy there, John. Brad Kessel: Yeah. Okay. John Rodis: Thanks, Brad. Brad, maybe just a follow-up on the M and A question. You guys talked about through the normal course of business sort of adding a handful of bankers each year. I mean, would you be open to picking up a team of lenders or anything like that? I know it gets a little bit tougher when you add teams as far as culture and stuff like that, but what are your thoughts? Brad Kessel: Yeah. I mean, that has not been the pattern historically. But I would say we'd be open to that. Joel, what what are your thoughts on that? Joel Rahn: Yeah. Certainly open to it. That doesn't happen very often. It's fairly rare. And we've just had really good success in just going after one banker at a time. And so I would expect that's where the majority of our ads will continue to come. Brad Kessel: Sort of one banker at a time and then building a team. Joel Rahn: Correct. Yeah. John Rodis: Okay. Thanks, guys. You're sort of breaking up a little bit, but I think I get the picture. Thank you. Brad Kessel: Thanks, John. Operator: I'm showing no further questions at this time. I'll now turn it back to Brad Kessel for closing remarks. Brad Kessel: In closing, I would like to thank our Board of Directors and our senior management for their support and leadership. I also want to thank all our associates. I continue to be so proud of the job being done by each member of our team. Each team member in his or her own way continues to do their part toward our common goal of guiding customers to be independent. Finally, I would like to thank each of you for your interest in Independent Bank Corporation and for joining us on today's call. Have a great day. Operator: Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.
Operator: Good day, ladies and gentlemen, and welcome to the GE Aerospace Fourth Quarter 2025 Earnings Conference Call. At this time, all participants are in a listen-only mode. My name is Liz, and I will be your conference coordinator today. If you experience issues with the webcast slides or there appears to be delays in the slide advancement, please hit F5 on your keyboard to refresh. As a reminder, this conference is being recorded. I would now like to turn the program over to your host for today's conference, Blaire Shoor from the GE Aerospace Investor Relations team. Please proceed. Blaire Shoor: Thanks, Liz. Welcome to GE Aerospace's Fourth Quarter and Full Year 2025 Earnings Call. I'm joined by Chairman and CEO Larry Culp and CFO Rahul Ghai. Larry Culp: Thanks, Blaire, and good morning, everyone. I'd like to begin with our purpose. We invent the future of flight, lift people up, and bring them home safely. Right now, nearly 1 million people are in flight with our technology under wing, connecting people and goods worldwide. We play a vital role in powering the warfighters who defend freedom. While we work to deliver for our customers today, we're also inventing technology that will propel the industry forward tomorrow. Our purpose is our call to action. I could not be prouder of what our team achieved in 2025, but also how we got there—with our culture of respect for people, being customer-driven, and continuous improvement. Turning to our results on slide four, 2025 was an outstanding year for GE Aerospace. We made operational progress, delivered on our financial commitments, and continued to invest in our future. The fourth quarter was a strong finish to the year. Orders were up 74%, reflecting continued robust demand for our services and equipment. Revenue increased 20% with double-digit growth in both segments. EPS was up 19% to $1.57 and free cash flow grew 15%. For the full year, we drove substantial improvement across all key metrics. Orders were up 32%, Revenue increased 21%, operating profit grew $1.8 billion, and free cash flow was up $1.5 billion. In CES, orders were up 35% and revenue grew 24%, including services orders up 27% and revenue up 26%. This supported our profit growing 26% to $8.9 billion. In DPT, orders increased 19% and revenue was up 11% with increased deliveries in defense. Profit increased 22% to $1.3 billion. Our performance reflects the impact of flight debt, driving incremental gains that compounded into meaningful improvements. This enables us to accelerate output to deliver on our roughly $190 billion backlog, which is up nearly $20 billion over the last year. We are also investing to improve time on wing and reduce the cost of ownership to deliver value to our customers, supporting growth today, tomorrow, and into the future. I want to thank the entire GE Aerospace team, our suppliers, and our customers who put their trust in us. Looking to 2026, we're poised for another year of substantial revenue, EPS, and cash growth. Demand remains robust with 2025 orders up 32% and continued backlog growth, supporting our expectation for revenue to be up low double digits including commercial services up mid-teens. We expect operating profit of $9.85 billion to $10.25 billion, up a billion dollars at the midpoint. This translates to EPS of $7.10 to $7.40, up nearly 15% at the midpoint. And we expect to generate $8 billion to $8.4 billion of free cash flow with conversion remaining well above 100%. This outlook builds on the progress we made in '24 and '25. We expect to deliver mid-teens revenue growth between '24 and '26 compounded and $10 billion of profit in '26 two years earlier than our outlook has been. We continue to convert this into cash, expecting to generate more than $20 billion of cash between '24 and '26 to reinvest in our future, including in US manufacturing to support both our commercial and defense customers. GE Aerospace is an exceptional franchise, servicing and growing the industry's most extensive installed base of 80,000 engines. As we further embed flight deck, we'll unlock greater value for our customers and shareholders. Turning to Slide six, in their first year, our technology and operations, or T&O, team made a meaningful impact. We partnered more effectively with our suppliers, resulting in material input from our priority suppliers growing over 40% year over year in 2025 and up double digits sequentially in the fourth quarter, both translating to higher outputs. While we're making progress, we know our customers need more from us. To further accelerate our progress in 2026, we're expanding CES to include T&O, now led by Mohammad Ali. Integrating our product line, engineering, and supply chain teams will improve our end-to-end engine life cycle management. We're also elevating our customer-facing teams, led by Jason Tonich, now reporting directly to me, aligned with our customer-driven approach. These changes will enable greater cross-functional problem-solving, agility, and alignment to deliver for our customers. I also want to take a moment to thank Russell Stokes, who announced he'll retire from GE Aerospace in July after 29 years of service. His continuous improvement mindset and passion for developing leaders helped build this world-class business. Russell was one of the first leaders I met here at GE. He's been a critical partner over the last seven years. We wish him nothing but success in his next chapter. These changes, along with flight deck, will further support growth in deliveries in '26. Across our MRO network, we're removing waste to improve shop visit output and turnaround times. For example, we're converting from batch to flow production, which supported LEAP, CFM56, and GE90 turnaround times, improving over 10% year over year in the fourth quarter. Additionally, at our Wales facility, CFM56 turnaround time improved by 20%, and at Selma, we sustained turnaround times below 80 days. This enabled us to deliver our highest LEAP shop visit output of the year. With the LEAP installed base expected to roughly triple between '24 and '30, we're expanding capacity across our global MRO network to support aftermarket demand. In 2025, we added MTU Dallas as our sixth premier MRO partner supporting third-party shop visit growth, now representing around 15% of total LEAP shop visits. We're dedicating approximately $500 million of our more than $1 billion of investment in MRO to LEAP. This includes expanding several MRO sites, including Malaysia, Selma, and Dallas, and a new on-wing support facility in Dubai. We expect these investments will roughly double LEAP's internal capacity. Taken together, these actions drove meaningful progress in services and equipment output in 2025. CES services revenue increased 26% with internal shop visit revenue up 24%, including LEAP internal shop visit volume up 27%. Spare parts revenue grew more than 25%. Deliveries across commercial and defense increased 26% for the year, including a strong finish with 8% sequential growth in the fourth quarter. Commercial units increased 25%, including LEAP up 28%, exceeding 1,800 units, a record output for the program. And defense engine deliveries increased 30%. While 2025 marked a year of progress, we know there's more to do to meet customer demand. And I'm confident we'll deliver. Turning to slide seven, one of the behaviors that guides us is to be customer-driven in all that we do. We're leveraging over 2.3 billion flight hours and nearly $3 billion in annual R&D to drive meaningful improvement for our customers. Our focus remains on delivering mature levels of time on wing and lowering costs of ownership. In November, the GE NX fleet leader, equipped with the upgraded HBT blade, which has improved time on wing over two and a half times in hot and harsh environments, achieved a new milestone surpassing 4,000 cycles. Informed by our progress with the GE NX, the LEAP 1A durability kit will improve time on wing by more than two times, matching our industry-leading CFM56 performance. This is now incorporated in all LEAP 1A new engine deliveries and shop visits, with nearly 1,500 kits shipped since certification. In addition to improved durability, we're also expanding our LEAP repair catalog, which will lower costs of ownership and improve turnaround times. In '25, LEAP parts certified for repair increased 20%, and we expect continued growth in '26. Combined with our progress on delivery, we're actively working to meet customer expectations on LEAP. At the same time, utilization of our mature engines remains robust. CFM56 is the most widely owned and operated engine in commercial aviation. With retirements in '25 consistent with '24 levels, the third-party MRO ecosystem provides customers with optionality for servicing their fleets, supporting higher asset values, and lowering costs of ownership. We continue to strengthen MRO access to OEM materials to support further CFM56 longevity. Last quarter, for example, we reached a materials agreement with EFTIA Aviation to support the service of its growing fleet of CFM56 engines. We're also progressing the next generation of engines. We recently completed a ground test campaign demonstrating our first hybrid-electric narrow-body engine architecture. This first-of-its-kind propulsion milestone demonstrates systems integration, advancing the technology from concept to practical, scalable application. As we deliver greater customer value and advanced breakthrough technologies, we're growing our backlog. At the Dubai Air Show, we recorded over 500 engine wins across narrow bodies and wide bodies. Including Riyadh Air's commitment for 120 LEAP 1A engines and fly Dubai's selection of 60 GE NX engines. Additionally, Pegasus Airlines committed to up to 300 LEAP 1B engines to power its future Boeing 737-10 fleet. And we're honored that Delta, a new GE NX customer, selected us to power and service their new fleet of 30 Boeing 787s. In defense, Indestin Aeronautics ordered 113 F404 engines for the Tejas fighter jets. Demonstrating our position as a trusted partner for allied fighter programs. Overall, we're driving progress, improving field performance, turnaround times, and advancing future propulsion technologies. We're well-positioned to strengthen our leadership across both the commercial and defense sectors in 2026. Rahul, over to you. Rahul Ghai: Larry, thank you, and good morning, everyone. We closed out 2025 with another strong quarter. Fourth quarter orders were up 74%, with CES up 76% and DPT up 61%. Revenue was up 20%, led by CES Services, up 31%. Operating profit was $2.3 billion, up 14%. Service volume, productivity, and price were partially offset by the impact of lower spare engine ratio, OE growth, including 9x shipments and investments. Margins, as per prior guidance, were down 90 basis points to 19.2%. EPS was $1.57, up 19% from increased operating profit, a lower tax rate, and a reduced share count. Free cash flow was $1.8 billion, up 15%, largely driven by higher earnings with over 100% conversion. For the year, our results exceeded the high end of our guidance on all key metrics. Orders were up 32%, with commercial services orders up 27% and total equipment up 48%. Revenue increased 21% from commercial services, which was up 26% and higher deliveries of both commercial and defense units. Operating profit increased 25% to $9.1 billion, with margins expanding 70 basis points to 21.4% as commercial services volume and price offset OE growth and investments. EPS increased 38% to $6.37. Free cash flow grew 24% or $1.5 billion to $7.7 billion, with conversion over 110%, driven by earnings growth and continued contract asset favorability, which was partially offset by inventory growth to support continued output increases in 2026. Overall, very strong performance for GE Aerospace, positioning us well for 2026. Turning to our segments, starting with CES. In the fourth quarter, orders were up 76%, with services up 18% and equipment more than doubling. Revenue increased 24%, with services up 31%. Internal shop visit revenue grew 30%, from higher volume and increased work scopes. Spare parts sales were up over 25% as improved material availability supported increased output. Equipment grew 7%, with engine deliveries up 40%, including LEAP up 49%. This more than offset a decline in spare engine ratio due to the timing of back-end-loaded spare engine deliveries in 2024. For the year, spare engine ratio was lower than '24 as planned. Profit was $2.3 billion, up 5% from higher services volume with improved margins, price, and favorable mix. This was partially offset by the impact of lower spare engine ratio, higher installed shipments, including NINEX, and an increase in R&D. As expected, margins were down 420 basis points to 24%. For the year, CES delivered outstanding results, with orders growing 35% and services revenue and engine output both up roughly 25%. This supported profit growing 26% to $8.9 billion, with margins expanding 40 basis points to 26.6% from services growth, productivity, and price. Moving to DPT, orders were up 61%, with defense book-to-bill above two. Revenue grew 13%, with defense and systems revenue up 2%. Defense units were down 7% due to a difficult compare, which was more than offset by price and customer mix. Sequentially, this was the third consecutive quarter of strong defense engine shipments, with full-year deliveries up 30%. Propulsion and additive technologies grew 33%, led by higher commercial and military volume at Avio. Profit was up 5% from volume, favorable mix, and price, partially offset by investments and inflation. Margins were down 70 basis points to 8.9%. DPT also had a solid year, with orders up 19% and defense book-to-bill at 1.5, with backlog now at $21 billion, up nearly $3 billion. Improved output reported revenue growing 11%, profit was $1.3 billion, with margins up 110 basis points to 12.3% from volume, mix, and price. Going deeper into the drivers of our 38% EPS growth for the year, growth in operating profit drove $1.32 or 75% of the improvement in EPS, with the increased profit in CES and DPT partially offset by higher corporate cost and eliminations. Corporate cost was roughly $570 million, up about $170 million due to lower interest income. Eliminations were about $530 million, up approximately $70 million. Lower tax rate, a reduction in share count, and interest expense accounted for an additional 46¢ of EPS growth. Tax rate was down three points for the year, primarily from the benefits of long-term tax planning projects. Share count reduced by $26 million. Turning to Slide 12, we're updating our segment reporting to reflect the organizational changes announced last week. Importantly, there is no change to total company metrics. Aero derivative engines, which were previously reported in CES, will be included with DPT to drive greater supply chain alignment with the marine and mobility business. As a result, roughly $1.4 billion of revenue and a couple hundred million of profit will move from CES to DPT. With the expansion of CES to include T&O, we are also transitioning the cost of remaining sites and external engineering revenue to their respective businesses. This results in a small change to corporate cost and eliminations. The resegmentation impact is reflected in the 2025 segment financials on the left side of the page. We've also included a preliminary bridge in the appendix and plan to provide recast segment financials for first-quarter earnings. Turning to guidance, starting with CES, we expect mid-teens revenue growth, including services up mid-teens. This includes internal shop visit revenue and spare parts revenue, both up mid-teens from low double-digit engine removals combined with higher work scopes and price. LEAP internal shop visits are expected to grow 25%. We expect equipment up mid- to high-teens, including LEAP deliveries up 15% with higher growth from wide-body programs. We expect $9.6 billion to $9.9 billion of profit, up about $1.2 billion at the midpoint. This reflects the benefit of services growth and price, which is partially offset by OE growth, including NINEX, a lower spare engine ratio, and continued investments. In DPT, we expect mid-to-high single-digit revenue growth and profit of $1.55 billion to $1.65 billion. Higher deliveries will be partially offset by inflation, mix, and investments. Corporate costs and eliminations are up year over year to $1.2 billion to $1.3 billion from lower interest income, AI investments, and higher eliminations from internal BAT growth. In total, we expect low double-digit revenue growth for the company, with profit in the range of $9.85 billion to $10.25 billion, up $1 billion or more than 10% at the midpoint. Further unpacking the drivers of EPS and free cash flow growth, we expect EPS in the range of $7.10 to $7.40, up nearly 15% at the midpoint. About 85% of the improvement will be from higher operating profit. The balance will be from a marginal improvement in the tax rate to below 17% and a reduction of 18 million shares from our previously completed and announced capital allocation actions. Interest expense is expected to be roughly $900 million. We expect to generate $8 billion to $8.4 billion of free cash flow, primarily from higher earnings. Working capital and AD&A combined will be a source year-over-year from slower inventory growth. We continue to expect CapEx at roughly 3% of sales. Overall, we expect another year of conversion solidly above 100%. Taken together, GE Aerospace is poised for another year of solid growth ahead. Larry Culp: Rahul, thank you. 2025 was another outstanding year. Our sustained competitive advantages support our in our leadership positions across both commercial and defense. With the industry's largest fleet of 80,000 engines and growing, we've accumulated over 2.3 billion flight hours. This experience keeps us close to our customers through decade-long life cycles, building enduring relationships, and making us the partner of choice. This field experience combined with our nearly $3 billion in annual R&D investments allows us to drive continuous improvement across our services and products, enhancing time on wing and lowering the cost of ownership. As a result, across our narrow body, wide body regional defense platforms, we offer the best performing products under wing. Our world-class engineering teams develop next-gen technology to improve durability, efficiency, and turnaround times, along with advanced defense capabilities. Through flight deck, we're turning strategy into results with a focus on safety, quality, delivery, and cost, always in that order. Stepping back, the GE Aerospace team is focused and ready for what's ahead. In 2026, we're well positioned to deliver for our customers and shareholders, and I'm confident in our trajectory. With that, Blaire, let's go to questions. Blaire Shoor: Before we open the line, I'd ask everyone in the queue to consider your fellow analysts and ask one question so that we can get to as many as possible. Liz, can you please open the line? Operator: Ladies and gentlemen, if you wish to ask a question, if you wish to withdraw your question or your question has already been answered, please press 11 again. Our first question comes from John Godden of Citigroup. Your line is now open. John Godden: I was hoping you could elaborate a bit on the commercial aftermarket backdrop. Obviously, it was a great services quarter with revenue growth accelerating versus the quarter, so I'm just curious to what extent this momentum has carried through to start the year. And if you could just unpack some of the assumptions underlying the mid-teen services growth guidance for 2026. Is there any room there to outperform if recent momentum continues? Larry Culp: Well, John, good morning. Thanks for getting us started. I would say we haven't seen anything here at the beginning of the year that gives us pause relative to the tailwinds, the momentum that you referenced continuing. We've all seen Delta and United out since last week, I think, talking confidently about 2026. So when you couple their outlook, the fact that we come into the year with a $190 billion backlog, we know our share of cycles with LEAP in particular in the narrow body segment being up and the opportunities to leverage that underlying unit volume in the aftermarket with both expanded workscopes in both narrow and wide body as well as price, we feel like we have another very strong commercial services year supporting the aftermarket. Again, I think we've commented in the prepared remarks at a rate that should be up mid-teens. Will we be able to do better than that? We're certainly going to aim to do that. But as we talk through the course of 2025, we're not particularly concerned about the demand environment. It's really all about our ability to move spare parts out to third parties to complete our own shop visits. While we were pleased with the sequential and the year-over-year numbers that we cited in the fourth quarter, there's much more to do here in 2026. It's a bit of what undergirds the organizational move that we announced. To the extent that we can continue to make progress, and we think we will, perhaps not in line with the 40% bump we saw from our prior suppliers last year on a full-year basis, I think we'll be able to satisfy that demand better than we did in 2025. Rahul Ghai: Yeah. Just a couple of things, John, welcome to our call here. Just as we said in our prepared remarks, we expect both shop visits and spare parts to be up kind of the same range as mid-teens as the overall services growth. On spare parts first, our delinquency when we ended 2025 was up 50% over where we ended 2024. So as Larry mentioned, strong demand environment. As you think about the spare parts growth, it's gonna be primarily driven by narrow body. That's coming as the LEAP external channel continues to grow, and more than 15% of the LEAP shop visits are now performed by a third-party channel partner. CFM56 continues to be strong as well. Larry mentioned in his prepared remarks about how we ended 2025 retirements, which were similar to 2024. As we think about 2026, we expect retirements to be in the 2% range. Our prior expectations were in the 2% to 3% range, so trending a little bit better, and that puts CFM shop visits in the 2,300 to 2,400 range between 2026 and 2028. External demand environment looks good. We're expecting double-digit removals this year from engines that have already flown. Plus, the work scope continues to increase a little bit of price. All of that leads to that 15% growth that we mentioned on shop visit. Overall, we feel good about the services outlook for 2026. Operator: The next question comes from Myles Walton with Wolfe Research. Your line is now open. Myles Walton: Good morning. Larry Culp: Good morning, Myles. Myles Walton: I was wondering about the LEAP breakeven or LEAP profitability on the original equipment side. Are we crossing the root count of profit or breakeven in '26 still? Larry, you must be feeling a lot better about the trajectory to get output on a LEAP to 2,500 by 2028. What, if anything, is required from investment within the supply chain, not the MRO network, but more the OE side of the supply chain still to get to where manufacturers want the production rates? Larry Culp: Well, Myles, from a NewMake perspective, and as you know, the supply chain supports new make and also the aftermarket. No one can really isolate the new make demand and invest for that without being mindful of the aftermarket demand as well. I think we have improved over the course of 2025 our visibility further out and deeper into the supply chain, further out timewise, and deeper into the supply chain with respect to readiness to satisfy our needs to serve both the airlines and the airframers. There will be capital investment in various places. I'll let different suppliers and different commodity categories speak to their own plans. But I think we're confident that as we move forward here through the rest of the decade, we'll be able to satisfy what the airlines need in the aftermarket and what the airframers are looking to do for the airlines as well, right from a new delivery, from a modernization and expansion perspective. But there's work to do. Again, I don't think we're gonna be up 40% every year, not that we have to, but I feel very good that with the body of work we put in 2025, we're poised to step up again with the supply base, be it process improvement, be it capital expansion, and the like, to keep pace with these considerable tailwinds that we're all fortunately exposed to. Rahul Ghai: And, Myles, to answer your question on the LEAP profitability, yes, we expect LEAP OE to be profitable in 2026 as per our prior plans. Operator: The next question comes from Douglas Harnett with Bernstein. Your line is now open. Douglas Harnett: Good morning. Thank you. Larry Culp: Good morning, Doug. Douglas Harnett: You talked about the improvement in turnaround times across the board, like LEAP, CFM56, GE90, by about 10%. For LEAP, I can see that, but CFM56 and GE90 are very mature engines. Is this turnaround time improvement for both internal and third-party shop visits? What levers enable you to do that? How should we see that improvement reflected in financials since CFM56 is largely time and materials and GE90, you'd be on CSAs, I would assume. Larry Culp: Doug, it's an internally oriented number. We watch turnaround time closely at every one of our shops across platforms across the network. The way I think about turnaround time improvement, it's really driven by two things: one, material availability, and two, efficient execution of our standard work on the shop floor. We've talked a lot about supply chain. You've written about it as well. To the extent that we are getting not only more from our suppliers but getting what we get in a more predictable way, the teams on the shop floor are better able to execute and bring down turnaround times. We talked about a 40% year-over-year improvement from our priority suppliers. Those suppliers delivering at a 90% plus level to their commitments takes a lot of noise out of the system. That is an unlock for us. I think to take full advantage of the process improvements by way of flight deck that we've laid in the various shops. It's not equally spread across every shop, but those turnaround times that you see improve in the fourth quarter, for example, really is a combination of better input materials and better execution. How does that show up in the financials? Well, we should be getting more shop visits completed in terms of the top line, but we also believe it's a considerable productivity unlock. If a team on the floor has to stop a shop visit, if they are idle waiting for a part delivery, that's obviously unproductive time. If they have everything they need from induction to certification, we will see and have seen early signs of real productivity bumps there as well. Operator: The next question comes from Scott Deuschle with Deutsche Bank. Scott Deuschle: Good morning. Rahul, can you quantify what the GE9X headwind ended up being in 2025? What is the incremental profit headwind from NINEX in 2026? If you could comment on the quarterly earnings cadence at CES in '26 as well, that would be helpful. The question is around 9x losses and earnings cadence. Thank you. Rahul Ghai: Scott, on 9x, our losses ended. We said a couple of hundred million dollars of losses in 2025, and we landed right about there, so right in line with our expectations. For '26, as we previously said, we are gonna ship more engines in '26, and the volume continues to grow. With that, our losses on the 9x programs will double year over year. Our current guidance for '26 incorporates those losses getting to that level, so all consistent with what we said previously. On the first quarter, let me just elevate the question a little bit, Scott, and just kind of speak to the total company here, including CES. First, we expect a solid start to the year. Our output started out slow last year in the first quarter, so we expect our engine and shop visit output to grow substantially here in the first quarter. That will drive our revenue growth, and we expect at the total company level high teens revenue growth for the company. Both CES and DPT expect above their respective full-year guides. For CES, we ended 2025 with 27% orders growth, so we're entering '26 with a strong backlog. About 85% of the spare parts that we need to ship in the first quarter are already in the backlog. We had a CMR charge in the first quarter of last year that we're not expecting to repeat. It'll be a strong start for us in our services business, and commercial equipment output is expected to be strong. That'll drive revenue growth. First quarter last year was our strongest spare engine shipment quarter, so there'll be some year-over-year impact due to that. Still, it'll be a strong revenue performance despite that. There will be 9x shipments here in the first quarter as well, which we did not have in '25, and DPT, they're on a good run here on sequential performance, and expect that to continue, driving revenue growth for the DPT segment. Switching to profit, expect that profit to be up year over year growth primarily from the services growth and absence of the CMR charge offsetting the higher deliveries and the 9x shipments. However, because of the lower spare engine ratio and 9x shipments, our total margins for the business will be kind of in line to slightly better or marginally better here versus where we ended 2025. Free cash flow, we expect certain payments here in the first quarter, will be down year over year, but overall, thinking about revenue and profit, we expect to get out of the gate strong. Operator: The next question comes from Sheila Kahyaoglu with Jefferies. Good morning, Larry, Rahul. Sheila Kahyaoglu: Maybe, Rahu, since you were just speaking about CES profit guidance for '26, if you could walk through margins at the midpoint, it implies margins are flat. I know you gave a few pieces on the GE9X headwind, how are you thinking about shipments there? What are you seeing offset the goodness to help overcome some of the mix issues you're facing with equipment growth outpacing services, 9x headwind, as you mentioned, spares ratio, and LEAP growing double digits while CFM is flat? How do we think about that? Rahul Ghai: I think, Sheila, you kind of outlined some of the key drivers here in the math. The margin story at the CES level is exactly the way you said it. Strong services growth, with 3 and a half billion dollars expected in services revenue growth in '26 that drops through at a healthy clip despite LEAP being a bigger share of growth, still, expect strong drop through from services revenue improvement year over year. OEM shipments are increasing, spare engine ratio gradually comes down as we expect it to, as time passes on. And then NINEX shipments and with R&D coming in as well. Those are the big drivers for CES margins here in 2026. The margins ended up better than expected during October guidance. Margins about 70 basis points better than what thought in October. So, despite that, expect margins to be flattish in 2026. Feel good about trajectory. Operator: The next question comes from Seth Seifman with JPMorgan. Seth Seifman: Hey, thanks very much, and good morning, everyone. Larry Culp: Morning, Seth. Seth Seifman: Maybe just to continue along that line of questioning, as we think about the headwinds accumulating from a mix perspective in CES and then look out beyond '26, how should we think about margin trajectory there with LEAP OE becoming profitable, LEAP aftermarket continuing to become more profitable, but maybe OE aftermarket mix headwinds and more 9x? I'm getting to, like, a 26.6% in CES for '26. So, kind of where do we think about that going directionally in the years beyond? Larry Culp: I think you captured some of the headwinds we've talked about not only for '26 but for '28. It's important to recognize that when we spun, thought to be at a $10 billion operating profit level two years from here. We're able to hit that milestone, and will hit it at the midpoint here in 2026. There are many things outweighing the headwinds as we continue to grow the install base. With suppliers grow the installed base at a low to mid-single-digit level, and get the full benefit of utilization in term volume, work scopes, and price. The commercial services business is the engine that drives profit growth. LEAP is better as we go forward and will look to have NINE do the same. Despite progress in defense, with 11% top-line operating profit up over 20%, we have opportunity to deliver on the $11.5 billion operating profit targeted for 2028. Potentially do better. Serve airlines, ramp with airframers to help modernization and expansion. Support warfighters fully. Rahul Ghai: Seth, if add a couple of things, back in July when we gave 2028 guidance, expected around 21% margins in '28. We got there last year, jumping off higher point. Margin profile maintained into 2026. Spoke about CFM56 goodness, retirements trending low, shop visits expected in the 2,300 to 2,400 range, maybe better than previously thought. LEAP service profitability continues to improve, external channel repairs to grow, incremental shop visits drive productivity in LEAP services. Wide body program, especially GE90, no retirements expected. All that looks toward 2028, improved margin profile. Operator: The next question comes from Ron Epstein with Bank of America. Ron, are you there? Ron Epstein: Hey. Can you hear me? Sorry about that. Rahul Ghai: No problem, Ron. Ron Epstein: Good morning, guys. Larry Culp: Good morning. Ron Epstein: So, yeah, a lot's been asked already, but back to prepared remarks, mentioned spending $3 billion a year on R&D, a big number. Can you elaborate on spending, investments being made? Larry Culp: Ryan, I'd say it's where anticipated it to be. Customer experience improvement on ramping engines, like LEAP, with improvements like the durability kit. Nine X coming under wing with the triple seven X. Programs EIS or ramping are the first order. Additionally, investing in future flight. RISE program, technology development, not product development but spends big chunk of annual spend, coupled with some defense next-gen programs, contributing to meaningful portion of R&D. NEX with the 2.3 billion flight hour experience base positions us well to shape future of flight. Balance of 2026-28 rests on protecting and expanding R&D envelope, key for innovation and technology. Operator: The next question comes from Gavin Parsons of UBS. Gavin Parsons: Thank you. Good morning. Larry Culp: Good morning, Gavin. Gavin Parsons: You guys talked about CFM56 retirements trending lower than expected, 2%, despite successful LEAP deliveries. Expecting that to pick up to 3% or 4%, what's changed, still expecting shop visit peak in '27? Thank you. Larry Culp: Gavin, it's really more of a demand function, keeping CFM56 powered planes in flight as airlines need them. Retirements in 2025 ended up at about 1.6%, in line with 2024, balance '26 a little better, expecting slightly better at 2% compared to two to 3% range given in July. From shop visit perspective, ranges 2,300 to 2,400 through 2028 sets better expectations. Expect no big decline come 2030. Floating better utilization with demand leading to subdued retirements, meaning CFM56 strong longer. Operator: The next question comes from Noah Poponak with Goldman Sachs. Noah Poponak: Hey, good morning, everybody. Rahul Ghai: Morning, Noah. Noah Poponak: Could you elaborate on the agreement announced with Eptai? Rahu, on free cash flow, this year flirting with what provided for 2028. Anything abnormally high in '26, fade away, bridge 26 to 28? Larry Culp: On Eptai agreement, third-party aftermarket seen as a strength, want maximum optionality how fleets serviced, both supporting asset values and lowering cost of ownership—foundation for agreement. Rahul Ghai: On cash flow, Noah, nothing abnormal in 26. Last year inventory growth was a challenge, added a billion-dollar inventory. Supply chain improving, but not there entirely, so investment made to continually increase output. For '26 expect less contract asset favorability this is getting offset here with slower inventory growth. Total working capital AD&A last year was a half a billion net headwind, expect slightly less this year. It's not a bad given low double-digit revenue growth. Really nothing abnormal coming into the cash number and more opportunity on inventory as we get out. Maybe less on contract assets, all in line with what was communicated before. Blaire Shoor: Liz, we have time for one last question. Operator: This question comes from Gautam Khanna with TD Cowen. Gautam Khanna: Hey, thank you. Good morning. Congrats to Mohammad and Russell. Customer behavior in the aftermarket, any change anticipated on overhauls scope, on wide-body engines or CFM56, any pricing pushback, discontinuity compared to recent times? Larry Culp: Nothing stands out frankly. Demand environment post-pandemic robust, with airlines wanting maximum fleet support. Talked about supply chain and flight deck over last years. CFM56's stability, demand leading toward some expanded workscopes. Satisfaction without compromising safety and quality is the reasonable ask, one committed to delivering new year. Blaire Shoor: Larry, any final comments to wrap the call? Larry Culp: Blaire, thank you. The hour flew there. Thank you, everyone.
Operator: Greetings, and welcome to the LSI Industries Inc. Fiscal 2026 Second Quarter Results Conference Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance, please press 0 on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce Jim Galeese, Chief Financial Officer. Please go ahead. James Galeese: Welcome, everyone, and thank you for joining today's call. We issued a press release before the market opened this morning detailing our fiscal 2026 second quarter results. In addition to this release, we also posted a conference call presentation in the Investor Relations section of our corporate website. Information contained in this presentation will be referenced throughout today's conference call. Included are certain non-GAAP measures for improved transparency of our operating results. A complete reconciliation of GAAP and non-GAAP results is contained in our press release and 10-Q. Please note that management's commentary and responses to questions on today's conference call may include forward-looking statements about our business outlook. Such statements involve risks and opportunities, and actual results could differ materially. I refer you to our safe harbor statement which appears in this morning's press release for more details. Today's call will begin with remarks summarizing our fiscal second quarter results. At the conclusion of these prepared remarks, we will open the line for questions. With that, I'll turn the call over to LSI President and Chief Executive Officer, Jim Clark. James Clark: Thank you, Jim, and good morning, everyone. I appreciate you joining us today. This morning, we'll be reviewing our second quarter results for fiscal 2026. As you likely saw in our earnings release, we delivered solid second-quarter results that were in line with our expectations. Revenue was essentially flat year over year at $147 million while profitability and free cash flow improved. Given the strength of the prior year comparisons, particularly within Display Solutions, I'm pleased how this quarter performed and how our teams executed throughout the quarter. Jim Galeese will walk through the financial details in a few minutes, but I want to spend some time on a few areas that I think were important as we move into the second half of the year. As we've discussed previously, the second quarter of last year benefited from unusually strong event-driven demand, most notably in the grocery vertical, following the resolution of a failed merger between two large grocery chains. The release of pent-up demand drove exceptional growth of 100% in our Display Solutions segments, with 50% of that being organic growth in Q2 of last year. This demand pattern in groceries has returned to a more normalized level. And against that backdrop, flat consolidated sales and improved margin represents solid execution. More importantly, we continue to see healthy customer engagement, active planning discussions, and increasing order trends as we exit the quarter. Lighting delivered another strong quarter with sales growth of 15% year over year and meaningful margin expansion. This follows 18% growth in the first quarter, and we're encouraged by the consistency of performance across multiple end markets. Several factors have contributed to the strength in lighting, including the addition of aluminum poles to our steel pole product line, an increase in large project shipments, continued momentum in our national account strategy, and solid traction from recent product introductions as we remain focused on product vitality. As we exit the second quarter, lighting orders were up approximately 10% year over year, resulting in a book to bill above one. This gives us continued confidence as we look ahead. In Display Solutions, we maintained a high level of execution across several large multiyear customer programs. Particularly in the refueling area, convenience store, quick-serve retail, and casual dining restaurant verticals. While revenues declined slightly year over year due to the prior year comparisons, orders improved sequentially and were up year over year supporting an improved backlog entering into the third quarter. What's particularly encouraging is how the opportunity set within display solutions continues to evolve. Historically, much of our growth in food services has come from quick-serve restaurant customers. These programs often involve large numbers of sites, sometimes hundreds at a time, with individual product values ranging from $20,000 to $40,000 per location. This work remains an important and durable part of our business, and we continue to win and execute well in that space. While at the same time, we are now seeing meaningful traction beyond traditional QSR into the casual dining space and premium food services. With these programs, they typically involve fewer locations and the value per site is significantly higher, often ranging from $250,000 to $1 million per location. These opportunities align well with our capabilities in custom fabrication, integrated design, and program execution, and they represent a natural extension of the platform we've built over the past several years. We're also encouraged by improving activity in the international market, particularly in Mexico and the islands. Conditions strengthened during the quarter after several softer periods. Based on what we're seeing today, we expect activity to remain elevated into fiscal and calendar year 2027. Over the last two quarters, I've emphasized that our focus for 2026 and what will continue into 2027 will be our people. That commitment remains unwavering. Talent management through thoughtful role design, succession planning, and deeper cross-team integration are not just priorities, they're essential to creating a single unified organization we continue to bring JSI and EMI together under the LSI umbrella. While there will be opportunities for operational consolidation in the future, the greatest return on our investment will continue to come from empowering our people. Aligning them around shared goals, and enabling them to collaborate more seamlessly. The core objective of this integration is to unlock meaningful cross-selling opportunities by breaking down silos, improving transparency, and ensuring our teams are working as one cohesive commercial engine. A few months ago, we brought on a senior sales leader within our display solutions group specifically targeted to enhance visibility into our current sales activities, pipeline development, and near-term conversion opportunities. Just as importantly, this role is helping us to strengthen alignment between sales, operations, and execution, ensuring that we are not only identifying opportunities across brands, but we act on them quickly, consistently, and with a unified customer experience. Next week, we will take another important step forward as we host our sales meeting here in Cincinnati. Bringing together nearly 120 sales employees and marketing professionals from across the organization, we will be spending several days together, including time over the weekend, focused on collaboration, alignment, and building the relationship that makes true cross-selling and coordinated execution possible. This time together is not just about strategy and planning. It's about reinforcing our shared purpose, our culture, and continuing to work on becoming one integrated team moving forward as one organization. From a customer perspective, we continue to see increasing engagement from large, sophisticated organizations that place a premium on supplier scale, geographic coverage, and manufacturing depth. In several cases, customers have specifically cited our ability to design, fabricate, and deliver across multiple regions as a key differentiator. This capability continues to elevate the types of programs we're invited to pursue. Profitability and cash generation were highlights of the quarter. Adjusted EBITDA increased year over year to $13.4 million, and margin performance benefited from disciplined project pricing, productivity improvements, and effective cost management, which together helped offset ongoing cost inflations. Free cash flow was strong at $23 million, driven by profitability and continued working capital discipline. We used that cash flow to reduce our total debt by $22.7 million during the quarter, ending with a net leverage ratio of 0.4. The balance sheet strength supports our fast-forward strategy, allowing us to invest in our organic growth, pursue operational improvements, and maintain optionality around future acquisition opportunities, all while continuing to return capital to our shareholders through our dividends and other programs. Execution across the organization continues to reflect LSI's high SAGE ratio and culture. Our team stayed focused during a quarter that required careful management of mix, margin, and timing. I'm proud of how they delivered. The collaboration between sales, operation, design, and supply chain continues to be strong, and that alignment is showing up both in execution and in customer confidence. Looking ahead to the '6, we expect continued progress on our goals supported by improving order trends and backlog. We remain confident in the secular growth outlook across our key vertical markets and in our ability to grow above the market through a differentiated solutions-based approach. In closing, I want to thank you for your continued support in LSI. We're executing well, we're financially strong, and we remain focused on building long-term value through disciplined growth and operational excellence. With that, I'll turn the call back over to Jim Galeese for a more detailed review of our financial results. James Galeese: Good morning, all. LSI Industries Inc. generated sales of $147 million in Q2, consistent with the prior year, successfully offsetting challenging prior-year comps. Adjusted net income and adjusted EBITDA were modestly above the prior year and all were double-digit above the same quarter fiscal 2024. Adjusted earnings per share were $0.26 for the quarter. Cash flow in the quarter was higher than expected at $23 million following a timing-related softer first quarter. The strong cash flow lowered our debt to EBITDA leverage ratio to 0.4 times, providing significant capital allocation flexibility. With our amended financing facility, LSI has cash and availability of approximately $100 million. Next, a few comments on our two reportable segments. As mentioned, Lighting had an outstanding quarter, realizing sales growth of 15%. This represents the third consecutive quarter of double-digit growth as compared to the prior year quarter. Referencing various reports on non-resi construction, our double-digit growth rate continues to outperform the market. As a result of volume and effective margin management, adjusted operating income increased 29%, with the adjusted gross margin rate improving 190 basis points versus last year. One of the growth opportunities identified for Lighting was increasing our business with national accounts. We felt our operating model capabilities aligned closely with satisfying strict customer requirements, so investments were made to support this initiative. Results reflect significant progress in gaining new customers and sales. This, along with the health of our key vertical markets, is driving our strong growth rate. We expect favorable momentum to continue into the '26 as lighting orders for Q2 were 10% above the prior year, a book-to-bill ratio above one on strong shipment quarter and an improved backlog. Shifting to Display Solutions. Jim did an excellent job providing context to the current quarter's performance for Display, and how to interpret comparisons to the prior year. I'll just add a few additional comments. For the grocery vertical, second-quarter sales reflect a return to normal seasonal demand. Implications were lower sales this quarter versus the pull-forward of last year, but also a return to more predictable demand flows, allowing us to plan and fulfill customer programs more efficiently. For example, Q2 adjusted gross margin improved 30 basis points despite lower production volume, reflecting improved productivity enabled by more stable production scheduling. Orders also followed a return to seasonal demand patterns, Q2 grocery orders increased double digits year over year, generating a strong book-to-bill ratio of 1.2 versus under one last year in building backlog. We expect sales growth in grocery in the '26. Activity remains high in the refueling c-store vertical, as we continue to execute against several large customer programs. In addition to our established foundation of large customers, we recently added multiple mid-sized projects, representing a combination of new and existing customers and brands. Building relationships with new customers provides the opportunity to expand our sustainable, repeat business model successfully built and executed. Over time, growing growth in our service business is also providing cross-selling opportunities. For one refueling c-store customer, where we are currently active with service at over 140 sites, the opportunity to present our broader solution set resulted in a significant number of sites specifying our Archer perimeter lighting system, generating an expansion of revenue per site. The QSR vertical has been sluggish as large chains manage multiple priorities, inflation, leadership changes, and shifting consumer habits. Our teams, however, are very busy working with customers on numerous programs in the concept and development phases. So future investments are planned, the timing of release remains unclear. In summary, LSI delivered a solid Q2 in 2026, and we remain encouraged by the level of activity in the majority of key vertical markets. Work to market the value of our LSI solution set is ongoing, and we expect to generate growth in Q3 and the second half of the fiscal year. I'll now turn the call back to the moderator for the question and answer session. Operator: Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press 1 on your telephone keypad. One moment while we poll for questions. Our first question is from Aaron Spychalla with Craig Hallum. Aaron Michael Spychalla: Yes. Good morning, Jim and Jim. Thanks for taking the questions. Maybe first on refueling in C store. You talked about onboarding multiple projects given some more targeted sales initiatives. So it sounds like a little bit more consistent growth is expected there. Can you just maybe help frame that opportunity a little bit for us more on what that looks like and just, you know, some of those initiatives? James Clark: Yes. Aaron, it's Jim Clark. Thanks for the question. I think that the word I'd use is steady. I can think about this call last year, this time, and we were looking at a project that we knew in the refueling sector was gonna run out into fiscal year 2026, and that has proven true. Right now, I would say we have a number of those projects, smaller in scale, but the same kind of makeup where we have received the order, we're looking for the releases, and we've got a nice path in front of us gonna bring us through the remainder of '26 and into '27. So I can't give specific color on any one particular project. They're all a little bit different, but I would say they're geographically spread, both internationally and domestically. The business is healthy in both its content and its pace. James Galeese: Yes, Aaron. Jim G. here. I'll just add on to Jim's comments that we have this very strong foundation with our large core, repeatable customers that we've done business with multiple cycles for years. Some of these mid-sized customers indicate two things. Number one, the health of the vertical, the level of activity going on there, and secondly, it's a combination of having done business with some of these customers before, but several of them are new, and some of those are actually non-domestic entities. It is an opportunity for us to further develop relationships and build on this foundation that we have. It sends a positive signal about the health of the vertical. Aaron Michael Spychalla: Yeah, that's helpful. Thanks. And then maybe on Mexico, good commentary on activity levels there. Can you just talk about some of the market drivers you noted elevated demand into FY '27? Maybe just at what level has that business been for you, and where can it get to if we look out into FY '27? James Clark: You know, I think that, in general, relatively conservative. We look the best we can when we start to forecast out six, nine, twelve, or eighteen months. It gets difficult for us, but I'll comment on this: if you look at that market in general, and it's just one of the markets, right? I don't want to get overly focused on c-store because we've got grocery in there, we've got QSR, we've got casual dining that I just talked about today. We've got auto, we've got a number of other segments. We talk a lot about grocery and C store, but they are not our only verticals, and I feel good about the momentum in all of them right now, to tell you the truth. What we're seeing is a competitive environment that's accelerating. If you look at companies like Wawa's, Sheetz, Casey's, and conversations around Circle K and 7-Eleven, it says a lot in that particular vertical about the pace of that industry, the competitive forces that have come to play, and new construction is driving remodel. Remodel is driving remodel. And this pace to continue to refresh their location, refresh the aesthetics of the location, the capabilities both in food services and other services, it bodes really well for us. We see this going on for many years, and that's just within that vertical. We think the things that returned to normal have a nice upward curve to them. We believe that the competitive forces in grocery also have the same dynamics we talk about in c-store, which are competitors raising the game, and the foundation in those industries raising their game along with it. That bodes very well for us. Someone asked me just the other day to recap new construction versus remodel. We love new construction, but it's a smaller component, 20, 80, 20. It's 80% remodel. That remodel is on a nice curve where it's trending kind of five year remodels right now. People are investing in those stores and putting money in them to be competitive with all these new starts and the changing environment. Aaron Michael Spychalla: Okay, that's helpful. And maybe on the non-U.S. or the Mexico component, just how does that potentially look as we move out, like, pipeline and just maybe what that business can become for you? James Clark: Yeah. I think that basically, Mexico, all the chaos, the global chaos of trade and duties and immigration caused a lot of question marks over heads in Mexico. I think a lot of that has normalized now, and folks are ready to get back to their original plans. I would argue that we're far behind based on their plans, and now it's just a matter of how much effort they start and try to go on their plan from day one or start and try to catch up with some of the things that were in arrears. That will materialize over the summer, and we'll have a better vision on that. James Galeese: And Aaron, I would just add that the deregulation of the external retail or environment's been a nice win for LSI. It's had its ebbs and flows and probably will continue to have some ebbs and flows, but one thing is certain. Our partners, oil company partners who entered Mexico, it truly reflects that we are partners with them. So it's not a supplier relationship. We bring some experiences to them as they enter and grow in that market, and vice versa. Right now, that activity is on an upswing, and in the intermediate term, we see that upswing as positive to continue. James Clark: And we're in the second inning on that, by the way. To even say we've scratched the surface would be an overstatement. Aaron Michael Spychalla: Okay. Yeah. Understood. And then maybe just one on EMI, the integration. Can you just talk about where margins stand today as we get closer to that two-year mark? Talk about some of the operational initiatives there and maybe more broadly across the business as well. James Clark: Well, first of all, we love EMI, we love the whole team, and it fit in well. I think we've talked about this before, but when we look at M&A, we don't just look at the financials. We look at culture and everything else associated with the business as much as we look at any element. I want to underline the culture part. What I usually say is we look at the operational efficiency, the sales synergies, the balance sheet with as much weight as we look at culture. Our thinking behind that from an M&A perspective is if we're a square and they're a triangle, that takes a lot of work to kind of get them into our company and get them operating in the same rhythm. They demonstrated, the people there and their culture, are very close to LSI's culture. So it was a real win-win together, just like JSI was, just like Canada's Best is. We've talked about it before. They've had better than 200 bps of improvement in their margin, and we're continuing on that. I think that for us to reach, to get them up to that 10.5 and better, we probably still got a full year left in that journey, but I'm very pleased with the progress. Aaron Michael Spychalla: Understood. Thanks for the color. I'll turn it over. Operator: Okay. Our next question is from Christopher Glynn with Oppenheimer and Company. James Galeese: Thanks. Good morning, Jim. You know, wanted to go into your comment about the premium food services, get a better picture of what that entails. And I had a couple of other opportunities in mind. I don't know if they fit into premium food services or other, but how do you look at, like, the campus meal plan infrastructures and maybe hotel buffets? James Clark: Yes. So Chris, thanks for the question. I wanted to kind of highlight what we're going to just kind of moniker as premium food services, and it was really to delineate and differentiate between QSR. We've always had a very strong position in QSR. We remain in that. We see a lot of growth opportunities, particularly on our display solutions side, and across the gamut—our digital menu board, our refrigerated products, our food-grade countertops, all of that. We love QSR. But we've always had a spot in this premium food services, and I want to break it up into two pieces. One, we'll call casual dining. Those are restaurants that are, you know, think about waiter-waitress service, a restaurant that you're gonna come in, typically a chain, and some of them are larger, some of them are smaller. But the numbers tend to be smaller than QSR, but the investment inside the store is measurably bigger. Right? So we were just looking at a project last week that's gonna tip over a million dollars just for this restaurant interior. We have steady business in that, and there are indications that it's improving. On the campus side and on the food services side, particularly related to refrigeration, we have been making inroads there. We sat down just over two years ago to double our effort there. We have a steady business, but we don't have the volume that I think we deserve. And they've been working across EMI and across JS. They've been working very hard to put themselves in those spots. The difference between our core business, where we have multiple projects that span across multiple years, when we get into this premium food services side, a campus for a college, cafeteria plans, these casual dining restaurants, hospitality, the number of locations tends to be smaller. If we get a project, a lot of times it's a project of one, or maybe a regional project of five or twelve or something like that. But the scale of the project is much bigger—10, 20 times the size of our smaller projects. Same kind of development time, but we think that our spot is unique to their demands because we're able to come in and truly be a one-stop-shop, from refrigeration to countertops to steel, to lighting, to graphics, to millwork. It's a nice fit, and I think that the work we're doing in these other sectors has created more visibility for us and more credibility. So we come in much more credible, much more recognized, and I think we're starting to see the beginning of that as a viable market for us, one that we can continue to grow exponentially. Christopher Glynn: Yeah. Thanks. Seems like campus could be a nice-sized vertical at some point. And then you've talked about the three acquisitions today and the one-point integrated team. Appreciate that explanation. Messaging is really well packaged, and obviously suggests the opportunity to continue to do the appropriate consolidation. So I was just curious about how you think about what might be an appropriate leverage ratio range for the right kind of deal? James Clark: When we're talking M&A, what do we look at for multiples? Is that what you were saying? Or you were talking about leverage? Christopher Glynn: No. I was talking about your balance sheet. James Clark: Yeah. We've talked about this before. I mean, certainly anything below three, we're comfortable with, and we sleep even better when it's below two. Right now, we're at 0.4. We've had a demonstrated history of using our debt revolver, using debt inside the company to go and make acquisitions and then quickly put ourselves into a leverage ratio where we're comfortable. But generally, we want to be, certainly below three. If we had something extraordinary, we always talk about it in terms of incremental or exponential. Right? So incremental is something we do within our debt revolver, and it's, you know, 50, 80, 100, 125 million maybe. We're very much there. And then we look at exponential, which might be something that pushes us into the threes. I can't see a scenario where the first number wouldn't start any greater than a three. But, yeah, that would be exponential, and we're always on the look for that. We just haven't found the right fit for us at this point. James Galeese: Yeah. Chris, you know, we feel very strong about our cash flow generation. As you saw, we had an excellent cash flow quarter. We're on pace now for our fourth consecutive year of cash flow exceeding free cash flow exceeding $30 million. So we're comfortable at looking at M&A transactions of sizes and then the ability to bring that leverage ratio down pretty quickly given our cash flow generation capabilities. Operator: Thank you, guys. Our next question is from Alex Rygiel with Texas Capital. Alex Rygiel: Thank you. Good morning, everyone. Very nice quarter. First question here, could you give us an update on the Canada Best acquisition integration activities and the traction, in particular, on entering the banking vertical in the U.S.? James Clark: So Alex, thanks for the question. Canada's Best has worked out very well for us. Again, I just talked about it a minute ago about culture, and they were just another good fit. I couldn't underline that enough, that we look at the balance sheet, but we look at culture with as much diligence and as much focus as we look at anything else in the business. These guys have been great. They hustle, they are proud and energized to be part of LSI and part of a bigger team. But I gotta tell you, they're true entrepreneurs. The whole team up there, they look for opportunities. They are more emboldened with the financial strength of LSI and the capabilities. I didn't talk about this specifically, but JSI has a facility up there in Collingwood. Our Canada's Best facility is just outside of Toronto. We're in the process right now of integrating those two, making them a stronger Canadian operation under one umbrella. So it has worked out very well for us. We have begun to talk to retail bank environments here in the U.S. These projects typically, when we're talking about hundreds or thousands of sites, it's not unusual for the gestation period to be twelve, eighteen, or twenty-four months for us to get involved in a large project. I can't say we've had any meaningful wins yet, but we're investing time. They will have a spot at our sales meeting next week to talk about the markets they're in, the diversity, and how they're addressing those markets. We have teams collaborating on that. We're hopeful we're able to talk about retail banking as another top five, top 10 market for us, within the next twelve months. So, in summary, activity started. We've had some small wins, and we're looking to push that forward. Alex Rygiel: And then secondly, more broadly on price increases. I believe your last price increase might have been around March. Can you talk to us if there have been any recent price increases or if there's a need for price increases given tariff implications or other raw material cost inflation? James Clark: Yes. When you look at the two segments, Display Solutions is minimally impacted by tariffs. I'm not giving specific numbers, but I would broadly say no more than 10% or 15% of any material or any product we use in display solutions has been impacted by tariffs. Lighting is a little bit more because of the sourcing locations on some key components and things like that. But in terms of pricing, we make price adjustments now as opposed to price changes. Some categories and products are more susceptible, and others are more stable. We're always looking for the opportunity. We're disciplined in pricing, and we respect fairness. We are market competitive and make it difficult for others to breach. Pricing is one of them, but we're disciplined. We don't want to overstep our bounds and bring different competitive forces into our customer environment. We are price disciplined and focused on it. Most of what we're doing now is price adjustments as opposed to blanket price changes. James Galeese: Yeah, just to reinforce Jim's comments. We are principally a project-based business. Given that, it gives us the opportunity, on a regular basis, to examine pricing and make sure we are aligned with what's going on with our cost structure, particularly our material input costs. Our team does an excellent job of maintaining current cost. When making project quotes, we are accurate and make pricing decisions that optimize our margin management. James Clark: And I will just add on the closing comment. We always reserve the right for price review. Even when we win an award, have a three-year project, we are not locking ourselves in on pricing for three years. We have good relationships with our customers. We're upfront about negotiations and project costs. That discipline around price goes both ways. We want to ensure we're good stewards for LSI and we want to ensure we're good partners for our customers. Alex Rygiel: And then lastly, you talked a little bit about some operational improvement opportunities. Are there any notable CapEx needs associated with that over the next twelve months? James Clark: Nothing notable. Our CapEx is relatively small. We don't see anything material impacting that, at least in the foreseeable future. But I will say, not related to that question but not specific to spending, we are looking for these opportunities. We always talked a few years back about building a better company before we built a bigger company. We've built that better company, we've built a bigger company. Now we're going back and making those improvements and doing it in respectful ways for the people within our company, for our customers, to ensure we're not doing anything disruptive. We are after all of those improvements and consolidation and rationalization, and all of the opportunities are hidden in it. James Galeese: You know, Alex, I would just broaden your comment that it's not just about capital spend but also about investment. We invest in multiple ways, not just CapEx, like looking at our facilities footprints, our talent structure, new product introductions, development costs, etcetera. We are aggressive in having our team put forth proposals to us in all those categories. We invest accordingly, and I think those investments are showing up in some performance areas across our two reportable segments. Operator: Very helpful. Thank you. Our next question is from George Gianarikos with Canaccord Genuity. George Gianarikos: Hi. Thank you for taking my questions. Maybe to focus first on your statement here in the press release that you expect above-market growth for the year. Can you sort of talk a little bit about the competitive environment and what you're seeing there that gives you the conviction you can grow faster than the competition? Thank you. James Clark: Yes, good morning, George, and thanks for the call. I think we hit on it a little bit earlier, and I appreciate bringing it up again. We think there's a lot of dynamics going on in the spaces we're playing in. You know, we purposely, if you remember the whole story of how we constructed our first plan and then the fast-forward plan, it was about narrowing the aperture and looking for markets where we thought we could make an impact and differentiate ourselves. But the other component, the other leg of the stool, was identifying those markets with some type of disruption for long-term growth, which we define as five or ten years. I underline that new entrants in the convenience store space are very aggressive, they're committed to the customer environment in those stores, aligning well with what we're delivering. The grocery market, the work and investment they're putting in for shopper experience, branding, and customer experience, it's key. Lighting plays a big role in this. But our entry has been Display Solutions, which gets us in the door. The combination of products, the uniformity of it, our ability to deliver, our services component, I think it puts us in a category of one. I feel like we have the opportunity to not only win those projects but accelerate our win rate with those projects. George Gianarikos: Thank you. And maybe just one last question for me. Focusing on the M&A opportunities, that you've been focusing on and have executed on, I'm curious as to what the return dynamics look like with the bump up in rates here that we've seen and your willingness and desire to use debt as a way to finance them. What has that done to the pipeline and the available pool of acquisitions in the marketplace? Thank you. James Clark: Yes, I don't want to poke the bear here, but obviously, I don't like that the rates are higher. But I do feel like there's been a leveling effect, particularly regarding private equity. The multiples are more realistic, and the conversations are more business-oriented. I don't feel there's as much of the fever pace as there was a couple of years ago. Deals were just getting done sometimes, one, two, three turns higher multiple than we would even consider. So even with higher rates, the environment’s better for strategic acquirers like us. It just comes down to the selection process. We're picky buyers, right? I talked about it a couple times on the call today. It can't just be the company performance or the products. The culture has to be there. We don't want to go in and try to rework anyone or fight an opposing or different culture. It doesn't mean theirs isn't good, but ours is better. We want to have similar thoughts, goals, and tools. It makes it trickier because we are so selective. But, to be completely honest, the rates aren't that bad as we look at them. And I do think they have helped turn conversations more realistic and more business-oriented. I wouldn't mind lower rates, don't get me wrong, but I feel better in this environment than I did when it was free money. George Gianarikos: Thank you so much. James Clark: Thank you, George. Operator: Our next question is from Sameer Joshi with H.C. Wainwright. Sameer Joshi: Hey, good morning, Jim and Jim. Thanks for taking my question. Congratulations on a better than expected quarter. Really good performance in the Display segment here. Most of the questions were answered already, but just digging a little deeper into the implications of meaningful traction in the casual dining and the premium fast food services, where there are large projects. I think you mentioned the timing is similar, so that is good. But in terms of visibility and profitability, how does it compare with QSR? James Clark: First of all, Sameer, thank you for the question. Very good to hear your voice. I was hesitant to even bring up casual dining because when you look at QSR, typically, the projects we're involved in are multi-site, hundreds and hundreds of sites. And when we talk about them, we talk about a project award, and a project deployment or release schedule tends to go on for six months or a year. It's much easier for us to get the visibility and talk about it. But at the same token, I felt like we were underselling the work we were doing, particularly because we see the real cross-selling happening more in this casual dining space more quickly, I should say. And I wanted to draw attention to it. The casual dining space is going to be counted in the dozens, as opposed to the hundreds. The project sizes are going to be much larger, and they tend to be larger. The combination of goods and services we offer tends to be much bigger. I would just say it's a work in progress, developing and picking up speed. If you give us two or three more quarters to talk about it, I'll have more visibility and maybe a stronger story to tell. But we've always been in this space. I don't want anybody to think it's new or that it represents a significant turn. But I did want to bring it up because I just feel momentum building in it. The project sizes are much bigger, which I think reflects on our cross-selling opportunity. And just in general, I think we see some more accelerated market activity right now, which could end tomorrow with one bad quarter of sales in that casual dining spot. But right now, looking ahead for the rest of 2026 even though it's just January, I feel pretty good about it. Sameer Joshi: Thanks for that color. Bringing this out gives us better insight into the inner workings of the company. Thanks for that. And then just one immediate question. I know Q3, the fiscal Q3, is historically a low quarter, especially in the Display segment. Are things any different for the current year fiscal third quarter? James Clark: Well, I'm not going to hide the fact that I said it in my comments. I’m enthusiastic about what Q3 could be, but I'm moderate in the sense that I think it's going to track similar to our other Q3s. On a comparative to any other quarter, Q3 is always our toughest. But on a comparable basis to prior year, I have very little doubt we will outperform prior year. How much we'll do that? I’d like to say that we have opportunities. I feel good about Q3. But if it’s Q3 and bleeds into Q4 or is more moderated over Q3 or Q4, I can't tell right now. But I feel good. Sameer Joshi: That's fine. And that's good to hear. Thanks a lot for taking my questions. James Clark: You're welcome. Thank you. Operator: There are no further questions at this time. I'd like to hand the floor back over to Jim Clark, President and CEO, for any closing remarks. James Clark: I'd just like to say that we're proud of the accomplishment of the team in Q2. Myself and Jim are two people out of 2,000 that are here. We're very happy with the work they're doing, we're very happy with the confidence our customers have in us, and we're encouraged by what we see in front of us. That's a good quarter, and we're looking for even better ones in the future. Thank you for your time and attention and your interest in LSI Industries Inc. Operator: This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.
Operator: Thank you for standing by. Welcome to NovaGold Resources Inc.'s 2025 Year-End Report Conference Call and Webcast. As a reminder, all participants are in listen-only mode. The conference is being recorded. After the presentation, there will be an opportunity to ask questions. Webcast viewers may submit questions through the text box in the lower right corner of the webcast frame. I would now like to turn the conference over to Melanie Hennessey, Vice President, Corporate Communications. Please go ahead. Melanie Hennessey: Thank you, Ayesha. Good morning, everyone. We are pleased that you have joined us for NovaGold Resources Inc.'s 2025 Year-End Webcast and conference call and also for an update on the Donlin Gold project. On today's call, we have NovaGold Resources Inc.'s chairman, Doctor Thomas Kaplan, president and CEO, Greg Lang, and Peter Adamek, NovaGold Resources Inc.'s vice president and CFO. At the end of the webcast, we will take questions by phone. Additionally, we will respond to questions received by email. I would like to remind you, as stated on slide three, any statements made today may contain forward-looking information, such as projections and goals, which are likely to involve risks detailed in our various EDGAR and SEDAR filings and forward-looking disclaimers that are included in this presentation. With that, I will now turn the presentation over to Doctor Kaplan. Thomas Kaplan: Thank you very much, Melanie. When we start on slide four, I would just like to point out something which in this era of volatility and resource nationalism, it is important to understand that NovaGold Resources Inc. and our partners at Paulson are building the path to what will be America's largest single gold mine. That's an extraordinary statement. And candidly, one that would have seemed to many people a year ago something that would be very hard to imagine. And yet here we are at a perfect time to be building America's gold mine. If we go to slide five, I would like to speak to the most important event that took place last year. And that was the transaction that has already shown itself to be catalytic. And yet, on the other hand, for reasons which I will state, I believe that we are really in just the first inning of the revaluation of NovaGold Resources Inc. And the reason is simple. For the first time, NovaGold Resources Inc. is perfectly aligned with its partner. People used to ask me, Tom, you own gold assets, silver assets, and you never joined the public boards, why this one? And my answer to that is because I enjoy it. I love working with the people, and by temperament, I'm interested in something, I tend to go all in. My interest in NovaGold Resources Inc. has been metaphysical. From the time that I first saw it in the public markets to the time when on 12/31/2008, Igor Levantal negotiated an agreement that effectively had us come in as the savior of NovaGold Resources Inc., which was going to go out of business. It had a lot of problems. We turned them around. But along the way, our first shareholder has become something of an angel. And that's John Paulson. He was the first investor in NovaGold Resources Inc. after the Electrum Group took it over. And it was a fantastic journey, as some of you will read Greg Lang's own story of how he came to NovaGold Resources Inc., when John sent his analysts to see whether I could possibly be right, when I posited that we think it's possible that NovaGold Resources Inc. just on the 5% of the land package that's been explored, is a pure play on the next 80 to 100 million ounces of course, he found that that was highly improbable. He sent his analysts to visit. They came back. He called me. And he said, do you wanna do? And I said, I'd like a $100 million. He said, done. And I said, what changed? And he said, our analyst came back, we can see what you see. Congratulations. Up until about 2020, I think I can say that it really was a lot of fun. And then, unfortunately, we had some glitches. I'll get to that in a moment. But suffice to say, that since John Paulson took the extraordinary step of investing $800 million personally to take a 40% stake in Donlin, the market has understood that this may well have been the best single buy in the gold mining space, since Barrick itself bought Goldstrike which was the company maker for that company and certainly one of them as well for Franco Nevada. The market reception that we've had from a low of $2.50 early last year to well, where we are today, certainly shows that people understand not just the quality of the asset, but that we are due for a major, major revaluation which, as far as we're concerned, hasn't really even taken place yet. Next slide, please. On slide six, what you can see is a very interesting story. We were partners for a very, very long time. The Barrick partnership preexisted my coming into the story in 2008 to 2009. But from the time that we applied our team approach, NovaGold Resources Inc. was one of the premier rated assets in the GDXJ. And we believe that it has the potential to be that once again, maybe the premier asset in the play. And what you see is a very, very nice progression up until about 2020 when there was a change in management at Barrick. Well, the next several years were not as fun as the previous ones. However, by the time that last year or the year before rolled around, it was very clear that our partner's agenda was not going to work. And, fortunately, Mark, Bristow, and I were able to reach an agreement to buy Barrick's half of Donlin. With John Paulson buying 80% of that stake and NovaGold Resources Inc. increasing its stake from 50 to 60%, we went from having years of nonalignment with our partner whose eyes had wandered very much to copper, and in some very interesting jurisdictions. To being in a position where we could once again reboot and take us back to where we were. Well, if you look at this chart, we were a $12 stock. In 2020. So many things have happened since then. And I would argue and I think John Paulson would heartily agree, that based on where we should be, where we would have been without the delay, we would be multiples higher than where we are today. One thing I can tell you is that I will be working with management and also with the Paulson Group, for us to regain that lost ground and multiply where we should be. Because to my mind, that lost ground took place in sub $2,000 gold. And we are in a completely different place. And one of the reasons why I am so confident about that is that we are literally in the right place. People talk about world class but as somebody who really made his fortunes in countries like Bolivia, Zimbabwe, South Africa. I sold Kibali. To Mark Bristow. I really do believe that in order to be able to get the premium rating, you have to be in a place where people can sleep well at night, where when they go to sleep, they know that when they wake up in the morning, what they thought they owned they still own. In other words, you want all the leverage to an underlying thesis but in a jurisdiction that will allow you to keep the fruits of that leverage. It really doesn't get any better than Alaska. So for all of those reasons, I believe that we are really just in the first inning. We haven't really even taken back to where we should be at $2,000 gold. Next slide. Now let me talk a bit about the advantage that we have from being partners with John Paulson and his team. They are proven talents in the mining industry at a time when very few generalists have the kind of expertise that they have shown not just in picking the right assets, but also where necessary becoming activists. John Paulson, of course, is very famous for having been perhaps the greatest benefit of identifying the macro trade that coincided with the financial crisis. And as George Soros put it at the time, he not only identified the trade, identified the very, very best vehicles, be able to make from 10 to 100 times on the investments for his clients. I am very proud to say that John who has been an investor in NovaGold Resources Inc. since 2010, it's our longest standing and most active shareholder. But the fact that John, who is as I've been, a very, very well known public advocate for gold ownership. Has decided to make such an investment. He's basically said the macros, I know. I'm bullish on gold. I want more exposure to it. And as far as I'm concerned, Donlin is the single best way for me to play it. In other words, the same thesis that accompanied his views on how to be able to deal with subprime and the housing crisis are embodied in the stake that he has taken in Donlin. He didn't have to do it. He saw an opportunity. And, again, I really do believe and all credit to him, that this will be the single savviest investment having been made in the gold space in many, many decades. One other factor that I'd like to add is not only does Paulson bring acumen, and strategic depth to the project, but also they have extraordinary access to financing that, not necessarily my frame of reference. So in Electrum, we have several sovereign wealth funds, which are the only outside owners in what is essentially a family and employee owned business. And my strong suit is in the sovereign wealth funds. John's is in The United States, and as we've seen with the success of Perpetua, he knows how to be able to bring capital to an equation to be able to lower the cost of capital. And there are many, many upsides in the financing opportunities which we can look towards. There are a number of countries including Japan, Korea, The Emirates, Saudi Arabia, which really have pledged to invest well over a trillion dollars in The United States. I would venture to say that the largest gold mine in The United States on the Pacific Coast might very well be attractive to countries like Japan, where you have very, very strong gold demand for a country like Korea. Where the central banks the central bank has said that they're going to resume gold purchases. Well, Japan has pledged $550 billion, and last I saw, Korea, $350 billion. And then, of course, you have the Emiratis, who are partners with me, Saudis, who are partners with me. It's a whole different world to be able to finance the largest gold mine in The United States. Paulson brings advantages to us in that respect. And there are many, many upsides that could take place. Possibly, we could merge. And on a 100% basis, be a one and a half million ounce gold producer. Whatever is in the interest of NovaGold Resources Inc., we will always consider and most important take into consideration our shareholders who, have been fantastic guides. But the point is there are upside cases on financing stories that really didn't exist until a year ago. So, again, watch this space. Now I'd like to go into something which on slide eight may look like a little bit of self aggrandizement, there are others who've been bullish on gold, not as many who have basically, you know, put all of their wealth into gold and silver mining assets. You know, we are called Electrum. Because it is a naturally occurring ally of alloy of gold and silver. And we have been all in. And, obviously, what's transpired over the last year or two has been wonderful. But when I go out on the road, because I have been, gold's evangelist or one of them for a number of years, I'm very often asked where I see gold going. So if I can take a step back so that it gives me the opportunity without selective or selective hypothesizing for years. I expressed that I thought the first equilibrium level for gold would be between $3,000 to $5,000. I expressed this publicly as early as when gold was $550. And that, of course, took a lot of people by surprise. I expressed I was going to sell. What I then had is the fastest growing privately held natural gas producer in The United States. We sold that in 2007 to pivot entirely into the one money that I believed in. And still believe in. Gold one point o, has been great. Candidly. Crypto and calling it gold two point o has expanded gold one point o's reach. To so many places that I normally don't even have to speak to most people about why they should own gold. I just tell them where I think it's going. In May 2019, I did a Bloomberg peer to peer interview with David Rubenstein, that night. Gold was at about $1,900, actually, that's not true. It was $1,280. And David asked me, so you see it going past $1,900? Would was a previous high? And I told him, I believe that when it goes past $1,900, we're talking about $3,000 to $5,000. But I also added this, which was, if not a lot higher, depending on macro circumstances that today seem dim. But which I can't really quantify. Now at that time, I was already formulating a different thesis, on where I saw gold going. A lot changed. Since the early two thousands, and my thesis had changed, but I really didn't think it was prudent for me to say that. Publicly, you know, it was already enough when gold was at $1,280 to say I see it going from $3,000 to $5,000. But now I wanna walk you through my thesis which is born out of the fact that I'm no more a gold bug than I was a silver bug. A hydrocarbon bug, a platinum bug, or any other insect. It's just that this is my belief, and you can take it for whatever it's worth. On slide nine, I think it's very clear now that gold is here to stay. It has been revitalized as an asset class. I'm not going to spend too much time on the things that make it attractive. Gold has been thriving whether you have inflation fears, deflation fears, whether you require a safe haven or you don't, the gold industry itself has dwindling discovery rates or grades you know, are now plunging to below a gram. Central buyers have been have been buying upset for years. The central banks are not dumb money. They actually know better the lack of credibility of so much of the assets that they own on their balance sheet that by buying gold as an act of choice, an act of volition, they are doing as much as anyone to be able to show you that you should own it, and, clearly, everyone who's been buying gold as a central banker, and they're not paid two and twenty to take bold decisions is obviously looking like a genius. That also goes with the other aspect that I've always said, since gold was at $500, which is whenever the Indians and the Chinese are competing over a scarce asset you must want to own it. So you have Chinese and Indian demand, you have central bank demand, and you now have new investors who are coming in to compete with the official sector. This environment is perfect. I should add that I never used to resort to talking about the fear factors, in, pushing for why people should own gold. I spoke about economics one zero one. Supply and demand, why one wants to have a money that can't be debased by fiat, you know, a lot of good logical factors. But I didn't go into the four horsemen of the apocalypse or any of the things that sometimes people veer into. When they talk about gold. However, after 2022, and the combination both of the real displacement in the world order the Russian invasion of Ukraine and the displacement of financial order with, the freezing of Russian assets outside of Russia, that really was a game changer. It was a game changer for a lot of central banks. It was a game changer for a lot of investors who want to preserve their capital. Both as a safe haven and also because gold is something that when you own it, it doesn't represent someone it doesn't represent someone else's liability to repay you. So all of these things which seemed a little bit esoteric all of a sudden came into sharp relief. And you see gold taking off. Well, I do believe this is the early stage of a complete revaluation. On slide, 10, this is where I believe, we're going to see gold going. Now that chart is a chart of the Dow Jones Industrial Average since 1975. Here's what happened in the Dow. Up until about 1980, essentially, thirty years, the Dow was in a trading range. And if it came to a thousand or peaked above it, you know, smart people said, well, you know, sell it. It's at the top of the trading range, and that worked. For a while. The problem is that reversals essentially mean that at some point, you can actually say this time it's different. Otherwise, it's not a reversal. So normally when people hear this time it's different, they think, uh-huh. Well, that's a bubble about the burst. Very often, it is. But sometimes it's just representing new facts. And this is what happened with the Dow. Now I happen to remember, I was working for someone in London in '87 while I was doing my PhD. And I remember the crash of eighty seven. I'd like you to try to see if you can see it on this chart. A crash which took the Dow down from the 2 thousands to think, $161,700. It seemed like the sky was falling in. You cannot see it. It was a downdraft essentially in the passage of time meant to wipe out weak hands as it started to make its climb to 45,000. I don't know where the goal needs an 87 moment. If it happens, you just have to buy it and buy it and buy it. It could be brief. It could be short, and it may not even happen at all. Because the reality is that the fundamentals for gold are so strong and literally, get reinforced almost with every tweet. It is reinforced on a weekly, if not daily, basis, why everyone should have gold in their portfolio. Problem is there really isn't enough gold to go around. Except at much, much higher equilibrium prices. So with the $3,000 to $5,000, area having been met, by the way, people sometimes say, why 3 to 5? I say, because it could go to 5, and then correct down to 3, before going past 5, to 2 or 20. In any event, I'd like to cite Ray Dalio, who is someone that I deeply, deeply respect. Ray is extraordinary, and if there's a public service announcement, read his books. He's the best what I would say, market related applied historian in the world today. So at a certain point, not long ago, Ray said gold is now the second largest reserve currency behind the U. S. Dollar. To understand why, you need to look at the history of fiat currencies like the dollar and hard currencies like gold. The way I see it, we're currently facing a classic currency devaluation to what we saw in the nineteen seventies or in the nineteen thirties. In both of those cases, fiat currencies around the world all went down together and also went down in relationship to hard currencies like gold. Up until about a year or two ago, for decades, when people asked me which currencies should I own, I said, on the US dollar, because although I do believe that all paper currencies are toilet tissue, the US dollar is double ply. It has factors that make it better than its other paper currency comparables. Not that I believe in it, but if you need a paper currency, the dollar. Of course, there's always room for the Swiss franc and a couple of other esoteric things, but you get the idea. The dollar and gold. And I said, for me, it's all about gold, not the dollar. But for most investors, you know, they can't be as all in as a private investor like myself. Suffice to say that The US is doing everything it can to debase the cornerstones of its being not just first among equals, but the superpower. Those chickens will come home to roost, and I'm sorry to see it, The United States obviously has factors. That make it unique. It has the ability to project power, all over the world in a way that until the Chinese catch up, is unique to itself. It well, it had a multilateral alliance system that the Chinese could not compete with and therefore was, quote, the boss. In return, for this leadership, people were willing to buy the dollar despite America's bipartisan commitment to spending so much more money than it has, and they were willing to go along with the convenient fiction, which is to say, if you defend us, you are the economic superpower, and that's a trade we're willing to make. It was a trade off. Well, we are starting to witness shifts in that which I'm not saying are going to immediately displace the dollar, but for a variety of reasons, you will see not only adversaries now, but friends look to be able to have more financial autonomy. One thing, however, I do have to say for those who are buying gold because they think that the dollar will weaken, that's not necessarily true. I remember when I sold my energy company, we got a lot of money. I remember saying, George Soros, said that the existential decision for any investors in which currency to denominate themselves. I chose gold, but also I had other paper currencies. The dollar euro at that time in November 2007, was about $1.47. The dollar has strengthened to $1.15, let's say, and gold has gone from $600 to nearly $5,000. In other words, you do not need a weaker dollar. To buy gold. Does it help? Yes. But those who shuck off that mythology will do a lot better. I knew that the gold in the dollar could go up in tandem, so, really, when you're looking at that analysis, don't make that the central pivot, in my opinion. If it helps the analysis, no problem. But there are a lot of myths about gold which have been dispelled. That now people really do understand. You didn't need strong oil. When I sold my energy company, oil was at a $120 a barrel. It's half of that gold was at $600. Are a lot of myths. The point is this is a bull market. And you're going to play it if you're not in it. And you're going to be increasing your allocation as other people come into it for the first time. The mining equities are tremendously undervalued, and the reason for that is after so many years of dismissing gold as a barbarous relic, people almost can't believe what they're seeing. They can't believe it's it's gold really going to be $3,000, $4,000, $5,000? Well, if it is, the gold miners are truly, truly value plays. Something to consider. If I move to slide 11, very simply put, if you look back over twenty five years, which is not unreasonable since the turn of the century, gold has done a brilliant job as an asset class. As we know that people do like to look back I think people are investors are going to be encouraged more and more to have gold in their portfolio as portfolio diversifiers. Not to mention the other myriad factors owning gold in today's world. Slide 12. So this, for me, has been one of the great reasons why I love Donlin. The leverage to gold the leverage to what we see as 45 million ounces now in all resources. With the potential for that to multiply along strike. You know, the 45 million ounces is only three kilometers of an eight kilometer mineralized belt. Which itself is only 5% of the land package. 95% of Donlin is unexplored. That's going to turn around. We are now, for the first time, systematically going through our land package. We believe that it is possible, although this is a wildly forward looking statement, that the next Donlin could be a Donlin. The chances that there's nothing else big there are very small. Having said that, even if nothing else was there, we do believe that we can see, the existing resource multiply. But assuming never none of that happens, this is the leverage that we have to gold. And it shows NPV fives, which are perfectly fine, and it also shows NPV zeros. And the reason why I say that is because up until the early nineteen nineties, US assets were valued at a 0% discount rate. I believe we're going to get back to that. If you have the right jurisdiction and you have exploration potential, and you have so many of the other attributes that Greg will be describing in just a couple of minutes. I really do believe that we will be closer to the right of the right hand side. But be that as it may, you can clearly see that the beauty of Donlin is that it gives you all the leverage you could possibly want to gold but in a jurisdiction that will allow you to keep it. At Donlin, you can sleep well at night. And be exposed to tremendous good news while being short jurisdiction risk. And so with that, I'm going to hand the baton over to Peter Adamek to talk about our financial results. Thank you. Peter Adamek: Thank you, Tom. Turning to our operating performance on Slide 14, NovaGold Resources Inc. reported a fiscal 2025 fourth quarter net loss of $15.6 million. This represents an increase of $4.7 million from the comparable prior year primarily due to higher site activity at Donlin Gold, and higher general and administrative expenses. NovaGold Resources Inc.'s fourth quarter results also reflect the company's second consecutive quarter with a 60% interest in Donlin Gold. For the full year, NovaGold Resources Inc. reported a net loss of $94.7 million during fiscal 2025, which included a $39.6 million noncash nonrecurring charge for warrants issued as consideration for a backstop commitment in support of the Donlin Gold transaction. Excluding this, one time charge, general and administrative expenses during the fiscal 2025 were largely unchanged from prior year while Donlin Gold expenditures were $9 million higher due to the 2025 field program. On Slide 15, our treasury during fiscal 2025 increased by $13.9 million which left us with $115.1 million at the end of the year. During the year, we closed a public offering and a private placement generating net proceeds of $259.6 million. We also acquired an additional 10% of Donlin Gold for consideration and transaction costs totaling $210.1 million at the start of the 2025. Corporate G and A cash spent during the year increased by $1 million versus prior year and our share of Donlin Gold funding increased by $10.1 million due to increased site activity in 2025 and the company's 10% increase Donlin Gold funding obligation. Moving to Slide 16. As discussed on the previous slide, our treasury sits at a robust $115.1 million at the end of the 2025. Our 2025 cash expenditures of $41.2 million were below our overall 2025 guidance by $800,000 due to slightly lower than anticipated spending on debt spending at Donlin Gold and marginally higher G and A costs at NovaGold Resources Inc. as a result of higher professional fees following the closing of the Donlin Gold transaction. Looking ahead to 2026, our anticipated expenditures for 2026 are approximately $98.5 million which include $78.8 million for NovaGold Resources Inc.'s 60% of Donlin Gold expenditures and $19.7 million for corporate G and A. With that, I will now turn the presentation over to Greg. Greg Lang: 2025 was a very active year at the Donlin site. We completed an 18,000 meter drill program. Throughout this program, the safety record was impeccable, and we hired over 80% of our employees from villages in and around the Donlin Mine Site. The results from this program will be used to enhance our geologic modeling resource conversion, geotechnical drilling to support the designs of the project facilities. We recently updated our technical report for regulatory compliance pending the completion of the feasibility study. This report, more than anything else, really demonstrates the robust nature of the mineralization at Donlin. We're also very active in the communities this year with the renewed progress at the site. Garnered a lot of interest. We hosted many community visits, regulatory visits, as well as additional analyst tours. So a very active year at the site. Our team in Alaska also finalized shared value statements with additional villages bringing the total to 20. We completed a restoration program at Snow Gulch and Henrique Fernandez, one of the Donlin employees, was recognized by his peers for his contributions to this undertaking. Turning to the next slide. What I really wanna highlight here is just to remind everybody, we have completed the federal permitting process, and we have substantially completed the state permitting. We're one of the few projects that is not relying on permitting and the decisions impacting the timing are solely in the hands of the owners. As shown on slide 20, we continue to support the state and federal agencies in defending the permits they have issued. The court rulings to date have validated that the agencies did a thorough job preparing the environmental impact statements and the associated permits. We're continuing to advance the design of our tailings dam and other water retention structures. This work has been submitted the regulatory agents in Alaska, and we expect them to be responding the near future. Our federal permit, turning to the next slide, was remanded for a small additional study by the courts. This requires a supplemental EIS. During the permitting, we evaluated the tailings release. And the court asked that we study additional releases. This work is well advanced. And this supplemental EIS has been incorporated into the fast 41 program. This is a program that creates schedules and deadlines for the agencies to follow. In processing a permit. Doesn't change anything in our designs, but it just focuses the agencies on getting this work done in a timely fashion. My next few slides will talk about why one might consider investing in NovaGold Resources Inc. Yeah. Donlin is you know, it is just simply a unique asset. In terms of its production profile. It will average over a million ounces a year in a mine life of almost three decades. There aren't many mines in the industry of this size anymore. At 40 million ounces, we've got a huge endowment at two and a quarter grams. Know, great grade for an open pit deposit. You know, the exploration potential at Donlin is tremendous. We know the ore body is open ended at strike, at depth, and along the three kilometers of the eight kilometer gold bearing system has only lightly been explored. When the time is right, we will resume exploration on the project. We also know that there's tremendous potential on our land holdings at Donlin. The area of the known mineralization represents about 5% of our land holdings there. You know, Alaska is a great place to do business. They've got a well established tradition of responsible mining and are the second largest gold producer state in The US. Another great factor about Donlin, it is located on private land. Owned by two days native corporations. As I mentioned earlier, our permits are in hand and we're wrapping up the state permitting. We've maintained a great environmental and safety record at our site, and we're committed to responsible mining. You know, the team at NovaGold Resources Inc. has the expertise it takes to bring a project like Donlin into fruition. Moving to the next slide. When you look at the other development projects that are being advanced in the industry, the output of them is less than a half million ounces a year. You know, clearly Donlin would be far and away the largest new gold mine to be built. Its first ten years will produce about 1.3 million ounces a year. Truly in a class of its own. Greatness also a very key attribute at Donlin. The industry grades are approaching a gram per ton. At two and a quarter grams, Donlin is twice that. And it's that grade that gives Donlin very competitive cash costs. And this slide just highlights the potential of long trend. The ACMA and Lewis deposits are less than half of the eight kilometer belt. We've got gold bearing drill holes all up and down the trend, and we will resume exploration when the time is right. You know, this year's drill program included results of over 26 grams per ton demonstrating the quality of the resource and the potential for significant grades when we continue exploring. Moving to the next slide. Were up in Alaska. We've been there for many years. We're very comfortable operating in the state. It's got a great regulatory environment. There is a responsible active mining industry in Alaska. And we're really privileged to be there. When you look at their jurisdictional risks, of other mining jurisdictions, Alaska is third globally on the Fraser Institute index. As I mentioned earlier, we are on private land. Chelista Corporation owns the mineral rights. And TKC owns the surface rights. Both of these entities have been staunch allies and advocates for the project as we navigated the permitting process. We have life of mine agreements in place with both of these entities. Donlin will provide a meaningful impact to these businesses, and they look forward to the economic opportunities that the mine will bring. Another development in Alaska that we're following very closely is the planning to bring gas down from the North Slope into the Cook Inlet. Is being championed by Glenfarm. And they are working to secure funding to advance this. Know, gas resources up in the North Slope have been known for many years. But it was the difficulty getting them to market. Was the challenge. With the administration's new focus on US energy independence, I think the time is getting close. To bring this gas into the Cook Inlet. For use in Alaska as well as the export. Markets. This is very important to us, and I think you might have noticed we have signed a nonbinding letter of intent with Glenfarm, the champion of this pipeline project. The parties will advance discussions on the supply agreement with Glenfarin. As their plans materialize to build the gas pipeline from the North Slope. You know, NovaGold Resources Inc. enjoys strong institutional support. We've been very fortunate have a shareholder base. It's been with us many, many years. The top 10 shareholders represent almost two thirds of our outstanding stock. It's great to have such blue chip investors behind us. We value their support and long term relationships. That have guided us for many, many years. Turning to the next steps at the project and some of the catalysts that'll be coming up. Yeah. Within the next few weeks, we anticipate that we will announce an engineering firm to complete the bankable feasibility study. This work is expected to take about eighteen months and the firm will be certainly well known to many of you that follow the construction activities in the mining industry. We've also hired Frank Arquise. He is the project manager. He brings extensive experience to the project, and we're very fortunate to have a man with his background. We will also be exploring future sources of financing as we advance the feasibility study. Looking ahead, we look forward to updating all of our shareholders and stakeholders on the progress we're making. We'll now open the line for questions. Operator: Thank you. To join the question queue, you may press Webcast viewers may submit questions to the text box in the lower right corner of the webcast frame. The first question comes from Raj Ray with BMO Capital Markets. Please go ahead. Raj Ray: Thank you, operator, and good morning, Doctor Kaplan, Greg, and the NovaGold Resources Inc. team. Have three questions, if I may. The first one is, well, congratulations on getting the non binding LOI signed with the Glenfarm. I know it's early days of negotiations, but is there anything you can share with us with respect to what's the ideal structure of that agreement that NovaGold Resources Inc. would like to have. That's the first. The same question is on your RF for the VFS. That you have sent out to various engineering funds. Look. I know it's there's a lot of good engineering firms, but given the fact that commodity prices across the board are running, you also important to have the best teams within those engineering firms. So as we are starting to talk to them, what's the feeling you're getting about the capacity they have and your ability to have not only the top firm, but also the best team within the firm? And my last question is on the technical report. Report update. It's great to have that very informative. I did see that there's a slight pickup in the strip ratio. I just wanted to get a sense whether some of the geotech drilling you have done, if that's informing that increase in the ratio or if you can share any additional details. Thank you. Greg Lang: Alright, Raj. Well, thank you for joining the call this morning. You know, I think I've could cover all your questions. You know, beginning with the pipeline and our discussions with Glenfarm. You know, it's a clean slate. You know, Glenfarm is quite interested in all aspects of what we're doing. You know, they've expressed interest in building and operating the pipeline for us. And we think that's really a logical piece of the project to carve out. So we're really just, like I said, an open slate. We're discussions will continue. And I would, watch Alaska for the next, month or so and look for announcements on their success in financing the pipeline. And it's important to note that, you know, this is not a new project, and it's already permanent. And it will follow the existing Trans Alaska oil pipeline. Very exciting developments there, and it's great that Donlin has a seat at the table. As their plans advance. You know, on the RFP for the feasibility study, you know, we were very select in the firms that we brought into the bidding process. You know, we only wanted to consider firms that had one experience to take on a project of this scale. And the capacity of people to do it. So we kept the field very narrow and you know, we anticipate releasing that news in the next few weeks. But I think part of the selection process addressed the very issue you talked about, and that was we went with the firm that did have the capacity to take on a big project. And finally, on the technical report, you know, the strip ratio has ticked up a bit, and that's driven, you know, by two factors. I think one, we've taken a put some areas of the pit. We've flattened the slopes a little bit. And we've also taken a little different view of dilution. And, you know, these are areas that we will revisit when we are advancing the model that will support the feasibility study. Raj, did that cover great. Raj Ray: Yes. Yes. That covers all my questions. Thank you very much. And all the best. Pleasure. Operator: The next question comes from Saundaria Iyer with B. Riley Securities. Please go ahead. Saundaria Iyer: Hi, team. Congratulations on the quarter. I just have two questions. One is on the bankable feasibility study. So I'm trying to understand, like, how the current budget that the $78 million that has been you know, budgeted for the upcoming Donlin activities. How that allocated between, like, feasibility work and the ongoing exploration? It's been my my actual question is how do we look at it as a do we look at it as a single year budget, or is it, like, through the feasibility study that's gonna take twelve to eighteen months? Greg Lang: Well, the work the work program at Donlin 2026 will be very active. You know, the bankable feasibility study will obviously be a large component of that. You know, in addition to the bankable feasibility study, we're also in final discussions on firms on several unique parts of the project. For example, these would be the autoclaves. There's some companies out there with deep experience in this processing technology. So we'll have a separate contract for that as well as the gas pipeline and other components of the infrastructure. Those are also included in the Donlin budget for next year. You know, we continue to be very active in the communities and we've increased our budget in the communities to reflect the increased activity as the project is moving forward. Of course, it's getting more and more interest. So we're gonna, you know, really be out in the the villages and throughout the state and in our nation's capital actively talking up the project and keeping everybody informed of our plans. So that's the main components of the Donlin budget. The feasibility study, we've guided. It'll take about eighteen months to complete. And we'll be you know, once we announce the firm that we've selected, we'll update everybody on the schedule. Saundaria Iyer: Thank you. Just one more from me. I mean, there's a lot of potential in the Donlin land package with just like 5% explored so far. So as we move into feasibility and then eventual construction, Nick, how are you guys thinking about advancing that exploration optionality in the near term. Will that be a concurrent event along with the feasibility study? Greg Lang: Well, we will you know, last year, we did a pretty extensive soil sampling program along the known mineralized trend. As I noted earlier, that's just a very small part of our land holdings at Donlin. So we will be, you know, working with our partner developing plans for future exploration. Yeah. But right now, you know, really, it's all hands on deck. Getting the feasibility study kicked off. And once we get that work well underway, we'll turn our attention to the exploration and other matters. But certainly, the potential is vast at Donlin and yeah, we look forward to updating everybody on that work. But I think the immediate potential exists in and around the known ore bodies. So it'll be an exciting time to be exploring it up in Alaska. Saundaria Iyer: Thank you. Thank you, and congratulations. I'll turn it over. Greg Lang: Thank you. Melanie Hennessey: Thank you. We have a few questions coming in from the webcast, and I'll start with a question coming in from Eric Shinseng. Is the tailings design now effectively locked or still at risk of material change? Greg Lang: That's a good question. Let me you know, first off, remind everybody that the tailings dam at Donlin is a downstream rock construction anchored into the bedrock. It's also a fully lined structure and that's really that state of the art. That's the most stable dam being built and the liner is just added protection. So the design of the tailings dam is really not impacted at all. It's finalized, and we've submitted the design packages to the state. We've not don't anticipate any changes at all. Melanie Hennessey: Great. The second question, what are the project economics NPV and IRR that you're targeting as part of the BFS? Greg Lang: I think, you know, that's you know, that will be addressed in, you know, the feasibility study sensitivities. You know, looking at our recent technical report, and I encourage everybody when they have time to to give it a review. You know, the economics at gold price of about $2,100 were, you know, double digit rate of return. And it's you don't have to stretch your imagination, you know, that you know, from 2100 to where we sit today, that's almost better than a twofold increase in price. So I think you know, the economics at much lower gold prices are robust, as you've noted in all of our presentations, we have tremendous leverage to upside. And at the current projects, of course, it's amazing. Cash flow generator. Melanie Hennessey: The next question is for Tom. It's actually more of a statement from Matt Kovacs. Doctor Kaplan, I have been listening to you and NovaGold Resources Inc. for many years. How does it feel to be right and see your predictions and the price of gold coming to fruition? Thomas Kaplan: It's not really a function of satisfaction of being right. Obviously, being right is essential, for the way that we do business. We always start with a macro view, on an underlying commodity or, as I would put it, in the case of precious metals, currencies. And the reason why we start with macros for the good reason that I'm not a mining guy, I've been in the business for thirty three years. And I've surrounded myself with the best of the best geologists, people who've been there and done that, like doctor Larry Buchanan. You know, who's still our chief geologist since 1994. You know, or a Greg Lang and a Richard Williams, who both brought in Cortez and Pueblo Viejo, on time, on budget, when they were at Barrick. If you surround yourself with great people, and you have assets that have superlatives attached to them, you're going to be right. The question is, how long does it take? If I have that kind of conviction, which is some part to his metaphysical certitude, about a thesis like I'd have had with gold and silver. And I have the right vehicle with which to be able to get the greatest leverage to that, especially today, in a jurisdiction that allows you to keep the fruits of the leverage. I can hold forever. I don't get frustrated. So by the time people come around to my point of view, it's not like I feel vindication. It's, well, I'm glad that they came around, and that, you know, offers me the opportunity to reward the people who've been with us with outsized gains. To me, business is personal. I mean, I have multiple passions in life, but, you know, over the last thirty three years, we've only really focused on maybe half a dozen, six, seven, assets. But if you look at our track record, from first investment to exits, the annual track record is into the eighties of percents, that was actually over a 100%, you know, around the time of the financial crisis. But, you know, the last ten years or so have been almost like watching paint dry in the mining industry. But fortunately, you know, the fundamentals always will out. I've never had a doubt about gold. And if I don't have a doubt and by the way, I'm always questioning myself. I'm always saying, have the circumstances changed? In fact, in 2007, when I made that statement at a private equity conference that I was selling my energy company. Fastest growing natural gas producer in North America, to go into gold and silver. And remember, I'm in a petro state. And they said, what is your target? And I said, my first equilibrium level is between three and five thousand. And then the next question was a very, very intelligent one. Which was, what can go wrong with your thesis? You obviously have so much conviction. And I said for the first time in my life, in my career, I can't find how I'm wrong, and that scares me. And for years, I was looking around, you know, for people to challenge me, like, you know, an ancient Greek with a light, you know, Diogenes with a lamp, looking for an honest man. And I was never persuaded out of my position and god only knows or excuse me. Heaven knows there is nothing that has happened either within the realm of gold specifically or the macro circumstances in which we find ourselves that has done anything to dissuade me from my firm beliefs, which are, as you've seen, that gold will do as the Dow has done, in terms of the breadth and long waves and sweep of the bull market, and it may happen much faster than the Dow for reasons that are almost self evident at this point. So it's not really so much about being right, it's about doing the right thing, and candidly, golden because I felt it was the best way to protect my family's wealth. And the fact that we express that through mining companies means that other people can join in if they like what we're doing. But first and foremost, it was out of personal interest. And so being right is not about crowing about it. It's about knowing that we allocated capital properly, for our kids. I hope that answered well. You made a statement. But I hope that that just gave a little bit more context to it. It's not so much about being right. It's about doing the right thing. And that can sometimes seem different. Melanie Hennessey: The final commentary is worth sharing, and I'll just read it. It comes from the line of Jim, Jamison. Mister Lang, Doctor Kaplan, and Mister Paulson, my wife and I have been NovaGold Resources Inc. shareholders and related Trilogy shareholders since 2011. I have been a true believer from the get go. My wife, not so much. Thank you all for saving my marriage. Just kidding. Seriously, thank you for your blood, sweat, and tears, your extraordinary efforts, patience, resilience, and foresight have brought us this far. We can't wait for the next eight innings. Best wishes, Jim. Thomas Kaplan: Thank you, Jim. You made you made you certainly made our week. Greg Lang: Thank you. Yeah. I'm glad it worked out for you. Melanie Hennessey: That ends our Q&A. So back to you, Ayesha. Operator: All right. Well, everybody, thank you. Thomas Kaplan: Thank you, everyone. Thank you. Operator: This brings to a close today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.
Operator: Good day, and thank you for standing by. Welcome to the Independent Bank Corporation Fourth Quarter 2025 Earnings Call. At this time, all participants are in listen-only mode. After the speakers' presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded. I would like to hand the conference over to your first speaker today, Brad Kessel, President and Chief Executive Officer. Please go ahead. Brad Kessel: Good morning, and welcome to today's call. Thank you for joining us for Independent Bank Corporation's conference call and webcast to discuss the company's fourth quarter and full year 2025 results. I am Brad Kessel, President and Chief Executive Officer. And joining me is Gavin Mohr, Executive Vice President and Chief Financial Officer, and Joel Rahn, EVP, Head of Commercial Banking. Before we begin today's call, I would like to direct you to the important information on Page two of our presentation, specifically the cautionary note regarding forward-looking statements. If anyone does not already have a copy of the press release issued by us today, you can access it at the company's website, independentbank.com. The agenda for today's call will include prepared remarks followed by a question and answer session, and then closing remarks. I am pleased to report on our fourth quarter and full year 2025 results as we advance our mission of inspiring financial independence today with tomorrow in mind. Our vision is a future where people approach their finances with confidence, clarity, and the determination to succeed. Our core values of courage, drive, integrity, people focus, and teamwork are the blueprint our employees live by. We strive to be Michigan's most people-focused bank. Independent Bank Corporation reported fourth quarter 2025 net income of $18.6 million or $0.89 per diluted share, versus net income of $18.5 million or $0.87 per diluted share in the prior year period. For the year ended 12/31/2025, the company reported net income of $68.5 million or $3.27 per diluted share compared to net income of $66.8 million or $3.16 per diluted share in 2024. Highlights for the year include an increase in net interest income of $1 million, that's 2.2% over 2025, a net interest margin of 3.62%, that's eight basis points up on a linked quarter basis. A return on average assets and a return on average equity of 1.35% and 14.75% respectively. Net growth in loans of $78 million or 7.4% annualized, that's from 09/30/2025. Net growth in total deposits less brokered deposits of $57.5 million or 4.8% annualized. An increase in tangible common equity ratio to 8.65% and the payment of a $0.26 per share dividend in common stock on 11/14/2025. Our fourth quarter performance marked the culmination of another remarkable year with our organization excelling on all fundamentals. Over the past year, we increased tangible book value by 13.3% and delivered near-record earnings. Meanwhile, our dividend payout ratio was 32% for the year as we continue to recognize the value of returns for our shareholders. During the fourth quarter, we realized continued net interest margin expansion, strong loan growth, and increased non-interest income. In addition, our credit quality metrics remain positive with watch credits and nonperforming assets below historic averages. In anticipation of continued strong earnings, we repurchased shares and executed a tax credit transfer agreement during the fourth quarter which is expected to reduce tax obligations and enhance earnings per share. Looking ahead to 2026, our confidence is bolstered by a robust commercial loan pipeline and our ongoing strategic initiative to attract and integrate talented bankers into our organization. Moving to Page five of our presentation, deposits totaled $4.8 billion at 12/31/2025. An increase of $107.6 million from December 31, 2024. This increase is primarily due to growth in savings and interest-bearing checking reciprocal and time balances that were partially offset by decreases in noninterest-bearing and brokered time deposits. On a linked quarter basis, business deposits increased by $20.4 million, retail deposits increased by $64.1 million, offset by a $28.6 million decrease in municipal deposits. The deposit base is comprised of 47% retail, 37% commercial, and 16% municipal. All three portfolios are up on a year-over-year basis. On Page six, we have included in our presentation a historical view of our cost funds as compared to the Fed fund spot rate and the Fed effective rate. For the quarter, our total cost of funds decreased by 15 basis points to 1.67%. At this time, I would like to turn the presentation over to Joel Rahn to share a few comments on the success we are having in growing our loan portfolios and provide an update on our credit metrics. Joel Rahn: Thank you, Brad, and good morning, everyone. On page seven, we share an update of loan activity for the quarter. We continue to experience solid loan growth in the fourth quarter with total loans growing by $78 million or 7.4% annualized, as Brad just referenced. For the year, we increased our loan portfolio by $237 million or 5.9%. Our commercial portfolio led the way with $276 million or 14.2% growth. Commercial loan generation continued its strong trend in Q4 with $88 million in quarterly growth or 16% annualized. Our residential mortgage portfolio grew by $7.2 million, and our installment loan portfolio decreased by $17 million for the quarter. Our strategic investment in commercial banking talent continues to supplement our loan growth. During the fourth quarter, we added an experienced banker in Metro Detroit, and in total, we have 49 bankers comprising eight commercial loan teams across our statewide footprint. During the year, we added a net of five experienced bankers to the team. Looking ahead, we believe we will continue low double-digit growth of our commercial loan portfolio in 2026. Our pipeline remains solid, comparable to January 2025. We continue to see market opportunities from regional banks in both talent and customer acquisition, and we are seeing steady organic growth from existing customers. Looking at the commercial loan production activity on a year-to-date basis, the mix of C&I lending versus investment real estate was 57% and 43%, respectively. And for our commercial portfolio, our mix is 67% C&I and 33% investment real estate. Page eight provides detail on our commercial loan portfolio concentrations. There has not been any significant shift in our portfolio over the past year, with the portfolio remaining very well diversified. Our largest segment of the C&I category is manufacturing, $183 million or 8.3% of the portfolio. In the investment real estate segment of the portfolio, the largest concentration is industrial at $202 million or 8.8%. We outlined key credit quality metrics and trends on page nine. We continue to demonstrate strong credit quality. Total nonperforming loans were $23.1 million or 54 basis points of total loans at quarter-end, up slightly from 48 basis points at September 30. It is worth noting that $16.5 million of this total is one commercial development exposure that we discussed last quarter. We continue to work through the challenges of this particular project and are appropriately reserved for any loss exposure. Past due loans totaled $7.8 million or 18 basis points, up slightly from 12 basis points at September 30. It is not reflected on the slide, but worth noting that we realized net charge-offs of $1.6 million or four basis points of average loans for the year. This compares to $900,000 or two basis points in 2024. At this time, I would like to turn the presentation over to Gavin Mohr for his comments, including the outlook for 2026. Gavin Mohr: Thank you, Joel, and good morning, everyone. I am going to start on Page 10 of our presentation. Page 10 highlights our strong regulatory capital position. I would like to note our tangible common equity ratio has moved back into our targeted range of 8.5% to 9.5%. Additionally, 407,113 shares of common stock were repurchased at an aggregate purchase price of $12.4 million in 2025. Turning to page 11. Net interest income increased by $3.5 million from the year-ago period. Our tax-equivalent net interest margin was 3.62% during 2025 compared to 3.45% in 2024 and up eight basis points from 2025. Average interest-earning assets were $5.16 billion in 2025 compared to $5.01 billion in the year-ago quarter and $5.16 billion in 2025. Page 12 contains a more detailed analysis of the linked quarter increase in net interest income and the net interest margin. On a linked quarter basis, our fourth quarter 2025 net interest margin was positively impacted by two factors. Change in interest-bearing liability mix added nine basis points and a decrease in funding cost added 13 basis points. These were offset by a change in earning asset yield and mix of 13 basis points as well as interest charged off on a commercial loan that was negative one point. On page 13, we provide details on the institution's interest rate risk position. The comparative simulation for 2025 calculates change in net interest income over the next twelve months under five rate scenarios. All scenarios assume a static balance sheet. The base rate scenario applies to the spot yield curve from the valuation date. Shock scenarios consider immediate, permanent, and parallel rate changes. The base case modeled NII is slightly higher. During the quarter due to nine basis points of model margin expansion. The NIM benefited from mix shifts in both assets and liabilities. On the asset side, solid commercial loan growth was funded by runoff in overnight liquidity, investments in lower-yielding retail loans. Funding costs benefited from growth in non-maturity deposits and a decline in wholesale funding. The NIM further benefited from a reversal of excess liquidity in the fourth quarter 2025. The NII sensitivity position is largely unchanged for rate changes of plus and minus 200 basis points. The bank has slightly more exposure to larger rate declines minus three and four hundred and larger benefit from larger rate increases plus 300 or 400. The shift in sensitivity for larger rate moves is due to shifts in non-maturity deposit modeling. Primarily caused by 50 basis points of Fed cuts during the quarter. Currently, 38.3% of assets repriced in one month and 49.2% repriced in the next twelve months. Moving on to page 14. Noninterest income totaled $12 million in 2025 compared to $19.1 million in the year-ago quarter and $11.9 million in the third quarter 2025. Fourth quarter 2025 net gains on mortgage loans totaled $1.4 million compared to $1.7 million in the fourth quarter 2024. The decrease is due to lower profit margins and lower volume of loan sales. Mortgage loan servicing net was $900,000 in the fourth quarter 2025 compared to $7.8 million in the prior year quarter. The change due to price was a gain of $200,000 or $0.01 per diluted share after tax in 2025 compared to a gain of $6.5 million or $0.24 per diluted share after tax in the year-ago quarter. The decline in servicing revenue compared to the prior year quarter is attributed to the sale of approximately $931 million of mortgage servicing rights on 01/31/2025. As detailed on page 15, noninterest expense totaled $36.1 million in 2025 as compared to $37 million in the year-ago quarter and $34.1 million in 2025. Compensation expense decreased by $300,000, primarily due to lower performance-based compensation expense, lower medical-related costs, and lower payroll tax expense, and higher deferred loan origination costs due to higher commercial loan production. That was partially offset by higher salary expense. Data processing costs decreased by $300,000 from the prior year period, primarily due in part to a reimbursement from the core provider for billing overages and other credits received. That was partially offset by smaller increases in several other solutions and one-time charges relating to special projects. Income tax expense included a $1.8 million benefit or $0.09 per share resulting from the execution of a tax credit transfer agreement related to the purchase of $22.9 million of energy tax credits during the three-month and full year ended 12/31/2025. Compared to no such benefit in the prior year. I am going to move on to page 18. This will summarize our initial outlook for 2026. The first column is loan growth. We anticipate loan growth in the mid-single-digit range and are targeting a full-year growth rate of 4.5% to 5.5%. We expect to see growth in commercial with mortgage loans remaining flat and installment loans declining. This outlook assumes a stable Michigan economy. Next is net interest income. We are forecasting growth of seven to 8% over 2025. We expect the net interest margin expansion of five to seven basis points in the first quarter 2026 with successive quarterly increases of three to five basis points, primarily due to decreasing yields on interest-bearing liabilities that's partially offset by a decrease in earning asset yields. This forecast assumes a 0.25% cut in March 2026 and August 2026 while long-term interest rates increased slightly from year-end 2025 levels. A full-year 2026 provision expense for allowance for credit losses of approximately 20 to 25 basis points of average portfolio loans would not be unreasonable. Moving to page 19. Related noninterest income, we estimate a range of $11.3 million to $12.3 million quarterly. We estimate the total for the year to increase three to 4% as compared to 2025. We expect mortgage loan origination volumes to decrease six to 7% and net gain on sale to be down 14% to 16% compared to the full year 2025 results. Our outlook for noninterest expense is a quarterly range of $36 million to $37 million with the total for the year five to 6% higher than 2025 actuals. The primary driver is an increase in compensation and employee benefits, data processing, loan and collections, and occupancy. Our outlook for income taxes is an effective rate of approximately 17% assuming the statutory federal corporate income tax rate does not change during 2026. Lastly, the board of directors authorized share repurchases of approximately 5% in 2026. Currently, we are not modeling any share repurchases in 2026. That concludes my prepared remarks, and I would now like to turn the call back over to Brad. Brad Kessel: Thanks, Gavin. We have built a strong community bank franchise, which positions us well to effectively manage through a variety of economic environments and continue delivering strong and consistent results for our shareholders. As we move through 2026, our focus will be continuing to invest in our team, investing in and leveraging our technology while striving to be Michigan's most people-focused bank. At this point, we would now like to open up the call for questions. Operator: As a reminder, to ask a question, you will need to press 11 on your telephone, and wait for your name to be announced. To withdraw your question, please press 11 again. Our first question comes from the line of Brendan Nosal of Hodde Group. Your line is now open. Brendan Nosal: Hey, good morning, everybody. Hope you are doing well. Good morning. Let me just start off here kind of on your market outlook here in Michigan. Can you just kick it off by offering your latest thoughts on the opportunity set you are seeing, particularly in Southeast Michigan given the M&A dislocation? And I guess, if you added five commercial bankers in 2025, like, what would the ambition set look like for banker ads in '26? Joel Rahn: Well, I will take it. And Brendan, this is Joel. Good question. I would think in terms of our talent acquisition expectation, it is similar. We will have some departures with retirements, etcetera, that we have to cover. But I think a net add of four to five bankers this year would be reasonable to expect. And in terms of opportunity in Southeast Michigan, we do think there will be opportunity there. It is just beginning. And so typically, the account side window opens first and can be some time before the customer feels the impact. But we are watching it closely and feel that it will be accretive for us. Brendan Nosal: Okay. Thanks, Joel. Maybe one more from you before I step back. Just on the loan growth outlook for, I guess, 5% at the midpoint. I guess, like, typically, I think of your bank as a high single-digit organic grower. So I guess just given the market opportunities you see, what is pushing that range down to the mid-single-digit area? And is there upside if payoffs behave a little more rationally in '26? Brad Kessel: Brendan, this is Brad. I will jump in there, and I would just say that over the last few years, we have actually reshaped the balance sheet. And particularly with the loan portfolios and our strategic emphasis. So of course, we have got the rundown in the investment portfolio, which has been funding our loan growth. But within the loan portfolios, the largest emphasis and where we have been investing in talent has been in Joel's group, that is the commercial banking team. And that has driven what I would call the outsized growth rate for our company for that line of business. At the same time, we still have a very strong and robust lending talent and teams in the consumer and mortgage banking groups. Yet we are just putting less on in those categories on our balance sheet. And in fact, we forecast in '26 some shrinkage in the consumer portfolio. And that is not so much coming out of the branch channel. The shrinkage is really coming off of less originations from our indirect lending group. Which is, as we have shared in the past, has always two focuses. One is marine, and the second is an RV. And we really have just not seen the same volume that we saw several years ago coming through the RV channel. The marine is still pretty good, but so when you add that all up, what ends up happening is you have double-digit growth in commercial, but the lower level of net growth in mortgage consumer gets us to that somewhere mid-single-digit overall loan growth projected for 2026. Does that make sense? Brendan Nosal: Yeah. No. That is a helpful framework to view it through. I guess just I will sneak in one more on a related topic then. Just given how much of the loan growth has been funded by securities, cash flows in the recent past, what is the outlook for that dynamic this year? Gavin Mohr: Thanks. Yes. So we have got about $120 million of forecasted runoff in securities for 2026. And that will fund loan growth. So we again, continue to intend to continue to remix that asset mix into next year. Through next year. Brendan Nosal: Fantastic. Thank you for taking my questions. Gavin Mohr: Thank you. Operator: Thank you. One moment for our next question. And our next question comes from the line of Damon DelMonte of KBW. Your line is now open. Damon DelMonte: Hey. Good morning, Hope everybody is doing well today, and thanks for taking my questions here. First one, just on the margin and the guidance provided around that. Gavin, just wondering if you could kind of walk through the cadence again for kind of what you expect here in the first quarter and then the forthcoming quarters after that? And then what were some of the drivers behind that, for a rising margin? Gavin Mohr: Yeah. So, we are looking at five to seven basis points of expansion in Q1, and then Q2, '3, and four, we are forecasting three to five basis points of expansion each quarter. And that gets you to the overall forecast of, you know, 18 to 23 basis points on a year-over-year, full-year basis. What is going on there is a couple of things. One, just the benefit of we have two rate cuts in the forecast of March and August. We feel really good about our ability to see that 40% plus beta on the repricing down of deposits. The yield curve shape right now in terms of the forward yield curve is beneficial. The mid the five to seven point of the curve is actually drifting a little bit higher. So we are getting some more slope in that respect. And then also, it is the continued repricing of below-market assets as we go into 2026. Does that make sense, Damon? Damon DelMonte: It does. Yep. I appreciate that color. And then kind of just broader on capital management, just kind of given where capital levels are and you do have a buyback in place, just kind of wondering. I know it is not in your guidance and your forecast, but just kind of wondering what your appetite is for buybacks. And then also, you know, how do you view the M&A landscape right now? Are there any interest in trying to pursue a merger with another company? So just kind of curious on your thoughts around that. Thanks. Gavin Mohr: I will start with capital and then hand it over to Brad. I would just say that we are really excited about the capital build and outlook for the organization. And you know, that provides us with a tremendous amount of flexibility, and that is really what we are focused on. Obviously, the dividend is very important. We just announced a significant increase over seven and a half percent. The board approved. And we want to continue to have a stable and growing dividend. But with that capital build, it is going to allow us the flexibility to do share repurchase when we think the price makes sense. So I am really excited about the capital position today. For Brad? Yeah. Very good. Brad Kessel: Gavin. And in regards to the M&A in the Michigan market, of course, you have got the Fifth Third Comerica, which while that is not directly impacting us, indirectly, as it goes back to Joel's remarks, we think there is an opportunity for talent and customer acquisition. Across the state, today, we have 80 plus or minus independent Michigan-based community banks. I think we will see consolidation at a similar pace to what we have seen historically in Michigan. And that is probably somewhere between 4-6%. Who they are, I am not sure. Our appetite, we would be very interested, depending on the specifics. And so that would include sort of strategically or geographically, how does it fit the footprint, the overall size, you know, and not wanting to maybe well, want to be cognizant of all the other good work we have got going on organically. So I think the culture would be very important. The metrics need to work, and it needs to materially add to EPS and at the same time, we are very respectful of not wanting to dilute our existing shareholders. So I would just step back and just say M&A for Independent, it could very well happen but is not a requirement for us to continue the success that we have experienced historically over the years. Damon DelMonte: Great. That is excellent color. I appreciate that. That is all that I had. Thank you very much. Brad Kessel: Thanks, Damon. Operator: One moment for the next question. And our next question comes from the line of Nathan Race of Piper Sandler. Your line is now open. Nathan Race: Hey, guys. Good morning. Thanks for taking the questions. Gavin, just going back to the margin discussion, could you update us just in terms of how much cash flow you have come off the bond portfolio each quarter and what the magnitude of or the amount of loans that you have that are repricing higher and what that amount looks like in terms of that yield pickup? Gavin Mohr: Yeah. Give me one sec. So the bonds, the run for the run rate for 2026 is $120 million. And I think it is fair. You could model that as pro forma to the or split it up equally per quarter. On the loan side, let me get through my notes here. Maybe to ask another question while you dig that up, Gavin. Do Great. Nathan Race: Maybe Brad, just thinking, you know, more holistically about the balance sheet composition. Just curious what the appetite is to maybe trade some of your excess capital. Obviously, you guys are going to be building capital at pretty strong clips just given the profitability profile this year. But just what the appetite is, maybe trade some regulatory capital to maybe reposition the securities book, whether it is on the AFS or HTM side of things. Brad Kessel: You know, so that is a good question, Nathan. And revisit that strategy regularly. Historically, we have sort of nibbled at selective investment sales and, generally where we can earn it back within a reasonable time frame. But we have had a book. It is running off. And I am not sure you are really going to see Independent needing to accelerate that taking losses and I just that is not really in the strategy at this point. Nathan Race: Okay. That is helpful. I appreciate that. Maybe one more from me. Just in terms of what you are seeing or expecting from a charge-off perspective, I appreciate the provision guide, and, you know, charge-offs have been really well behaved over the last several quarters now. But just any thoughts maybe, Joel, in terms of, you know, any normalized expectations around charge-off range going forward? Joel Rahn: Yeah. We do not see we see it being very similar to the past few years. We really do not see any big change in that profile. And cannot recall, Gavin, if in your guidance, if you had any specific range there. We did not. Well, we said provision would be Yeah. 20 to 25 basis points. Yeah. And that provision is going to be a function of more loan growth than anything. But I think the charge-off history, you know, recent history has been really, really well. And I think probably is unrealistic to expect that indefinitely. The charge-offs really to date have been in the consumer loan portfolio. And the biggest driver has been quite frankly, due to a customer passing away and then getting the collateral back in and then disposing of it. But I think somewhere in our recent history, maybe a little bit higher, could be modeled on a go-forward basis. Nathan Race: Agree with that. Nathan, I have your the details for your question on cash flow repricing. Nathan Race: Mhmm. Gavin Mohr: Average for the quarterly for 2026 is going to be about $105 million. At an exit rate of on average of $5.50. So at current speeds, CPRs. Nathan Race: Okay. And that is on the commercial book or just overall, Gavin? Gavin Mohr: That is fully I mean, that is the entirety of our fixed-rate portfolio. So that includes mortgage, commercial, is going to run about let us see, for the year, it is about $80 million. I am sorry. Excuse me there. It is $228 million. My totals were off. Let me Nathan Race: Do not worry about it, Gavin. Yeah. So yeah. Yeah. We are good. We are good. Appreciate it. Yeah. Can Gavin Mohr: It is yeah. You are good. It is 200 and total commercial is around $220 million for the year to May. So it is yeah, Nathan Race: Okay. Quite substantial then. Yeah. That is all I had. I appreciate all the color, guys. Thank you. Gavin Mohr: Thanks, Nathan. Operator: Thank you. One moment for our next question. And our next question comes from the line of John Rodis of Janney. Your line is now open. John Rodis: Hey, morning, guys. Gavin, just following up on the securities portfolio. You said runoff of roughly $120 million. Does that all I mean, are you looking to reinvest any into the securities portfolio at this time? Or I think looking at my prior notes, I think you said sort of targeting securities portfolio, you know, 12 to 15% of assets. Is that still sort of the thought process? Gavin Mohr: That is, John. And we I do not think we will get through 2026, without doing any securities purchases. John Rodis: Okay. Okay. But if you look I know 2027 is a long way away, but could you maybe hit a bottom then, I guess? Or Gavin Mohr: Yeah. Yeah. I anticipate in 2027. Do not make me give you a month in 2027, but within 2027, we will have four out and we will start to reinvest. Yeah. So I you know, we have not met 12 to 14% of total assets is still a target for us in terms of triggering investment purchases. So that is still the strategy. They are John. John Rodis: Yeah. Okay. Thanks, Brad. Brad, maybe just a follow-up on the M&A question. And you guys talked about through the normal course of business sort of adding a handful of bankers each year. I mean, you be open to you know, picking up a team of lenders or anything like that? I know it gets a little bit tougher when you add teams as far as culture and stuff like that, but what are your thoughts? Brad Kessel: Yeah. I mean, that has not been the pattern historically. But I would say we would be open to that. Joel, what are your thoughts on that? Joel Rahn: Yeah. I am certainly open to it. That does not happen very often. It is fairly rare. And we have just we have had really good success in, in just, you know, going after one banker at a time. And so I think would expect that is where the majority of our ads will continue to come. Sort of one bank credit and then building a team. John Rodis: Correct. Yeah. Yeah. Yep. Okay. Thanks, guys. You are sort of breaking up a little bit, but I think I get the picture. Thank you. Brad Kessel: Thanks, John. Operator: Thank you. I am showing no further questions at this time. I will now turn it back to Brad Kessel for closing remarks. Brad Kessel: In closing, I would like to thank our Board of Directors and our senior management for their support and leadership. I also want to thank all our associates. I continue to be so proud of the job being done by each member of our team. Each team member in his or her own way continues to do their part toward our common goal of guiding customers to be independent. Finally, I would like to thank each of you for your interest in Independent Bank Corporation and for joining us on today's call. Have a great day. Operator: Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.
Operator: Ladies and gentlemen, thank you for standing by, and welcome to the Freeport-McMoRan Fourth Quarter Conference Call. Later, we will conduct a question and answer session. If you wish to ask a question during the Q&A session, press 1 on your touch-tone phone. If you require assistance during the conference, please press 0. I would now like to turn the conference over to Mr. David Joint, Vice President, Investor Relations. Please go ahead, sir. David Joint: Thank you, Regina, and good morning, everyone. Welcome to the Freeport-McMoRan conference call. Earlier this morning, Freeport-McMoRan reported its fourth quarter and full year 2025 operating and financial results. A copy of today's press release with supplemental schedules and slides are available on our website fcx.com. Today's conference call is being broadcast live on the Internet. Anyone may listen to the conference call by accessing the webcast link on our homepage. In addition to analysts and investors, the financial press has been invited to listen to today's call. A replay of the webcast will be available on our website later today. Before we begin our comments, we'd like to remind everyone that today's press release and certain of our comments on the call include non-GAAP measures and forward-looking statements, and actual results may differ materially. Please refer to the cautionary language included in our press release and slides to the risk factors described in our SEC filings, all of which are available on our website. Also on the call with me today are Richard Adkerson, Chairman of the Board, Kathleen Quirk, President and Chief Executive Officer, Maree Robertson, Executive Vice President and CFO, and other members of our management team. Richard will make some opening remarks, Kathleen will review our slide materials, and then we'll open up the call for questions. Richard? Richard Adkerson: Thanks, David. Thank each of you for joining our call today. We're pleased to report positive results for our fourth quarter. 2025 was a truly eventful year. Recent copper prices have been strong in the face of uncertainties from global trade, tariffs, and geopolitical conflicts. The future for copper remains bright. Kathleen will report on the notable progress we have achieved during the fourth quarter following the September mudflow event at PTFI. It is impressive and provides our organization confidence about our future. PTFI has a well-designed plan to recover. Now we must execute, and we will. Our long-term strategy commitment for Freeport-McMoRan to be foremost in copper remains intact. With our high-quality assets, our strong financial position, and our highly motivated, confident global team, I'm personally enthusiastic and confident about Freeport-McMoRan's ability to create significant value for our shareholders and all of our stakeholders. Kathleen? Kathleen Quirk: Thank you, Richard. And I'm gonna be referring to our slide materials. We're very pleased to be here today to report on our fourth quarter results, review our 2025 performance, and update you on our initiatives, projects, and outlook for the future. Starting with Slide three and looking back on our performance in 2025, our team demonstrated resilience in overcoming challenges and achieved meaningful progress on several initiatives to support a strong foundation and position the company for a positive long-term future centered on value creation. As we look ahead, we're strongly positioned as an experienced global leader with compelling opportunities to enhance values through our ongoing operational initiatives and future prospects for substantial cash flow generation, which support investments in profitable growth and returns to shareholders. We show our annual information on Slide three, on copper sales, unit costs, and financial metrics. For the year 2025, we finished the year strong with copper sales and net unit cash costs slightly better than our adjusted guidance for the year. Despite the Grasberg incident, which impacted annual copper volumes by approximately 10% compared to our plan going into 2025, our consolidated unit net cash cost for the year of $1.65 per pound were within 3% of our guidance going into the year, and adjusted EBITDA of nearly $10 billion for 2025 was similar to 2024 levels. From a big picture standpoint, the results demonstrate the benefits of our diverse portfolio of copper assets. It's clearly evident in our strong fourth quarter financial results. Strength of our Americas business in this environment. I'm returning to our focus areas for 2026 where we summarize on Slide four our priorities. The first is execution. This is a hallmark of the Freeport-McMoRan culture. We're committed to maintaining Freeport-McMoRan's long track record for successful execution, carefully planning our work, and bringing relentless focus and energy on achieving our plans. The Grasberg incident was humbling, but our team has risen to the challenge and is dedicated to safely and sustainably restoring our operations as we go through 2026. Across the business, we're sharply focused on delivering our planned volumes, meeting our cost targets, executing capital projects safely and efficiently, and on maintaining discipline each day on the underlying metrics which drive our results. Managing risk, overcoming unforeseen challenges, and staying on top of what matters, for the short term and the long term. A second key focus area is crystallizing value in our Leach opportunity. This is a meaningful value driver for our business given the opportunity for near-term low-cost growth. The work we have done in recent years positions us to scale production in the coming years, and we're targeting a 40% increase in 2026 from this initiative on our path to achieving 800 million pounds per annum. Third, we're adopting innovation, automation, and new technologies to drive enhancements to reliability, efficiencies, and overall operational performance. These initiatives show promise for significant value as we work to reduce cost, enhance growth, and profitability of our US business. We have a robust profile of organic growth options and we'll continue to advance these initiatives during the year. We've got three projects, major projects in The Americas that provide optionality for future growth. And as we go forward, our team is focused on opportunities to increase margins and cash flows through greater efficiencies and disciplined investments in long-term growth. Turning to the markets on Slide five, prices on the LME during 2025 traded in a broad range between $3.87 per pound and $5.68 per pound, averaging $4.51 per pound for the year. On the US COMEX exchange, average prices for the year were slightly higher, although the differential is not significant. Year to date in 2026, prices have risen significantly in recent months with current LME prices approximately 30% higher than the 2025 average. During 2025, copper prices largely tracked macro sentiment. Market weighed US dollar weakness, expected US rate cuts, accelerating AI and technology-driven demand, and Chinese stimulus against mixed economic data, uncertainty around tariff and trade policy, economic pressures in China, and elevated geopolitical risk. At a micro level, demand benefited from secular demand trends associated with electrification and AI data centers and offset the impact of weakness in private construction and more cyclical sectors. Supply disruptions in copper and regional trade distortions which drove significant material to The U.S. also impacted copper markets during 2025. In The U.S., our customers are reporting that data center demand represents the most significant source of growth for power cable and building wire. This growing sector is offsetting weakness in traditional demand sectors, residential construction, and autos. Demand from China continues to be supported by significant investments in the electrical grid and continued growth in China's production of electric vehicles. China's demand for copper continued to grow during 2025. As you'll see in this chart, global inventories of copper on exchanges have risen in recent months during a period of sharp increases in copper prices. Most analysts are projecting that the market will be tightly balanced during 2026 with some projecting deficits and others small surpluses. Copper's superior conductivity makes it the metal when it comes to electrification. Massive investment in the power grid, renewable generation, technology infrastructure, and transportation are driving increased demand for copper and forecasts call for above-trend growth and demand for the foreseeable future. As we review the fundamentals, we continue to expect the market will require additional copper supplies to meet growing demand. And at Freeport-McMoRan, we're well-positioned to supply copper reliably and responsibly to a growing market. You've probably seen by now the recent report from S&P Global, which was released earlier this month. On Slide six and seven, we published some highlights of the report. It was a new study which evaluated the role of copper in the age of artificial intelligence. And we've summarized key findings which indicate that massive growth in demand for electricity will translate into above-trend growth in copper demand, pointing to a doubling of copper demand through 2040. The study projects a long-term annual growth rate in demand of 2.9% over this period, including significant growth in new secular demand drivers. The report is available from S&P Global, and we encourage everyone to take a look at it. Moving to our fourth quarter results on Slide eight. We've got a summary of the quarter. Our operating performance during the fourth quarter was favorable to our estimates going into the period. Production was in line with expectations, and sales were better than expected principally because of the timing of shipments in Indonesia. As indicated in our November update, we completed investigations on the Grasberg incident and restarted the Deep MLZ and Big Gossen mines during the fourth quarter. Since our November report, we've continued to make steady progress to prepare the Grasberg Block Cave to resume operations, and we're on track for a second quarter 2026 start-up. With strength in copper prices during the quarter, the performance of our U.S. business was quite strong with operating income 3.5x the level of the 2024 fourth quarter. This demonstrates a positive leverage of pricing at these operations with strong conversion to the bottom line. Moving to the operating statistics, on Slide nine, we summarize the highlights by geographic region. Starting in The U.S., production was up 5% versus both the year-ago fourth quarter and for the year 2025 versus 2024. This is notable given the declines that we faced in the prior two years, and despite the low grades, we've been working to increase volumes in The U.S. through efficiency gains through our leach recovery initiatives. We're targeting an 8% increase in volumes in The U.S. for 2026, in part related to adding scale in our innovative leach project. We're making excellent progress with our initiatives to improve efficiencies and cost performance. We're continuing to integrate new technologies to realize better performance in our basic mining functions, and we're successful in 2025 in converting our haul truck fleet at our Baghdad mine to autonomous. We're continuing to refine the autonomous process. We are optimistic that the value proposition of this technology can be applied on a broader scale. In South America, performance was in line with expectations. The Cerro Verde team will highlight finished strong to deliver another solid year. Our copper sales for South America for the year 2025 totaled 1.1 billion pounds. And the expectation is that we'll have a similar amount of sales from South America during 2026. Our unit net cash cost in South America for the fourth quarter averaged $2.57 per pound, and we expect a similar level in 2026. We're expecting stable production levels at Cerro Verde and some growth at El Abra, a project in Chile in partnership with Codelco. Over the next couple of years, there's a lot of activity at El Abra currently with a leach pad extension, and plans to conduct testing during 2026 of heated stockpile injections to enhance leach recoveries. We're also finalizing the preparation of an environmental impact statement for a major expansion at El Abra, which we plan to submit in the first half of this year. With our progress, you'll see we added reserves for the El Abra expansion of over 17 billion pounds of copper, and we're excited about this project as we progress through the regulatory process. In Indonesia, in line with our plans, we operated on a limited basis from the Deep MLZ and Bigas mines during the fourth quarter and continued our preparation for the planned restart of the Grasberg Block Cave. Sales for the fourth quarter exceeded production by about 60 million pounds of copper, which was a timing variance. Operations at one of two smelters resumed late in the year, and the new smelter remains in standby status with an expected restart later this year. We've made great progress to restore operations at the Grasberg Block Cave, which we'll cover in more detail on the next two slides. On Slide 10, we provide a refresher from our November call on the various work streams required to safely restart operations at the Grasberg Block Cave. As a reminder, the Grasberg Block Cave represents the most significant contributor in the district. We provided a schematic on the right showing the various production blocks within the Grasberg Block Cave. And as a reminder, the incident occurred in Flux Production Block 1C. Our plan incorporates a phased restart and ramp-up of the Grasberg Block Cave beginning in the second quarter, initially in Production Blocks 2 and 3, followed by Production Block 1S in 2027, and finally, Production Block 1C in 2027. With the successful ramp-up of production blocks two and three beginning in the second quarter, we expect to have 85% of production restored in the district in the second half of this year. The milestones for restarting production blocks 2 and 3 include cleanup of the mud in the tunnels, principally in the service area, the installation of cement plugs to isolate the panels in Production Block 1C, and to ensure there's no connection to the surface and replacement of the electrical and communication systems damaged in the incident. For Production Block 11S, the repairs are expected to extend beyond the restart of PB2 and PB3, principally to install additional productive barriers and replace the number of damaged shoes used to transport ore to the haulage level. We continue to target a restart of PB1, both PB1S and PB1C, during 2027. And we're gonna continue to progress the reopening plan as we monitor progress with various mitigation initiatives for the production block one. We're incorporating recommendations from the investigation to enhance our risk management and mitigation. The incident highlighted the need for more dynamic cave management plans tailored for various conditions and for more robust controls and operational procedures to address areas subject to risk from an external mud rush. In addition, we're continuing to adopt new innovative approaches to mud drainage solutions for the pit bottom. We've got those described on Slide 31. And to adopt emerging technology for imaging to improve cave shape monitoring, and those are all being advanced. We've got a scorecard on Slide 11. Very pleased with the progress that we've made to date. We're tracking the plan. Mud removals in the areas required to commence the start-up of PB2 and PB3 are substantially complete, and the barrier is being installed to isolate Production Block 1 are advanced and expected to be completed in the first quarter. With the installation of the protective plugs, infrastructure repairs are expected to move to completion by quarter-end, positioning the restart to commence in the second quarter. We remain confident in reestablishing large-scale production and in our ability to safely operate this great ore body over the long term. The progress to date continues to de-risk the plan, and in executing the restart, our team will be vigilant in prioritizing safety above all else. We're pleased to report on our reserve at year-end 2025. Those are reported on Slide 12. As you know, at Freeport-McMoRan, we benefit from a significant reserve and resource position where we have established operations and successful track records. A summary of the reserves is indicated here, where we continue to maintain long reserve lives and substantial resources to support long-term production and our growth opportunities. The reserve additions that we're reporting in 2025 are substantially in excess of our production, and those principally relate to the addition of over 17 billion pounds of copper for the El Abra project, which was previously considered a mineral resource. The reserves in Indonesia are included, and they're reported through 2041. And we note that an extension is in progress, and that would enable the report portion of the reported resource to be included in our longer-term reserve plans. In addition to the reserves, we have significant incremental mineral resources, with over half located in the United States. We'll point out the large resource in the Safford Lone Star District as we continue to advance studies to evaluate a major opportunity there. Slide 13, we wanted to update you on our growth plans. It's clear additional copper supplies will be required to support energy infrastructure, new technologies, and more advanced societies. Our projects at Freeport-McMoRan would provide significant copper which can be developed from our known resources in jurisdictions where we have an established history and experience. Our projects in Indonesia also benefit from the high gold content that goes along with the copper. Because these projects are brownfield in nature, we benefit from leveraging existing infrastructure and experienced workforce and relationships with key stakeholders to move more quickly with less risk than greenfield projects. We're now entering a period of growth in our Americas business with near and medium-term opportunities to scale our Leach initiative and double our production at our Baghdad mine. We have longer-term growth in the Saffron Lone Star District and an exciting project, as we mentioned, at El Abra in Chile. In approaching these projects, we're using innovative approaches to improve efficiencies, reduce costs, and capital intensity. And work to shorten lead times for our projects. Our high potential, low-cost innovative Leach initiative is a great example of doing this. We've talked about what we've done to date. We've produced over 200 million pounds from this initiative in 2025. We're targeting 300 million pounds in 2026. Some of the progress and milestones that we reached in 2025 was the initiation of deployment in the field of our first internally generated additive at Morenci. We've got encouraging results there. And we're planning to adopt it on a broader scale during 2026. We're continuing to be very encouraged by lab tests of additional additives, and those show even greater promise. We have projects in 2026 in our pipeline for the leach project to test injection of heated solutions in our stockpiles, which together with the additives have potential for significant recovery gains. 2026, we're looking at as a pivotal year for us in this initiative. As we work to scale to 400 million pounds in 2027 and to 800 million pounds by 2030. Our expansion opportunity at Baghdad is advancing toward an investment decision during the first half of the year. We're planning to advance engineering, retest the economics, and work with our vendors to secure fixed pricing on major components. We're also continuing to advance our work on tailings infrastructure to further enhance the optionality on timing. We're continuing our studies on Safford Lone Star District, as we mentioned, to evaluate optimal development options. And at El Abra, we have a great opportunity with our partner at Codelco to develop a large-scale expansion. Our total reserves at El Abra are getting close to the large position we have at Cerro Verde. This is a terrific opportunity for us. And we're looking forward to working with regulators as we commence the permitting process this year. Progress at Kuchin Liyar is also continuing in Indonesia, and this will allow us to sustain a low-cost long-term production profile in the Grasberg District. Before we get into our forecast for sales guidance and cost and cash flow, we want to highlight Freeport-McMoRan on Slide 14 as America's copper champion. Freeport-McMoRan is an important American copper producer and is by far the largest contributor to The U.S. copper market with an established and successful franchise dating back to the late 1800s. Our operations in The U.S. are fully integrated with smelting and refining facilities and leach processing that efficiently produce refined cathode. Freeport-McMoRan supplies 70% of the refined copper produced in The U.S. And as we pointed out, a large portion of our reserves, resources, and future growth are in The U.S. We're driving a series of initiatives to enhance our U.S. business through innovation, automation, and investment in expanded facilities. These initiatives are designed to add production at a low incremental cost and improve profitability and resiliency of our U.S. business. In an industry where development lead times can span more than a decade, our business in The U.S. is strongly positioned with the potential for an over 50% increase in copper production as we go through the next four to five years. We're very excited about these opportunities. And they most of all, they represent a significant value driver for Freeport-McMoRan. Maree is gonna cover our outlook, and then we'll circle back and open up the call for questions. Maree? Maree Robertson: Thanks, Kathleen. If you turn to Slide 15, we show our three-year outlook for sales volumes of copper, gold, and molybdenum. The plans are very similar to our last update in November. Our 2026 copper sales have been adjusted slightly to address the timing of sales between 2025 and 2026. As indicated, we expect growing volumes in 2027 and 2028 as we reach full recovery at Grasberg. We provide quarterly estimates on page 27 of the reference materials. We expect to be at a quarterly run rate of approximately 1 billion pounds per quarter in 2026. Unit net cash costs are expected to average $1.75 per pound for 2026, assuming by-product credits priced at $4,000 per ounce of gold, and $20 per pound molybdenum. With growing volumes, our first-half costs are expected to be above the average for the year, with second-half costs approximating $1.25 per pound. Putting together our projected volumes and cost estimates, we show modeled results on Slide 16. The EBITDA and cash flow at various copper prices, ranging from $4 to $6 per pound of copper. These are modeled results using the average of 2027 and 2028 with current volume and cost estimates, and holding gold flat at $4,000 per ounce, moly flat at $20 per pound. Annual EBITDA would range from approximately $11 billion per annum at $4 per pound copper to over $19 billion per annum at $6 copper, with operating cash flows ranging from approximately $8 billion per year at $4 to over $14 billion per year at $6 copper. The dotted line shows the 2026 estimates, which reflect the phased ramp-up at Grasberg. These amounts exclude potential recovery under our property and business interruption insurance coverage. The policy provides coverage for up to $700 million for underground losses. We show sensitivities to various commodities on the right. You will note we are highly leveraged to copper prices, with each 10¢ per pound change equating to approximately $400 million in annual EBITDA in the 2027-2028 periods. We'll also benefit from improving gold prices, with each $100 per ounce change in price approximating $120 million in annual EBITDA. With our long-lived reserves and large-scale production, we are well-positioned to generate substantial cash flow to fund future organic growth and cash returns under our performance-based payout framework. Slide 17 shows our current forecast for capital expenditures in 2026 and 2027. Capital expenditures for 2025 totaled $3.9 billion, half a billion dollars below our plan going into 2025, and are expected to approximate $4.3 to $4.5 billion in 2026 and 2027. We have added $150 million in capital in 2026 to advance engineering and early works at Baghdad to enhance optionality as we work towards an investment decision targeted in the second half of the year. The discretionary projects approximated $1.4 billion in 2025, and are expected to approximate $1.6 to $1.7 billion per year in 2026 and 2027, with roughly 50% related to the Piching Liard Development and the LNG Project at Grasberg. The balance includes acceleration of tailings and other infrastructure to support the Baghdad expansion, the Atlantic Copper Circular Project, which is expected to be completed during 2026, and capitalized interest. The discretionary category reflects the capital investments we are making in new projects, under our financial policy, are funded with the 50% of available cash that is not distributed. These projects are value-enhancing initiatives detailed on Slide 37 in our reference material. We continue to carefully manage capital expenditure and we'll continue to deploy capital strategically to projects with the best return and risk-reward profiles. And finally, on Slide 18, we reiterate the financial policy priorities, focusing on a strong balance sheet, cash returns to shareholders, and investments in value-enhancing growth projects. Our balance sheet is solid with investment-grade ratings, solid credit metrics, and flexibility within our debt targets to execute on our projects. We have no significant debt maturities during 2026, and have substantial flexibility for funding the 2027 maturities. We have distributed $5.7 billion to shareholders through dividends and share purchases. We have an attractive future long-term portfolio that will enable us to continue to build long-term value for shareholders. Our global team is focused on driving value in our business, committed to strong execution of our plans, providing cash to invest in profitable growth, and returning cash to shareholders. Thank you for your attention. We'll now take your questions. Operator: Ladies and gentlemen, we will now begin the question and answer session. If your question has been answered or you wish to remove yourself from the queue, please press 1 again. If you are using a speakerphone, please pick up your handset before pressing the numbers. We ask that you limit your questions to one. If you have additional questions, please return to the queue. Our first question will come from the line of Carlos De Alba with Morgan Stanley. Please go ahead. Carlos De Alba: Great to see progress in Indonesia. Just wanted to understand maybe a little bit the guidance for the outer years. Considering the opportunity in leaching that you have in North America, does the numbers, your guidance include the leaching reaching around 800 million pounds in 2028? Or is it not included in that official guidance? Kathleen Quirk: Good morning, Carlos. We've included in our outlook between 250 million and 300 million in 2026 and have not included anything beyond that for expansion. So it's around the long term. We've got around 250 million pounds in these numbers and have the opportunity. We expect to be at 300 this year, with an opportunity to scale to 427. So there's some upside in our numbers, obviously. The slide where we're showing what the potential is getting to 2 billion pounds in The U.S. includes the Baghdad expansion and getting the incremental volumes out of the leach program. So we have the potential to get to roughly 2 billion pounds in The U.S., but those aren't included in the 2027-2028 guidance at this point. Carlos De Alba: Alright. Great. Thank you. Operator: Our next question comes from the line of Katja Jancic with BMO Capital Markets. Please go ahead. Katja Jancic: The unit cash costs in South America are moving higher. Can you maybe elaborate on what's going on there and how we should think about costs there over the next few years? Kathleen Quirk: Yes. Patrick, in South America, we're forecasting net cash costs in the $2.58 range on average for 2026. Those are very similar to what we experienced during the fourth quarter of $2.57 per pound. When you look at the comparison to 2025, the increase relates mostly to labor and energy, power costs, as well as labor. You've got also a weaker dollar as well. So that's reflective, but it's very similar to what we've experienced in the fourth quarter, and we'll carry that run rate forward. Katja Jancic: Thank you. Operator: Our next question comes from the line of Alexander Hacking with Citi. Please go ahead. Alexander Hacking: Yeah. Thanks, Kathleen and team. The 2027 target to get costs in The U.S. down to $2.50 a pound. Could you maybe elaborate on how you plan to get there? Because costs last year were around $3.10, you're guiding to around $3 this year. Sorry, $3 this year, even with a nice increase in U.S. production. Like, how are you getting another 50¢ out by 2027? Thank you. Kathleen Quirk: It's really a target. And it assumes that we're successful with scaling our leach opportunity as well as continuing to drive efficiencies within The U.S. business. So it's really coming from adding volumes at a low incremental cost. We have a number of initiatives not only in the leach initiative, but we have a number of initiatives. Really, as we look at our U.S. operations, focused on minimizing downtime, improving, and just improving all of the efficiencies. And so we have really an opportunity to increase our volumes basically with the same operating rates that we have today. So that's the target that we have, and bringing in lower-cost volumes will bring down the average. Alexander Hacking: Thank you. Operator: Our next question comes from the line of Bob Brackett with Bernstein Research. Please go ahead. Bob Brackett: Good morning. I'd like to talk about Slide 14 where you highlight America's copper champion. We think rough numbers, The U.S. consumes 4 billion pounds of copper, 2 billion of which is imported. In that context, if you look at your targets, you'd be adding, you know, rounding up to 0.8 billion of that 2 billion of imports, which is a significant amount of those imports. And I'll highlight that the leaching initiative delivers refined copper, not concentrate. So I guess the question would be, can you do more? But also, the question is, how do you focus on this target in light of what copper tariffs could be going forward? Is that driving this production or just the unit economics in any world driving this production target? Kathleen Quirk: Thanks for those comments. And to highlight the leach initiatives, the exciting thing about these opportunities for us is that we're able to, with success, and we've got to have success on our additive work and with the heat injections that we're trialing this year, with success, the incremental cost of these pounds of copper that we're bringing on are very low cost, relative to the cost of what you'd have to do to actually mine the material and take it all the way through a smelter. So these are very low incremental cost pounds. They do not require significant capital. We already have the material that's been mined, and it's really the processing piece. And spending some incremental dollars to improve recoveries is what we're targeting. So that is really a very exciting value creation opportunity for us when you're talking about adding these kinds of volumes in a relatively short period of time. When you think about copper projects taking ten years or more, if we're successful here, we can be adding a new mine with very, very low operating costs and very insignificant capital expenditures. So that's a real opportunity for us. The Baghdad project is more of a conventional opportunity. As we've talked about, we've got a very significant reserve there. And what we have been talking about for a number of years now is the opportunity to build new processing facilities and bring that value forward. And we've been doing work on enhancing the optionality of that project. And as we look at that project today, it requires roughly a $4 average copper price to justify the investment. And, of course, copper prices are much higher than that today and support the project. You know, we look at a broad range of projects for copper prices when we qualify a project, but this is one we want to put our infrastructure where we have big reserve positions, and this is one where we believe it should be developed and can be developed within a short time frame. And so we're working to make sure that we have our arms around the capital and that we can execute the project efficiently. But that'll be a nice addition also to domestic production in The U.S. Bob Brackett: We're not really looking at tariffs to support this investment. It's hard to predict what those are. We're really looking at a broad range of absolute prices and how we can deliver a low operating cost mine and improve resiliency in The U.S. Bob Brackett: Great. Thanks for that color. A quick follow-up would be, in the past, you've talked about the next phase of leaching as being a phase three. In today's presentation, you're starting to take that phase three and tell us specifically how you're going to achieve it. Should I interpret that to mean that your level of conviction in the 600 million pounds target has increased over the last year or so? Kathleen Quirk: Certainly, with the additive work that we've done, prior to this past year, we were doing mostly lab testing. Now we're doing more work in the field where we're actually deploying additives on stockpiles in the field, gonna be doing that on a broader basis during 2026. And we've advanced these heat projects where essentially, we're taking the solutions that we apply on the stockpiles and heating those solutions as injecting heat into the stockpiles. And so what I say is 2026 is a pivotal year for us because we should have results on how heat and additives combine, and that really will set us up for scaling the opportunity. But you're right. We've made really good progress on the additives. We're excited to test this heat opportunity both at Morenci and El Abra this year, and that's gonna be very informative to us on our path. But we've made a lot of progress in converting some of the R&D work to early positive results. So the additive we end up with will likely be a little different than the additive we're using today. The additive we're using today is performing well. It is giving us incremental production. But we do believe based on what we've been seeing in the lab, that we'll use a variety of additives depending on the stockpiles to drive the best recoveries that we can get. And really think we're on to something. We've got more work to do, but this is a huge value creator for Freeport-McMoRan, particularly in our U.S. business. Operator: Our next question comes from the line of Lawson Winder with BofA Securities. Please go ahead. Lawson Winder: Thank you very much, operator. And, Kathleen, thank you for today's update. If I could just pick up on the comments you made on Baghdad 2X. Can you maybe give us a sense of a more precise timing this year for the update? That would be one. And then thinking about the CapEx, the slides highlight that the CapEx is still under review. What we've been seeing in the industry over the past several years is typical CapEx inflates at about 5% per year. Versus the 2023 dollars 3.5 billion. Is that a reasonable way to think about the level of CapEx inflation? And then are there any changes to the plan being contemplated with this latest updated study that could potentially change the approach or the overall mine plan or the CapEx? And then just finally, you highlight the attractiveness of this project at the current copper price. Given that it works at $4, what other factors will you consider when thinking about approving this project potentially later this year? So I know that's sort of four questions, but really it's just about Baghdad 2X and a few more details on that project. Kathleen Quirk: So as you pointed out, the 3.5 billion for the project was based on work that we had done at the end of 2023. And what we're doing in the first half of this year is continuing our engineering work and actually getting to a point where we can have enough of the engineering done to go out to our vendors to actually get fixed pricing. So that's really where we want to put ourselves as we go through the next six months. So that we have more concrete bids on what the project will cost. And so we're looking to make a decision on the project when we have this information, at midyear. And so we don't know the answer to your question yet about this 5% per annum. We know there is cost inflation. We've been trying to assess whether the tariffs will have any impact on some of the components that are involved here. And we'll continue to do value engineering to try to keep the capital intensity of the project as low as possible. But we want to do enough front-end work so that when we qualify the project for investment, we can deliver and execute on that plan. And that's what we're working on in the first part of this year. We're also doing some work on the power and making some deposits there. So we've added $150 million in capital associated with this project that will put us in a position to make a decision. In terms of the factors that we are looking at, in addition to the copper price, we want to look at the long term and the range of prices and how this project would perform. We also want to make sure that we have the right workforce set up, and we've been investing in infrastructure. Labor has been a challenge in The U.S. And that's what partially drove us to going to autonomous during 2025 to set up better optionality for Baghdad for expansion in the future. We want to optimize the performance of the autonomous fleet. We're not getting exactly what we expected to get from the performance of the autonomous fleet, but we've got progress ongoing to get us to a point where we're comfortable that the autonomous fleet is capable of running at these higher rates. So we've got some other things going on to de-risk the plan as we go through the first half, but those are the major factors: confidence in our ability to execute the capital plan, confidence in our ability to operate efficiently. Part of the goal here, in addition to bringing on additional volumes, is to bring on those volumes at a lower incremental cost than our current cost and take advantage of efficiency. So that work we're gonna be doing as well over the next several months as we get to an investment decision. But this is a project that is pretty straightforward. It's a relatively short lead time. And we just want to make sure that we can deliver on the economics that we set up at the start. Corey Stevens is on the call, and Corey, anything that you want to add there either on the Baghdad expansion, the Leach initiative, or our focus on bringing down our unit cost in The U.S.? We'd be happy to see if you have any insights that you want to add to that. Corey Stevens: No. I appreciate that, Kathleen, and yeah, just the comment on the Baghdad work. You know, the team is super energized. You know, we're through a lot of the incoming infrastructure requirements and designs and long lead items from, like, power upgrades and so forth. So and then in parallel, like we talked about, the autonomous work, very inspiring. You know, it's still early days there. You know, we really only went full autonomous in the late in the summer. So there's a bit of a learning curve there, but we're on a good track. And the team's gonna figure that out as we go forward. On the leach side, the ramp-up is really based on a lot of the initiatives that are coming to pass this year. So heat, you know, we talked about at Morenci, at El Abra. Those are big demonstration activities going on there. And then yesterday, as a matter of fact, we started another leach stockpile at our New Mexico operation at Chino. And there, we were using chemical heat. So we termed that one the perfect pile. It's an engineered piece that, you know, we build confidence around our lab work there that's really giving us a lot of excitement there that really can facilitate not only a benefit to Chino, but could change the way that we design future stockpiles going forward to enhance the ultimate activity that's coming out of those. So lots of moving parts, lots of activities, more to come this year. Lawson Winder: Excellent. Thank you both. Operator: Our next question will come from the line of Bill Peterson with JPMorgan. Please go ahead. Bill Peterson: Yes. Hi, good morning team, and thanks for taking the sounds like Indonesia is on track with the timing guidance from last year. I was wondering if you can add any incremental lessons learned at Grasberg since the November update. You know, you called PB2 and 3 on schedule for 2Q 2026. Any further granularity you could provide on timing where it could land in the quarter? Where you know, what would make it come in faster versus extended? Thanks. Kathleen Quirk: Thank you. And Mark Johnson's on the line, and he can add to these comments. But you know, we did an update in mid-November on the investigation, and we have learned a lot. And as I mentioned, we are adopting the recommendations from the investigation. The plan in terms of what we laid out in that time frame in November is very much the same. We've been executing on that plan. We've been achieving the results. As we mentioned, the mud removal within the mine workings has gone well. And we're 97% of what we need to be to start up production blocks two and three. We've just completed a cement pour at one of these protective barriers that we talked about that's needed to restart production block two and three. And so the work that we're doing between now and start-up really is related mostly to infrastructure. Now that we have these plugs in, we'll be able to advance that more. But we haven't given a specific date within the second quarter. But we would expect it would be in the first half of the second quarter at this point, and we're on track to do that. Mark, don't know if you want to add anything about that and also add maybe any comments about the overall risk management we're doing on mud removal from the surface. Mark Johnson: Yeah. The plan, as you stated, that we came up with in November, the team's done a great job of executing that. You know, it's primarily driven at first with the cleanup of the mud. That is essentially complete for the PB2, PB3 startup. Obviously, there were some challenges there that a lot of you know, it's not it's kind of a unique work environment. We dealt with some localized drainage issues. You know, it required pumping, and the team was quick to respond. Very happy also with the response from some of our key suppliers. A lot of this infrastructure that we're building is the communication systems that allow us to do the remote mining. So our suppliers on that end have risen to the challenge. So we don't see any problem with the supply chain side of things. We've continued to work with our consultants and verify our plan, make it more robust. We're looking at some new tools for our cave management that'll also play into how we look and mitigate risks, and all of that's progressing quite well. Really, I don't see any real hurdles at this point to be able to start up as we've planned. You know, any variation, I think, will be relatively minor. Plus and minuses. I think it's a very solid plan to start up. The ramp-up, you know, is something that we've spent time looking at as well. We have good history on that as to how we'll reopen some of these draw points, do it in a very cautious and safe manner, step by step, and observe and adjust as we go. Anyway, I'm very happy with the overall progress and where we are today. So PB2 and PB3, you know, is the lion's share of our production. And then, obviously, we're also working towards the PB1 area restart. Bill Peterson: Thanks for all the color. Operator: Our next question will come from the line of Liam Fitzpatrick with Deutsche Bank. Please go ahead. Liam Fitzpatrick: Good morning, Kathleen and team. Just a couple of follow-up questions on the GBC profile. It sounds like the initial start-ups of 2026 are going to plan. But in terms of 2027, is it possible that PB1S could be brought forward ahead of the mid-2027 start-up that you have? And then for PB1C, if you conclude that you can't restart production from that block, do you have the flexibility to open up other areas and bring those into production also by late 2027? Thank you. Kathleen Quirk: We haven't, with respect to our plans for PB1, the work that we've done to lay out this plan, we're continuing to expect that Production Block 1 South will be a mid-'27 start-up, and then we're gonna continue to evaluate the PB1C. Our focus really is getting the 85% up and running that we're talking about during 2026. And as we go through and in parallel, we're working on PB1. But our focus for the current period is to get the substantial amount of production restored, and then we'll look to see how to optimize and enhance it. But we're not, at this point, not looking at advancing PB1 South. But we'll be in a position to continue to evaluate that as we go. Liam Fitzpatrick: Okay. Thank you. Kathleen Quirk: With the question about the PB1C, do you want to comment on that? If we decide not to go back into PB1C? Mark Johnson: Yeah. We have some other, you know, we haven't had to face this yet, but some of the other opportunities there would be to change our sequence and go to PB1 North. We also have some options to incrementally add production from Deep MLZ. It would be at a lower grade if we did that. And, you know, the potential would be to continue to develop and ramp up PB2, PB3 beyond what we have in our plans. But all of those are, you know, forward-looking. We don't have any, our plan is still to proceed as we've shown. On Slide 31, a lot of those initiatives there on the mud removal are focused on PB1. So the execution of those and the results of those will very much drive how we look at what our options or what our future plans may look like. Liam Fitzpatrick: Just a quick follow-up. If you wanted to do PB1N, you could bring that in around a similar time, late 2027, early 2028. Mark Johnson: Yeah. We'd have to do some different development. It's a change in the sequence. It would be something that we'd have to work through. We've talked about it at a high level, but we don't have anything firm. And, you know, I'd hate to until I have that, I'd hate to respond on the timing, but we've got a lot of development capability. It's not, you know, it's adjacent to what we're already doing. We were in the process of developing all of the infrastructure around that. So that would be an option, but we don't have any firm plans. Liam Fitzpatrick: Okay. Thank you. Operator: Our next question comes from the line of Timna Tanners with Wells Fargo. Please go ahead. Timna Tanners: Wanted to ask in light of the sharp move in copper lately if you have any fresh thoughts about the recycling opportunity. I know that you have a plan and program at Atlantic Copper. Are there other potential initiatives that could leverage secondary material? And then along those same lines, any thoughts on substitution, copper for silver in solar, but also aluminum for copper in other applications? It'd be great to get your thoughts. Thanks. Kathleen Quirk: You pointed out the circular that we're doing in Spain at our facility, and Atlantic Copper, where we're completing a project to process scrap from electronics. So it's got a lot of precious metals associated with it. And so that project, we're completing the middle of this year. We do some scrap processing in The U.S. at our existing facilities. It's not, you know, we follow that business, but it's not the core of what we do. You know, our core really is around producing mining and processing what we mine. But we'll look on the margin if there's an opportunity, but it's not our, obviously not our business. In terms of substitution, that is a topic that people have long talked about. You know, we believe that the properties of copper because of its superior conductivity are compelling. You know, when you talk about data centers and that sort of thing, you know, copper still is a very, very important component of data centers. There will be substitution and thrifting as prices rise. But when you look at the big picture, you still need a lot more copper to be able to support the demand, the secular demand trends that are ongoing. So we're very confident that copper will still be viewed as a superior metal really from a conductivity standpoint, recognizing that there will be thrifting. There will be substitution that takes place as that relative value changes. Richard Adkerson: Yeah. I'd appreciate it. But that's inevitable, but it will be in the context of a higher copper price. Timna Tanners: Sure. Thanks. Operator: Our next question will come from the line of Brian MacArthur with Raymond James. Please go ahead. Brian MacArthur: Two questions on Indonesia. First, in the fourth quarter, I see there's no export duties when I look at your guidance going forward, TCs are up to $0.43 versus historical levels. Can you just tell me how you're accounting for that, whether there are export duties in that guidance going forward or what's going on, or whether that's just inter-transfer of costs as you go to the new smelter as things ramp up? And my second question has to do with KL. Obviously, it's getting bigger. Is that all additive post-2030, i.e., the higher production at KL, you still have the mill capacity, you have to do anything? And I see capital has gone up. Is that just inflation? Or is that given the KLR is a little more complicated and you have to do something else? Thank you. Kathleen Quirk: In terms of the question around export duties, we're no longer exporting concentrates. And so we don't have any export duties in our numbers. The TC number is really just the internal smelter cost. The operation of the existing smelter as well as the tolling fees that we pay or the operating cost of the new smelter and the tolling fees we pay at PT smelting. So they're really kind of internal costs. Of course, it doesn't include, you know, when you're comparing selling concentrate to a third party, that rate reflects all of the byproducts in the free metal. So going forward at CTFI, you're gonna have the cost to the smelter in that processing line, that TCRC line, but all the benefits that you get from the free metal, the byproducts, etcetera, will be in the revenue line. So it's a little different than historically when we've been just, you know, selling most of our concentrates. And Brian, we can follow up more with you on that if that's, I didn't fully answer it. But on the Kuchin Liyar, this is actually a positive here. We've been looking for some time at what's optimal between Grasberg Block Cave and Kuchin Liyar operating rates to look at what is optimal from an NPV standpoint. And as you know, the footprint of KL is very big, and a lot of it was carrying forward after 2041. But in looking at the Grasberg Block Cave and Kuchin Liyar, and the need potentially to invest in pyrite handling and processing facilities for certain types of ore, we developed a plan that allowed us to defer a significant amount of pyrite processing that would have been associated with Grasberg Block Cave and actually defer that out. And so you see KL rates going from where we were projecting 90,000 tons a day to 130. So we've added production from KL. Grasberg Block Cave is slightly smaller. All of this is just timing because with an extension, we'll get those reserves over time. But this plan allows us to defer processing for pyrite. Brian MacArthur: Got it. So you wouldn't have to make, I mean, the mill will be, what, 240 or whatever at its max like it used to be before. You're just substituting A for B in this process. Kathleen Quirk: Right. Exactly. And what it allows us to do is defer the time frame when we need to spend capital on the pyrite handling. Brian MacArthur: Great. And just back, we can take the rest of this offline. But just that 43¢ for Indonesia this year for treatment charges, is that inflated this year because we have a lower production rate and it's a ramp-up, i.e., on an ongoing basis, would it be better than that? Kathleen Quirk: Yes. Brian MacArthur: Okay. Thank you very much. Operator: And I will now turn the call back over to management for any closing comments. Kathleen Quirk: Thanks, everyone, for participating, for your questions. And if you have any follow-ups, David Joint is available, and our management team is available. And we look forward to reporting our progress as we go through the year. Operator: Ladies and gentlemen, that concludes our call for today. Thank you for your participation. You may now disconnect.
Operator: Thank you for your continued patience. Your meeting will begin shortly. If you need assistance at any time, please press 0, and a member of our team will be happy to help. Thank you for your continued patience. Your meeting will begin shortly. If you need assistance at any time, please press 0, and a member of our team will be happy to help you. Please standby. Your meeting is about to begin. Good morning. Thank you for joining OFG Bancorp's conference call. My name is Nikki, and I will be your operator today. Our speakers are José Rafael Fernández, Chief Executive Officer and Chairman of the Board of Directors, Maritza Arizmendi, Chief Financial Officer, and Cesar Ortiz, Chief Risk Officer. A presentation accompanies today's remarks. It can be found on the homepage of the OFG website under the fourth quarter 2025 section. This call may feature certain forward-looking statements about management's goals, plans, and expectations. These statements are subject to risks and uncertainties outlined in the Risk Sectors section of OFG's SEC filings. Actual results may differ materially from those currently anticipated. We disclaim any obligation to update information disclosed in this call as a result of developments that occur afterward. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. Instructions will be given at that time. I would now like to turn the call over to Mr. Fernández. José Rafael Fernández: Good morning, and thank you for joining us. We are pleased to report our fourth quarter and 2025 results. Let's go to Page three of the presentation to review the fourth quarter. Earnings per share diluted were up 17% year over year on 2% growth in total core revenues. This was driven by disciplined core operations and a favorable tax benefit. Asset quality and credit metrics were sound and well controlled throughout the quarter. During the quarter and year, in line with our strategies, we saw increased commercial loans, and broad acceptance of our flagship mass market Libre account and mass affluent Elite deposit account. Performance and credit metrics remained strong. Capital continued to grow, and we repurchased $40 million of common shares in the fourth quarter. Maritza will go into more detail on these numbers shortly. Please turn to page four. We accomplished many of our strategic and financial goals last year. Earnings per share increased 8.3% on a 2.8% increase in total core revenues. Total assets grew 8.4% to a record $12.5 billion. Core deposits grew 5% to $9.9 billion. Loans grew 5.3% to $8.2 billion with commercial loans growing to $3.5 billion now representing 43% of our loan book. In addition, new loan production increased 11.5% to $2.6 billion. We repurchased close to $92 million of shares and increased our dividend 20%. Business activity is robust in Puerto Rico, the outlook. Economic growth is positive, and businesses and the consumer are resilient. Having said all that, one of our biggest strategic and financial accomplishments of 2025 was the progress we made with our digital-first strategy. Please turn to page five. Over the last two years, we have clearly emerged as a leader in banking innovation in Puerto Rico. Our digital focus gives us a differentiated approach and provides customers with a unique enhanced experience. In 2024, we introduced the Libre Account for the mass market and the Elite account for the mass affluent market. Both Libre and Elite have been successful in attracting deposits from new and existing customers. In addition, we enhanced our Oriental Biz account suite making treasury management easier and more secure for small businesses, driving a 5% increase in commercial customers during 2025. We have further enhanced the customer experience through technology. In 2025, we launched our omnichannel platform. This provides customers with a seamless banking experience anywhere they choose to interact, transforming the branch into a place for building customer relationships. With our intelligent banking model, customers now receive tailored insights based on cash flows and payment habits. Helping them access and monitor their finances with real-time value-added tools to improve their financial life from their mobile phones. Please turn to page six. All this has directly contributed to our increased market share in retail deposits and a 4% growth in retail customers. To put this into perspective, we have provided data showing our progress over the last two years. As you can see, OFG is well-positioned for continued success in the coming years. Now here's Maritza to go over the financials in more detail. Maritza Arizmendi: Thank you, José. Let's turn to page seven to review our financial highlights. All comparisons are to the third quarter unless otherwise noted. Core revenues totaled $185 million, an increase of $1.4 million. Total interest income was $197 million, a decrease of $3 million. This reflected higher average balances of loans and cash at lower average yields. This was partially offset by higher average balances of investment securities at slightly higher yields. Total interest expense was $44 million, a decrease of $1 million. This reflected higher average balances of deposits and borrowings at lower average rates. Total banking and financial service revenues were $33 million, an increase of $3.4 million. This mainly reflected increased wealth management revenues due to $2.3 million in annual insurance commission recognition. The other income category was a loss of $1.11 million compared to a profit of $2.2 million in the third quarter. The change reflects $6.1 million for accelerated amortization of technology-related assets. Gains of $3.9 million on the sale of nonperforming loans and $1.1 million on the sale of free real estate. Please note that the third quarter benefited from gains from OFG Ventures investment in fintech hubs. Looking at non-interest expenses, they totaled $105 million, up $8.5 million from the third quarter. This reflected $3.3 million in professional services fees related to performance-based advisory costs. This was part of the cost savings renegotiation of our technology service contract. $2.5 million of business rightsizing and $1 million related to the previously mentioned acceleration of technology-related assets. Compared to the third quarter, there were $1.7 million in increased costs related to an additional accumulation of performance bonuses, expanded marketing activities, and the sales of foreclosed assets. For 2026, we currently expect that total non-interest expense to be between $380 million to $385 million. Income tax was a benefit of $8.5 million due to two discrete items. $12.9 million from the expiration of a tax agreement from the 2019 acquisition of Scotia and Puerto Rico and USVI operations and $3.9 million from a release evaluation allowance of deferred tax assets at the holding company level. Excluding discrete benefits, the estimated tax rate for 2025 was 21.8%. Looking at some other metrics, tangible book value was $29.96 per share. Efficiency ratio was 56.7%, return on average assets was 1.81%, and return on average tangible common equity was 17.2%. Now let's turn to Page eight to review our operational highlights. Average loan balances were $8 billion, up slightly from the third quarter. This reflected increases in Puerto Rico commercial loans, partially offset by lower balances in auto and residential mortgage. Loan yield was 7.73%, down 70 basis points. This was mainly due to the effect on variable rate commercial loans from the Fed's 50 basis point rate cut in the fourth quarter. New loan production was $606 million compared to $624 million. This reflected decreases in Puerto Rico and U.S. commercial and consumer lending, partially offset by increases in auto and residential mortgage lending. Average core deposit balances were $9.9 billion, up almost 1% from the third quarter. This reflected increases in retail, commercial, and government balances. By account type, it reflected increases in demand, time, and saving deposits. Core deposit cost was 1.42%, down five basis points. This was mainly due to the lower cost of government deposits. Excluding public funds, the cost of deposit was 102 basis points compared to 103 basis points in the third quarter. Investments totaled $2.8 billion, down $96 million. This reflected principal paydowns and maturities and it was partially offset by purchases of $25 million of mortgage-backed securities and residential mortgage securitization of $21 million. Average borrowings and broker deposits were $787 million compared to $769 million in the third quarter. The aggregate rate paid was 4.03%, down eight basis points from the third quarter. End of period balances were $897 million compared to $746 million. This reflected increased broker deposits for liquidity management. End of period cash at $1 billion was 41% higher reflecting increased core and brokered deposits. Net interest margin was 5.12% within the range we had expected. Please turn to page nine to review our credit quality and capital strength. Credit quality continues to be resilient. Provision for credit losses was $31.9 million, up $4 million from the third quarter. This reflected $21 million for increased loan volume, $5.1 million for a specific reserve on a Puerto Rico telecommunications commercial loan, $2.4 million related to the U.S. macroeconomic factors, and $1.7 million in charge-offs from the sale of nonperforming loans. Net charge-offs totaled $27 million, up $6.7 million. Net charge-offs included $4.8 million related to the sale of nonperforming loans, of which $3.1 million had been previously reserved. Looking at other credit metrics, we observed the typical seasonal pattern of higher delinquency and nonperforming levels during the year-end period. Despite this, overall credit quality remains within expected ranges. Early delinquency rate was 2.8%, down from the third quarter and down year over year. Total delinquency rate was 4.18%, up from the third quarter but down year over year. The nonperforming loan rate was 1.59%, due to the move to nonaccrual classification of the Puerto Rico telecommunication loan that I mentioned. On the capital side, our CET1 ratio was 13.97%. Stockholders' equity totaled $1.4 billion, up $15 million, and the tangible common equity ratio decreased eight basis points to 10.47%. To summarize the year, loans and core deposits both grew about 5% in 2025. This year, we expect loans to continue to grow in low single digits. We also expect retail and commercial deposits to increase with Libre plus Elite, Oriental Biz, and our digital offerings driving customer growth. As for the large Puerto Rico government deposits, $500 million moved this month to our wealth management business as an advisory account. The remaining $600 million is staying a variable rate for deposit. Net interest margin was 5.27% for 2025. Looking ahead, net interest margin should range between 4.95% to 5.05% in 2026. That takes into account two more 25 basis point cuts, the effect of the partial exit of the government deposit, and the incremental cost of funding to replace it. Noninterest expense totaled $89 million in 2025. We currently expect them to be between $380 million to $385 million this year. Credit should remain steady, reflecting the strong economic environment in Puerto Rico. Our effective tax rate for 2026 should be around 23%, excluding any possible discrete items. Capital should continue to build, enabling us to continue to return capital to shareholders through dividends and buyback shares on a regular basis. Now here's José. Thank you, Maritza. Please turn to Page 10. José Rafael Fernández: The Puerto Rico economy continues to be steady with a sustainable long-term outlook. Liquidity is solid, businesses and consumers remain resilient, and unemployment is low. Public reconstruction funds and private investments are providing economic tailwinds. Manufacturing investments are continuing from multinational companies seeking onshoring solutions, particularly in the pharmaceutical and medical devices sectors. Having said that, we always have to closely monitor all the global macroeconomic and political uncertainties these days, and their potential impact on Puerto Rico. Turning to OFG, the success of our differentiated positioning has been evident over the last several years. We will continue to focus on the client experience with enhanced product tailoring strategies. Our Libre plus and Elite accounts offer AI insights and tools not available elsewhere in Puerto Rico. Commercial loan and deposit account growth is benefiting from deeper relationships and services, and credit and asset quality are sound and well controlled. The technology investments we make and our continuous improvement culture are starting to produce tangible efficiencies. All of these give us confidence in sustainable long-term growth across our core businesses. As always, we could not have achieved these results without the hard work of our dedicated team members. We're very thankful to them and excited about our future. With this, we end our formal presentation. Operator, let's start the Q&A. Thank you. Operator: If you have a question at this time, please press 1 on your telephone keypad. Press 2. Again, if you would like to ask a question, press star, then the number 1 on your telephone keypad. We'll take our first question from Kelly Motta of KBW. Please go ahead. Your line is open. Kelly Ann Motta: Hey, good morning. Thanks for the question. Maybe to just kick it off with credit, given that provisions were a bit elevated for the second quarter now. Can you provide additional color into the larger Puerto Rico charge-offs this quarter as well as there was some movement in NPLs with some sales? Can you provide more color as to what was done there and what migrated back in? Thank you. José Rafael Fernández: Hi, Kelly. This is José. I'll let Cesar take that question. Cesar A. Ortiz-Marcano: So the charge-offs that you're looking at in the quarter are the result of a sale that we performed that released $17 million in nonperforming loans during the quarter. And that release triggered charge-offs, etcetera. But the result at the end of the day was a gain of $3.9 million. We reported. Offset, of course, by the entry of a telecommunications loan that was recorded as nonaccrual nonperforming during this quarter. So that's basically the movement in nonperforming during the quarter in commercial. So, only one loan, and it's not something that it's across the portfolio. We just see this as very idiosyncratic. Maritza Arizmendi: Yeah. And just to add, and I shared a little bit on prepared remarks. There was a charge-off related to the sale, of about $4.8 million, and a big portion of it was already reserved. It was about $3.1 million that was already set. Kelly Ann Motta: Got it. And then on loan growth, I mean, you've been talking about auto being more competitive in prior calls and such. In terms of your outlook, for low single-digit loan growth ahead, can you provide additional color in terms of what's the driver of that? Is the expectation that auto will be kind of more muted like the past two quarters? José Rafael Fernández: Yep. Yeah. Yeah. That's a great point. We see auto starting to stabilize at these levels. As again, in Puerto Rico, you also are starting to see a stabilization in the new car sales. So we look at auto balances to be down in the year between 2-3%. We also see commercial loans up 5-6% during the year. Both Puerto Rico and US. So with that kind of a setup, see consumer going up a bit. Mortgage also is trending down, but less than in years past. We see low single digits as a reasonable target for us for loan growth overall. Kelly Ann Motta: Got it. Last question, if I can just sneak it in, is on your expenses. $380 to $385, you know, relative to your operating is relatively flat year over year. Can you provide like your confidence in that and the drivers of those increased efficiencies? Maritza Arizmendi: Well, yes, thank you for your question, Kelly. The range reflects our continuous investment in technology and people capabilities talent. To continue driving the digital-first strategy that we are deploying constantly in the bank. And we have seen certain efficiencies. Like, this year, we have, like, you look at our full-time equivalent employee, there are 30 less, 30 people. 60. Sixty altogether. No? So we continue to expect that number to go down. But we need to continue reinvesting. That's why we see expenses to continue to be flat this year, but we're thinking that by the end of the year, we will start seeing some of that saving and in 2027 and 2028, we see savings to accelerate. And we will see that more in a time you will wait for 2027, 2028. Yep. José Rafael Fernández: It's something that we've always been very cognizant of. These investments in technology they certainly have enhanced the customer experience in a significant way, and it's providing us the ability to grow and differentiate ourselves. But it also has a very intentional effort to bring efficiencies to the bank. And is the first year where we are seeing in 2026, we're seeing the expense range flattening it out. And it has everything to do with a little bit of what we've done in the past, but it's being more importantly on the culture of a continuous improvement and how do we look at processes to simplify them, make them more agile, and really try to eliminate interactions and processes that are very manual and with very little value add, try to convert them into technologies and use the blockchain and all the technology, all the robotics and all. We are starting to use all those things. And we feel more confident in our expense ranges in 26 for sure. And we will continue to work hard to bring additional expense reductions in '27 and '28. Maritza mentioned. Kelly Ann Motta: Great. Thank you so much. I'll step back. Appreciate the color. José Rafael Fernández: Yep. Thank you, Kelly. Thank you. Operator: Our next question comes from Arren Cyganovich of Turist. Please go ahead. Your line is open. Arren Cyganovich: Thank you. Good morning, José, I was wondering if you could talk a little bit about what you're viewing as the best strategic initiatives or your focused on strategic initiatives for 2026. Maybe relative to 2025, it seems like you're making a good push on the deposit side and, of course, always investing in technology. José Rafael Fernández: Yes. Thank you, Arren. So as we will continue to enhance our retail efforts. It's not something that we're gonna decelerate. So we will continue to invest in enhancing the customer experience and adding additional functionality to our omnichannel platform and drive additional benefits for our customers on the retail side, and you'll see some of those playing out throughout 2026. In 2026, our focus is gonna be much more on commercial. And we see a good opportunity as you saw, we grew 5%. Our commercial customers last year. And I think we have an opportunity here to continue to translate the same strategies that we have done in terms of technology and digital translate it as it is appropriate on the commercial side. And it's gonna be a journey. It's gonna be three years or so for us to be able to deploy all this and all that stuff. Well, that's where we're gonna be putting more effort. We see an opportunity for us to keep growing our commercial business and we think the Puerto Rican economy is supporting that. And I also as a bank feel compelled to invest in small and mid-sized clients and help them grow because that's critical for the growth of our economy here in Puerto Rico. We're really focused on the Puerto Rico market, and we feel that we have a great opportunity there. Arren Cyganovich: Thanks. And on capital return, I think we just said that she expects capital to build so to return capital to shareholders. I'm just trying to balance the two. What's the expectations for account for return for 2026? José Rafael Fernández: I think the fourth quarter capital actions that we took in terms of the buyback I think it's going to become more given our valuation. Right? Given the way the market is valuing our stock and given the multiples that they're assigning to us versus our peers, we feel the best use of our capital after loan growth and balance sheet growth is buying back shares. And so we will continue to be very intentional there. We certainly will also look at the dividend. But, again, we see some differentiation in the valuation there, and we feel that it's the best way to reward our shareholders by buying back shares. Arren Cyganovich: Great. And then just lastly, some clarification on your answer about expenses. The expense reductions in '27 and '28, is that more so thinking about the efficiencies that you're going to get from actions you're making this year? It's like And Correct. And then I guess I'm just thinking, like, is it actually gonna go down, or is are you gonna Yeah. Yeah. Yeah. So going down and some erosion on top of that. José Rafael Fernández: I don't wanna put the cart in front of the horses. Right? But I tell you, you're working we're working very hard to bring additional efficiencies during 2026 that will play out in '27 and '28. We will give you more details as we execute on those initiatives. But as Maritza mentioned, we are looking at FTEs and where can we redeploy our people talent to more customer-facing and value-add building relationships type of talent versus having FTEs sitting behind a desk in operations and servicing and pushing papers and dealing with Excel spreadsheets to manage different functions. And I can give you an example. We have been able to optimize the entire fraud management processes just simply by using robotics and being able to eliminate several FTEs that were basically managing fraud on a daily basis. And those are some of the small examples that we can provide. And I'm sure, you know, many banks in the US and in Puerto Rico are also doing the same. We're trying too hard to bring down expenses. Not without investing in technology, investing in our people, and continuing to do the right thing for the long term of our franchise. Which is critical for us. It's important. Arren Cyganovich: Great. Thank you. José Rafael Fernández: Yep. You're welcome. Operator: Thank you. We will move next with Brett Rabatin of Hovde Group. Please go ahead. Your line is open. Brett Rabatin: Hey. Good morning, everyone. Wanted to start on the margin and just on the fourth quarter, wanted to get a little better color on the linked quarter change in the loan yields. Which had been fairly stable up until this quarter. So this the 17 basis point linked quarter change, was just hoping to figure out how much of that was the large nonaccrual loan and any other comments on the loan portfolio yield change linked quarter? Maritza Arizmendi: Yep. My name is Alex. Yeah. You. Thank you, Brett, for your question. And you know, remember that we are asset sensitive and we continue to be asset sensitive and this quarter, as I mentioned in my prepared remarks, the loan yield went down basically because of first, 50 basis point cost during the quarter, but also we have the full effect of the September 25 basis cost. So that's one of the main drivers for the reduction in the NIM, and we were able to compensate that to our government deposit variable rate because it also got a reduction there. But it reflects our asset-sensitive positioning. Yep. I think also, you're also on the loan side. You're starting to see since we have moved our auto originations to higher significantly higher quality, we have been able to we are also seeing a slight decrease in the yield coming in on the auto lending side. And that's just a testament to the credit quality that we're bringing in, better credit quality. Brett Rabatin: Okay. That's helpful. And then just thinking about the margin guidance for '26, it was nice to see that the funding cost which were up a little bit in 3Q, moved back down in the fourth quarter. Is the margin guidance for 26%, does that reflect some additional leverage to lower funding costs from here? You know, one of the key things that's always been a question is Puerto Rico has lower cost deposits. The mainland, you know, how much can those go down? As rates go down given they're already fairly competitively priced? Maritza Arizmendi: Yeah. The reality is when you look forward for this year, 2026, we will have a change in our funding mix because the $500 million exit, $500 million exiting the bank, you know, moving to the wealth management business. And we will replace that with wholesale funding, and that carries a higher cost of about 25 basis point to 40 basis point depends on the term of that wholesale funding, but the reality is that we will have that change. And that's part of the impact of the NIM. But when you look at 2026, 2026 will have the full effect of the 75 basis point cut that happened in the last part of 2025. Will have all that full effect, plus we are also foreseeing two additional cuts during 2025. And we are sensitive. We have more assets repricing than the deposit side. And that's why we are giving that indicative in the margin. Okay? That guidance. And when you look at 2024 basis 2025, it reflects that. You know, we had a margin in 2024 of 5.43%. This year, it was 5.27%. It was about 16 basis points reduction, and it's related to the rate cuts that 100 basis point late 2024. And this year, 75 basis point end of 2025. Brett, and could also add as you saw this quarter and you saw throughout 2025, core deposits, excluding government, went up. On the retail side as well as on the commercial side. And that is also something that we expect to help mitigate what Maritza just said. Right? Because the more core funding that we bring in, it's gonna be cheaper than wholesale funding. So you know, our margin guidance is the margin guidance, and that's how we see it. But we're gonna be working hard to beat that margin guidance as you guys can expect. So we'll update everybody on the first quarter when we talk again. Brett Rabatin: Okay. If I could ask one last one, the other thing I was hoping to figure out was if you look at slide 20, it has the auto portfolio net charge-off rate. It was a little bit higher in the fourth quarter as were NPLs. And just wanted to see if the higher level in 4Q, if that seems to be an anomaly, a year-end cleanup of the portfolio or what have you. You know, versus something maybe you're seeing with the book? Cesar A. Ortiz-Marcano: Yeah. Seth, I can take that one. This is a like Maritza mentioned before, it's typical that the seasonality of the portfolio starts very low in terms of delinquencies and nonperforming loans in the first quarter of the year, and then it tickles up until the fourth quarter. And at the fourth quarter, got the upper level of that equation. But next year jobs, if you compare this next year job, we usually compare it to last year. Same period last year. And what you saw what you see there is 1.63 last year. But that was benefited by because we sold charge-off portfolio. Without that sale, that number would have been 1.86%, and we are right now at 1.81%. This quarter. So it is a positive sign. But, you know, but again, the seasonality of the portfolio will result in an increase in delinquency in this quarter, but we expect that benefit in the next quarter. You're gonna see a positive effect on all those metrics. José Rafael Fernández: Yeah. Cesar A. Ortiz-Marcano: Okay. So it's That's helpful. Central and lower. Brett Rabatin: I'm sorry. The year is no. It's just end of the year seasonality. And we'll keep on keep you guys updated in the first part of the year and see if that turns around again. But that's what we've seen in the last three years. We'll be watching closely in the part of this year to see if that replicates again. Brett Rabatin: Okay. Okay. Great. Thanks for all the color. José Rafael Fernández: Yeah. Thank you for your questions, Brett. Operator: Thank you. Our next question comes from Timur Braziler with Wells Fargo. Please go ahead. Your line is open. Timur Felixovich Braziler: Hi, good morning. Maybe bigger picture on the credit. Hi. Can you hear me? José Rafael Fernández: Operator, we can't hear anymore. Timur Felixovich Braziler: Here. One second. How about now? Can you hear me? Operator: Hello. Timur Felixovich Braziler: Can you hear me now? Operator: Timur, we are able to hear you. One moment, please. Sure. Timur Felixovich Braziler: Hey, and for the interruption speakers, are you able to hear us? Is this better? José Rafael Fernández: I can hear now I can hear Okay. Timur Felixovich Braziler: Perfect. Sorry about that. Maybe just a bigger picture on credit. You know, if we look at kind of 1% full-year charge-off rate, is that kind of a good proxy for where we are in this post-pandemic cycle? And then if you look at the allowance ratio, you know, year over year, you added a little bit over $25 million to allowance. You built that to almost, you know, 2.46% of loans. I guess, how do we think about the allowance build in 2025, what that might portend for charge-off activity in 2026, and then you know, what does a stabilized level of credit activity look like going forward here? Maritza Arizmendi: Well, I think that the 1% range that you mentioned is within what we can expect here in the in HR two. If you look at 2025 without any specifics of the sales or any particular case, that should be a good run rate. When we think about how we build the reserve, please be mindful that there's some specific reserve at the end of this year related to the telecommunication loan. So that's a very isolated case, very specific. So setting that aside, I think that we could continue monitoring credit and building this stuff as needed, but 1% net charge-off delinquency remaining this the level that we're managing this year. Maybe we won't be reserved at the same level because of the specific that we have this quarter, but definitely it could be about flat from what we have right now. Excluding any specific case that we have managed during the year. Okay? Timur Felixovich Braziler: Got it. And then the telecom credit this quarter, was there anything incremental that happened in 4Q that drove the activity? Or is this just really recalibration of maybe what the other banks were talking about in the third quarter and you guys kind of catching up to that same level of reserving in the fourth quarter? Cesar A. Ortiz-Marcano: No. It's basically, we receive financials every period. So last period, you know, they didn't, you know, warranted right away, you know, no closed out. But this period, it repeated the deterioration of the on the financials. So basically, we decided, yeah, this is a situation that merits the no approved status. Maritza Arizmendi: Yeah. And at the end, this is a loan that is continuing to pay. You know, it stays paying. So what we're doing is being prudent on giving the specific situation of the company that comes from the outcome of a merger we decided to put it in. Timur Felixovich Braziler: Got it. That's great color. Thank you. And then just last for me, you guys have had really good success rolling out some of these retail deposit products during the course of 2025 that have been, you know, differentiated from what the island typically sees. I'm just wondering from a competitive standpoint, what's been the reaction? And as you think about, you know, Puerto Rico ex public fund deposits, during 2026, during 2027. Does it feel like the competitive nature is shifting now, and do you still think you can maybe get those lower with these rate cuts, or is the competitive nature such that even with these rate cuts, the cost of the core Puerto Rican deposits are likely continuing to rise here? José Rafael Fernández: Yes. I think the competitive landscape is slowly but surely intensifying. I think each institution has its own drivers. Right? And some of the drivers that come in from the reinvestment in the investment portfolio at a higher yield gives flexibility to be more competitive and more aggressive on some of the CD offerings and stuff like that. So I'm not saying that we are going out crazy here in the market in Puerto Rico in terms of deposits, but it's slightly and slowly but surely getting more intense in terms of deposit competition. Also, be aware that we have credit unions, US credit unions that have been for the last three or four years very aggressive. They remain so. And that is also part of the equation here in Puerto Rico, these tax-exempt credit unions. They have another lever there that allows them to be more aggressive on the deposit side. So that's our strategy is to target the mass and the mass affluent. We have come up with the products. We have come up with the in terms of our platforms and technology and the way we do the business. That's the formula that we're using. And it's paying off. I'm sure, our friendly and larger competitors are also doing their thing, and I'm sure they're going to be very competitive throughout. So it's just now blocking and tackling and trying to achieve organic growth on the loan side and on the deposit side. And it's exciting for us at this juncture how we are well-positioned to achieve both. Timur Felixovich Braziler: Got it. Thanks for the color. Appreciate it. José Rafael Fernández: Yep. Thank you, Timur. Operator: Thank you. We will move next with Manuel Navas with Piper Sandler. Please go ahead. Your line is open. Manuel Navas: Hey, good morning. I just wanted to follow-up on that last question. Has there been any price response from other players on the island from your new, Libre and Elite products? And where are those having the most success? Yeah. Happy to hear a little bit more on those two products as well. José Rafael Fernández: So there's no need to have a price response because we're not paying high yield. So, I don't know where the idea that we're kind of bringing in higher yields or so. It's actually, the Libre account is a noninterest-bearing account. So I don't know where that comes from. But Elite does pay 1.28% average cost of funds on the balances that we have. And that is the way we approach the mass affluent, and it's paying off, and it's doing well. Because it's not about the rate only. It's about what we offer as a product and what is the value that we bring into the equation here. And it's not only a rate. It's more than a rate. It's the functionality. It's the accessibility. It's the everyday, every time, anywhere, wherever you are. And the fast, the agile way we service our customers in any that they have with us. That brings us the ability to attract, deepen, and expand relationships across markets that we operate, which is here in Puerto Rico. So reaction from the competition, zero. There's no increase in competition in terms of rates here. What we're seeing is more on a targeted basis, CD rates, and that's what I have mentioned earlier, Manuel. Manuel Navas: Alright. I appreciate that. And it is pretty early innings, but are you seeing that deeper relationship? Are you seeing younger clientele in these accounts as well given they're a little bit more digital forward? José Rafael Fernández: Actually, that's a good point, Manuel. Given Puerto Rico's demographics, what we're seeing is that I'll share this information 75% of the accounts that we're opening on the Libre account are new customers. 40% of those are 29 years or younger. And to us, that is extremely positive. Because it allows us to build a long-term relationship and build a long-term franchise with them. So it's exciting times for us. That's kind of the crux of the matter. You actually pointed out one of the great things that is going on in the last couple of years. Manuel Navas: I appreciate that extra color. Going back to the NIM for a moment, as you're targeting a little different auto client and commercial loans are adjusting. What are kind of some of your new yields coming on, especially in those two categories in auto and commercial? José Rafael Fernández: So commercial, remember, our commercial originations are 50% fixed, 50% variable. And the rates are depending on the type and the size of the commercial loan, but it ranges between, let's say, 275 to 350 basis points above the term that we're lending at. So that's kind of I'm giving you a range, and it can get on the lower end when it's a larger account, a larger loan, or if it's a small business or a larger commercial account or loan. So that's on the commercial side. On the auto side, I think the yields are in the eight handle, eight and change. It is coming from the higher eight levels. It's now stabilizing around eight thirty or eight forty or something like that, between eight thirty and eight fifty. And it's all about, certainly competition, but also us originating close to 90% of our loans in prime and super prime loans. Manuel Navas: That's really helpful. And then I guess my last question is, is there a level, I appreciate the commentary around the buyback. The pace was a little accelerated in the fourth quarter. Do you think we stay at this fourth quarter pace? And is there any price sensitivity, or where is there some price sensitivity on repurchases? José Rafael Fernández: Oh, I'll repeat what I said earlier, Manuel, because we don't have a price target. We do see the market being of penalizing us a bit in terms of the multiples that they're pricing us at. So I think we kind of look at the market in general. We see where we can deploy our capital in terms of loan growth. This year, we're probably going to grow single digits, as I said earlier, low single digits. Because of what I mentioned earlier on the auto. So we might have more ability to deploy capital through buybacks throughout the year. But we don't have a set number or a set stock price to go after. It's just part of our natural ongoing capital management strategies. Manuel Navas: I really appreciate the commentary. Thank you. José Rafael Fernández: Yep. Thank you for your questions, Manuel, and welcome to the calls. Cesar A. Ortiz-Marcano: Thank you. Yeah. Thank you. Operator: And once again, if you would like to ask a question, please press star then the number one on your telephone keypad. And at this time, there are no further questions. I will now turn the call back over to management for closing remarks. Arren Cyganovich: Thank you, operator, and thanks again to all our team members. José Rafael Fernández: Thanks. To all our shareholders who have listened in. Looking forward to our next call. Have a great day. Operator: Thank you. This does conclude today's program. Thank you for your participation, and you may disconnect at any time.
Operator: Welcome, everyone. The Texas Capital Bancshares, Inc. Full Year and Q4 2025 Earnings Call will begin shortly. To ask a question, please press star followed by one on your telephone keypad. Thank you. Hello, everyone, and thank you for joining the Texas Capital Bancshares, Inc. Full Year and Q4 2025 Earnings Call. My name is Claire, and I will be coordinating your call today. During the presentation, you can register a question by pressing star followed by one on your telephone keypad. If you change your mind, please press star followed by two on your telephone keypad. I will now hand over to Jocelyn Kukulka from Texas Capital Bancshares to begin. Please go ahead. Jocelyn Kukulka: Good morning, and thank you for joining us for Texas Capital Bancshares' Fourth Quarter 2025 Earnings Conference Call. I'm Jocelyn Kukulka, of Investor Relations. Before we begin, please be aware this call will include forward-looking statements that are based on our current expectations of future results or events. Forward-looking statements are subject to both known and unknown risks and uncertainties that could cause actual results to differ materially from these statements. Our forward-looking statements are as of the date of this call, and we do not assume any obligation to update or revise them. Today's presentation will include certain non-GAAP measures, including, but not limited to, adjusted operating metrics, adjusted earnings per share, and return on capital. For reconciliation of these and other non-GAAP measures to the corresponding GAAP measures, please refer to the earnings press release and our website. Statements made on this call should be considered together with the cautionary statements and other information contained in today's earnings release, our most recent annual report on Form 10-Ks, and subsequent filings with the SEC. We will refer to slides during today's presentation which can be found along with the press release in the Investor Relations section of our website at texascapital.com. Our speakers for the call today are Rob Holmes, Chairman, President and CEO, and Matt Scurlock, CFO. At the conclusion of our prepared remarks, the operator will open up the call for Q&A. I'll now turn the call over to Rob for opening remarks. Rob Holmes: Thank you for joining us today. 2025 was a defining year in this firm's history. In the third quarter, we achieved our stated financial targets, marking completion of our transformation and delivering the largest organic profitability improvement of any commercial bank exceeding $20 billion in assets over the past two decades. We reinforced this achievement in the fourth quarter with a 1.2% ROAA, demonstrating that our third quarter performance was not an anomaly but instead reflects firm-wide client obsession, unwavering commitment to operational excellence, and a balance sheet and business model increasingly centered on the high-value client segments that we are uniquely positioned to serve. Full-year adjusted ROAA of 1.04% represents a 30 basis point improvement versus 2024 and signals a fundamental improvement of our earnings power. The result of disciplined execution, strategic investments, conservative portfolio management, and sustained operational leverage. Our comprehensive 2025 results validate this trajectory. Record adjusted total revenue of $1.3 billion. Record adjusted net income to common stockholders of $314 million. Record adjusted earnings per share of $6.8. Record adjusted pre-provision net revenue of $489 million. Record fee income of $192 million from strategic areas of focus. Equally important, we achieved record tangible common equity to tangible assets of 10.56% and record tangible book value per share of $75.25. Metrics that underscore both the quality of our earnings and the prudence of our capital allocation strategy. Our disciplined capital allocation process remains focused solely on driving long-term shareholder value. We continue to bias capital towards franchise accretive client segments, evidenced by commercial loan growth of $1.1 billion or 10%. And interest-bearing deposits excluding brokered and indexed, increased $1.7 billion or 10% year over year. During periods of market dislocation in 2025, we opportunistically repurchased 2.2 million shares, or 4.9% of prior year shares outstanding, and approximately 114% of prior month tangible book value per share. Since 2020, we repurchased 14.6% of our starting shares outstanding at a weighted average price of $64.33 per share, while adding 340 basis points to our peer-leading tangible common equity to tangible assets ratio. These achievements demonstrate a fundamentally stronger business model, one positioned to deliver consistent, industry-leading returns and sustainable value creation for shareholders. Having established a strong foundation, our strategic focus now shifts to consistent execution and realizing the full potential of our investments. Our infrastructure, talent, and platforms are designed for scale, enabling us to handle significantly higher volumes and revenue while maintaining disciplined expense management. A defining driver of our improved profitability is the diversification and growth of our fee income streams. Fee income areas of focus generated $192 million in 2025, with substantial growth opportunity ahead. These businesses are differentiated in the market, capital efficient, and provide revenue stability across economic cycles. Focused investment in product capabilities, technology platforms, and talent will drive fee income as a percentage of total revenue higher, further enhancing our return profile and reducing earnings volatility. Transformation over the past several years has fundamentally repositioned Texas Capital as a scalable, high-performing franchise. This positions us in a new phase of consistent execution and compounding returns. The combination of balance sheet growth, operating leverage, and fee income expansion creates multiple paths to enhance profitability and sustainable shareholder value creation. Our focus is clear: execute with discipline, scale with intention, and deliver consistent superior returns. Our strategy, platform, talent, and momentum position us to achieve these objectives. Thank you for your continued interest in and support of Texas Capital. I'll turn it over to Matt for details on the financial results. Matt Scurlock: Thanks, Rob, and good morning. Starting on Slide five. Fourth quarter results capped a record year with broad-based improvements across all key metrics. Our increasingly durable business model, uniquely positioned to deliver high-quality client outcomes, is translating into sustainably strong financial performance that we knew was possible when this transformation began. For the second consecutive quarter, adjusted return on average assets exceeded our legacy 1.1% target, reaching 1.2% in Q4. The 2025 delivered 1.25% return on average assets, while full-year adjusted ROAA of 1.04% represents a 30 basis point improvement versus 2024. A testament to the strategic repositioning we've executed since September 2021. Over year quarterly revenue increased 15% to $327.5 million as a resilient net interest margin, strong fee generation, and improved expense productivity supported the second consecutive quarter of pre-provision net revenue at or near all-time highs. Full-year adjusted total revenue reached $1.26 billion, the highest in firm history, up 13% year over year. This reflects 14% growth in net interest income to $1.03 billion and 9% growth in adjusted fee-based revenue to $229 million, marking the third consecutive year of record fee income and underscoring the durability, diversification, and scale potential embedded in our current platform. Full-year adjusted noninterest expense increased modestly by 4% to $768.9 million, consistent with our full-year guidance, demonstrating our proven ability to effectively support investment and growth capabilities while delivering continued operating model improvements. Quarterly adjusted noninterest expense decreased 2% or $4.2 million to $186.4 million, benefiting from continued expense realignment and regular accrual adjustments that resulted in outperformance relative to the guide. Taken together, full-year adjusted PPNR increased $119 million or 32% to $489 million, a record high for the firm. This quarter's provision expense of $11 million resulted from $10.7 million of net charge-offs on a relatively flat linked quarter total loan balance. With our continued view of the uncertain macroeconomic environment, which remains decidedly more conservative than consensus expectations, full-year provision expense as a percentage of average LHI, excluding mortgage finance, came in at 31 basis points, the low end of our prior 2025 full-year guidance. Supported by year-over-year improvements in portfolio quality metrics. Adjusted net income to common at $94.6 million for the quarter or $2.8 per share increased 45% year over year, while full-year adjusted net income accounted for $313.8 million or $6.8 per share improved 53% over adjusted 2024 levels. This financial progress continues to be supported by a disciplined capital management program contributed to 13.4% year-over-year growth in tangible book value per share to $75.25, an all-time high for the firm. Our balance sheet metrics continue to reflect both operational strength and financial resilience, with ending period cash balances of 7% of total assets and cash and securities of 22%, in line with year-end targeted ratios. Focus routines on target client acquisition are delivering risk-appropriate and return-accretive loan portfolio expansion. The commercial loan balance is expanding $254 million or 8% annualized during the quarter. Total gross LHI increased $1.6 billion or 7% year over year to $24.1 billion, with growth driven predominantly by commercial loan balances, increased $1.1 billion or 10% year over year to $12.3 billion. As expected, real estate loans declined $31 million quarter over quarter, as payoffs and paydowns outpaced construction fundings and new term originations in the fourth quarter. The full-year average commercial real estate loan balances did increase modestly year over year. Our expectation is for commercial real estate payoffs to continue into 2026, with full-year average balances down approximately 10% year over year. Our portfolio composition remains weighted to conservatively leverage multifamily, further characterized by strong sponsorship and high-quality markets. Average mortgage finance loans increased 8% linked quarter to $5.9 billion, driven by strong industry demand, our clients' preference for our offerings, and what is an increasing holistic relationship. And modestly increasing dwell times. Average mortgage finance loans grew 12% for the full year, slightly outpacing guidance. Given unpredictability and rate expectations, we remain cautious on our outlook for average mortgage finance balances going into 2026. Estimates from professional forecasters suggest total market originations to increase by 16% to $2.3 trillion in 2026, compared to our internal estimates of approximately 15% increase in full-year average balances should the rate outlook remain intact. As we contemplate potentially higher volumes in the mortgage finance business, it is important to note the material changes in this offering over the previous few years. In addition to the significant credit risk and capital benefits of the approximately 59% of existing balances now in the well-discussed enhanced credit structures, over 75% of current mortgage warehouse clients are now open with our broker-dealer. Nearly all maintain treasury relationships with the firm, which collectively drives significantly improved risk-adjusted returns should the industry realize anticipated 2026 growth. Full-year deposit growth of $1.2 billion or 5% was driven predominantly by our continued ability to effectively leverage growth in core relationships, to serve the entirety of our clients' cash management needs, partially offset by our continued programmatic reduction in mortgage finance deposits. Trends are evidenced in part by our sustainability to effectively grow client interest-bearing deposits, which when excluding multiyear contraction and index deposits are up $1.7 billion or 10% year over year, while also effectively managing deposit betas, which are 67% cycle to date inclusive of the mid-December cut. The quarter, ending noninterest-bearing deposits excluding mortgage finance increased 8% or $233 million. Average noninterest-bearing deposits excluding mortgage finance remaining flat at 13% of total deposits linked quarter. Period-end mortgage finance noninterest-bearing deposit balances decreased $963 million quarter over quarter as escrow balances related to tax payments begin remittance in late November, and run through January, before beginning to predictably rebuild over the course of the year. For the quarter, average mortgage finance deposits were 85% of average mortgage finance loans, down from 90% in the prior quarter and 107% in Q4 of last year. We expect the mortgage finance self-funding ratio to remain near these levels in the first quarter, with potential for further improvement expected during the seasonally strong spring and summer months. The cost of interest-bearing deposits declined 29 basis points linked quarter to 3.47%, and 85 basis points from 2024. Accounting for realized beta on the December cut, we expect cumulative beta to be in the low seventies by the end of the first quarter assuming no Fed actions during Q1. Our model earnings at risk increased modestly this quarter, with current and prospective balance sheet positioning continuing to reflect the business model that is intentionally more resilient to changes in market rates. Despite short-term rates declining approximately 100 basis points during 2025, we delivered 14% full-year net interest income growth, 13% total revenue growth, and a 45 basis point year-over-year increase in net interest margin. This resilience is in part the result of disciplined duration management and acknowledge of our improved ability to deliver returns through cycle. During Q4, $250 million in swaps matured at a 3.4% receive rate. Replace this with $1 billion in receive fixed over swaps executed at 3.41%. Additional $400 million in swaps at a 3.32% received rate became effective early Q1. Looking ahead, we will continue disciplined use of our securities and swap book appropriately augment rates following generation, embedded in our current business model. Quarterly net interest margin declined nine basis points and net interest income decreased $4.3 million reflecting timing differences related to lower interest rates on our super weighted loan portfolio relative Fed fund driven deposit cost reductions realized in the quarter. The benefit of reduced deposit costs will be more fully reflected in January's financials. Year-over-year quarterly net interest margin expanded 45 basis points, driven primarily by favorable deposit betas and structural improvements in portfolio efficiency, including a reduction in our mortgage finance self-funding ratio from 107% to 85%. Fourth quarter adjusted noninterest expense increased 8% relative to the same quarter last year, primarily driven by higher salaries and benefits expense aligned with investment in our areas of focus. As a reminder, first quarter noninterest expense is expected to be elevated due to annual accrual resets and seasonal payroll and compensation expense. Full-year adjusted noninterest income grew 8% to $229 million, a record for the firm. Fee income from our areas of focus continues to differentiate our client positioning and strengthen our revenue profile. Treasury product fees again delivered industry-leading growth, increasing 24% for the full year. This growth reflects robust client acquisition and 12% gross P times V expansion, both significantly outpacing industry benchmarks and demonstrating our competitive advantage in getting the primary operating relationship with our target clients. Investment banking achieved substantial scale expansion, with transaction volumes across capital markets, capital solutions, and syndications climbing nearly 40% year over year. While average capital markets deal sizes contracted relative to 2024, this material increase in volume underscores our deepening market penetration and the expanding nature of relationships across the target client universe. Total notional bank capital arranged increased 20% this year, positioning us as the number two ranked arranger for traditional middle market loan syndications nationwide. This ranking reflects our market leadership and a core client segment. and ours. While highlighting our ability to provide client financing solutions that best fit both their balance sheet Texas Capital Securities delivered noteworthy traction as well. With 2025 volume increasing 45% year over year. Together, these results validate our focus on building diversified, scalable revenue streams while deepening our primary operating relationships with middle market and corporate clients. Total allowance for credit loss, including off-balance sheet reserves of $333 million, remains near our all-time high. Which when excluding the impact of mortgage finance allowance and related loan balances were relatively flat linked quarter, at 1.82% of total LHI. The top decile among the peer group. Net charge-offs for the quarter were $10.7 million or 18 basis points of LHI, related to several previously identified credits in the commercial portfolio. Positive grade migration trends over the first March of the year resulted in an 11% reduction year over year in criticized loans. During the fourth quarter, select commercial real estate multifamily credits migrated from past to special mention. These projects and lease up continue to require ongoing rental concessions to gain or maintain occupancy. Impacting net operating income in spite of material project specific equity and sponsorship support. Capital levels remain at or near the top of the industry. CET1 finished the quarter at 12.1% with full-year improvement 75 basis points, reflecting strong earnings generation, and disciplined capital management. Tangible common equity to tangible assets increased 58 basis points for the full year. A significant driver of capital strength is our mortgage finance enhanced credit structures. By quarter end, approximately 59% of the mortgage finance loan had migrated into these structures. Bringing the blended risk weighting to 57%. This improvement is equivalent to generating over $275 million of regulatory capital. With client dialogue suggesting an additional five to 10% of funded balances could migrate over the next two quarters. Further enhancing both credit positioning and return on allocated capital. During the quarter, we purchased approximately 1.4 million shares $125 million at a weighted average price of $86.76 per share. Representing a 117% of prior month's tangible book value. Full-year share repurchases totaled 2.25 million shares or $184 million, equivalent to 4.9% of prior year share outstanding. Finally, tangible common equity tangible assets finished at 10.6% ranked first amongst the largest banks in the country. While tangible book value per share increased 13.44% year over year to $75.25. The fifth consecutive record quarter for the firm. Looking ahead to 2026, our outlook reflects continued realized scale from multiyear platform investments. We anticipate total revenue growth in the mid to high single-digit range. Driven by industry-leading client adoption and continued growth in our fee income areas of focus. With full-year noninterest revenue expected to reach $265 to $290 million, anticipated noninterest expense growth in the mid-single digits reflects increased compensation expense tied to improved performance. Target expansion into fine client coverage areas, and platform investments meant to expand upon best-in-class client execution, further enhancing our operating resilience, supporting future enhancements to structural profitability. Given continued economic uncertainty and our commitment to operating from a position of financial resilience, we are moderating our full-year provision outlook to 35 to 40 basis points of average LHI excluding mortgage finance. Taken together, this outlook reflects another year of positive operating leverage and meaningful earnings growth. Operator, we'd like to now open the call for questions. Thank you. Operator: When preparing to ask your question, please ensure your device is unmuted locally. Our first question comes from Woody Lay from KBW. Woody Lay: Good morning, Lucas. One wanted to start on the investment banking and trading outlook and specifically the investment banking pipeline, I believe in 2025, you know, deals kinda got pushed to year-end just given some of the tariff volatility over the first half of the year. So how does the pipeline look entering 2026? And how do you think about pacing of investment banking fees relative to the back half of the year? Rob Holmes: Woody. Let me just give you a little facts on the investment bank performance in '25. We arranged about $30 billion of debt across term loan B, high yield, and private placement. And then on top of that, about $19 billion in lead less indications in the bank market. So we ranged about $49 billion of debt for our clients, which is very impressive. Broad new client penetration and leadership in the segment. IB transaction volume was up about 40%. The fees were much more granular. So people like you and others would suggest that's a healthy, better earning stream. Equities, we participated in more transactions than we had forecasted. And even though some got pushed, and sales and trading is past $330 billion of notional trades since the opening of the business. That's up about 45% since last year. So there's broad growth. We're starting to see repeat refinancings. Remember, we just really got into this business in earnest, like, three years ago. And so now you're starting to see the repeat of a client that came onto the platform three years ago, which will add to the earnings going forward. I would say that what you are really focused on in terms of things that got pushed was more in the M&A space and equity space. And we are seeing, and we do expect to see that pull through and pipelines remain very healthy. But it's very broad now. Public finance, best we can tell our public finance desk has grown for a de novo public finance desk faster than any public finance desk that we can find. And the synergies in the investment bank across commercial banking and corporate banking is proved to be very, very strong. Like, just the example, stay on public finance. Have a government, not-for-profit segment in corporate. Well, before we had Pug Finance, all we could really do lend to them short term and do the treasury. And now we can lend to them short term. We can do the treasury. We can do financings for them as well in the public markets. So it's working as anticipated. And we remain very, very optimistic and proud of the business. Matt Scurlock: What did the fee income from treasury wealth and investment banking top? $50 million for the second consecutive quarter which when you compare that to the $47.4 million of total fees for the full year 2020 from those three categories, so it's just how much progress we've made since announcing the transformation. Full-year guide for noninterest income is to increase 15 to 25% to $265 million to $290 million which is underpinned by investment banking fees of $160 million to $175 million. And if you just think about Q1 outlook as for stable linked quarter performance. So total noninterest income is $60 million to $65 million investment banking $35 million to $40 million which to Rob's comment, expectation of continued platform maturity and integration all the hires and capabilities that we've built over the last twelve to eighteen months. Driving positive trajectory both in fee income and investment banking as we move through the year. Rob Holmes: And I would just add one more first. It didn't happen in the fourth quarter. It happened this quarter, Woody, but we did lead our first sole managed lead left equity deal. Which we think is a first for a Texas-based firm for any period that we've been went back and found. So, really, really excited about the business. Woody Lay: That's great to hear. That's really, great color. I appreciate that all. Next, I just wanted to hit on capital and a little bit of a two-part question. First, just you were pretty active on the buyback front in the fourth quarter. Was that a reflection of the elevated CRE paydowns freed up some capital? And then the second question is, you know, you reiterated the CET one guide of over 11%. You know, you've been price sensitive on the buyback. Historically, stocks now trading well above where you bought in the fourth quarter. How do you think about additional buybacks from here? Matt Scurlock: Yeah. We're pushing CET one up 75 basis points to 12.13% while growing loans $1.6 billion or 7%, buying back 5% of the company for 114% of prior month tangible, and billing tangible book value per share by 13.44%. We're obviously pretty pleased with how we utilize shareholders' capital for their benefit in 2025. We're highly focused on doing it again in '26. And to your point, I think we have a lot of options at our disposal. The published strategic objective of being financially resilient to market and rate cycles for us is a core is paramount. And while we think we have significant capital in excess of internally observers profile Rob said repeatedly that carrying sector-leading tangible common to tangible assets is a raw material contributor to our ability to attract the right type of clients. That's gonna benefit the shareholder over time and is an advantage that we're currently unwilling to give up. I would say as the profitability continues to improve, the resources available support items on the capital menu also expands. So if you're trading at 1.3 times tangible, take the 2026 and 2027. Consensus estimates for ROE buying back today suggests that you're purchasing it book value in two and a half years. Which could certainly make sense for us given our internal view of forward earnings trajectory and then an ability to generate both book equity and regulatory capital. Rob Holmes: I think also what if we could to really focus well, I think humbly, we proved it pretty good allocators of capital over these over the past several years. With that Matt just outlined. But we also continue to drive structural improvements in the platform. So if you remember, we talked about the SPEs structure and mortgage finance. We have the majority of our mortgage finance sector clients in that structure now. 77% or over 70% of those clients are open with the dealer. We do treasury with basically a 100% of those clients. But when you move those clients, the sophisticated best of class clients to the SPE structure, you go from the risk weighting of a 100% down to sub 30% now on average, which clearly is a better model and releases capital. And, we're not gonna we'll forever try to drive efficiencies both in cost, but also capital in the businesses that we have to firm. Woody Lay: Alright. That's all for me. Thanks for taking my questions. Thanks. Operator: Thank you. Our next question comes from Michael Rose from Raymond James. Michael, your line is now open. Please go ahead. Michael Rose: Hey, good morning, guys. Thanks for taking my questions. Maybe just on the expense outlook. I think you mentioned, obviously, some wage inflation clearly and some hiring efforts. Can you just talk about some of the areas where you're looking to kind of incrementally add? Is it on the lender front? Has it continued to build out the capital markets platform to is it all of the above? Just trying to get a better breakdown of how we should think about that mid-single-digit expense guidance as we move forward. Matt Scurlock: You bet, Michael. We are highly focused on leveraging the material previous material investments that we've made by expanding capabilities and adding targeted coverage with the 2026 expense guide continue to heavily feature growth in salaries and benefits with select increase in technology. We now have a, we think, a multiyear pattern of effectively improving the productivity of the expense base through the deployment of technology solutions which we anticipate is only gonna accelerate as we more fully adopt AI across the franchise. I would call out this expected seasonality in the expense base, which will increase at a higher percentage this year just given the larger portion of total salaries and benefits that's currently tied to stop. So the current guide does anticipate Q1 noninterest expense between $210 million and $215 million with about $18 million of seasonal comp and benefits, the expense and then another $10 million from the combination of incentive comp reset late quarter merit increases and full quarter impact of late year hires. As you exit Q1, we think about salaries and benefits around $105 million a quarter and then other noninterest expense in that $75 million or so a quarter range. And then importantly, the mid-single-digit expense guide is sufficient to cover the current revenue expectations and the composition inclusive of the fee growth. Do you wanna add on that, Rob? Rob Holmes: I guess the only thing the last thing I would say as we as we change the mix of investment, to a higher mix front office, in terms of expense mix with salaries and benefits. That's been a long journey. We continue to do that. But the revenue synergy today that we get from an incremental front office hire, is dramatically more. So remember, you know, Matt talked about this a lot, Michael. We talked about it with you a lot. When we're building these businesses, we had to build the back, the middle, and front office. The back and middle are substantially complete as we discussed a lot. So we add somebody to the front line the return on that hire is much greater. Which is reflected in everything that Matt said. Michael Rose: Great. I appreciate the color. Maybe just as my follow-up. Can you just talk about the opportunities? I know you're not going want to talk about loan growth figures per se, but high single-digit commercial loan growth, CRE down a little bit. There's obviously been some market some mergers in and around your markets. Can you just talk about and then you obviously have hired a lot of lenders, right, as you've kind of upgraded the staff. Is there any reason to think that the loan growth LHI momentum again, I'm not asking for a target. But that wouldn't continue against kind of a more, in theory, favorable backdrop some of the, momentum that you have just on the hiring front that you've made already then just a more conducive loan market? Thanks. Matt Scurlock: Mike, I think a lot of the trends that you seen in the 2025 should really continue into 'twenty six with strong C and I and more finance growth offsetting contracting commercial real estate balances. So that we noted in the prepared remarks, the guide contemplates a $2.3 trillion mortgage origination market, which sits on top of a 6.3% thirty-year fixed-rate mortgage. Which for us would drive about a 15% increase in full-year average mortgage finance balances. As Rob just noted, it's obviously a completely different mortgage finance offering than the legacy warehouse we've had at TCPI. 59% of these loans are in the enhanced credit structure, which have the average risk weighting of 28%. 80% of these clients are both the dealer, nearly all of them take advantage of our treasury products. We which suggested any realized pickup in one to four family originations is gonna generate significantly higher and more diversified per unit risk-adjusted return for us this year. We also think we'll have another record year of client acquisition in the C and I focused offerings, which should be enough to offset continued balance reductions in CRE, which in our view should be pretty expected given multiyear pullback in originations really across all property types. I think all those things together, Michael, would support another year of mid to high single-digit growth in gross LHI. Rob Holmes: Yeah. And, Michael, there the reason I said you know, when we first started, I said loan growth doesn't matter. Was is because we knew loan growth would come if we had the right clients left in. And we also knew that I mean, like like we just talked about, we ranged you know, $30 billion of term loan B high yield and private placement debt for clients that wasn't bank debt, which helped the client and was a great risk management tool for us. And then also, as as we mentioned, we're number two in the country in middle market, lead left bank syndication leads. Well, there's a lot of banks out there that would just kept that exposure. Which we don't think is the right decision for the client, but it's certainly not the right decision for us from a risk management perspective. So we're not trying to maximize loan growth. We're trying to provide the clients with the right solutions and keep really good credit discipline. And have a great client outcome. So that's why we said what we said before. Loan growth does matter. But it's going to come. In spite of our prudent risk management because of our client acquisition and client selection. Matt Scurlock: Another way just to think about that client acquisition Michael, is mean, commitments for us in the C and I space. Linked quarter, we're up over 25%. So we continue to drive low double-digit growth in C and I balances and our last quarter, think we grew commitments 18, but we grew commitments percent year over year and again those are up to 25% linked quarter. A lot of client activity showing up on platform. Michael Rose: Okay. So a lot of momentum, to continue. Thanks for all the color, guys. Appreciate. Rob Holmes: Sure. Operator: Thank you. Our next question is from Casey Haire from Autonomous Research. Your line is now open. Please go ahead. Jackson Singleton: Hi. Good morning. This is Jackson Singleton on for Casey Hare. I was wondering if you could just provide some more color into recent credit trends and maybe help us kinda understand what factors drove the increased in the provision guide year over year? Matt Scurlock: Yeah. We did experience modest linked quarter increase in special mention loans, which as we noted in the comments was tied exclusively to a handful of multifamily properties. That are experiencing net income net operating income pressure just given required rental concessions to maintain target occupancy levels? These are extremely high-quality sponsors that are in historically strong Texas markets, which we think over time are gonna benefit from the limited new supply and increased level of absorption. I would say, importantly, the ratio of criticized loans to LHI as we exited the year marked the best level since 2021. With really strong credit metrics generally across all categories. We've had a 35 to 40 basis point guide, years ago, moved it to 30 to 35 basis points this year, came in obviously at the low end of the guide and we're certainly a group that wants to operate from a position of financial resilience to felt it prudent to move to 35 to 40, again, consistent with things we've done in the recent past. Jackson Singleton: Got it. Okay. Thank you for that. And then just for my follow-up, just a NIM question. Can you help us think about the drivers for 1Q and then maybe any sort of range you could help for our modeling? Matt Scurlock: Yeah. I think two fifty to two fifty five for one q on NII. Flattish margins, so somewhere in the mid threes. That's with one month average SOFR down about 27 basis points. If you think about the mortgage finance business in Q1, stay at the 85% self-funding ratio on $4.8 billion average balance. Again, with 27 basis point reduction in average one month SOFR quarter over quarter, that should push the yield on the mortgage finance business down to three eighty five or three ninety or so. So those are probably the factors that I would incorporate. The other comment that I'd make is we're 67% recycled beta inclusive of the December cut. Once all those pricing actions are passed through the deposit base, you're somewhere in the low seventies, probably by the end of January. For the full-year outlook, we've been pretty noting our expectation that straight deposit betas were going to moderate. So any incremental cuts in '26 the guide would incorporate a 60% interest-bearing deposit paid up. Which is obviously also what we'd now have in our earnings at risk down 100 scenarios. Jackson Singleton: Got it. Okay. Great. Thanks for taking my questions. Matt Scurlock: You bet. Thank you. Operator: Our next question is from Anthony Elian from JPMorgan. Anthony Elian: Hey. Hey, Matt. On mortgage finance, I'm curious what specifically drove the sequential increase in 4Q average balances. Was there any pickup in refi activity in, in that business? Matt Scurlock: Rates were lower than had incorporated in the Outlook, which it did drive a pickup in aggregate originations in inclusive of refi. Then you had slightly slightly longer dwell times as well, Tony, which supported those average balances. Anthony Elian: Okay. And then my follow-up on credit, can you give us more color on what drove the increase in special mention? Know you called out the multifamily credits, but why did this surface now? And do you expect some sort of resolution on those credits? Thank you. Matt Scurlock: Yeah. You bet. So it's a $100 million. We $205 million $250 million, excuse me, of special mission commercial real estate on a 5 and a half billion dollar portfolio. That we've experienced, I wanna say, $5 million of charge-offs on in the last thirty-six months. So we like to be proactive in communicating with you guys any potential downgrades or realized downgrades and as I noted in the previous question, simply a handful of Central Texas based multifamily properties where you had significant new product come online. That the market is working to absorb. Many of these properties offer rental concessions to bring folks into the apartment complex and they had to those for another year longer than they originally anticipated. We grade based on cash flow, Tony, not appraised value. Which is why we sometimes have more sensitivity and downgrades than peers. So that rental concession is pressuring their net operating income and resulted in us moving it to special mention. So we feel very well reserved against these properties. They're clients that we do a lot of business with. Well structured with significant equity. There's no, in our view, pending wave. So if you look further upstream in the credit, scale or the credit grades, watch list was essentially flat. So there's nothing sitting behind this other than these properties that we've identified. Rob Holmes: I would say just to say, I think Matt three years ago, was ahead of all the bank peers pointing out that we were gonna have a small wave of provision increase in commercial real estate for a number of factors but we didn't we did not anticipate any real credit problems. We had worked through them. And that's exactly what happened, and I think this is very akin to that. Just to add what Matt said, I mean, we're in the top decile of firms since we started in and reserves added. And we're at an all-time high of reserves in the history of the firm at 1.82% excluding mortgage finance. So just think the percentages are high because the numbers are so small. Anthony Elian: Great. Thank you. Operator: Thank you. Our next question comes from Janet Lee from TD Cowen. Line is now open, Janet. Please go ahead. Janet Lee: Good morning. For to clarify, on NIM, so mid three thirty range for '26. If I were to think about the direction of travel for NIM beyond that point, can you sustain flattish NIM from there given mean despite rates coming down, a potential improvement in self mortgage self-funding ratio. I guess that would looks like you know, considering your $265 to $290 million fee income range for '26. Your NII could be, you know, very low single-digit growth to almost mid-single-digit growth there depending on where that lands. So I wanted to get some color. Matt Scurlock: Yeah. I think given some pretty good detail on expectations for deposit repricing, self-funding, the only component of the liability base we haven't described as expectations commercial noninterest bearing. Which we continue to experience and anticipate record new client acquisition with a lot of those economics showing up in treasury product fees. Which we've grown over 20% for multiple quarters now and delivered north of 10% growth in p times v for the last five years. We think about their contribution to overall deposit balance portfolio mix to stay around that 13% level. So, obviously, deposits are going to grow, commercial NIV will grow, but their percentage stay relatively static. Given some good hopefully, some good insights into how we think about the loan portfolio. We'll continue to invest cash flows from the securities book. We added about a billion 1 of securities last year at five and a half percent sold almost $300 million at 3%. So nice sequential picture of 80 basis points of improvement and the securities portfolio yields a nice sequential impact. To margin there. The hedge book today should cost us about $10 million pretax NII. In 2026. We are a little higher than we traditionally wanted to operate. On earnings at risk in a down one hundred. So you will see us selectively add to the swap book moving through 2026. We're much more active. The spread obviously changes. Depending on the curve, but we're much more active today. When we see the negative spread between two-year and one month. So for inside of 30 basis points, which as of yesterday, we were sitting there. So you'll see us add some swaps. I think all that together should give you a pretty good sense for how we're thinking about margin moving into 2026. And then just to reiterate, perhaps counterintuitively, all the all the work that we've done as a firm to reduce our reliance on margin NII as a sole contributor to earnings is perhaps again counterintuitively actually really supporting NII and margin because we're relevant to these clients across a wide range of products and services. They're generally less price sensitive. And then just the final comment there, Janet, I mean, we've shown an ability to deliver increasing net interest revenue and PPNR in a wide range of interest rate environments. Including delivering 14% increase in NII, 13% increase in revenue, and 32% increase in PPNR, with rates on average down 100 basis points this year relative to last year. Rob Holmes: Only thing I'd to reiterate is what Matt said at the end, because I think it's I just wanna make sure everybody got it. I think it's it's a key to the strategy. The clients are less price sensitive on rate when you're adding value a lot of different ways and you're relevant to your client with quality client coverage and proactive ideas and execution on other fronts. Become much less price oriented on deposits. So just wanna make sure like, I think all the lines of business are contributing to that improvement in them. Janet Lee: Got it. And just one follow-up for me. Appreciate the comments around commercial real estate payoffs and balances coming down 10% year over year. That commentary seems somewhat different from most of the banks that are beginning to see CRE balances inflecting or stabilizing. Is it just a function of your appetite to not grow CRE originate CRE loans as much or your CRE is more tilted towards construction? How what is the underlying factor there? Matt Scurlock: Honestly, Jan, we're somewhat perplexed by that industry trend. I mean, volumes have been at historic lows for multiple years. There's a lot of capital in the space. And by the space, meaning financial services where folks are looking to deploy into loan growth. As a primary way to drive earnings. That obviously is gonna push down spread on high-quality transactions, which is a shop that's really focused on through cycle return on equity with the right clients. We have no desire to go chase lower spread. So our view is that it's just gonna take a couple of years for the market to chew through the supply that's coming online. And ultimately to correct and see new originations maybe in 2728. We do not anticipate growth in commercial real estate this year, again, not a byproduct of us devoting less focus, intensity, or resource into space, but mostly just because of the market dynamic where there's just not product coming online. Rob Holmes: Also, I think it's an indicator of a very healthy commercial real estate portfolio with regularly scheduled payoffs. Janet Lee: Got it. Thank you. Operator: Thank you. Our next question comes from Matt Olney from Stephens. Matt Olney: Hey, thanks. Good morning. Question for Rob. Since you achieved and exceeded those legacy ROAA targets in 2025, I heard you mention the focus now becomes recognizing the full potential of the recent investment. So we'd love to appreciate what this full potential at full scale look like as far as the operating metrics at the bank longer term. Thanks. Rob Holmes: Matt, great question. Obviously, we're not gonna give multiyear guidance. I'll tell you that the platform is the synergy of the platform the talent we've been able to recruit, the talent we've been able to maintain, the pipelines, and the platforms even working in a better coordinated synergistic way than even I could have hoped for. Supported by a really good investment and historical technology improved operating efficiency, improved operating risk and controls, which I you know, and we talked about the credit portfolio and the discernment there. I feel really, really good about the future. And, we're very optimistic. We look. We've got a lot we got a lot to do. What I would say is the theme of this year is execute and scale. We've got we just gotta execute. We've got all the parts and services we need. We've got the majority of the banker roles filled that we need. We just need to execute. There is so much investment that hasn't reached scale in the platform. But if we could beat these profitability levels, with that investment already in the platform, which is proven will work, with record client acquisition every year. We just gotta execute and scale. That's it. Which really derisks totally derisks the investment thesis. Matt Olney: Okay. Appreciate the, the color, Rob. And then as a follow-up, going back to the capital discussion, we've already talked about the buyback and the enhanced credit structure. It does look like on capital, you have a few instruments that either mature or become callable here. Pretty quickly. So we'd love to get your know, preliminary thoughts around these instruments and any any plans you may have as far as some of these debt instruments? Thanks. Matt Scurlock: Thanks, Matt. We've got a ton of optionality in the capital base and we'll look to behave accordingly in Q1 when some of these instruments become callable. Matt Olney: Okay. Appreciate it. Thanks. Matt Scurlock: Thanks, Matt. Operator: Our next question comes from Jon Arfstrom from RBC. Jon Arfstrom: Thanks. Good morning. Rob Holmes: Good morning, John. Jon Arfstrom: Hey. Rob, just to follow-up on Olney's question. You'd use the term subscale on some of your businesses. What are the top few areas where you feel like you're the most subscale, where you've already made the investments, where are the opportunities? Rob Holmes: Seven trading, equity, public finance, treasury, I don't think any of our businesses are at scale yet. Like, not one. Mean, business banking is not at scale. So you know, we're this is just the prefaces of what this firm can do. Matt's gonna get mad at me and we hang up because he's gonna say I was too optimistic, but there's literally not a business approaching scale. You know, we've done our first lead left equity deal. We have one of the best equity teams on this platform. If you look at their historical body of work. Our public finance team I'm super proud of. Our sales and trading like, it I could keep I'm gonna get in trouble also because I didn't name everybody. I don't know of a sub business on the platform that's at scale. Which I think is great. And then we've proven to be we're really improving our operating risk and we're really improving our ability to syndicate risk you know, being number two in the country, We're not we don't need to we're in the risk business, but we don't need to take risk and hit returns. Like a lot of pure banks need to do. Jon Arfstrom: Okay to turn the heat up on that a little bit. That's okay. The other thing I wanted to ask about it's kind of a related, but you you guys have this relationship management return hurdle exercise. And I know it's been around for a while, but as the business has evolved and you we just said things were immature, but as the business has matured, how was that evolved and how has that allowed you to maybe keep clients around with less of an ask than maybe you did two or three years ago? Rob Holmes: Yeah. It's thank you, John. It's I think it's it's evolved to being from an exercise to being part of our culture. So when we commit capital for a client, it's the relationship management exercise you talked about is balance sheet committee. The heads with LLPs are on that. The head of risk are on that. Madison's at a lot. Remember, everybody every LOB is fighting for the same amount of finite capital. And so if they're gonna vote to deploy that capital, it's then it's good for the farm, and we have the right current ROE for loan only, but also for the relationship as a whole. Both in a downgrade scenario with the credit, and when you do that, you have other lines of business signing up to support that client. So over 90% of the loans we've done since we started have other lines of other business tied to it when we onboard it. Treasury is probably the most, about 90%. But you have private wealth signing up to do business with them or private banking. And then if you have a banker leave or something, which every bank does, people retire or what have you, you have like, four or five touch points with that client. So the client's been institutionalized. It's not a banker relationship. It's an institutional relationship. So which I think makes the client much more valuable in the current state and a go-forward state to the firm. And we're bringing more value to the client, so it's a win-win. Jon Arfstrom: Okay. Thank you very much, guys. Rob Holmes: Thank you. Operator: Currently have no further questions, and I would like to hand back to Rob Holmes for any closing remarks. Rob Holmes: I just wanna thank all the employees of Texas Capital for another very solid quarter. I look forward to a great '26. Thanks, everyone. Operator: Thank you. This now concludes today's call. Thank you all for joining. You may now disconnect your lines.
Operator: Good day, and welcome to the Northern Trust Corporation Fourth Quarter 2025 Earnings Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Jennifer Childe, Director of Investor Relations. Please go ahead. Jennifer Childe: Thank you, operator, and good morning, everyone. Welcome to Northern Trust Fourth Quarter 2025 Earnings Conference Call. Joining me on our call this morning is Michael O’Grady, our Chairman and CEO; David W. Fox, our Chief Financial Officer; John Landers, our Controller; and Trace Stegeman from our Investor Relations team. Our fourth quarter earnings press release and financial trends report are both available on our website at northerntrust.com. Also on our website, you will find our quarterly earnings review presentation, which we will use to guide today's conference call. This January 22 call is being webcast live on northerntrust.com. The only authorized rebroadcast of this call is the replay that will be made available on our website through February 22. Northern Trust disclaims any continuing of the information provided in this call after today. Please refer to our safe harbor statement regarding forward-looking statements in the accompanying presentation, which will apply to our commentary on this call. During today's question and answer session, please limit your initial query to one question and one related follow-up. This will allow us to move through the queue and enable as many people as possible the opportunity to ask questions as time permits. Thank you again for joining us today. Let me turn the call over to Michael O’Grady. Michael O’Grady: Thank you, Jennifer. Let me join in welcoming you to our fourth quarter 2025 earnings call. Turning to Slide four, in 2025, we made significant progress executing on our One Northern Trust strategy, delivering strong and improving financial performance and providing solid momentum going into 2026. In the fourth quarter, compared to the prior year, trust fees grew 7%, net interest income increased 14%, and revenue was up 9%, excluding notables. For the sixth consecutive quarter, we delivered positive trust fee and total operating leverage while continuing to invest meaningfully in the business. Excluding notables, pretax margin expanded to 33% and EPS grew 19%. For the full year, revenue rose 7% and expenses grew 5%, delivering over two points of operating leverage and a 30% pretax margin, 14.8% return on equity, and 17% EPS growth, all excluding notables. We returned $1.9 billion to shareholders in 2025, including a record $1.3 billion of share repurchases, which reduced share count by 5%. These results reflect strong market conditions and demonstrate the strength of our One Northern Trust strategy, which serves as our roadmap to becoming a consistently high-performing company that delivers meaningful value for clients, partners, and shareholders. Turning to Slide five, we've made significant strides across each of our strategic pillars, starting with optimize growth. We advanced several initiatives at both the enterprise and business unit levels, resulting in deepened client relationships and expanded market share in key areas. We broadened our private markets footprint across the enterprise and further enhanced our capital markets and banking penetration, which now contributes more than one-third of enterprise revenue. These firm-wide efforts improve collaboration across our businesses, allowing us to bring the full capabilities of Northern Trust to our clients while accelerating the pace of product development and innovation. Turning to productivity, we initiated significant changes to enhance and scale our operations. Our client-centric capability operating model provides a unified and consistent way of working across the company, standardizing core processes, increasing spans of control, reducing organizational layers, and empowering the broad adoption of AI-driven automation inclusive of our AI platform NT Byron. For example, the chief operating officer's organization, which encompasses more than half of our workforce, increased managerial spans of control by over 35%, while reducing management layers by over 20%. This is improving speed, accountability, and efficiency across the firm, creating a leaner, more agile operating structure and fostering enhanced collaboration. Our accelerated deployment of AI across high-volume activities, such as digitizing documents and automating manual tasks, is driving efficiency gains while improving quality and consistency across key workflows. Overall, we increased productivity savings last year representing more than 4% of our expense base. We strategically reinvested these savings into growth and resiliency initiatives, fueling our future performance. For 2026, we plan to raise our productivity target by 10%, supported by maturing initiatives, further structural and workforce improvements, and broader AI deployment. On resiliency, we strengthened the firm's risk technology and operational foundations. We advanced cybersecurity, upgraded our data environment, expanded cloud adoption, modernized key software platforms, and enhanced core risk and control processes. These initiatives help future-proof the company. Turning to our business unit performance, starting with wealth management on Slide six. We delivered strong momentum in the fourth quarter, particularly in our upper-tier segments, continuing to deepen our leadership position in global family office and the ultra-high-net-worth market. GFO achieved record new business in 2025, surpassing last year's high watermark with strong contributions from both domestic and international markets, the latter up 15%. Last year, we launched Family Office Solutions, extending our world-class GFO platform to families with more than $100 million in net worth, to serve as their outsourced family office. FOS exceeded its goals for clients and assets last year, and we're scaling this proven model across all markets. Together, GFO and FOS position us exceptionally well to meet the needs of the most complex segment of the market. Another area of focus is talent. In 2025, we unified sales across GFO and the regions, strengthened coverage models, and enhanced pipeline rigor and win rate expectations. We will continue to invest in high-performing, growth-oriented front office talent while sharpening incentives around new client acquisition and organic growth. The third area of focus is expanding our suite of investment solutions. Alternatives remain a key priority in 2025, as we more than doubled the number of funds launched on the platform and tripled assets raised, broadening client choice across strategies. We also made the fund launch and distribution process more scalable, which will support a faster cadence in 2026, including our first evergreen fund. Finally, we will enhance our client acquisition strategies across segments, geographies, and channels, including deeper engagement with centers of influence and intensified digital engagement initiatives to generate more high-quality leads. Across each of these areas, we are simplifying processes, upgrading platforms, and applying AI to reduce friction in service delivery. These steps will enhance both the client and partner experience and strengthen wealth management growth. Turning to Asset Servicing on Slide seven. Overall, we ended the year with improved organic growth and profitability, driven by our strategic focus on scalable growth in core product areas. Capital markets performed particularly well in 2025, ending the year with robust FX trading and integrated trading solutions activity in the fourth quarter. Private markets were another highlight, with wind-related revenue up 18% over the prior year, further solidifying our leading position with global hedge fund managers and UK LTAS. We will build on the success in 2026 by further scaling core fund administration and depository services while increasing cross-sell of capital markets activities. Led by our industry-leading front office solutions offering, which continues to be a key differentiator, we will further expand our global asset owner franchise, building on the over 100 new mandates in 2025. Finally, we will sharpen our focus on selectively enhancing the products and services we offer, such as growing ETF servicing in the US, expanding European transactional banking, and building out our digital asset capabilities. Asset servicing enters the year with solid tailwinds and a clear path to accelerate profitable growth. Turning to Asset Management on Slide eight. NTAM delivered another solid year and is well-positioned to continue executing on its growth initiatives. Liquidity was particularly strong, with the fourth quarter marking the twelfth consecutive quarter of positive flows, and liquidity AUM reaching nearly $340 billion. We continue to broaden our successful liquidity franchise by leveraging digital capabilities, including introducing a tokenized share class of one of our money market funds. Building on last year's strong alternatives fundraising, we will continue to expand our product capabilities and strengthen distribution across wealth and institutional channels. On the product innovation front, we maintained a high-velocity cadence last year, doubling product launches year over year, including 11 new ETFs, meaningful expansion of our SMA fixed income suite, and the rollout of multiple custom solutions across alternatives. NTAM will maintain an elevated new product base and work closely with Northern Trust Wealth Management to co-develop tailored solutions, building on the first-of-their-kind distributing ladder ETFs introduced in 2025. Direct indexing and customized SMAs remain areas of strong client demand, supported by $5 billion of net organic flows in our tax-advantaged equity suite in 2025. We will extend this momentum through the launch of a long-short tax-advantaged equity strategy and expanded customized fixed income SMAs, reinforcing our position as a top-three industry provider. Together, these priorities strengthen our growth trajectory, deepen our client engagement, and expand our ability to deliver differentiated high-demand investment solutions. Turning to Slide nine. The execution of our One Northern Trust strategy over the last two years is translating into improved financial performance. Productivity and expense discipline are driving positive operating leverage, reducing our expense to trust fee ratio, and improving pretax margin levels. While ROE has been at the high end of our target range, and EPS have grown at a double-digit pace for the past two years. Turning to Slide 10, as we move forward, we're doing so with a clear vision, good momentum, and a resolute commitment to consistently deliver on our strategic pillars, producing financial performance that rewards shareholders. With the goal of generating attractive returns on capital and double-digit EPS growth through cycles, we have the conviction to boost two of our medium-term financial targets. In addition to targeting expense to trust fees below 110%, we're now targeting a pretax margin of 33% and return on equity in the mid-teens. To wrap up, this progress is only possible as a result of the exceptional efforts of my fellow Northern Trust colleagues. I want to thank them for their commitment to delivering for our stakeholders. With that, David will take you through our fourth quarter and full-year financial results. David W. Fox: Thanks, Mike. Let me join Jennifer and Mike in welcoming you to our fourth quarter 2025 earnings call. Let's discuss the financial results of the quarter starting on Slide twelve. This morning, we reported fourth quarter net income of $466 million, earnings per share of $2.42, and our return on average common equity was 15.4%. Our fourth quarter results reflect another quarter of solid progress toward achieving our financial objectives and enhancing the durability of our financial model. Relative to the prior year, currency movements favorably impacted our revenue growth by approximately 90 basis points and unfavorably impacted our expense growth by approximately 140 basis points. Relative to the prior period, currency movements were immaterial to both revenue and expense growth. Trust, investment, and other servicing fees totaled $1.3 billion, a 3% sequential increase and a 7% increase compared to last year. Net interest income on an FTE basis was up 10% sequentially, to $654 million, a new record, and up 14% from a year ago. Our assets under custody and administration were up 3% sequentially and up 11% compared to the prior year. Our assets under management were up 2% sequentially and up 12% year over year. Overall, our credit quality remains very strong, with all key credit metrics in line with historical standards. We recorded an $8 million release of the credit reserve in the fourth quarter, largely reflecting refinements to factors used to estimate losses for the C and I portfolio. Our effective tax rate was 26.5% in the fourth quarter, up three ten basis points over the prior year's rate, largely as a result of higher tax impacts from international operations. We expect the effective tax rate in 2026 to be approximately 26 to 26.5%. Our results included $69 million in net unfavorable notable items, including $19 million in expenses associated with our Visa swaps, recognized within other operating income, $59 million in severance-related expense primarily recognized within compensation expense, and a $10 million release of our FDIC special assessment reserve recognized within our other operating expense. Relative to the prior year period and excluding notable items, revenue was up 9%, expenses were up 5%, our pretax margin was up 250 basis points to 33.2%, we generated over four points of positive operating leverage, earnings per share increased 19%, and our average shares outstanding decreased by 5%. Turning to our wealth management business on Slide 13. Wealth management had a good quarter with strength in both GFO and the regions. GFO won three of its largest wins of the year in the quarter. Priority markets delivered their best overall quarter of the year, and the regions posted their best quarter for flows. Assets under management for our wealth management clients were $507 billion at quarter end, up 13% year over year. We saw healthy incremental flows late in the quarter, including $5 billion within GFO. Trust investment and other servicing fees for wealth management clients were $578 million, up 6% year over year, primarily due to strong equity markets as the favorable flows occurred late in the quarter. Trust fees within the regions were up 5% year over year in the quarter and were up 6% for the full year, with strength mostly attributable to favorable equity markets as strong advisory fee growth was mostly offset by continued product pressure. Within GFO, trust fees were up 6% in the fourth quarter relative to the prior year, showing healthy improvement from the third quarter's more muted performance. They were up 5% for the full year. Wealth management average deposits were up 5% sequentially, reflecting year-end portfolio repositioning coupled with new business momentum. Average loans were down 4%, reflecting the repayment of a large GFO loan. Including severance charges of $15.2 million, wealth management's pretax profit decreased 3% over the prior year period's record levels, and the pretax margin contracted by 300 basis points to 38.9%. Excluding these charges, the pretax margin was down 120 basis points. Moving to asset servicing results on Slide 14. Our asset servicing business also had a very strong finish to the year. Transaction volumes accelerated, capital markets activities were robust, while new business generation continued to be healthy and margin accretive. Assets under custody and administration for asset servicing clients were $17.4 trillion at quarter end, reflecting an 11% year over year increase. Asset servicing fees totaled $730 million, reflecting an 8% increase over the prior year. Custody and fund administration fees were $496 million, up 9% year over year, reflecting the impact from strong underlying equity markets, net new business, and favorable currency movements. Assets under management for asset servicing clients were $1.3 trillion, up 12% over the prior year. Investment management fees in asset servicing were $166 million, up 6% year over year, largely due to favorable markets. Asset servicing average deposits increased 3% sequentially, reflecting normal seasonal patterns, and were up 6% year over year. Loan volume increased 6% from third quarter levels but remained down 8% year over year, albeit off a small base. Asset servicing pretax profit grew 23% over the prior year or 40% excluding severance charges. The pretax margin expanded two ten basis points year over year to 25.5%, an increase of five fifty basis points excluding severance. The segment level margin benefited from the NII associated with the seasonally strong deposit levels, the pivot in our new business approach, including our focus on cross-selling high-margin capital markets and other adjacent products and services, which translated to a pretax margin on our new business that was above 30%, as well as our efforts to streamline our operations. Moving to Slide 15, and our balance sheet and net interest income trends. Average earning assets were up 3% on a linked quarter basis, as higher deposits drove an increase in cash held at the Fed and other central banks and in our securities portfolio. We issued $1.25 billion in new debt in November, $500 million in senior and $750 million in sub debt. The debt was swapped to floating and proceeds were invested in floating rate securities at a positive carry. As a result, the fixed percentage of the securities portfolio dropped to 52% from 54% in the third quarter, including the impact of swaps. The duration of the securities portfolio dipped slightly to 1.48 at the end of the quarter, and the duration of our total balance sheet continued to be under one year. Average deposits were $119.8 billion, up 3% compared to third quarter levels, reflecting normal seasonality. Deposits performed largely as expected throughout the quarter, but we saw a higher than usual surge in the last two weeks. We expect deposit levels to normalize in the first quarter. Within the deposit base, interest-bearing deposits increased 2% sequentially and noninterest-bearing deposits increased by 10%, climbing to 15% of the overall mix. Net interest income on an FTE basis was $654 million, up 10% sequentially, up 14% compared to the prior year. Sequentially, NII was favorably impacted by higher deposit levels, a greater proportion of noninterest-bearing deposits, and the ongoing impact from deposit pricing actions we've taken outside of rate cuts. Our net interest margin increased sequentially to 1.81%, reflecting the favorable deposit pricing actions taken coupled with a more favorable deposit mix shift. Turning to our expenses on Slide 16. Expenses increased 9% year over year in the fourth quarter, but excluding the notables listed on the slide, they were up 5% over the prior year. Excluding both notables and unfavorable currency movements, expenses were up just 3.8% in the quarter and 4.3% for the full year. This translated to an expense to trust fee ratio of 110.8% excluding notables, and our sixth consecutive quarter of year over year improvement. Turning to Slide 17 and our full year results. Including notable items listed on the slide, full year revenue decreased 2% and EPS declined by 11%. Our ROE was 14.4%, and we returned 111% of our earnings to shareholders. Relative to 2024, currency movements favorably impacted our revenue growth by approximately 50 basis points and unfavorably impacted our expense growth by approximately 60 basis points. Our full year results included $69 million in net unfavorable notable items, all reported in the fourth quarter. 2024 results included $536 million in net favorable notables recorded in quarters one through three, including an $878 million gain related to the Visa B share monetization. Excluding notable items in both periods, 2025 revenue was up 7%, expenses were up 4.9%, or 4.3% excluding unfavorable currency impacts. Our pretax margin was up 160 basis points to 30%. We delivered over 200 basis points of positive operating leverage, and earnings per share increased 17%. Turning to slide 18, our capital levels and regulatory ratios remained strong in the quarter, and we continue to operate at levels well above our required regulatory minimums. Our common equity Tier one ratio under the standardized approach increased by 20 basis points on a linked quarter basis to 12.6%, driven by capital accretion and a decrease in RWA. Our tier one leverage ratio was 7.8%, down 20 basis points from the prior quarter driven by our larger balance sheet. At quarter end, our unrealized after-tax loss on available for sales securities was $401 million. For the fourth quarter, we returned $522 million to common shareholders through cash dividends of $152 million and stock repurchases of $370 million. For the full year, we returned $1.9 billion, including a record $1.3 billion in share repurchases. This reflected a 113% payout ratio in the fourth quarter and 111% for the full year. Turning to our guidance on Slide 19. As I've been signaling, we're moving away from an expense growth target instead focusing on positive operating leverage, which is our North Star. We want to maintain the flexibility to opportunistically invest in growth initiatives when top-line growth is more favorable and dampen expense growth when the market environment is more muted. But generally speaking, I can assure you that the direction of travel for expense growth will be down. As shown on the slide, we now expect full-year 2026 NII to grow by low to mid-single digits over the prior year, which is up from our previous guidance. This assumes current market implied forward curves and relatively stable deposit mix. We expect to generate more than 100 basis points of positive operating leverage and we expect to return more than 100% of our earnings to shareholders. And with that, operator, please open the line for questions. Operator: Thank you. If you're dialed in via the telephone and would like to ask a question, please signal by pressing star 1 on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Please limit yourself to one question and one follow-up in order to allow everyone an opportunity to ask a question again. Press star 1 to ask a question. And our first question is going to come from Brennan Hawken from BMO Capital Markets. Brennan Hawken: Good morning. Thank you for taking my questions. Good morning. Michael O’Grady: Hi. Brennan Hawken: Hi, Mike. Really encouraging to see the targets moved higher on the medium term. And actually, looks like really some encouraging ambition in the targets. Can you speak to your conviction in driving change across the organization? And like when you think the timing of some of this traction could start to come through in the financial results? Michael O’Grady: So I would say, Brennan, that we have a high level of conviction that we're seeing the change transmit through the entire company. I talked about in my comments there just the fact that this is an effort on the part of all of our employees, all of our partners to do this. And I think you're seeing, you know, what I think I'll call the early days of the results from a financial perspective. And that to the extent we continue to maintain that conviction and execute on the strategy, we'll continue to see consistently high performance like we did this quarter. That's why we had the confidence to move the targets up in the medium term, which we look at as kind of a three to five-year time frame. And if you just think about, you know, what Dave has said even for the year that we're in right now, trying to generate more positive, operating leverage, you know, that will take us in the direction towards those targets. Brennan Hawken: Right. Okay. Thank you for the timing around that. And definitely really encouraging to see it. I it was great. Maybe one on the balance sheet. So the deposit cost trends were encouraging here in the quarter. Can you speak to what drove the lower cost on the IB side? We saw the net the NIBs, the noninterest-bearing balances move higher, but sometimes that's seasonal. So you spoke to I think, stable deposits in the outlook. For the NII, does that mean that that include maybe the IB composition normalizing and how sustainable is the ability to drive down the interest-bearing deposit costs? Thanks. David W. Fox: Yeah. So there's a lot to unpack in that question. I would say generally speaking, fourth quarter growth in NIB particularly, I think had a lot of definitely seasonal, but also keep in mind that the government was closed for forty-three days during the quarter. And I do think there was some cash stockpiling during that period because of the lack of economic data. So I think it may have been a little inflated because of that. And going forward, into Q1, you should expect the seasonality of that to fall. Too soon to say when and how. Usually, it happens sort of after audit season when they when the funded admin companies decide that they've spent all their money for that particular quarter. So it will normalize at some point during Q1. I would just say that Q4 is definitely not a jumping-off point. For NII going forward into Q1. It will Q1 will definitely be lower in terms of total NII. In terms of the deposit pricing, we continue to spend a lot of time through our liquidity solutions efforts to look at our deposit pricing. We still have a lot of tools in our tool shed to continue to lower that going forward. We also had in the quarter, though, some expensive wholesale funding that rolled off, and we need to replace it. And so because of that more stability there, we're able to bring down our deposit cost accordingly. Brennan Hawken: Okay. Thanks for that color, Dave. David W. Fox: Sure. Operator: And our next question is going to come from Ebrahim Poonawala from Bank of America. Ebrahim Poonawala: Hey. Good morning. Michael O’Grady: Morning. Ebrahim Poonawala: I guess, maybe Paul, if you could just start on the fee growth side. And just talk to us, I appreciate you don't want to sort of pin down the guidance if we assume a relatively sort of a steady state macro backdrop, one, what does that imply for fee growth this year? And then you and just talk to us in terms of, like, one or two areas you think drives trends. You talked about GFO ending 25 on a strong note. Would love to get some color around sort of the two or three drivers of growth that you are seeing on the fee side. For 2026? Thank you. David W. Fox: Yeah. So, you know, the way we look at '26 and we just finished our planning period, is if the market conditions as are you as the way you described, we would think that we would be around mid-single digits in revenue growth. And trust fee and revenue growth, maybe revenue growth a bit higher, but around mid-single digits. And that would also give you an implication in terms of where we wanna solve for our expense growth for the year as well. So that's sort of how we're thinking about it going into '26. You know, in terms of the fee growth, you know, as you know, in GFO, the business there can be very lumpy. And when you win, you usually win very large amounts. And so the traction win rate in GFO really picked up in Q3. And because of the quarter lag, you saw a lot of it in Q4. We even had additional inflows in GFO of another $5 billion, and Q4, which you're going to see primarily in Q1. So that's driving a lot of the growth. The other thing I would say, and Mike can comment on this as well is the traction we're getting in the ultra-high-net-worth segment around from the front of or the family office solutions. Which really we're finding our win rate and our traction and our backlog in that particular area of the $100 million plus that don't have a family office. Has really picked up considerably. Michael O’Grady: Yeah. And I would just add beyond wealth management that in the asset servicing business, again, with our strategy focused on moving upmarket, just meaning some of the larger more complex asset owners, where we had the success in the wins, in 2025. You know, some of those are being onboarded now. So you'll see some of the strength in the fee growth, in '26, and that's both in The Americas, but also, UK and more broadly. And on the asset management front, you know, we've, as you've heard, continued to have strong flows in liquidity. And in many respects, that's been offset from a flow perspective by outflows on the index side. To the extent that that slows down, that drag goes away, and we still have the strength and liquidity, know, that'll add a boost on the asset management front. Ebrahim Poonawala: Got it. And just maybe just sticking with asset management, you know, this leadership changes eighteen months ago. You we've seen the results in terms of the targets. When we think about on a go-forward basis, the capital position that you have where the stock's trading, are there opportunities in asset management to bolster that business inorganically? Via tuck-in deals or something larger? Just give us a sense of how you're thinking about that business over the next year or two. Thank you. Sure. Michael O’Grady: Yeah. So and as you heard in my opening comments there, the strategy is pretty focused, in asset management. And so, know, looking to continue to execute on that. From an organic perspective. To the extent that we can accelerate it, with inorganic opportunities, whether that's acquisitions or partnerships, we're certainly open and looking to do that. If you think about where those might be, on the capability side, you know, you've heard about the success we've had in alternatives, but it is an area that continues to grow. And so that's an area that we certainly look at ways to increase our exposure there. And then on the other side, opportunities to expand our distribution. You know, the majority of, NTM product is distributed through the partners in the business through wealth management and through the asset servicing side and quite well. But anything we can do to expand to know, third-party intermediary, which we do, but it's right now a smaller portion than we'd like to see long term. Operator: And our next question is going to come from Michael Mayo from Wells Fargo. Michael Mayo: Hi. What is it about now that gives you the confidence to increase your pretax return targets? And three to five years, I guess, that would be what, somewhere between 2029 and 2031 if I'm reading that correctly. Michael O’Grady: Yeah. And Mike, I would say it's a few things. And they're aligned with strategy and with what we're seeing. So the from the first perspective is we've talked about optimized growth. And we've talked about it now for a few years here. And the whole point on that was focusing on scalable growth focusing on profitable growth. And that has a couple dynamics. One is just the mix overall for the company. So the emphasis on growing the wealth management business faster and asset management and those two businesses have higher margins. So just the mix shift that we'd like to see as we grow those businesses. And then even within asset servicing, focusing on, again, scalable opportunities, and where we've built out our capabilities. In those specialized areas or segments. Where we have the scale to not only compete effectively but do so in a profitable way. So we're seeing that work. So that's the first thing I'll say. They that gives us confidence as we go forward. The second is around productivity. You know, again, you heard me mention our productivity for 2025 was about 4% of our expense base. And this year, you know, we bumped that up. It's gonna be know, closer to 5%. And a lot of that is because of the impact we're seeing of AI. It lends itself to a lot of our activities. Across the company, but I would say particularly in asset servicing and in the COO organization. So that makes the business more scalable is what we're seeing. Long way to go. But that's why, you know, I'll say that three to five-year time frame makes sense. To see that. And then the third is on returns. We have a strong capital position. We always wanna have a strong capital position. You know? So we feel good about the level that we're at. And as you saw, we purchased repurchased more than 100% of our net income this year. Dave mentioned we'll be, you know, somewhere in that neighborhood next year or excuse me, 2026. So that is a demonstration of just the level of capital we think we need in the business. But, also, I would say, the clarity and stability on the capital regime and regulations around that also gives us more confidence in that level. So you put that together and also just trying to raise the bar to make sure that we're doing everything we can to meet the financial expectations of our shareholders. And, there's still the lingering question about Wood Northern combined with another bank. I assume your board saw these revised targets, approved that. So I guess that puts a fork in the idea of you doing anything other than this organic growth you know Yeah. To the into the medium term. And but if you can confirm that, but also as far as you pursuing acquisitions, I mean, seeing some of your peers do some smaller deal. Deals. Sure. So as we've said consistent, we have to earn our independence. And so, yes, that involves having strong financial performance like that. And so that is absolutely our strategy and our intention. And as always, you know, the board also takes its fiduciary duties very seriously and has to always consider, you know, what would be best, for our stakeholders and for our shareholders. So that is absolutely the plan. And, yes, to your point, you know, we'll look at acquisitions. We do look at acquisitions. But we're primarily focused on organic growth and generating these types of results. If we see opportunities that we think can help in those areas that I mentioned, along the strategy, that's when we look to deploy capital. Or we think we can get an attractive return on it. Will help us further, meet those targets. Operator: And our next question is going to come from Steven Chubak from Wolfe Research. Steven Chubak: Hi, good morning, and thanks for taking my questions. Michael O’Grady: Sure. Good morning. Steven Chubak: So maybe to start just on the expense to trust fee ratio. When we think about the in margins that are contemplated in the medium-term guidance, given some of the enhanced focus on improved profitability at what expense to trust ratio are you underwriting new business today? And does the mid-single-digit revenue growth that's contemplated in the guide for earnings this coming year, assume any revenue attrition from shedding less profitable business? Just trying to gauge how the enhanced focus on profitability might impact some of that through the cycle revenue growth. Michael O’Grady: So the answer to the first part of your question is, yes. When we price new business, we absolutely look at that expense to trust fee ratio. But that's at a, I'll call it, high level. Just meaning that it really depends on the nature of the business as to what the right expense to trust fee ratio is. So you can just imagine, you know, certain relationships, the fee portion of that relationship is going to be, you know, higher or lower relative to other businesses, other relationships that you're looking to price. So that's one, you know, important factor. Second is it gets broken down even further as to the types of expenses as a percentage of those fees. So it's very much, you know, the expense of trust fee we use is the broader metric. It breaks down much further by business, by product, and by client type on that front. And I would just say that to the second part of your question, yes. We continually look at client profitability. That's something that we view as a part of good relationship management. It's something where, you know, we don't wanna have relationships that are not value-generating for both partners, meaning ourselves and our clients. And we look to, you know, address those relationships in a way that we can get improved profitability as opposed to just necessarily exiting relationships. But from time to time, if it's not aligned, that's when we have to take those types of actions. I wouldn't say there's anything, you know, dramatic in there, but it is just something we do on a continual basis. Steven Chubak: That's great. And for my follow-up, just on the NII and maybe the NIM outlook more specifically, NIM in the quarter reached a post GF high. You guys have been very focused on optimizing the balance sheet. Was hoping you could unpack as we think about the glide path towards a 33% margin, how much of that is a function of continued benefit from rate tailwinds versus volume? Just trying to gauge what's gonna how you're thinking about sustainable NII growth over the next couple of years, so beyond 2026? David W. Fox: Yeah. So a couple of things. The NIM in the quarter, of course, was artificially boosted by about three points because of the FTE true-up that we did. So think more high high one seventies than one eighty one. The second thing would be that as we go forward, we have a lot of levers we can pull both on the asset and the liability side. And we don't see a lot of compression in the NIM until we get to much lower interest rates. And so from our perspective, we think during the course at least of 26, would never wanna do an estimate of 27 at this point. But in '26, we think we can keep the NIM pretty stable during the course of the year in the January. And that's how we're looking at it going forward. So obviously, deposit growth something that we're looking at. Quite carefully and in particular in the wealth management business. There is an effort going on to get our loan to deposit ratio higher within that business. And so from that perspective, we're trying to drive more deposit growth, but we're also looking at both sides, asset and liability side, to make sure we have offsetting measures. And we really feel like we have a lot we can still do I would also tell you to keep in mind that a lot of deposit pricing actions that we took we took in the middle to the end of last year. And so we haven't lapped those yet. So as we go into the first and second quarters, it gives us more confidence around our NII guide, and our ability to continue to kinda grow that line going forward. Operator: And our next question is going to come from Betsy Graseck from Morgan Stanley. Betsy Graseck: Thank you. Just one follow-up on the deposit question here. I know you indicated there was a bit of a boost in the quarter with the government shutdown. And when I look at the balance sheet, it looks like most of that boost came from non-US offices and interest-bearing. I just anticipate that the q q increase that we got there around $7 billion comes out over the course of the quarter. As you've been discussing, it's gonna take some time to flow out. Is that the level about that you see as being unusually high from the government shutdown. David W. Fox: No. I mean, I think the increase in the noninterest bearing was around 3 I do think there was a lot of new business as well that we grow with new business, but I think there was also some cash hoarding as I mentioned previously, because of the lack of economic data. So I wouldn't take out the entire $7 billion. A lot of that was just normal growth that we would have in the quarter. Betsy Graseck: Okay. Perfect. And then follow-up question here is on the buyback. You indicate, you know, over a 100% payout ratio. And I just wanted to understand, what's the governor on the buyback? Which capital ratios are you thinking about with regard to how high and how long you let that over a 100% ride? Thank you. David W. Fox: Yeah. It's a good question. And, you know, the variables the number of variables in that decision are many. It's regulatory capital. It's earnings power. It's ROE, loan growth, dividends, m and a. You go through the entire menu of what you're looking at, and then share price obviously has a role. But at the end of the day, if we feel there's an opportunity to reinvest in the business, that's also compelling. But right now, we feel as if we'll have that ability going forward into 2026 sort of the same way we did in 2027. That's how we're looking at it. Operator: And our next question is gonna come from Glenn Schorr from Evercore. Glenn Schorr: Let's start with an easy one. FX trading was strong, better than peers. In the text, you talk about lower FX swap activity on your part. Could we just break down what's what's you driven versus client driven and just so we can get our expectations going forward? Thanks. David W. Fox: Yeah. So, obviously, volatility and volumes will help us quite a bit in the quarter, but we also added quite a few new clients. And one of the things we don't talk about a lot as it relates to foreign exchange flows is the integrated trading solutions business or the outsourced business we have in both FX and brokerage. And we've seen a much greater adoption as clients start to realize that they can offload middle and back office functions on an agency basis to us. As a result of that, we get more flows because of it. So the growth in that ITS business has really been strong and continues to be strong. So I would say it's a combination of volume, I'd also say it's also a lot to do with the traction we've gotten in our integrated solutions business and outsourcing going forward. Michael O’Grady: And just to add to that, Glenn, that level of activity that Dave's talking about, is more consistent than what comes through the FX line there because of that swap activity. And so this quarter, just the nature of the swap activity, I resulted in more of that showing up in the FX line and less in NII. Even though know, the actual level of activity was not that much greater than the previous quarters. Glenn Schorr: Okay. I don't wanna put words in your mouth, but does that mean this quarter is as good as we got as a jumping-off point? David W. Fox: But, know, obviously, dependent on the markets. Yeah. I mean, volatility is gonna play a huge role there. I do think it's gonna steadily tick up because of the additional clients we're bringing in. So I would just say that in that business generally, there is more traction than just waiting around for clients to make a decision around their hedging. There's proactive sourcing of new business going on as well. Operator: And our next question is gonna come from Kenneth Michael Usdin from Autonomous Research. Kenneth Michael Usdin: Hi. Good morning, guys. This is Bob Chetzalin in for Ken. Sure. How are you guys talking about growing the wealth and asset businesses, which helps the PTM. How do you guys just think about the split between the two businesses? Do you still envision high twenties for the asset servicing while wealth grows at current? PTM margins? Michael O’Grady: Yeah. So I would say that with the asset servicing business, it had a good quarter from a margin perspective, but there's still more work that needs to be done in order to get it consistently at the level of margins that we expect for that business in the high 20s. And with the wealth management business, it already has very attractive margins. We're looking to grow that business faster. And, you know, to the extent that that came at some margin dilution, if it if you will, that would be okay if we were getting the growth that's creating more value, on that side. So it's you know, in the right range, but not something where we operate that business in order to just maintain high margins. Bob Chetzalin: Got it. And just in terms of just organic growth trends, within each business, what was the organic growth rate for this quarter? And how do you envision that to pick up over the next few years? Any color on that would be great. Michael O’Grady: Sure. So within the wealth management business, the organic growth rate was somewhere in the for the year which is also consistent with the quarter, kind of the 1% to 2% range. As Dave talked about earlier, there are different parts of the business that are growing faster or slower within that. So a GFO, for example, is at a higher organic growth rate. The business the ultra-high-net-worth, so think about families with a net worth above $10 million. Growing faster. And then also, the advisory, component of what we do. Has a higher organic growth rate right now, whereas the product portion, of the fee has been flat. And so as we go forward, we expect that combination, to increase. And that's why the strategies that I talked about are focused on that. Asset servicing, it had strong organic growth rate in fourth quarter. You know, closer to kind of 2%, 3%. And as we've talked about before, very focused on making sure that that's scalable profitable growth for us. So it's at an attractive level for us, at this point. Operator: And our next question is going to come from David Charles Smith from Truist Securities. David Charles Smith: Good morning. I was wondering if you'd help us frame out how the degree of operating leverage might move depending on the revenue backdrop I think this past year, for example, you did about 7% revenue growth and got closer to 200 points of operating leverage. You know, if the revenue environment ends up being similar next year, you know, is that 200 basis points, like, plus or minus a decent way to think about how you might, you know, keep the expense growth moving. And on the flip side, you know, how you know, painful would the revenue environment have to be for you to feel like you would be better served going below a point of operating leverage in order to keep all the investments that you still wanna make for the longer-term health of the business? Michael O’Grady: Yeah. I think the way I would have you guys this year focus on the expense line in particular and then the operating leverage that comes out of that is the fact that our planning process this year is a little bit different than it was last year. In that, we start with productivity. We don't start with, I got this much last year in expenses, and I'm gonna increase it by x or y. We start with productivity. And then we look at that number relative to the investments we wanna make during the course of the year. And that implies an expense growth rate. And you kinda go back and forth that until you sort of land where you think you should land. And so from our perspective, keeping that 1% is critical. In any environment. And the idea is from my perspective, not to be attached to a particular expense growth number but to know that we have the discipline built in in the muscle memory developed within the company to flex up or flex down if we need to. We don't wanna starve our businesses of growth opportunities. And right now, we're seeing a lot of really interesting growth opportunities organically within the company. And so to the extent that the environment lets us do that, we wanna maintain the one point of operating leverage, but at the same time, be able to invest in those businesses. So we don't sell for one, two, three, four. We sell for greater than one. Right? And so and then we look at every quarter in terms of the relative investments we wanna make, and we balance that against know, what we're seeing in the following quarter as well. David Charles Smith: Okay. I mean, just in your base case, though, if you're doing about five points of efficiency, and net expenses are growing something like 4%, you know, of those 9% of, like, gross expense growth approximately, could you break it down for us how much of that would be volume and revenue related versus new investments to grow the bank? David W. Fox: Well and obviously, a large part of our expense base is compensation. Right? And then it's gonna be our technology spending. If you look at equipment and software as an example of that, you know, depreciation is two-thirds of that. So when you think a little bit about the additional investment we're gonna be making in the course of the year, a lot of that is gonna be growth investment. Right, from the business perspective. So that's really what I'm talking about is the growth investment. So if we're able to free anything up, during the course of the year, it's going to go towards the business growth. Not towards the, you know, the operate the bank growth, for example. We feel like we've got a very good handle on our tech expenses, on our modernization expenses at this point. So that additional dollar flow would go into those growth levers. Operator: And our next question is going to come from Gerard Cassidy from RBC Capital Markets. Gerard Cassidy: Thank you. Hi, Mike. Hi, Dave. Michael O’Grady: Good morning. David W. Fox: Good morning. Gerard Cassidy: At the risk of being called a commotion again like I was on one of your peer calls earlier in the week. Can you guys the setup for yourselves, your peers, the banking industry is very positive. Going into 2026. And you know, we always are looking at, you know, both the positives and risks. Can you share with us, aside from the geopolitical environment that we're all dealing with, what when you look around corners, what are you guys watching for? Is that know, you gotta make sure we don't get surprised by as we as 2026 unfolds. Michael O’Grady: Sure. So as you know, Gerard, that can be either incredibly complex, or relatively simple. And I would say we look around all the corners as best we can. We worry about everything. But if you boil your question down to, okay, what can have a very negative impact on the environment, which to your point right now is very positive, certainly, on one front, if interest rates change dramatically, that is more difficult for us and for other financial institutions to adjust. You know, we've seen that in the past. When interest rates go up 500 basis points in a year, that is a challenge to the financial models of financial institutions. So that can be up. Certainly, one direction, it creates big issues. And also down. When you think about the impact on zero rates, when you have waivers on money market funds, things like that. That's where, like, big impact second, obviously, is the market. You know, much of what we do is priced on AUM levels, AUC levels, AUA levels that are based on the market. And a lot of our growth that we've had this year is based on those strong market levels. So anything that obviously causes the markets to go down, almost like regardless of what it is, is concerning, and we'll have a big financial impact to us. Then the last thing I would just say is you have challenging operational environments. Just given the nature of our business. The pandemic is certainly an example of that. Where it's extreme and how you have to be able to operate the business to continue to provide the services to your clients. And once again, hard to predict those. We try to do a lot. To prepare for them, to anticipate them, and you've seen in the last few years, invest to be able to deal with those types of environments as well. So trying to do everything we can. Can't predict it, but, you know, hope for the best. Gerard Cassidy: No. Very helpful. I appreciate the insights, Mike. Thank you. Michael O’Grady: Sure. Operator: And there are no further questions in the queue at this time. I'd like to turn the conference back to Jennifer Childe for any additional or closing remarks. Jennifer Childe: Thanks for joining us, and we look forward to speaking with you again soon. Operator: And this concludes today's call. We appreciate your participation. You may now disconnect.
Operator: Ladies and gentlemen, thank you for standing by. Welcome to the CACI International Second Quarter Fiscal Year 2026 Earnings Conference Call. Today's call is being recorded. At this time, all lines are in a listen-only mode. Later, we will announce the opportunity for questions and instructions will be given at that time. If you should need any assistance during this call, please press 0, and someone will help you. At this time, I would like to turn the conference call over to George Price, Senior Vice President of Investor Relations for CACI International. Please go ahead, sir. George Price: Thanks, Rob, and good morning, everyone. I'm George Price, Senior Vice President of Investor Relations for CACI International. Thanks for joining us this morning. We're providing presentation slides, so let's move to slide two. There will be statements in this call that do not address historical fact and as such constitute forward-looking statements under current law. These statements reflect our views as of today and are subject to important factors that could cause our actual results to differ materially from anticipated. Those factors are listed at the bottom of last night's press release and are described in the company's filings. Our safe harbor statement is included on this exhibit and should be incorporated as part of any transcript of this call. I would also like to point out that our presentation will include a discussion of non-GAAP financial measures. These should not be considered in isolation or as a substitute for performance measures prepared in accordance with GAAP. Let's go to slide three, please. To open our discussion this morning, here's John Mengucci, President and Chief Executive Officer of CACI International. John? John Mengucci: Thanks, George, and good morning, everyone. Thank you for joining us to discuss our second quarter fiscal year 2026 results as well as our updated fiscal 2026 guidance. With me this morning is Jeff McLaughlin, our Chief Financial Officer. Slide four, please. I'd like to start the call by reiterating our strategy, why CACI is a company that no longer fits within traditional industry labels, and how we are expanding the limits of national security. You've heard us say many times that strategy is a place we come from. Our strategy defines where we are going, what we are building, and how we are executing with discipline and consistency. We serve seven markets. We possess decades of mission knowledge so we truly understand what our customers need. Within these markets, we focus on enduring national security priorities with narrow deep funding streams. We differentiate ourselves by delivering software-defined technology to address critical needs with the speed, agility, and efficiency our customers demand. We invest ahead of customer needs, showing them the art of the possible, exactly what the current administration is asking for. We've been doing this for years. The market is coming to where we already are. Through deliberate actions, informed investments, and flexible and opportunistic capital deployment, we have expanded our technology portfolio to nearly 60% of total revenue. Over the long term, expect technology to continue to increase as a percentage of revenue and support margin expansion. I will share some additional information about two areas of our technology portfolio later in my remarks. Our results and accomplishments clearly demonstrate that CACI is not the company we were ten years or even five years ago. We are continuing to evolve. That's why you see us competing and winning against a wider range of competitors, including defense primes and defense tech companies. It's why we're delivering consistent financial performance despite a dynamic and sometimes uncertain environment. And it's why we are confident we will continue to drive long-term shareholder value. Slide five, please. Speaking of performance, our strong second quarter results are another example of the success of our strategy and execution. We delivered free cash flow of $138 million, driven by revenue growth of 6%, and an EBITDA margin of 11.8%. We won $1.4 billion of awards, representing a book-to-bill of 0.65 times for the quarter, 1.4 times for the first half, and 1.3 times on a trailing twelve-month basis. As a result of our strong first-half performance, increased visibility, and the continued momentum of the business, we are raising our fiscal 2026 guidance. Slide six, please. Within technology, we have built a leading position in electronic warfare, which alone represents about $2 billion in revenue. We have also established CACI as an industry leader in agile software development and software modernization, part of our enterprise technology portfolio. And we recently announced a fantastic acquisition, ARCA, which represents the latest step in our technology-driven portfolio evolution and the execution of our space market strategy. These are all areas of significant and enduring investment by our customers, which support long-term growth for CACI. I'll spend some time talking about EW and enterprise technology. Our software-defined capabilities in electronic warfare illustrate how our strategy and technology-driven evolution are driving our performance. It's a critical warfighting domain and an area where we position CACI as a leader by investing ahead of need and delivering differentiated software-defined technology. We've known for years that virtually everything with a power button emits a signal. And today, we are seeing the significance of this in conflicts around the globe and how it's impacting our customers' priorities and their budgets. We've developed and deployed proven technology that allows warfighters to sense, identify, locate, and defeat these signals. Whether through targeted non-kinetic effects or by tipping and queuing other systems for kinetic ones. Our software-defined approach provides increased speed, flexibility, lethality, and the ability to adapt as threats evolve. Exactly what's needed on the battlefields abroad and in defense of the homeland. We won a number of programs of record with the Army and the Navy, rapidly developing, delivering, and fielding our EW technology. And based on that success, we see growing demand for other services, including the Air Force. An important benefit of our software-defined approach to EW is our ability to quickly adapt to new mission requirements, accelerate delivery of new capabilities, and sell commercially to alternative acquisition models such as OTAs. We previously highlighted Merlin and RMT, our latest counter-UAS and counter-space systems, as two examples of this concept. And customers are responding positively to these proactive investments, deploying a Merlin demo unit to the southern border, and placing the first production order for RMT. We've been saying for years that software would be the enabler of greater speed, agility, efficiency, and lethality, and we are proving it by rapidly addressing an expanding set of missions. This is a repeatable process. These successes are a clear validation of our strategy and differentiation. And they position us well for additional opportunities and growth in the coming years. Slide seven, please. Enterprise technology is another area where CACI is strategically positioned well ahead of market demand. The current administration has made modernization a clear priority to drive efficiency, transparency, and operational improvement as well as enhanced security. We've been focused on this for many years, investing in commercial agile software development methodologies and building differentiated capabilities that are driving measurable results and significant value for our customers. That's why we've won the three largest agile software development programs in the federal government. A great example is our work with Customs and Border Protection. We're not just modernizing software. We're delivering transformational efficiency. Nearly 200% increase in software releases over the last five years, like-for-like cost reduction, and exceptional software quality. We're also bringing new AI software capabilities to CBP to help secure our borders, including AI-based object tracking technology that we initially developed for the intelligence community. This cross-pollination of innovation is a direct result of our strategic focus and investment approach. Slide eight, please. We continue to see a constructive macro environment and good demand signals from our customers. While post-shutdown activity is still a bit uneven in the near term, our strategy has positioned CACI exceptionally well to outperform in this environment. As you know, 90% of our revenue comes from national security customers, and we are seeing reconciliation funds starting to flow to several areas of our business. As a result of our strong performance and continued business momentum, we are raising our fiscal year 2026 guidance. We now expect free cash flow of at least $725 million, revenue growth of nearly 8% to 10%, and an EBITDA margin in the 11.7% to 11.8% range. Finally, looking at our three-year financial targets, we expect to exceed the $1.6 billion free cash flow target even after normalizing for the benefit from the changes to R&D capitalization from the one big beautiful bill. As for our revenue and EBITDA margin targets, we are highly confident in our ability to hit the high end if not exceed them. And I should note that none of our projections include any benefit from our planned acquisition of Arca. With that, I'll turn the call over to Jeff. Jeffrey MacLauchlan: Thank you, John, and good morning, everyone. Please turn to Slide nine. As John mentioned, we're pleased with our second quarter performance despite the lengthy government shutdown. Our revenue and awards generally reflect the modest shutdown disruption we expected, while our strong margin and cash flow highlight the enduring differentiated elements of our business enabled by our strategy and the deliberate actions that we've taken. In the second quarter, we generated revenue of $2.2 billion, representing 5.7% year-over-year growth, of which 4.5% was organic. While we saw some lingering impacts from the shutdown that impacted program timing and delayed some government material purchases in Q2, our confidence in raising our fiscal '26 guidance reinforced the broader strength that we're seeing. EBITDA margin of 11.8% in the quarter represents a year-over-year increase of 70 basis points. This performance was driven primarily by strong program execution, timing of some higher-margin software-defined technology deliveries, and overall mix. Second quarter adjusted diluted earnings per share of $6.81 were 14% higher than a year ago. Greater operating income along with a lower share count more than offset higher interest expense and a higher income tax provision. Finally, free cash flow was $138 million for the quarter, driven by our strong profitability and increasing cash generation from working capital management. Day sales outstanding or DSO were fifty-seven days. Slide 10, please. Our leverage at the end of Q2 is 2.4 times net debt to trailing twelve-month EBITDA. We intentionally allowed leverage to drift slightly below our target range in anticipation of the acquisition of Arca. As we announced in the call a month ago, we expect leverage to increase to 4.3 times once the acquisition closes. I'll remind you, though, as I did on that call, that we have a strong track record of successfully quickly delevering after major acquisitions. Which is illustrated by our historical leverage we provide in the appendix. This underscores our consistent financial performance, disciplined approach to capital deployment, and our demonstrated access to capital. In fact, we expect leverage to return to the low threes within six quarters of closing ARCA. Based on the strong cash flow characteristics of the combined business. The acquisition of ARPA is just the latest example of our flexible and opportunistic capital deployment strategy and the evolution of our technology portfolio. Which position CACI to deliver long-term growth and free cash flow per share and additional shareholder value. Slide 11, please. We're pleased to be increasing our fiscal twenty-six guidance across all metrics. We now expect revenue to be between $9.3 billion and $9.5 billion. This represents total growth of 7.8% to 10.1%, which includes slightly less than two points of growth from acquisitions. We're increasing our fiscal twenty-six EBITDA margin to be in the 11.7% to 11.8% range. Underscoring our strong execution and continued evolving portfolio. As a result of our higher revenue and EBITDA margin outlook, we are also increasing our FY 'twenty-six adjusted net income guidance to be between $630 million and $645 million. This yields an attendant increase in adjusted EPS to between $28.25 and $28.92 per share, representing growth of 7% to 9% despite last year's unusually low tax rate. And finally, we're increasing our free cash flow guidance to at least $725 million. As we consistently say, we see free cash flow per share as the ultimate value creation metric. Our FY '26 guidance now implies a 65% growth in free cash flow per share. To assist you with your modeling, I'll note that for Q3 revenue, we're comfortable with the current consensus estimate. And we expect second-half EBITDA margin to be consistent with what we saw in the first half. As John mentioned, our guidance does not include any assumptions for 12, please. Turning to forward indicators, all metrics provide good long-term visibility into the strength of our business. Our second-quarter book-to-bill of 0.65 times and our trailing twelve-month book-to-bill of 1.3 times reflect good performance in the marketplace, even with the protracted government shutdown and slow rebound in award decisions. The weighted average duration of our awards in Q2 was over six years. Our backlog of $33 billion increased 3% from a year ago, and our funded backlog increased 7% for the same period. For fiscal year twenty-six, we now expect 95% of our revenue to come from existing programs, with 3% coming from recompetes and 2% from new business. Progress on these metrics reflects our successful business development and operational performance and yields confidence in our higher expectations for the year. In terms of pipeline, we have $6 billion of bids under evaluation. Over 70% of which are for new business to CACI. We expect to submit another $20 billion in bids over the next two quarters, with over 70% of those being for new business. In summary, we delivered strong results in the second quarter and continue to demonstrate our differentiated position in the marketplace. We are winning and executing high-value enduring work that supports long-term growth, increased free cash flow per share, and additional shareholder value. And with that, I'll turn the call back over to Jonathan. John Mengucci: Thank you, Jeff. Let's go to Slide 13, please. In closing, I want to emphasize that our continued strong results are not by accident, but rather the direct results of our deliberate strategy execution. We built CACI to be resilient and differentiated, delivering strong performance despite the sometimes challenging macro dynamics. That's what happens when you focus on expanding the limits of national security. For us, this isn't just a phrase. It describes our relentless focus on anticipating tomorrow's challenges, in developing solutions to stay ahead of our customers' needs, not just meet them. What truly differentiates CACI is our ability to shape the future rather than simply respond to it. We don't wait for RFPs. We proactively show our customers what's possible through strategic investments and innovation. This approach allows us to be disciplined in our shop selection, shaping opportunities where we know we can win. As we look ahead, we remain confident in our ability to execute our strategy and deliver on our financial commitments. The momentum of our business, our healthy pipeline, and our strong first-half performance enable us to raise our fiscal 2026 guidance across all metrics. And with the pending addition of ARCA, we're further enhancing our position in a critical space domain that will drive additional growth and shareholder value. As is always the case, our success is driven by our 26,000 employees who are ever vigilant in expanding the limits of national security. To everyone on the CACI team, I'm extremely proud of what you do every day for our company and our nation. And to shareholders, I thank you for your continued support of CACI. For that, Rob, let's open the call for questions. Operator: Thank you. We will now begin the question and answer session. If you'd like to ask a question, please press 1 on your telephone keypad. If you would like to withdraw your question, simply press 1 again. We ask that you please limit yourself to one question and one follow-up. Your first question comes from the line of Gavin Parsons from UBS. Your line is open. Gavin Parsons: Good morning, You have Maximo on line. John Mengucci: Ah, good morning. Gavin Parsons: Yeah. So in light of recent developments around the world, I wanted to ask at a higher level what higher US military op tempo means for CACI specifically? And how that changes the opportunity set in front of you. John Mengucci: Yeah. Thanks. Terrific opening question. Look. Today's op tempo is extremely good for CACI because it requires much of what traditional companies, frankly, don't traditionally do. Our customers are demanding mission technology at the speed of mission. So we can talk about Exquisite EW, differentiating rogue drones from friendly ones and mitigating risk. I like to say welcome to EW. Enemy changes their tactics and their technological footprint, welcome to EW. Getting 20 helos in and out of a country without any issue, welcome to EW. We, frankly, do EW better and more strategically and more surgically than anyone. So what does the AppTempo demand? A few things. One would be resiliency. I look at our solutions. They're software-defined. They share a common baseline with a multitude of other sensors. What that really means is when one sensor anywhere detects a new signal, all of its features and how to mitigate that signal is sent across a broad network of already deployed sensors. The out combo demand speed We've been really clear that we build enhancements and mitigations almost instantaneously. It demands optionality. So whether you're looking at handhelds, backpack, mobile, fixed, short-range, long-range solutions, they all come with a common software baseline. And what the customer absolutely demands is it has to have some type of optionality that allows them to acquire commercially under FAR part 12. So to us, think of Optempo, quick response, build in delivery, provide your customers your best tech, provides investors with increased shareholder value, commercial terms, commercial investment model, commercial margins. You know, at the end of the day, we're doing a lot of what commercial companies do. And we deliver EBITDA as well. Great. Gavin Parsons: Thank you very much. And then it looks like the pipeline of submitted bids remains a little low. Exiting the quarter, but that you know, the expected bid number filled up pretty nicely in the quarter. Can you talk a little bit about how you're expecting things to flow through that pipeline and what the cadence of conversion might look like as we move through the rest of the year? John Mengucci: Yeah. You're connecting those dots the same way we do, Gavin. The you know, one of the implications of the protracted shutdown that is a little less obvious. You could see the awards obviously, but what you can't see is sort of the slower level of activity in ramping back up. And I think the length of the shutdown combined with the ending of it leading into the holidays put some amount of acquisition processes sort of behind the curve. We do see that filling back up. We feel that, getting back on pace and we you know, and that's visible, I think, in the pipeline. You see what we plan to submit over the next hundred and eighty days. We obviously, for competitive reasons, aren't gonna comment on any particular opportunities or, you know, or make any predictions about win rate or anything like that. But you can look at our historical performance on those metrics that we provide regularly on a consistent basis over a number of years, and you can draw your own conclusions from that. Gavin Parsons: Great. Thank you all. Operator: Thanks. You bet. Your next question comes from the line of Peter Arment from Baird. Your line is open. Peter Arment: Yeah. Good morning, John and Jeff, George. Nice results. John Mengucci: Hey. Thanks. Peter Arment: John, could you maybe give us an update? You recently had a protest that you won. I think it was last Friday. It was a big award that you won in August. Maybe how should we think about kind of the timing of that and just maybe any color you wanna give around the protest? Thanks. John Mengucci: Yeah. Sure. So as you mentioned, the JTMS protest was virtually denied last week. So we are in the process of starting to ramp up on that program. We've already had very detailed meetings with our customer during the protest period. You would imagine we were ready for go as soon as this was announced. It is a longer-term technology program, so that's gonna wrap up over an extended period of time. So I think it'd be more of a benefit to growth in 2728, but you would clearly given the timing of the protest decision, that's gonna help us drive our fourth-quarter revenue number which I know you'll all be watching. You know, it's a ten-year, $1.6 billion job. It's gonna be task order based. And that's which is very, very standard. And, look, we're extremely pleased. We're gonna take the off-the-shelf software platform. We're gonna use SAP. Which is a strong OEM. We're gonna take fast-paced solutions. We're gonna use our agile software, our agile solution factory. And our agile software development processes and I would expect, Peter, the JATMS is gonna consolidate a large number of disparate legacy systems, which falls directly in line with some of the EOs that we've read. And we have a couple of other protests out there, still. We're looking for them to resolve by the end of this month, and we'll be sure to advise all of our investors in that effort. Peter Arment: That's great color. Thanks, John. And just as a quick follow-up, you talked about reconciliation funding starting to flow. Could you just maybe and then there's been a lot of activity behind the scenes on Golden Dome. How do you see that kind of impacting, as you think about, you know, the second half of this year, but also the setup for '27. Thanks, John. John Mengucci: Yeah. Thanks, Peter. Look. We're we have our eyes on ride reconciliation funding, and I know there was a lot of talk. You know, is that gonna be early in '26, like, in '26? Is it total into '27? I think at the end of the day, the answer is yes to all three. You know, for us, we're seeing border security programs being positively impacted, by seeing reconciliation funds starting. I did share something in my prepared remarks about taking some intel AI-based technology. That was a, you know, quote, unquote, plus up using record reconciliation. Funds. You're gonna see a lot of that in the counter UAS area. We're always seeing already seen in indications of that. Space programs, we've been called on to look at modernizing a lot of the critical space force infrastructure, so we're working on that. I think I believe there was an EO out around modernization of Department of War Financial and Logistics System. Ties directly to that EO. We are seeing reconciliation funds show up there. And then as this sort of relates to Golden Dome, we are seeing the number of intelligence programs receive additional funding around left of launch. Because that provides the ultimate situational when you're looking to protect this nation in a golden dome scenario. So, you know, we have included a range of outcomes in our updated guidance, your left goalpost, clearly a smaller amount of funding. The right goal post more funding. But, look, at the end of the day, anytime somebody wants to add a $150 billion to a market that this company is doing extremely well in, it's a constructive macro environment overall. It really just doubles down on the strong demand signals that a company like us can make great use of. So thank you for those questions. Peter Arment: Appreciate the color. Thanks. Yep. John Mengucci: Yep. Operator: Your next question comes from the line of Colin Canfield from Cantor. Your line is open. Colin Canfield: Hey. Thank you for the questions. John Mengucci: Sure. Colin Canfield: We should be starting out with the federal acquisition regulation. You mentioned it before, John. Just talk us through kind of where are we at in terms of the reforms of the FAR and how should we expect both the magnitude and timing in terms of impact on any kind of we'll call it, CACI cost plus exposure? John Mengucci: Yeah. I mean, we're pretty much in line with the acquisition reform. There's a large number of deals out there, and there's a large amount of print around, you know, driving from cost plus to firm fixed price and know, are we gonna completely move from FAR part 15 to FAR part 12? Or we're gonna talk elements of 12 into 15? Go 12. I mean, there's a whole bunch of different avenues. What I like about what has come out and what's great for this company is that there's a new recognition of exactly what FAR part 12 is. Right? I mean, I think you're seeing that tied to OTAs. Look. At the end of the day, I think in items that are not highly specific but could be born by our own corporate investments and taken to the government in an 80% solution manner and then do some development work, you know, co-development with the government funds in our funds. That offer that into a long run of production. I mean, I think that's the ultimate best way. We're seeing other long-term cost plus programs. Right, Colin? Those are trying to be moved into some different investment models, which is great. You know, we don't possess any of those. So we're still doing some cost plus work, but make no mistake. This company was intentionally built to have a FAR part 12 commercial part of our business and a FAR part 15. We're able to provide customers either and or both. And, it's really driven the $2 billion of electronic warfare that we've been talking about. So we are very well poised to support where the government's going. TLS manpack outstanding example. Even RMT, even though it wasn't a specific OTA, they had a lot of investment on our part. That then led to a larger production order. So I think probably the third or fourth inning of acquisition or reform. But for this company, I believe that our results are shown that we're well aligned, and we're gonna drive even greater growth as we go forward. Colin Canfield: Colin, I'd add to John's point. We really are finding our rhythm here on OTAs. We've seen two and a half times the level of OTA contracting in the last two years that we saw in the previous five years. So it's really a mechanism that we and our customers are well aware of and taking advantage of. John Mengucci: Got it. No. I appreciate that color. And then moving over to Arca, maybe talk through kind of how you think about the scalability of the intelligent like, the related intelligence services that you might gain or kind of grow over time thanks to the acquisition of Bandberry? Optics business? Essentially, like, beyond just manufacturing work, I think back to when you first bought us Photonics and essentially utilizing the space-based hardware to inform the intelligence business? You know, maybe just talk through kind of how you think about that earnings algorithm and then the scalability of it. And where there's any kind of roadblocks that we should think about in terms of, like, data conflicts and the like. John Mengucci: Okay. I'm gonna unpack that one, Colin. Look. Let me just start off by saying that I'll share what we can share. We're going to hold a lot of discussions around financials and backlog and the like until we get that across the finish line and we close. But it suffices to say that it's great for us to be able to share what we see in this company and in the business. They are a leading developer and supplier of scents and scents making tape. Capabilities. Make no mistake. They were involved in just about every critical national security mission. What I liked about it similar to this company, they're at the forefront of technology developments. And they've been there since the Cold War. So these capabilities are not new. How they have to deliver is not new. The architectures that ARCA delivers into literally have acquisition plans that go out as far as planning goes to around 2040. They are right in the middle of long-term growth funding streams for both DOD and classified NRO space budgets. They're focused on the fastest growing parts of the market. Their laser warning systems are equipment of record on every platform which they deliver. They and they're talking about the Danbury business to your other set of questions. Extremely high technical barriers to entry. It's an environment of constant capability and upgrades. Their contract portfolio, combined with their outstanding record of execution even in fixed price environments, does distinguish them with their cost customers. You know, when I looked at this business and we've been studying it for quite a long time, the folks at BlackRock continue to invest in this business. Blackstone. Sorry. Continued to invest in this business. They continue to understand that the national security world needed an asset like ARCA so they didn't hold it for five years. They grew it, and they invested in it. What I like about them is they invest ahead of need. They innovate and execute with agility. They deliver predictability given cost and schedule focus. So they are well set up to the earlier question around acquisition reform. They are well understanding of cost plus versus firm fixed price. They do have a tremendous backlog that we'll be able to talk about when we get, you know, hopefully, as we get to the end of our third quarter. And we shouldn't ignore the sense-making part of their business. You know, that's a lot of work that they do similar to us, in an agile software development manner. They work on parts of the intelligence data. We work on other parts. They do some things that we don't do. We do some similar things. But, you know, they have differentiated capabilities. They have long-duration contracts. They're involved in very critical national security programs. Nothing speaks larger than this company doubling down again in the space market than this acquisition. I know it drives our leverage, you know, up to four three and such. We have the right buy-down mechanism. At the end of the day, you make bold investments to drive bold growth. And that's what this acquisition is about. And this is why we're very involved in the space market and driving future growth there. Appreciate the questions. Operator: Thank you. Your next question comes from the line of Seth Seifman from JPMorgan Chase. Your line is open. Rocco Barbero: Good morning. This is Rocco on for Seth. John Mengucci: Morning, Rocco. Rocco Barbero: Morning. Digging in more on Peter's question, how are you thinking about CACI's addressable market from the reconciliation bill both for CUAS in general and Merlin more specifically? And how are you thinking about that market growth in the coming years? John Mengucci: Yeah. I knew as soon as I shared the way $2 billion slice of revenue in EW, we'll be all looking for growth rates. You know, news flash are probably not gonna share what we see. But look. The reconciliation funding will do a lot in the EW area because, as you all know, we consider counter UAS being part of our EW market. It's probably worth spending just, you know, twenty seconds on why we answer questions like this, like that. Okay? If we provide a cyber effect to mitigate a dangerous drone, is that cyber, or is that counter UAS? Answer is it's all EW. So that's why we lump this, in one area. Because we share software baselines. We share talent. We share technology solutions. So the reconciliation dollars is a, you know, tens of billions of dollars to our addressable market. We continually assess that as many on this call know. We're looking at about a $300 billion TAM. We're nine, you know, roughly $9.4 billion company. So plenty more room to grow. And even though that reconciliation funding is driving that, the world of counter UAS is going to completely explode beyond what the record reconciliation funding needs. We're involved in the national market marketplace. You mentioned Merlin. We've done some outstanding work there. But it suffices to say in the counter UAS area, there's no less than about 25 acquisition organizations that have stood up and actually brought some of my notes. There's eight within DOD. Six within DHS. You've got DOT via FAA. Department of Justice, Department of Energy, Department of State, and, you know, Department Elemental B. So there's a lot of folks out there. The acquisition infrastructure is just getting set. We're actively engaging to expand our presence specifically with GYNA four zero one. DHS, and then Golden Dome. So there's a great spend looking to be done here, and we are extremely well positioned. Rocco Barbero: Great. Thanks. Rocco Barbero: Then are there any specific items to call out in the civil business? News over the last year plus has been pretty negative about the demand environment, and yet CACI is growing in the mid-teens on average over the period. Jeffrey MacLauchlan: Yeah. Those that's really dominated by our CBP work, DHS work, and the ramp-up on NASA end caps. So it's a little different flavor of civil than you may see in some others, really driven by DHS and NASA. John Mengucci: Great. Thanks, Ash. Rocco Barbero: Yeah. Thanks, Malcolm. Operator: Next question comes from the line of Scott Mikus from Melius Research. Line is open. Scott Mikus: Morning, John and Jeff. John Mengucci: Morning. Scott Mikus: A quick question. With all the acquisitions you've made over the past fourteen years and the announced deal of Arca, tend to find that you're shifting more away from services and you're here more becoming defense electronic suppliers, in particular, L3 Harris. Just given that the government is actually taking an ownership stake, L3's missile solutions business, you think that puts CACI and L3 Harris's other competitors at a disadvantage when competing for work with the Pentagon given that the government owns a will own a stake in L3 Harris? John Mengucci: Yeah. So, awesome question. Look. We see what's going on, and we read about all of those various engagements. But at the end of the day, we're seeing outstanding demand for our technology that we deliver. We're able to meet that demand. We continue to execute our business well. We continue to invest ahead of need and have access to capital we need to enhance our delivery capabilities. See, what makes us different is that we got in the market at a time where we expected that because of one of the earlier questions, because of the OpTempo, and because of the need to not only protect other countries under nations and our interest abroad, but also defend our nation that it was going to require. The fact that we would ourselves begin to invest ahead of customer needs. So we are one of those companies. We have a, you know, NAICS, GICS, whatever code you wanna call it, that makes us a government service company. But, you know, it's been a number of years since you all asked me what my bench strength is. It's been a number of years since you asked me what my direct labor numbers were. Because we're not that company. So I enjoy being compared against others. Who are trying to make changes to adjust. Okay? Those are changes you make because change has been presented. We've actually built this company purpose-built. In this last instantiation of CACI to be in seven markets with strong funding streams that drive shareholder value year-over-year growth regardless if the government shutdown or not, regardless of reconciliation budgets are slightly behind plans, K. We're not a quarter-to-quarter company. We're a year-to-year, and we're gonna be a decade-to-decade company. We are exactly driving this business and measuring ourselves to make sure we are providing eye-watering technology to Department of Warning Intelligence Community, that's what makes acquisitions like SA Photonics so important and LGS. And Mastodon and Arca and others that is driving where this company goes. So really appreciate that question. There's a lot of other things that are going on within this marketplace. We focus on what we can control. And we like to think that we've got an outstanding strategy that moves along with the times. And I think if you've been a shareholder in this company in the last ten to twelve years, you've been quite excited by the way we have navigated different funding forces and moving this company from delivering people to delivering enterprise and mission tech. So thanks for that question. Scott Mikus: Okay. And then just a quick question. I wanted to follow-up on Merlin. I don't know if I missed this earlier in the call. But are there any ITAR restrictions or obstacles that would prevent you from selling that internationally? John Mengucci: No. The actual system itself, no. There's a software load which has different ways to mitigate specific threats. And as you would imagine, like any weapons system, there are software and hardware provisos of what the US government allows all of us in the defense technology space to be able to deliver. So there will be some software proposals with that. But when it comes to defending this homeland, which is what Merlin was specifically built for, there are no issues of what we can do in The US between finding and providing exquisite non-kinetic effects to remove this entire drone layer threat to the homeland. Scott Mikus: Okay. Got it. Thanks for taking the questions. John Mengucci: Yeah. Thanks so much. Sure. Operator: Your next question comes from the line of Tobey Sommer from Truist Securities. Line is open. Tobey Sommer: Thank you. I'm wondering if you anticipate another strong year of defense spending growth in 'twenty-seven. The present articulated a relatively large indication and wondering what your thoughts are on the matter. John Mengucci: Yeah. Toby, thanks. Look. I did read the fiscal year twenty-seven tweet of $1.5 trillion. You know, a little extra color, I believe it's supported by SAS and Haas. But I'm not clear whether it has the support of the appropriators. I think we've got a little bit of time to see this one play out. And I also think that's pretty it's still early, so we'll have to wait and see what comes from the government fiscal year '27 president's budget request. From what I understand, it'll be a little bit later this year because he usually tags along when the state of the union announcement is, so we may see it a few weeks off. But, look, I've often said, this company, where I don't focus on the budget top line, either way, our $300 billion TAM for a $9.4 billion company then we have plenty of room to grow. We have shown that when budgets have decreased, and when they've increased. I think we're in the right markets, the right capabilities. Right customer sets. And at the end of the day, in the national security realm, if the threats present themselves, I've never seen this nation not invest to protect us either abroad or at home. Tobey Sommer: Thanks, John. My follow-up would be the of the large marquee contract wins that the company has won over the last maybe few or handful of years. How much incremental program ramp remains in front of the company to help support future growth? Jeffrey MacLauchlan: Yeah. That's no small amount. I mean, some of the recent contract programs that we've won we've talked about the fact that the changing profile is such that the early phases of the program are really focused on designing and developing the balance of the program. And so that has led to slower ramp-ups. And in fact, we're still seeing growth in ITAS. Earlier in this call, we talked about the fact we pointed out the growing NASA end caps activity. Even though those winds were, you know, still a couple of years ago. So if you think back to the ramp profiles that I talked about in our investor day I guess, a year ago now, there were three or four sort of standard profiles and most of our longer-term wins have been the profile where we don't really sort of reach our max until we're, you know, good three or four years into the program. So we still have wins from the last several years that are still ramping up. John Mengucci: Yeah. Toby, I'd also add. Perfect example of that would be spectral. Right? You know, we're in our third year, I believe, on spectral. We have just recently done all the paperwork and testing that we needed to submit. That would lead to a milestone c decision. So and that is one that once we receive that, that allows us to get into low-rate initial production, which then starts to ramp. Spectral. So just one of many examples. Tobey Sommer: Exactly. Right. Thank you very much. Bye. Bye. Operator: Your next question comes from the line of Jonathan Siegmann from Stifel. Your line is open. Jonathan Siegmann: Good morning, John, Jeff, and George. Thanks for taking my question. John Mengucci: Yeah. Good morning. Jonathan Siegmann: Sure, John. Hey. So I thought margins are definitely a good news for the quarter, and the second time that it's really beating your expectations. Maybe for you, Jeff, can you talk a little bit about what the drivers are? We noticed there are indirect costs or third quarter in a row less than 21% of revenues, just any one-time things to consider or how to think about the upside here? Thank you. Jeffrey MacLauchlan: Yes. Thanks, John. There's a couple of things going on in here. We talked a little bit about mix. We continue to see favorable acceleration in the technology part of the business. Which clearly has positive margin implications. Also noticed the indirect cost number. We're in our fourth year now of doing something that's pretty hard to do, which is reducing indirect cost as a percentage of running the business, while we're in a strong growth mode. Organizations have a natural impulse to grow indirect cost in times of accelerating business activity and we have been really hyper-focused on making sure that, you know, we don't do that. So in absolute dollars, while there is some modest occasional increase, that's in spots that's consistent with what we talk about often, John has a lot to say about investing at a need. We're certainly not giving any of those things short shrift. We're investing where we need to invest but at the same time, we're resisting the impulse to just sort of let the infrastructure grow as the top line grows. So both the technology revenue component acceleration and the management of the cost structure are both strong drivers of the margin performance that you see. Jonathan Siegmann: Thank you. And then maybe if I could flip one more for John. We you know, recently, we've seen some unexpected displeasure with dividends and buybacks. By the government for among the contractors. So the majority of the industry prioritizes that, and CACI has only done opportunistic buybacks and prioritized M&A. The question is, you know, the Pentagon clearly is not supportive of large-scale consolidation. But how does the Pentagon react to the acquisition that Dale at CACI does? Thank you. John Mengucci: Yeah. I mean, I haven't heard a lot about any blocking us to continue to do smart acquisitions that support the national security infrastructure, which at the same time then as a product of doing that, drive shareholder value. Look, we've read the EO, and we are supporting it. We believe we're in line with it. We have strong exit. We deliver where we're asked to deliver. We continue to invest ahead of need for probably seven years is where we've been. On that model. You know, as there's been a lot of talk about to some of the larger players, you know, divest. Do we unwind the current div we have today? I don't see that. Reaching us on the unwind piece. Should that happen, we're a buyer of capability and customer relationships that continue to drive us forward in these seven markets. And if that were to happen and it were to become much more specific, you know, is that an opportunity for us to look at, you know, pieces of other businesses that may have a better fit here that allows them to transform the parts of their business that are strongly far part 15 and get into more of an agile commercial model so we can address the nation's needs better, then it, then that would be additional M&A opportunities for us. But you know, I don't see anything that we're doing today that's in conflict with that EO, and we'll continue to watch where that one goes. Thanks, Sean. Thank you. Thank you. Operator: Your next question comes from the line of Mariana Perez Mora from Bank of America. Thank you so much. Good morning, gentlemen. Mariana Perez Mora: Good morning, Rana. Mariana Perez Mora: So my first question is gonna be around the Department of War wanting to hire more technical talent. They have telegraphed that in the past, but then through this Advana transformation, memo they put out a couple of weeks ago. They also mentioned that they wanna hire more technical talent. What does that do about CACI? Like, do you see any pressure to any, like, FTE type of roles, or how are you thinking about that? John Mengucci: Yeah. Thanks, Mariana. Yeah. I think it's January 12 was on that one came out. You know, when we look at the Advanta Park program, I think it's in three different teams and just, like, a war data platform team, the applications for the war data, and then financial management team. You know? We look at that as a great opportunity on the financial management team. It is if I read the language correctly, it has a lot to do with financial and acquisition. Readiness systems and spend this drive to drive a clean FOIA 27 defense working capital fund and clean FY '29, you know, pan agency audit, really big on financial modernization. We've got great examples with both the Air Force and US Marine Corps, and then we're already passing major audits. So for us, you know, on that pillar, that one reads well. On the war data platform team and the apps, already do that. Across the federal government. Today. On the hiring piece, it's not a risk to us. We actually deliver technology in low in those areas. We don't provide FTEs. There may be other government services companies that do, but we're not one of them. We're out there delivering outcomes to customers in those spaces, and which is why we don't track just pure FTE deployment. So and this isn't the first time the government's looked to, you know, to quote, unquote, in-source or bring that kind of work in-house, but, you know, that's a good question for them to answer. But it just doesn't so we don't see any threat. From those from that EO. Mariana Perez Mora: Thank you so much. And one more joint to assess potential risks. And you I think you have done through the prepared remarks and the questions a really good job explaining why you're well positioned to commercial terms, fixed price, OTA. That on the other side, do you see any risk for any of your existing early-stage programs to get canceled or a stop work order or anything, kind of like a stop and realign, redesign in order to have that contract or that program be more commercial in terms of, like, 80% type of capability, but, also, being able to be, like, higher volumes, ramp up faster or even cheaper. Like, do you see that risk in any early-stage programs? John Mengucci: Yeah. No. I mean, I don't see any risk. In fact, I like the opportunity of what the government has taken a look at. You know, we one example yes, two examples. One would be customs and border patrol. Our legal program, and one might be TLS Manpack. If you look at Beagle, we approached the customer and asked them, why you're buying 400 FTEs when you should be paying a fixed rate for every new upgrade to every app? That, you have. So we were ahead of government's thinking on that and worked with a tremendously creative acquisition folks at DHS within customs and border to actually put that program in place, and that's driven to other customers, you know, NASA and CAPS. Transcom, JEDMS. They're not buying people. They're actually putting orders in place to actually deliver our outcomes. On the TLS Manpack one, look. That was a job that was owned by a major defense contractor. And we went and we approached the army, with a concept of let's an OTA in place. Let's do some development work. And then let's take our 80% solution and see where you can go with that. So, you know, those are both examples of not the government coming to us and asking us to change what we're currently doing. We actually approached them, or we were in with them on TLS Manpack. So the OTA model does work. You have to be willing to invest upfront. You have to have mission knowledge and you have to have something that the government absolutely needs and wants. And that differentiates us, you know, every day, including Sundays. The one thing we need to understand about OTAs that we're gonna see as the government moves more towards that. You're gonna see smaller initial awards for the development work but it's gonna lead to a faster, larger production value of awards. So when I think about and I wouldn't call it risk marion, but when I think about how we look at businesses like ours, you know, we're used to know, nailing down multibillion-dollar awards. In the pure technology areas. But much sooner than that, we'll see that actual source production award come out. That's what you saw with, TLS Manpack, a $1 million initial award and a $500 million production contract. Jeffrey MacLauchlan: Yeah. The size will not correlate with the strategic significance. Mariana Perez Mora: Thank you so much for the color. Jeffrey MacLauchlan: Yeah. You bet. Operator: Your next question comes from the line of John Godin from Citigroup. Your line is open. John Godin: Morning, John. Thanks for fitting me in here. Where customers gonna do FAR part 12 the initial awards are gonna be a million to 5 or to 7 million. John Godin: I wanted to ask about margin. You know, the margin performance has been very strong. Of course, there's been some mix in there. You know, this isn't about sort of new multiyear guidance. You know, and, obviously, Arca kind of will change the margin outcome. But just bigger picture, wanted to dialogue about where margins could go. If we look at recent incremental margins, they would suggest it could go a lot higher. What are some of the puts and takes as we think about margin from here? You've done a tremendous job the last few years. Getting margins higher. I'm just curious if that trend can continue. Jeffrey MacLauchlan: Yes. John, I think you've heard us may have heard us talk about this before, but this is really for us maybe somewhat not intuitively a free cash flow question. The decisions that we make, you know, our North Star is free cash flow. So if we have the opportunity to invest in a way that accelerates the top line and maintains margin, we'll generally select that over expanding the margin. Because we're generating free cash flow. So it's really about dollars and free cash flow generation. And we're in the happy position of seeing a pretty opportunity-rich environment and plenty of opportunities to invest. And I think as we're starting to see the fruits of the accelerating technology content along with the management of the cost structure that I talked about a few questions ago, I think we actually have plenty of opportunities to invest and maintain or modestly expand the margin but more importantly and more excitingly, have opportunities to further accelerate our free cash flow generation. John Godin: Perfect. That gives me a great sense. Appreciate it. Jeffrey MacLauchlan: You bet. Thanks, John. Operator: And your last question today comes from the line of Sheila Kahyaoglu from Jefferies. Line is open. Sheila Kahyaoglu: Good morning, guys, and great quarter. John Mengucci: Hey, Sheila. Good morning. Sheila Kahyaoglu: Guys are morning, expand upon John's last question. As we think about margins, Duffy just gave a bunch of long-term thoughts. That's super helpful. Maybe a little bit more on the long term. Like, do you think you know, this is the new margin range for CACI, and how much further can it go? And then maybe short term, you mentioned some disruption to material purchases due to the shutdown. How do we think about that mix factoring into the second half margin? Jeffrey MacLauchlan: The material purchases are not I mean, they're a fact, obviously. They're we saw them, and it was a contributor. Not as big an issue as the mix in terms of waiting. You will see some growth. We do expect to see some growth in the material content year over half over half, but it won't significantly impact. It's considered in our guidance. It won't significantly impact the margin expectations that we've communicated to you. If that gets to your question. Sheila Kahyaoglu: Yep. Perfect. Thank you so much. John Mengucci: You bet. Operator: And that concludes our question and answer session. I will now turn the call back over to John Mengucci for some final closing remarks. John Mengucci: Alright. Well, thanks, Rob, and thank you for your help on today's call. We want to thank everyone who dialed in or listened to the webcast for their participation. That many of you will have follow-up questions. Jeff and George Price and Jim Sullivan are available after today's call. Please stay healthy, and all my best to you and your families. This concludes our call. Thank you, and have a great day. Operator: Concludes today's conference call. Thank you for your participation. You may now disconnect.