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Operator: Greetings. Welcome to BOK Financial Corporation's Fourth Quarter and Full Year 2025 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you'd like to ask a question at that time, thank you. And as a reminder, this conference is being recorded. I would now like to turn the presentation over to Heather King, Director of Investor Relations for BOK Financial Corporation. Please proceed. Heather King: Good afternoon, and thank you for joining our discussion of BOK Financial's Fourth Quarter and Full Year 2025 Financial Results. Our CEO, Stacy Kymes, will provide open comments and cover the loan portfolio and related credit metrics. Scott Brower, Executive Vice President of Wealth Management, will cover our fee-based results, and our CFO, Martin Grunst, will then discuss financial performance for the quarter as well as our forward guidance. The slide presentation and press release are available on our website at bokf.com. We refer you to the disclaimers on Slide two regarding any forward-looking statements made during this call. I will now turn the call over to Stacy Kymes, who will begin on Slide four. Stacy Kymes: Thank you, Heather. We appreciate you joining the call this afternoon. We are pleased to report earnings of $177.3 million or EPS of $2.89 per diluted share for the fourth quarter. Full year 2025 earnings reached $578 million or $9.17 per diluted share. This marks a record high earnings per share for both the quarter and the year. Throughout the year, we delivered solid growth and continue to invest in our strategy to create long-term sustainable shareholder value while maintaining a strong and disciplined approach to risk management. During the year, we achieved solid loan growth, expanding loan balances by more than $1.5 billion or 6.4%. This growth was broad-based, both in terms of geography and lending segment. After the economic pause in the first quarter of the year, loans grew at an annualized rate of 11% over the last nine months of the year. We delivered growth in net interest income and expanded our net interest margin in every quarter of 2025. We maintained a loan-to-deposit ratio in the mid-60% range all year, positioning us for future growth and continued pricing optimization. Our fee income engine, which continues to be a differentiator for us, produced consistent strong results once again this year, contributing $801 million to revenue. This represents a peer-leading 38% of total revenue. Our credit quality remains excellent. We've maintained a combined allowance of 1.28% of outstanding loans, and our annualized net charge-off rate for the year was only three basis points. Our strong performance across business lines has been recognized by the market, as we have outperformed the KBW Regional Bank Index total shareholder return over a one, three, five, and ten-year period by 73%, 42%, and 51%, respectively. I'm proud of our performance this year and have strong confidence in the path ahead for our organization. With that, I will turn attention to our fourth quarter results. As I discussed the quarter, you'll hear me emphasize broad-based growth. This is a testament to the work we've done over many years to position ourselves to deliver exceptional value to our shareholders. During the quarter, outstanding loan balances grew $786 million or 3.2% sequentially. The growth was broad-based as our core C&I portfolio and our healthcare and energy portfolios all posted strong results this quarter, expanding 5.3% in total. Growth in Texas specifically was exceptional, representing $561 million of total fourth quarter growth. Net interest margin expanded again this quarter, increasing seven basis points. Fee income was very strong, exhibiting again broad-based growth across our various lines of business. Total fee income increased 5.1% sequentially. I'd like to call out our fiduciary and asset management and transaction card lines of business. Both posted not only record quarters to revenue but also record full-year results. AUMA continued its impressive trajectory this quarter, surpassing $126 billion and setting a new record high. Our capital levels remain robust, with tangible common equity of 9.5% and CET1 at 12.9%. Given these strong capital levels, we also had the opportunity to return value to shareholders by repurchasing over 2.6 million shares at an average price of $107.99 per share during the quarter. Slide six provides a closer look at our loan portfolio. Total outstanding loans grew 3.2% this quarter. Our core C&I loan portfolio, which represents our combined services and general business portfolios, grew 5.5% sequentially. Core C&I loan growth is inherently relationship-driven, requiring time, focus, and disciplined execution. We've seen three consecutive quarters of growth in this business, reflecting the progress from those sustained efforts. Healthcare loans increased 3.3%, driven by strong origination activity and funding of prior commitments. Healthcare production remains robust, the cyclical payoffs we experienced in the first and second quarters of this year have moderated to more typical levels. Energy loans posted strong results, growing more than $200 million. This growth was driven primarily by higher utilization rates across the existing portfolio as well as solid new loan origination. This segment experienced higher than normal payoff activity during the early parts of the year, largely driven by industry consolidation. This activity has moderated, resulting in a more normal payoff rate during the quarter. Our commercial real estate business decreased 1.4% compared to the prior quarter but has increased 12.1% on a year-over-year basis. This small quarter-over-quarter decline was driven by a moderate level of refinancing into the permanent market. We saw a strong quarter of originations in commercial real estate and have a robust pipeline in this space. Let's move to slide seven. Consistent with the last couple of quarters, credit quality is excellent, so my comments will be brief. Nonperforming assets not guaranteed by the US government decreased $847,000 to $66 million. The resulting nonperforming assets to period-end loans and repossessed assets decreased one basis point to 26 basis points. Committed criticized assets increased this quarter but remained very low relative to historical standards. We had net charge-offs of $1.4 million during the quarter, averaging three basis points over the last twelve months. Importantly, the limited charge-offs we've seen recently show no patterns or concentrations that raise concerns about specific business lines or geographies. Over the long term, we do expect that credit normalization will occur. In the short term, we expect net charge-offs to remain below historical norms. No provision was required this quarter, as the impact of loan growth was balanced by an improvement in the economic forecast. Our combined allowance for credit losses is a healthy $327 million or 1.28% of outstanding loans. Our results in credit continue to reflect a highly disciplined approach supported by consistent execution and a strong track record over time. And now I'll turn the call over to Scott. Scott Grauer: Thank you, Stacy. Turning to our operating results for the quarter on Slides nine and ten. Total fee income increased $10.4 million on a linked quarter basis, contributing $214.9 million to revenue, reflecting an excellent quarter. The 5.3% growth in these businesses is an exceptional outcome. Total trading revenue, which includes trading-related net interest income, was $34.1 million, growing $4.3 million over the prior quarter. Trading fees were up $5.4 million, driven by increased trading volumes for agency mortgage-backed securities. Investment banking revenue, which includes investment banking and syndication fees, decreased $1.9 million. However, this is following a record high for these businesses. Investment banking revenue of $14.3 million is still a remarkable quarter. Turning to slide 10. As you know, recurring fee income-based businesses are among the most resilient, valuable, and sought after in the industry. Achieving a $7.1 million linked quarter increase in asset management and transactions revenue reflects not only the strength of our business model but also the dedication and expertise of our team. It was a banner year for both our fiduciary and asset management and transaction card businesses. Fiduciary and asset management revenue grew $4.5 million, led by asset growth from customer expansion and increased market valuations along with transaction management fees. AUMA grew an impressive $3.9 billion to $126.6 billion, eclipsing last quarter for the highest on record. Transaction card revenue increased $2.1 million, reflecting growth in volume and increased customer relationships. Overall, these results underscore the strength and diversity of our fee-based businesses, which continue to deliver consistent growth and resilience across market cycles. With that, I'll hand the call over to Marty to cover the financials. Martin Grunst: Thank you, Scott. Turning to slide 12. Net interest income increased $7.6 million, and reported net interest margin expanded seven basis points. Excluding trading, core net interest income increased $8.7 million, and core margin grew six basis points. Drivers of core margin expansion are largely consistent with those for recent quarters, including fixed-rate asset repricing, beneficial repricing of deposits, and loan and deposit growth. In addition, Q4 net interest margin experienced a small net benefit from SOFR spreads and shifting some existing wholesale borrowings into wholesale deposits. That benefit was partially offset by the impact of our subordinated debt issuance. When those funding market spreads return to normal, we would expect to see those wholesale deposits run off and return to normal wholesale borrowing sources. Within the other gains category, I'd like to point out that we exited a merchant banking investment in the fourth quarter, recognizing a $23.5 million pretax gain. We've included Slide 22 in the appendix to provide more color on notable items during the quarter. Turning to slide 13. Total expenses decreased $8.7 million. Personnel expenses were down $3.6 million. Cash-based incentive payments were higher, driven by increased loan production and new business volumes. However, that was more than offset by seasonal declines in employee benefit costs and by lower deferred compensation costs. As you know, deferred compensation costs vary quarter to quarter, but the amount is consistently offset in the other gains line item within the other operating revenue section. Non-personnel expense decreased $5.1 million. During the quarter, the FDIC updated their estimate of the special assessment, and other adjustments were made, resulting in a $9.5 million benefit. This was partially offset by higher professional fees and data processing costs. Slide 14 provides our outlook for full year 2026. We expect end-of-period loan growth to be in the upper single digits. This reflects a continuation of the growth we've seen in our existing portfolio, which has grown above a 10% annualized rate over the last three quarters, and meaningful contributions from our new mortgage finance segment. We expect net interest income to be $1.44 billion to $1.48 billion, which assumes two cuts in the latter half of 2026 and a slightly steeper curve. Our rate curve assumptions are broadly consistent with implied forwards. Fee income is expected to be in the $800 to $825 million range. There are two drivers here. First, we expect our portfolio of fee-based businesses to grow revenue at a mid-single-digit growth rate in 2026. Second, we expect a steeper curve in 2026 to shift some of the trading revenue out of fee income into net interest income, as we've discussed on previous calls. For total revenue, we expect growth in the mid-single-digit range. Please note that our baseline 2025 total revenue number of $2.18 billion includes NII, fees and commissions, as well as the other gains and losses in the other operating revenue category. We anticipate the growth rate for expenses to be in the low single digits. We've been very thoughtful about aligning our expense base with the future needs of the business, investing in growth areas, and focusing on efficiency in more mature areas. This should result in a 2026 full-year average efficiency ratio in the 63% to 64% range. This ratio should migrate lower during the course of the year as revenue continues to grow. We expect 2026 provision expense to be in the $25 million to $45 million area. This reflects our upper single-digit loan growth expectation and a very strong starting point in credit quality that we can see today. While we see no tangible evidence of credit normalization beginning in our portfolio, the guidance does allow for at least some amount of that eventual normalization to begin later in the year. With that, I would like to hand the call back to the operator for Q&A, which will be followed by closing remarks from Stacy. Operator: Thank you. We will now begin the question and answer session. If you would like to ask a question, please press star then the number one on your telephone keypad to raise your hand and enter the queue. If you'd like to withdraw your question at any time, simply press star one again. Your first question comes from the line of Peter Winter with D.A. Davidson. Your line is open. Peter Winter: Thank you. I was wondering, the loan growth has been really strong, and you've got a positive outlook for loan growth. But could you give a little bit more detail to the drivers to this upper single-digit loan growth? You know, I noticed that consumer loan growth did moderate in the fourth quarter, and commercial real estate was down, but you talked about the refinancings to permit finance, but strong pipeline. Just some of the drivers, including, you know, mortgage banking, mortgage warehouse as well. Stacy Kymes: Sure, Peter. This is Stacy. I think the good news about the loan growth really over the last nine months is how diverse it's been. It's been diverse by geography. It's been diverse by lending type. Significant growth, obviously, in loans in the fourth quarter. About $100 million of that was driven by mortgage finance business. The change from third quarter to fourth quarter. So it contributed in a meaningful way, but it wasn't the main driver. It was diverse across all the areas. I mean, if you think about loan growth for the year, early in the year, energy was a headwind. Here in the fourth quarter, it became a little bit of a tailwind. In the fourth quarter, commercial real estate was a bit of a headwind. But for the year, it still was up solidly double digits. I mean, I think that's the kind of the beauty of what we've created here is we've got a lot of diversity both by lending style and type as well as by geography. And it ebbs and flows each one over a period of time. It's not necessarily all linear but has worked very well together. I mean, I'd love to give you the main driver, but there's not a main driver. It's very diverse. Across particularly the C&I world where, as you know, we've made very significant investments over the last three years both in terms of staff and expansion. And so we're really seeing the benefits of that. Peter Winter: Got it. Thank you. And, you know, positive surprise on the level of share buybacks in the fourth quarter despite strong loan growth and where the stock is trading. But how are you thinking about future share buybacks? And do you have a targeted CET1 ratio? Martin Grunst: Yeah. Peter, you know, we this is Marty. Yeah. We don't really have a targeted ratio. I mean, as you know, we've got a long history of our share buyback activity being opportunistic. And the Q4 number, you know, that kinda connects to the sub-debt issuance we made. So as you think about us share buyback going forward, just reflect on our long-run history of doing that in an opportunistic and shareholder value-oriented manner. Peter Winter: Got it. Okay. Thanks, Marty. Your next question comes from the line of Michael Rose with Raymond James. Your line is open. Michael Rose: Hey, good afternoon, guys. Thanks for taking my questions. Maybe just to follow-up on Peter's question of the buyback. Looks like on November 7, there were 2.2 million shares traded. I was just curious if you guys did an ASR or if there's anything like that. I know you just talked about the sub-debt issuance. But if you can talk about that and then maybe also address the change in short interest during that period. It was a pretty big jump from kind of the 4% range to around 12 or 13%. Martin Grunst: Yeah. Michael, if you look at the Q4 number, we did a portion of that share buyback in four kinda regular way. But as you noted, there a portion of that is related to ASR and that was done right in that early November time frame, which explains what you see. Michael Rose: Okay. So I assume that was one with one of the institutional shareholders that owns your stock? Is that fair? Martin Grunst: That's generally not how you do ASRs. Michael Rose: Got it. Okay. Maybe just moving on. You guys had really good deposit growth this quarter, especially in the IB category. Obviously, I understand the guidance. But can you talk about the competition for deposits and how we should think about, you know, not only growth, but the mix and deposit betas as we move through the, hopefully, two cuts this year? Martin Grunst: Yes. So a couple of things about deposits. So just on of questions there. So competition, I'd say that the environment is, you know, it's always competitive. It is today. It has been for a long time. But there's nothing in particular that's irrational in our markets that we'd point to. You know, it's just sort of competitive at that high normal level. Growth this quarter, we felt very good about deposit growth all year long. I would just point out that a portion of the growth you saw in the fourth quarter was just the wholesale deposit that, you know, for odd reasons relating to the rate cuts, it just turned out there were some wholesale deposits available that were cheaper than the wholesale, you know, normal secured wholesale borrowing that we would use. So we just replace that. So at some point, that washes out, and don't be surprised if you see that happen in the first or second quarter when those spreads kind of go back to normal. But as you look forward into 2026, we expect to grow loans well. We expect to grow deposits well. The loan growth will probably exceed the deposit growth. That would be normal for us and given, you know, the loan-to-deposit ratio we have to start with. We're very comfortable with that drifting up a little bit over the year. And then lastly, on deposit betas, we've had very good performance on deposit betas in the mid-60s here for deposit beta and upper seventies on interest-bearing liability beta, and those numbers are, you know, cumulative down beta cycle. And we expect that as we get into the rate cuts later in 2026 that we have performance right on top of that, we feel very comfortable with being able to continue with those levels for those cuts. Michael Rose: Alright. Great. Thanks for taking my questions. Martin Grunst: Yep. Thanks. Operator: Your next question comes from the line of David Chiaverini with Jefferies. Your line is open. David Chiaverini: Hi, thanks for taking the question. So wanted to ask about fee income. Clearly, very strong fees here. And the growth mid-single digit, excluding trading. Can you give some comments on what your expectations are on the trading front and drivers for overall fees? Martin Grunst: So let me start here, and so I'd say that our intention here is to talk about both trading, the trading portfolio of businesses we expect mid-single digit in that. Really very long run rate, at times we're above that. But that's kinda how we see those businesses. And any given business can be a little higher or lower in a given year, but that's how we see that portfolio. And that when I say that I'm including trading total trading revenue, which includes the NII and fees part, with the same expectation there that that will grow, you know, mid-single digit and certainly market opportunities where that could be notably higher. Let's see. Anything you'd add? Scott Grauer: Yeah. This is Scott. So I would say that in, you know, in addition to I think Marty frames it well at the top of the house. I think that what we're seeing is a continuation of really the momentum that we built throughout '25. We had a, you know, a good first month of '25, and then the last two months of the first quarter were challenging for all the fixed income markets, and we stabilized after that. And I really think returned to more of our expected trend lines. In terms of our trading volumes, you know, activity. And we've continued to see the demand really coming from our financial and institution client base, as well as asset managers have kind of returned to more normalized demand, particularly in the mortgage-backed securities. And then we've seen continued strength in the municipal sector as well. So I don't think that, you know, if there's anything, you know, extraordinary that occurred, but really more of a return to normalized levels of demand. And then the total revenue, as Marty articulated, both the fees and the NII out of that activity we feel pretty good about and feel constructive in terms of the trends that we're seeing build back to our more normalized rates there. David Chiaverini: Great. Thanks for that. And then shifting over to the expense side of things. Can you talk about the outlook? Looks really good on the efficiency side. With the guide of 63% to 64% versus the 65%. Can you talk about the drivers there? I know mortgage finance, you're going to see some revenue catch up versus the expenses that came through in 2025, but you can you talk about that and other drivers of this strong efficiency outlook? Martin Grunst: Yes. So you're right. Part of that is just continued good momentum on the revenue side and then part of that relates to some work that we completed in Q3 and 2025. To make sure we've got our workforce and other expenses invested in the areas that we wanna have them invested in. And so as you go from Q4 to Q1, you'll actually see some reduction in expense levels in the personnel line item as a result and the fee, you know, professional fees line item Q4 to Q1, we would expect, to see some benefit there as well. Stacy Kymes: And I might just this is Stacy. I might just add on there a couple of points. I think number one, we think about things for the long term. We're not focused on next quarter. And we've made several long-term investments over the last several years about how we think about growing the business. Certainly, the expansion in San Antonio was a big investment for us, the investment in mortgage finance was a big investment for us. And, obviously, you lead with expenses there, and it takes time for the revenue to catch up. And those investments to earn a return. Now beginning to do that, and so that's gonna show up in the results. We have taken actions to try to manage that and demonstrate to the market that, look. We can manage these expenses, but we're gonna invest, and as those investments mature, you'll be able to see that efficiency ratio come back to a level you're more accustomed to for us. For us, given the mix of free revenue, we're never gonna be a 55% efficiency ratio type company because of our high mix of fee businesses. But we do think that the guidance we provided is very reasonable for us. And I think you should expect us to achieve that unless given the disruption in the markets that we see, there may be some opportunities for us to continue to be aggressive in talent acquisition. And should that opportunity come to fruition, we may obviously choose to do that. Which may delay the kind of efficiency ratio falling. But based on what we see today, we're very confident in our ability to let that efficient ratio evolve. But there could be some things that very opportunistically come about that would allow us to build a better even better revenue future. And so we'll we're not gonna walk away from that. To manage the efficiency ratio. David Chiaverini: Makes sense. Very helpful. Thank you. Operator: Your next question comes from the line of Jon Arfstrom with RBC. Your line is open. Jon Arfstrom: Hey, thanks. Good afternoon. Stacy Kymes: Hey, Jon. Jon Arfstrom: Couple of follow-ups here. Stacy, you talked about $100 million in balances from mortgage finance in the fourth quarter. What kind of a contribution do you expect from that business in 2026 in terms of balance sheet? Stacy Kymes: You know, we think the number could be we could get to it easily get to, you know, a billion commitments by the '26. Assume half of that's funded. You know, probably do better than that, honestly. But I think that's easy to assume. A lot of these things, they happen to kind of just take longer than you think that they will. By three to six months. And so I'm trying to be a little bit cautious there to, you know, don't overpromise. But clearly, the trajectory there is very positive. The momentum that the sales team has is very, very strong. And we're just exceptionally pleased with how that business is progressing for us. Jon Arfstrom: Okay. Good. That helps, in terms of framing it. And then, Marty, for you, I asked you a similar question to this last quarter, but it seems like a decent setup for the margin for you. Do you expect the core margin to float higher? And can you share with us some of the repricing of the fixed-rate loans and securities and how that might flow through '26? Martin Grunst: You bet. Yeah. Yeah. And you're right. We do continue to expect both margin and core margin will continue to expand into 2026. You know, fixed-rate repricing is certainly a big driver there. And so it's about $700 million a quarter of securities portfolio that reprices up old rate to new rate. And as we go forward, that step up is, you know, not what it was a year ago, but think, you know, that's maybe in the 60, 70, 75 basis point territory that rate step up. At least currently. And then fixed-rate loan book kinda similar story there, call it $200 million a quarter on average. And that's probably more, you know, over a 100 basis points of rates step up as those occur. So that gives you a nice tailwind going into the year. You know, the six basis points in core margin we saw this quarter, you know, there might be a little bit of a to the mean because that average has been more like 4.5 basis points. But, you know, we feel like that's still that there's legs to that driver there through 2026. Stacy Kymes: K. This is Stacy. Just to kinda confirm too. I mean, you know, the actual rate movements don't make a big difference to us. Maybe rounding around the fringes in our forecast or the guidance that we provided, these things are, you know, a couple of rate cuts that are in the, you know, back half of the year that don't really make much of a difference. What does make a difference to us is the steepening yield curve as to all financial institutions. We're not unique there. And so you are beginning to see, you know, really some steepness to the curve or actually some shape to the curve, maybe not steepness, but shape. And that's certainly helpful to us and other financial institutions. As we think about 2026 and future periods as well. Because that builds over time. So that steepness would continue on. Martin Grunst: Benefiting through 2027. Jon Arfstrom: Plus. Stacy Kymes: K. Seems like a good environment. So okay. Thank you for the help. I appreciate it. Operator: Your next question comes from the line of Jared Shaw with Barclays. Line is open. Jared Shaw: Hey, everybody. Good afternoon. Stacy Kymes: Hey, Jared. Jared Shaw: Hey, maybe just going back to the growth rate on fees and on the loan book. It feels like looking at what we've seen for the last three quarters that the guide for '26 seems very conservative. Is there some area where maybe you're expecting a little more pressure than we're expecting? I mean, talking about 50% funded on $1 billion of commitments with mortgage warehouse. That's one-third of the growth that you saw on the whole balance sheet this year. Where should we think that maybe there's some pressure on growth? Stacy Kymes: Well, I think upper single digits is, you know, like, could be seven to 9%. So I'm pretty confident in our ability to deliver that. I think that we wanna convey to the Street what we believe we can deliver. And certainly, we'll do our very best to outperform that. But we think in this environment, particularly upper single-digit loan growth, is a very positive outlier and we'll continue to I think we're very well positioned. We've done a lot of work across lots of lines of businesses to be in a position to grow loans. You've seen that we've grown it at 11% clip over annualized over the last nine months. And that's with some headwinds and some tailwinds from various areas. But I think that's gonna continue, and that's what we don't know is, you know, will there be an unexpected headwind in, you know, an area that we can't put our finger on today? And so I think we can deliver, comfortably deliver the guidance that we provided, and hopefully, we can do better. Jared Shaw: Okay. Alright. Thanks. Appreciate that. And then maybe shifting to the credit outlook. I mean, obviously, credit has been great, and you sound like things are the outlook remains strong. Just as you look at your model, what would drive any incremental concern on credit or which would have more of an impact on potential credit concerns? Would it be oil prices, tariffs, inflation, I guess, where are you keeping an eye out more closely? Stacy Kymes: Yeah. You're right. I mean, I get teased a lot here internally about saying that credit is unsustainably good, and it seems like it's been that way for several years now. And certainly in the short term, we think it's gonna stay that way. The biggest driver for provision levels going forward will be loan growth expected economic outlook. I mean, those will be the two things that will drive higher or lower provision levels. And as long as the economic outlook remains strong, we're well positioned from an allowance perspective. And, you know, there will be a day that criticized and classified and nonperforming levels come up to a more normal level. You can see in the investor presentation kinda where we were essentially pre-COVID. And we think that when it goes back to that level, it won't be, you know, that credit's going bad. It's just going back to normal. But we don't have some of the early indications that others may have, like don't have low-end consumer and things like that that you're beginning to see some weakness around. That's not core to our portfolio. And so our portfolio is held in there very well. I think in the short term, it's going to continue to do that. And there's not just this easily identifiable thing that we think is the next thing to focus on there. But we have a great credit team, a very seasoned experienced team, and a great group of folks on the line who take risk management very responsibly. So we feel good about where we're at there. Jared Shaw: If we see sort of an unchanged economic backdrop from where we are today, and the loan growth that you're expecting. Should we expect provisions in each quarter in '26 but maybe potentially still some downward pressure on the allowance as a ratio or what's the or you're going have to provide for all loan growth from this point, and we should think about that ratio as stable from here? Stacy Kymes: Yes. What I would go back to the guidance we provided. I'm not going to into quarterly what would happen or what could happen. We've given you an outlook a positive economic outlook a range of loan growth, and a range for provision levels next year, and that's our best estimate today. You've seen how we've handled it over time, and so you can certainly provide your own color to that. But I'm not gonna get more specific than that. Jared Shaw: Okay. Thanks. Operator: Your next question comes from the line of Woody Lay with KBW. Your line is open. Woody Lay: Hey, good afternoon, guys. Stacy Kymes: Good afternoon. Woody Lay: To start on the mortgage finance business. And longer term, it's as that business continues to grow, how do you plan to fund that business? Will it be core deposit funded based on, you know, a low loan-to-deposit ratio, or as the volatility picks up, we'll use broker deposits to help fund some of that? Martin Grunst: Yeah. Woody, that loan portfolio, like any other loan portfolio, will be funded just by the broader funding mix, and you should expect that to largely look like it does today, where there's a portion of that that's wholesale, a portion of that that's deposits. This business will bring with it a decent amount of deposits. But we've got a very strong funding profile, and this particular asset class is very liquid. So it gives us a lot of different alternatives to use, and we'll just use the lowest cost, most sensible mix. Woody Lay: Got it. That's helpful. And then last for me, wanted to ask a follow-up on the trading business. You mentioned the outlook there is mid-single-digit growth. But there are market conditions that would support much stronger growth. Could you just remind me of the market dynamics out there that would support faster growth in your trading business? Scott Grauer: Yes. So this is Scott. So obviously, as mortgage origination activity and volumes in the mortgage sector tend to add momentum and volumes in a declining rate environment. So this is one of those businesses that we enjoy real, you know, higher growth rates in challenging economic times that are spawning lower interest rates. So in a declining rate environment, where mortgage origination were to increase, that activity given our, you know, we're fairly equal in terms of volumes and revenues from municipals and mortgage-backed securities. That mortgage-backed security, in particular, would benefit from lower rates. As would refinancing activity in the municipal space. So as rates decline, those two segments of our trading book are beneficiaries. Stacy Kymes: The other thing I might add too there is a lot of our clients or other financial institutions and they've been reluctant to, if you will, take losses in their securities portfolio. So as those portfolios get closer to par and there's fewer unrealized losses there, that's gonna create a little bit more opportunity as well. We think, as we move forward. Woody Lay: Got it. That's really helpful. Thanks for taking my questions. Operator: Your next question comes from the line of Ben Gerlinger with Citi. Your line is open. Ben Gerlinger: Hey. Good afternoon. Stacy Kymes: Hey, Ben. Ben Gerlinger: I was curious if we could talk through a little bit on the expense. Why you is little bit myopic here, so I apologize. But you said March '26. Is it fair to think, like, here to level set all these core items, it's a little bit more of a mid-single digit? Going forward. I'm just trying to think about just underwriting the future given you guys have a faster pace of growth than the national average at this point. Martin Grunst: Yeah. Just in Q3 and Q4, it was small, but there's a little bit of period costs related to some of the realignment we did, but that's not a material number in thinking about next year. But that is a little bit of a tailwind for us. From Q4 to Q1. Ben Gerlinger: Gotcha. Okay. That's helpful. And then in terms of just the mortgage kind of silo, I get that it's relatively new you maybe you don't have the perfect life at this point, but there's like a ballooning effect to the mortgage business improved generally on a seasonality basis. Do you expect something similar where or is it such you're starting at such a low base, it's just kind of growth throughout and you have new customers adding and funding up their relative commitments. Like, should we expect it to kind of peak in the roughly July time frame and then kinda wane there or would you expect a little bit more linear growth throughout the year? Stacy Kymes: Given we're starting from essentially zero, I don't think you're gonna be able to see the effect of that. And I think you're right. We see that somewhat intramonth as that business has natural ebbs and flows inside of it. But given our starting point here, I don't think it's gonna be discernible. It's gonna look like just pretty strong expected largely linear growth throughout 2026. Ben Gerlinger: Gotcha. If I can sneak one more in. Know the San Antonio expansion was it's a pretty big lift for everyone involved. It seems we're pretty successful at this point. Given the seasoning effects with the disruptions throughout. Kind of Texas, I should say, or even just this Texas area that every continuous state would you expect to do incremental hires to give you opportunity in front of you, or is it kind of a playbook that you're you already wrote it and you were gonna write it here? Stacy Kymes: No. I think you're exactly right. I think that if you look back in our history, some of the highest periods of growth for us has when there's been the most market dislocation. And M&A is highly disruptive. It's disruptive to talent. It's disruptive to clients. Who were forced to go through a conversion that wasn't their choosing. And so our intention is to be aggressive and take advantage of that dislocation as much as we can. But I suspect we're not the only ones with that strategy, and so that will be in a of itself a very competitive process. But we certainly expect in the markets where there have been significant M&A activity to be active from a talent acquisition and a customer prospect acquisition. Ben Gerlinger: Sure. Appreciate the time, everyone. Operator: Your next question comes from the line of Brett Rabatin with Hofty Group. Your line is open. Brett Rabatin: Hey, good afternoon. Stacy Kymes: Hey, Brett. Brett Rabatin: Wanted to go back to the NII guide for the full year. Just given the comments on the margin, it seems like the guidance that you're giving would imply a similar like, low single-digit growth of average earning assets. 26 relative to the high single-digit growth of loans. Know, is that fair? And then you talked some about the various borrowing pieces that you can use on the funding side. You know, do you end up reducing that throughout the year as a result? Martin Grunst: Yes. So you're right. You'll the blend of fairly stable securities portfolio and good growth in the loan book will blend out to a lower earning asset growth, but combined with a little bit of margin expansion, that's how you get to the number. And we expect deposits to grow to support overall margin but we also expect to see the loan growth be a little faster than the deposit growth. Brett Rabatin: Okay. And you guys have talked quite a bit on this call about the fee income guidance, you know, and the, obviously, brokers and trading is hard to predict at best. You know, and it's depending on rates to a large degree. You know, I'm a little bit surprised the mid-single guide seems reasonable for some of the businesses. You know? But I'm just curious if you just feel like maybe the growth in what you've accomplished, which is huge on the asset management side, if maybe that's tough to continue to replicate or if there's anything else that's driving maybe a more sedate growth level than what you've experienced the past two quarters in particular? Martin Grunst: Well, two things. Keep in mind well, number one, you're right. That business we feel great about, and that should have a good long very long-term growth rate. But note that within that fee guide that there is a shift from fee income into net interest income just within trading just based on the curve slope of this. So don't let that confuse our enthusiasm for fee-based businesses. Stacy Kymes: The other piece that you may be missing is remember in Marty's prepared remarks, he talked about $23.5 million kind of onetime gain. That's included in the 2025 fee number, essentially. So if you think about that, x that number, I think that probably gets you to a little bit higher number than what you see on the surface. But Marty alluded to that in his prepared remarks. Brett Rabatin: Okay. And, Marty, would you be willing to throw out a number for the movement from the income to NII guide on the brokerage trading? Martin Grunst: You know, that's maybe a little bit more into the weeds, than is constructive, but, you know, it's not small. And when you look at the other large banks that have trading, they're doing the same exact sort of guide for the same exact reason. Brett Rabatin: Okay. And I don't know if I'm last. The other question I really wanted to ask was just around you guys have been growing Texas in particular and Oklahoma really well. Arizona had a good 25, but it seems like Colorado and Kansas, Missouri have been lagging. Any thoughts on those two states or three states and those markets and, you know, if there are competitive dynamics that are flowing stronger growth or anything else you might comment on that? Stacy Kymes: No. Obviously, we're excited about the growth areas that you mentioned. I mean, Oklahoma, Texas, and Arizona, you highlighted. Those were all great stories for 2026. Still very excited about Colorado and Kansas City. That's the great thing about our business lines and about our geography is that they're not all linear at the same point, but the diversity is what creates growth over time. And so we're as excited about those markets as we are any of the other ones. That we're in. There's nothing necessarily unique about those that creates a different growth dynamic there. From my perspective. Brett Rabatin: Okay. Fair enough. Appreciate all the color. Operator: Your final question comes from Matt Olney with Stephens. Your line is open. Matt Olney: Yes. Hey, guys. Just a few follow-ups here. Going back to Stacy's comments about the importance of the steepness of the curve, can we assume that the guidance implies about a 50 basis point improvement throughout the year? So shorting comes down 50 bps from the intermediate part of the curves maintains kinda where it's at today. Martin Grunst: Yeah. That's more or less what forwards have, and that's basically how we think about the year. Matt Olney: Okay. Thank you for that, Marty. And then on the capital discussion, it sounds like there aren't any specific targets target ratios out there you wanna disclose. I think we're all just trying to understand if there could be additional deployment activity or for 2026, whether it's buyback, M&A, or something. Or something else. So he just addressed if you see any interest in capital deployment opportunities for the year. Stacy Kymes: This is Stacy. I think, you know, look, our kinda order generally has been our first choice is loan growth. Loan growth has been very good. Second choice is looking at M&A opportunities as they come along. Opportunistic there. We're not interested in doing something just for the sport of doing it. It needs to add intrinsic strategic value as well in being financially beneficial to shareholders. We don't see anything today on the near-term horizon that would indicate that that's a near-term deployment of capital. And obviously, you saw us be more aggressive in the fourth quarter with share repurchases. Likely to slow that down here as we get into 2026. Yeah. I think that's the use of the capital for us. So we're kinda not locked into any one favored, and we can pivot and be more aggressive as we have a view over time. And we're still active. We're looking for ways to deploy capital from an M&A perspective. But as you know, we kinda don't act like capital is burning a hole in our pocket. We're not afraid to sit on it and wait to find an opportunistic time to redeploy it. That's proven to be a good strategy for us over time. Matt Olney: Yeah. Okay. That's helpful, Stacy. And then just lastly, the loan yields in the fourth quarter, I thought, were better than I was expecting. Anything unusual on those loan yields in the fourth quarter? And then any commentary about just loan beta expectations within that guidance in 2026? Martin Grunst: Yes. Really nothing that's a change fundamentally in that portfolio as you know, it's very much a floating rate portfolio and very much a one-month floater portfolio. And so, you know, there's nothing that would change the characteristics to make it behave any differently. And that's all captured in how we constructed the margin guidance. Stacy Kymes: The one thing I would say there, Matt, is as you know, and we talked about earlier on the call, SOFR most of those loans are SOFR based. So there's been a little bit of quirkiness with SOFR. That remains. And so, you know, they've benefited just a little bit from that. But that's really it. Martin Grunst: Yeah. That kinda flows through to a basis point or maybe two for the quarter. Matt Olney: Okay. That's helpful, guys. Thanks again. Operator: Thank you. With no further questions in queue, I'd like to turn the conference back over to Stacy Kymes for any closing remarks. Stacy Kymes: As I've highlighted today, broad-based growth has been a defining thing for the quarter and for the year. It reflects the disciplined work we've undertaken over many years to strengthen our foundation, diversify our earnings stream, and consistently deliver results across the business. BOK Financial is a strong, stable, growing company. Our progress has positioned us well to navigate the current environment, capitalize on market disruption, and continue generating long-term value for our shareholders. Appreciate your interest in BOK Financial and your willingness to spend time with us this afternoon. Please reach out to Heather King if you have any additional questions at h.King@bokf.com. Operator: This concludes today's conference call. You may now disconnect.
Operator: Good morning, and welcome to the First Quarter 2026 Earnings Conference Call for D.R. Horton, America's Builder. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. Please note this conference is being recorded. I will now turn the call over to Jessica Hansen, senior vice president of communications for D.R. Horton. Jessica, please go ahead. Jessica Hansen: Thank you. Sorry. It would help if I took myself off mute. Thank you, Paul, and good morning. Welcome to our call to discuss our financial results for the 2026Q1. Before we get started, today's call includes forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. Although D.R. Horton believes any such statements are based on reasonable assumptions, there's no assurance that actual outcomes will not be materially different. All forward-looking statements are based upon information available to D.R. Horton on the date of this conference call, and D.R. Horton does not undertake any obligation to publicly update or revise any forward-looking statements. Additional information about factors that could lead to material changes in performance is contained in D.R. Horton's annual report on Form 10-K, which is filed with the Securities and Exchange Commission. This morning's earnings release and our supplemental data presentation can be found on our website at investor.drhorton.com, and we plan to file our 10-Q later this week. After this call, we will also post our updated investor presentation to our Investor Relations site on the Presentations section under News and Events for your reference. Now I will turn the call over to Paul Romanowski, our president and CEO. Paul Romanowski: Thank you, Jessica, and good morning. I am pleased to also be joined on this call by Michael Murray, our chief operating officer, and Bill Wheat, our chief financial officer. The D.R. Horton team had a solid start to fiscal 2026 with consolidated pretax income of $798 million on $6.9 billion of revenues and a pretax profit margin of 11.6%. New home demand remains impacted by affordability constraints and cautious consumer sentiment. However, our teams continue to respond to current market conditions with discipline. We exceeded the high end of our revenue and closings guidance, achieved a home sales gross margin within our expected range, and our net sales orders increased 3% compared to the prior year quarter, demonstrating our ability to balance pace, price, and incentives to drive incremental sales and maximize returns. We are focused on capital efficiency to generate strong operating cash flows and deliver compelling returns to our shareholders. Over the past twelve months, we have generated $3.6 billion of cash from operations, and we have returned $4.4 billion to shareholders through repurchases and dividends. For the trailing twelve months ended December 31, our homebuilding pretax return on inventory was 18.6%, while our consolidated returns on equity and assets were 13.7% and 9.4%. Our return on assets ranks in the top 20% of all S&P 500 companies for the past three, five, and ten-year periods, demonstrating that our disciplined returns-focused operating model produces sustainable results and positions us well for continued value creation. We increased our sales incentives during the first quarter, and we expect incentives to remain elevated in fiscal 2026, with the level dependent on demand, changes in mortgage interest rates, and overall market conditions. We work every day to use our industry-leading platform, unmatched scale, efficient operations, and experienced employees to bring homeownership opportunities at affordable price points to more Americans. 64% of our mortgage companies' closings this quarter were to first-time homebuyers. We will continue to tailor our product offering, sales incentives, and number of homes in inventory based on demand in each of our markets to maximize returns. Michael? Michael Murray: Earnings for the 2026 were $2.03 per diluted share compared to $2.61 per share in the prior year quarter. Net income for the quarter was $595 million on consolidated revenues of $6.9 billion. Our first quarter home sales revenues were $6.5 billion on 17,818 homes closed, compared to $7.1 billion on 19,059 homes closed in the prior year quarter. Our average closing price for the quarter was $365,500, flat sequentially and down 3% year over year. Our average sales price on homes closed is lower than the average sales price of new homes in the United States by roughly $135,000, almost 30%. Additionally, the median sales price of our homes is $70,000 lower than the median price of an existing home. Bill? Bill Wheat: For the first quarter, our net sales orders increased 3% from the prior year quarter to 18,300 homes, while order value remained unchanged at $6.7 billion. Our cancellation rate for the quarter was 18%, consistent with the prior year quarter and down from 20% sequentially. Our average number of active selling communities was up 2% sequentially and up 12% year over year. The average price of net sales orders in the first quarter was $364,000, which was flat sequentially and down 2% from the prior year quarter. Jessica? Jessica Hansen: Our gross profit margin on home sales revenues in the first quarter was 20.4%, up 40 basis points sequentially from September, entirely due to a recovery of prior period warranty costs received during the quarter. On a per square foot basis, home sales revenues were flat sequentially, while stick and brick costs were down roughly 1% and lot costs increased 2%. Excluding the 40 basis point benefit in our gross margin quarter from the recovery of prior warranty costs, our home sales gross margin would have been 20%. Additionally, incentives increased as we moved throughout the quarter, so we expect our home sales gross margin to be lower in the second quarter compared to the first quarter. Our incentive levels and home sales gross margin for the remainder of the year will be dependent on the strength of demand, changes in mortgage interest rates, and other market conditions. Bill? Bill Wheat: Our first quarter homebuilding SG&A expenses decreased 1% from last year, and homebuilding SG&A expense as a percentage of revenues was 9.7%, up from 8.9% in the prior year quarter. The increase in our SG&A expense ratio was primarily due to our lower home closings volume as compared to the prior year quarter. We continue to manage our platform with discipline and are focused on gaining market share efficiently while driving operating leverage over time. Paul? Paul Romanowski: We started 18,500 homes in December, up 27% sequentially from the fourth quarter, and we expect our starts in the second quarter to be higher than the first quarter. We ended the quarter with 30,400 homes in inventory, of which 20,000 were unsold. 7,300 of our unsold homes at quarter-end were completed, down 2,000 homes from September. 900 of our unsold homes have been completed for greater than six months. For homes we closed in the first quarter, our median cycle time measured from home start to home close decreased two weeks from a year ago. Our improved cycle times enable us to hold fewer homes in inventory and turn our housing inventory more efficiently. We will continue to manage our homes in inventory and starts pace based on market conditions. Michael? Michael Murray: Our homebuilding lot position at December 31 consists of approximately 590,500 lots, of which 25% were owned and 75% were controlled through purchase contracts. We are actively managing our investments in lots, land, and development based on current market conditions. We remain focused on our relationships with land developers across the country to allow us to build more homes on lots developed by others, which enhances our capital efficiency, returns, and operational flexibility. Of the homes we closed this quarter, 67% were on a lot developed by either Forestar or a third party, up from 65% in the prior year quarter. Our first quarter homebuilding investments in lots, land, and development totaled $2 billion, of which $1.3 billion was for finished lots, $610 million was for land development, and $80 million was for land acquisition. Paul? Paul Romanowski: In the first quarter, our rental operations generated $110 million of revenues from the sale of 397 single-family rental homes. Our rental property inventory at December 31 was $2.9 billion, which consisted of $2.5 billion of multifamily rental properties and $356 million of single-family rental properties. We remain focused on improving the capital efficiency and returns of our rental operations. As for our financial services operations, pretax income for the first quarter was $58 million on $185 million of revenues, resulting in a pretax profit margin of 31.4%. Michael? Michael Murray: Forestar, our majority-owned residential lot development company, reported revenues for the first quarter of $273 million on 1,944 lots sold, with pretax income of $21 million. Forestar's owned and controlled lot position at December 31 was 101,000 lots. 62% of Forestar's owned lots are under contract with or subject to a right of first offer to D.R. Horton. $180 million of our finished lots purchased in the first quarter were from Forestar. Forestar's strong, separately capitalized balance sheet, national operating platform, and lot supply position them well to provide essential finished lots to the homebuilding industry and aggregate significant market share over the next several years. Bill? Bill Wheat: Our capital allocation strategy is disciplined and balanced to support an operating platform that produces attractive returns and substantial operating cash flows. We have a strong balance sheet with low leverage and healthy liquidity, which provides us with significant financial flexibility to adapt to changing market conditions and opportunities. During the first three months of the year, homebuilding cash provided by operations was $498 million, and consolidated cash provided by operations was $854 million. During the first quarter, we repurchased 4.4 million shares of common stock for $670 million, and our outstanding share count is down 9% from a year ago. We also paid cash dividends of 45¢ per share totaling $132 million, and our board has declared a quarterly dividend at the same level to be paid in February. At quarter-end, our stockholders' equity was $24 billion, down 4% from a year ago, and book value per share was $82.60, up 5% from a year ago. By December 31, we had $6.6 billion of consolidated liquidity consisting of $2.5 billion of cash and $4.1 billion of available capacity on our credit facilities. Debt at the end of the quarter totaled $5.5 billion, and we have $600 million of homebuilding senior notes maturing in the next twelve months. Our consolidated leverage at December 31 was 18.8%, and we plan to maintain our leverage around 20% over the long term. Jessica? Jessica Hansen: Looking forward to the second quarter, we currently expect to generate consolidated revenues in the range of $7.3 billion to $7.8 billion and homes closed for our homebuilding operations to be in the range of 19,700 to 20,200 homes. We expect our home sales gross margin for the second quarter to be in the range of 19% to 19.5%, and our consolidated pretax profit margin to be in the range of 10.6% to 11.1%. For the full year of fiscal 2026, we still expect to generate consolidated revenues of approximately $33.5 billion to $35 billion and homes closed by our homebuilding operations to be in the range of 86,000 to 88,000 homes. We continue to forecast an income tax rate for fiscal 2026 of approximately 24.5%, operating cash flow of at least $3 billion, common stock repurchases of approximately $2.5 billion, and dividend payments of around $500 million. Paul? Paul Romanowski: In closing, our results and position reflect our experienced teams, industry-leading market share, broad geographic footprint, and focus on delivering quality homes at affordable price points. All of these are key components of our operating platform that support our ability to aggregate market share, generate substantial operating cash flows, and return capital to shareholders. We recognize the current volatility and uncertainty in the economy and will continue to adjust to market conditions in a disciplined manner to enhance the long-term value of our company. Thank you to the entire D.R. Horton family of employees, land developers, trade partners, vendors, and real estate agents for your continued efforts and hard work. Let's continue working to improve our operations and provide homeownership opportunities to more individuals and families during 2026. This concludes our prepared remarks. We will now host questions. Thank you. At this time, we will be conducting a question and answer session. Operator: In the interest of time, we request that each participant limit themselves to one question and one follow-up on today's call. If you would like to ask a question, please press 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please while we pull for questions. And the first question today is coming from Stephen Kim from Evercore ISI. Stephen, your line is live. Stephen Kim: Yeah. Thanks very much, guys. Actually, you know, quite impressive here given the headwind. So congratulations to you guys. I wanted to ask you about your SG&A, if I could. I think that it was probably a little higher, my guess is, than you expected. And I was curious, you attributed the higher level primarily due to lower closings year over year, but your closings didn't miss your expectations or guide. And so I and, actually, it beat. So I was kind of curious. Did the SG&A sorta surprise you? And was there anything else other than the fact that you had, you know, some lower closings, you know, just given the fact that it didn't really sort of square with how your closings came in. Was and particularly within that, could you is there anything in the way of incentives or something that is showing up in SG&A? Paul Romanowski: Steve, not nothing unusual in SG&A this this quarter. Overall, relatively in line with our plan. We hit our operating margin guidance for the quarter. If you look at the overall spend on SG&A, it was down slightly year over year in terms of absolute dollars. And as we look at our platform and look we look at what we're planning to do this year, we're planning on growing our close Our guide is to grow our closings for the year. And so we're maintaining our platform in place. But our first quarter closings were down. And and just we get less leverage on our SG&A when we have fewer closings during the quarter. But our expectation is for the year is we would not continue to see this this kind of increase as a percentage of revenues over the course of the entire year. Stephen Kim: So just to clarify, you're saying your guide for the year is for SG&A to be kind of flattish on a year over year basis as a percentage of revenues. Is that what saying? We we Michael Murray: we don't guide any of our margins or expense ratios over the course of an entire year. We just guide one quarter out. We're guiding our operating margin for Q2 and our gross margin for Q2, and then obviously our our volume for the entire year. Stephen Kim: Gotcha. Okay. And then I guess, you you've also, you know, talked about your capital allocation and your sorry, in specifically, you reiterated your guide for cash flow. And I was curious if you I think in the past, you had talked about cash flow targeting a cash flow conversion of a about 100%. Could you talk about how that progression is going and whether or not that's still a reasonable expectation in the foreseeable future? Michael Murray: Yeah. That's still reasonable expectation. We're still guiding. We reiterated our guide to have cash flow consolidated cash flow greater than $3 billion. We're I think we're tracking right in line with expectations. Stephen Kim: Great. Thanks a lot, guys. Operator: Thank you. The next question will be from John Lovallo from UBS. John, your line is live. John Lovallo: Good morning, guys. Thanks for taking my questions as well. Strong community count growth in the first quarter of about 12% year over year on average. How are you guys thinking about kind of the cadence of community count growth as we move through the year? John, that community count is up. It was up 12%. And 2% I think sequentially. And we still think we're gonna see, you know, that community count continue to stay at a higher level, but we do expect it to drift down more towards mid single to high single digit range. We're pleased to have the community count out there today as we seen absorption across the market, not seeing as much absorption, per flags having the additional communities, allows us to, maintain our guide. And still feel, comfortable with, with where we're positioned today. As we see the spring season unfold. Matthew Bouley: Understood. And then if we walk from the fourth quarter gross margin of 20%, excluding the inventory reserve or the warranty I'm sorry, the warranty reserve benefit. What are sort of the moving pieces there? I know, Jessica, you mentioned that incentives kind of stepped up as you move through the quarter. But how are you thinking maybe about land, labor and materials on a sequential basis? Jessica Hansen: Sure. First, John, just as a reminder, in Q4, we also had an unusual item flowing through our warranty and litigation costs. We had 60 basis points of greater than typical litigation costs last quarter. This quarter, we had the opposite direction of 40 basis point benefit from those warranty costs. So kind of on an apples to apples basis, our fourth quarter gross margin was 20.6%. Our Q1 gross margins 20%. And then our guide for the quarter is 19% to 19.5% in Q2. So at the midpoint, we're estimating to be down 75 basis points. Quarter over quarter. The guide really reflects what we've been seeing, which is our stick and brick cost relatively flat. Sequentially and slightly down year over year. Is what we really posted this year or this quarter as well. Expect our lot cost to continue to be up sequentially and on a year over year basis. Based on we currently see in our lot pipeline. And then as I did say on the call, we had to use a a higher level of incentives as we move throughout the quarter. So the guide really, most importantly, incorporates the most recent market conditions we've seen and our backlog margin coming out of the quarter at the December. Matthew Bouley: Got it. Thank you, guys. Operator: Thank you. The next question will be from Matthew Bouley from Barclays. Matthew, your line is live. Matthew Bouley: Wanted to stick on the incentive topic. If I'm hearing you correctly, I mean, it sounds like that Q2 guide is reflecting of your increase in incentives over the past quarter in terms of what you're selling. So, you know, obviously, we've had this move lower in mortgage rates over the past several months, over the past couple weeks, etcetera. I mean, does the move lower in rates at at a certain point either support that kind of cost of incentives, for you guys? Or know, are you able to kinda do anything creatively around, you know, ARMs or temporary buy downs, etcetera, in this backdrop? Just kinda any visibility to where you know, you you might see that incentive sort of peeking out at some point. Thank you. The cost of the incentives that came through in the the first quarter were largely resulted from interest rate loss provided when rates were slightly higher, therefore, a higher cost. The Excel we accelerated the use of those incentives throughout the quarter and the exiting incentive levels in December are heavily coloring our margin outlook for the second quarter. If rates continue to compress, and stay compressed, would expect to see a slight decrease in the cost of providing those incentives but that's not yet factored into any of our guidance. Matthew Bouley: Okay. Perfect. And secondly, maybe just sticking on this topic of lower rates. I know we can't always read too much into the first three weeks of the calendar year, but just any color on sort of the cadence of demand, traffic and sales maybe through the quarter and then since you have gotten this move lower in rates, in in recent weeks, is is there just any kind of signals you can take from the past couple weekends on on how buyers are responding to that? Thank you. Paul Romanowski: Matt, I would say through the quarter, relatively consistent with what we would expect to see seasonally. You know, entering into that quarter and being one of the lower quarters in terms of overall demand As we enter into the the spring and and the first two weeks really too early to tell, you know, what we're gonna see as far as trajectory into the spring. But, you know, when we see those kind of rates moves in rates and hovering right around six, it does does spur some activity in our sales offices. And I think today, feel good about our position. In terms of our inventory, our community count, and the level of sales we've seen through the first quarter and into the first couple weeks here, of the second quarter to reaffirm our guidance for the year. Matthew Bouley: Alright. Thanks, Paul. Good luck, guys. Operator: Thank you. The next question will be from Alan Ratner from Zelman. Alan, your line is live. Alan Ratner: Hey, guys. Good morning. Thanks for the color so far. You know, obviously, there's a lot of focus, on the policy side, and I'm sure we'll we'll hear some more from President Trump this week on that front. But, I guess, first off, in terms of what has been announced so far or at least floated out there, you know, with specific regard to your rental business, I'm I'm curious how you're thinking about that in the context of the proposed ban on institutional buyers, purchasing single-family homes. I know you guys have been kind of reducing investment in rental in general, but, you know, how are how are you thinking about managing that business investment there, building out communities know, with the uncertainty hanging over the that part of the business? Paul Romanowski: Alan, our, you know, our focus on SFR rent has has largely been and continues to be on purpose-built communities. And believe that that's a good place for us to continue to stay focused. We don't sell, many homes to institutional buyers in our for-sale communities. So for us, really not much competition for those people that are coming in to buy a home, looking for a home. You know, and whether it's first time move up or or any one of our segments. We think we'll continue to stay focused there. And with our SFO SFR business, shifted more from, a full, build, lease, and then sell fully stabilized assets to more of a forward sales scenario. So feel really good about position of our, single-family rental business. And we'll see how all of this plays out over time, but, feel good about our position there. Alan Ratner: Okay. I appreciate that. Obviously, we'll we'll see whether there's any type of exclusion or carve out for those purpose-built communities. I think, obviously, there's a good, argument for that to be the case. But, shifting gears little bit in terms of the landmark, I'm curious if you could talk a little bit about you're seeing on the land front in terms of costs started to come down at all in the land market? Are you seeing more of a you know, bid ask spread widening and kinda and of a slowdown in overall activity, development cost inflation. Any color you can give there because, obviously, I think that's gonna be a necessary component towards rebuilding the industry's gross margin is to see some relief on land costs and development inflation. Paul Romanowski: I don't think we've seen significant capitulation in the land, the raw land market itself. I think the sellers there fairly patient. We have seen probably some progress on some of the development cost aspects that that activity levels have slowed. And further, we've seen some improved terms. Not a a tremendous amount of price discounts or any distress opportunities, but but rational conversations with our land development partners about meeting the market together and working through communities at acceptable paces. We've seen some adjustments in pacing, which has been very helpful. But we haven't seen any broad defaulted deals or or new deals coming deals coming back to the market over and over again with distressed sellers. Alan Ratner: Got it. Alright. Thanks, guys. Appreciate it. Operator: Thank you. The next question will be from Ryan Gilbert from BTIG. Ryan, your line is live. Ryan Gilbert: Hi, thanks and good morning everyone. I just wanted to go back on the on, I guess, the the year to date, demand trends Paul, it sounded like you said that when rates get to around 6%, you see a pickup in the sales in the sales offices. Has that been the case so far in January? Have you seen a pickup in homebuyer demand given the the drop in rates? Paul Romanowski: We've been pleased with what we've seen so far. Again, it's early very early in the spring selling season, and we'll see how that plays out over time. But feel good about our positioning. And and anytime you see you know, the the rates move across a a threshold like that, it certainly creates more activity in our in our sales offices. Okay. Got it. Thanks. And then on the on the supply side, it looked like maybe there was a step down in industry-wide housing starts, and I think we're seeing some move lower in in resell inventory as well. Are there any markets where you've where you're seeing any any benefit from you know, less inventory coming online or maybe supply or home construction dropping that could potentially help, help margins going forward? Paul Romanowski: I I don't think there's any specific markets I can speak to where we've seen any significant shift in supply. I do believe that you know, it's been pretty rational approach to the market in terms of of starts for us and and across the industry. We feel good about our inventory position. We our starts slightly exceeded our sales this quarter. We do expect our starts to be more in the second quarter than in our first. And, you know, what we watch closely is the number of completed homes that we have, and that is down a couple thousand units sequentially this quarter over last. So so feel good about our positioning. The amount of supply we have in the markets, and have the homes we need to meet demand in the spring selling season. Ryan Gilbert: Great. Thank you. Operator: Thank you. The next question will be from Sam Reid from Wells Fargo. Sam, your line is live. Sam Reid: Thanks so much. Why don't you just do a quick postmortem on the warranty cost piece of gross margin and that reversal you called out in the first quarter? First of all, were you expecting to get a reversal there? And then second, is there any warranty noise we should be contemplating in the second quarter guide? And then perhaps just want to talk to kind of what should we be thinking about for warranty costs within gross margins on a go forward basis? Jessica Hansen: Sure, Sam. The warranty recovery was something we've been working on for a period of time to recoup some costs that we've had to incur that you'll see when we file our 10-Q. We're predominantly in our San Antonio market in the South Central Region. So we were pleased to get that settlement in and be able to net that against the warranty cost that we incurred during the quarter. We also did see just slightly overall level slightly lower level of warranty and litigation costs incurred this quarter than our typical. And you layer that into also the the litigation costs last quarter, and and you see a big swing in the warranty and litigation cost line item in our gross margin supplemental detail that we provide that was actually a 20 basis point benefit We would expect going forward that to be more normal. And if you go and look at prior quarters outside of the last two, it's, call it, anywhere from 30 to 60 basis points that we net against our our gross home sales gross margin for warranty and litigation costs. And we don't know of anything at at this time that would make that be different in the go forward quarters. The last two quarters have just been unusual in terms of what's happened. Sam Reid: That helps, Jessica. And then switching gears here, one of one of your big competitors is stepping up the use of arms Can you just remind us your mix of arms and where that sits relative to last quarter and last year? And then if there is any change in your arm cadence, any implications for financial services margins that we should be cognizant of? Paul Romanowski: Our use of ARMs is in the low single digit as a percent of of homes financed through our mortgage company. And although we've seen some more attractive ARM products, that, for us, if they can be utilized for long-term approval, meaning that they're a longer-term ARM, then we've seen some. But it it hasn't stepped up much. Still, the the incentive used most when we talk about rates is for our buyers and through our mortgage company is thirty year. Fixed rate. Jessica Hansen: Yeah. So when Paul says low single digit on ARMs, that's just an absolute ARM product that is their product. If you look at the rate buy downs we're utilizing, we did see a tick up. In temporary buy downs that we layered in on top of the permanent. That was more like a low double digit percentage this quarter. But that's been running anywhere from a mid to high single digit percentage. Sam Reid: All incredibly helpful. Thanks so much. Operator: Thank you. The next question will be from Eric Bosshard from Cleveland Research. Eric, your line is live. Eric Bosshard: Thanks. Good morning. The comments you've made about affordability, I'm just curious Obviously, there's some hope for some external solution to affordability. But absent that, the steps that you're looking at, to address affordability you're doing with incentives is having some effect. But are there any structural things you're evaluating or taking, in regards to house size or house construct or location or or even markets that you're considering related to this ongoing affordability issue? Paul Romanowski: Eric, we focus every day on on meeting the homeowners where they need to be, especially on a monthly payment. And for us, and in today's market, the reality of of home pricing, and cost of materials and cost of land is is that we have seen continued introduction of smaller homes, whether that's, you know, a, plan or two inside of an existing community or you know, a whole community focused at more affordable price points for us. The biggest limiter to some of that and creating more of that tends to be lot size. And minimum lot size requirements at the municipal level where we can achieve that and get to a little higher density with more efficiency and provide a house that, that meets the monthly payment needs especially if we're first time homebuyers, we see success there. And so we have focused on that across markets, and I wouldn't say there's particular area where we're seeing that more maybe other than those municipalities that, that are a little more flexible and allow us to go meet the market where it wants to be met. Eric Bosshard: Okay. And then and then secondly, if I could, the the first time market first time customer, you is about two thirds of the business. I'm curious, is other third of the business behaving similarly to that two thirds for the first time? Or is is there some difference in performance, price sensitivity, traffic volume, anything that's notably different? Paul Romanowski: I I wouldn't say anything note notably different. You know, there's there's a lot of of macro discussion going on, which I think impacts buyer sentiment in the market, and we've seen some consistency across that Certainly, as you move up the price curve and there's less sensitivity to to rates that that that move up homebuyer can can move, you know, with a little more consistency when they want to and as they want to. So but I would say overall, haven't seen a specific trend, which which shows a big separation of what's happening in our first time homebuyer market compared to our our move up. Operator: Thank you. The next question will be from Anthony Pettinari from Citigroup. Anthony, your line is live. Anthony Pettinari: Good morning. As you think about '26, do you expect to continue to outgrow the market or maybe could you be more in line with the market? Or are there regions where you're willing to let go of a little share to maintain margin? And then just in terms of your spec count down year over year, is that just reflecting expectation for just kind of maybe a a tougher spring season versus last year? Paul Romanowski: I think in terms of looking at our growth expectations relative to the market, we are expecting to grow this year. Are certainly positioned for growth with the increase in markets served over the past few years. As well as significant increase in community counts being up 12% year over year. But we take that community by community and market by market looking to maximize the returns there. And where we can aggregate market share profitably, we'll continue to do so as we've done the company's history. And the second part of your question, Specs decline. On the specs decline. The the spec decline is something that we've been focused on with compressing our building times and our cycle times that we're able to be more efficient, the capital deployed in a given neighborhood. And more responsive to more immediate buyer buyer demands when they walk in. So the spec count reduction has been deliberate and purposeful. And it's not a limiter necessarily on our growth as it has been in the past. Because we can build homes faster than we ever have been able Anthony Pettinari: Okay. That that's very helpful. And then just following up on kind of the policy we talked about, I think, a few proposals, but I'm just curious what policies you think could be most helpful or impactful in terms of improving housing activity and getting more folks in homes in kind of a sustainable way. Paul Romanowski: Anthony, you know, we're we're pleased that the administration acknowledges housing affordability is an issue and that there's a lot of focus on that from from a lot of folks and and think that it needs to be a focus There you know, there's lots of of different things that could be done on both the supply and the demand side. But ultimately, you know, consumers feeling good about where they are today. Seeing the resale market open up, seeing availability at the local level, of willingness to, to for us to go drive more affordable housing into the market. All of those things, I think, would be helpful, and we'll see how all of this plays out over time. Jessica Hansen: And we're already doing more to address affordability, I'd say, than any other builder out there. And you know, we'll see what ultimately comes out of the policy, but we will believe we're the best builder to take advantage of if there is any sort of demand pickup out there, particularly for the first time homebuyer. Anthony Pettinari: Okay. That's helpful. I'll turn it over. Operator: Thank you. The next question will be from Michael Rehaut from JPMorgan. Michael, your line is live. Michael Rehaut: Hi, good morning. Thanks for taking my questions. Yeah. First, I wanted to focus on, there was recent tweets, I guess, or comments made by the FHFA director, directly speaking to share repurchases by large homebuilders in contrast to putting out more volume in the market. So I wanted your thoughts on that Obviously, today, you reiterated your outlook for $2.5 billion of share repurchases for the year. I'm curious if you've had any direct conversations with the FHFA regarding this because, you know, obviously, you guys are are mandated by all public companies You know, you have an obligation to your shareholders first and foremost, And so I'm just curious if there's been any discussions with the FHFA and and your thoughts on those those recent comments. Paul Romanowski: Michael, we we have maintained our balanced approach. And, you know, you look at our starts pace this quarter sequentially, up 27%. As Jessica know, intimated providing know, affordable housing to more Americans today, I think 64% of the homes financed through our our mortgage company were first time homebuyers in closing this quarter. We feel very good about our position to continue, to meet that demand and, provide the that we need out there. No direct conversations for us around buybacks and feel like a balanced approach, and that's why we reiterated what we plan to do on our guidance for the year. Feel like we're in great position to continue to provide the housing that we need to with the cash flow that we're generating to both invest in our operations and our business and to provide returns and return money to our shareholders. Michael Rehaut: Okay. Alright. Appreciate that. I guess, secondly, you kinda highlighted earlier in the call, that you know, your incentives went up. During the first quarter, and that's the appears to be the primary driver of the of the sequential decline in gross margins in the in the second quarter. Among other factors, I guess. Wanted to get a sense as a percent of sales, where you know, incentives ended the first quarter versus the beginning of the first quarter And if that shift occurred, towards the end of the quarter or was it kind of ratable throughout Michael Murray: Yeah. Mike, the, increase in incentives was really throughout the quarter, sequentially increased throughout quarter. And so we exited the quarter at a higher level of incentives and a lower gross margin on our closings in in December than for the overall quarter. And so that's really the level that we carry into Q2. And so that's a a part of the driver of our guide for our Q2 margin. Jessica Hansen: Pleased that incentives are still having the desired impact. Right? Our our sales were up 3% year over year. As a result of those efforts. Michael Rehaut: Right. And and can you just remind us as what percent of sales incentives were by the end of the quarter versus the beginning of the quarter? Jessica Hansen: We've been running a high single digit percentage today. We might have ticked up to low double digit. Michael Rehaut: Great. Thanks a lot. Operator: Thank you. The next question will be from Trevor Allinson from Wolfe Research. Trevor, your line is live. Trevor Allinson: Hi, good morning. Thank you for taking my questions. A follow-up question on your view on current new home inventory levels in your markets. I appreciate it varies market by market. But if we were to focus on some of the more important geographies in Florida Texas, and so the other more important markets. Is there still excess inventory relative to demand? Or has the slowdown in starts we've seen across the industry here in the fourth quarter brought that more into equilibrium. Paul Romanowski: I would say we still see pockets of elevated inventory and and that is market to market I don't think we're, you know, we're here today to call out anything with specificity as to where we're significantly overweighted in inventory, but certainly, you know, market by market, and and, submarkets inside of larger MSAs, And there are, you know, subdivisions and communities out there where, know, demand hasn't caught up with the amount of supply that's in the market, but we see that continue to right size across across our footprint. Trevor Allinson: Okay. Thanks for that, Paul. That's very helpful. And then second, obviously, there's been a lot of activity on the policy side here. There's it was next expectation for a lot of activity. Rates have come down here. If those are successful in driving better demand this spring, how do you guys think about your preference to do more volume versus the 86,000, 88,000 closings target you have currently versus recapturing some margin as incentives still remain really elevated? Thanks. Michael Murray: Trevor, we're gonna take a look at that community by community. And as always, we're gonna look to focus and driving the best return out of that given community based upon competitive dynamics at that submarket level. Replacement lot supply, and what our our demand trends are there and and where you know, there is opportunity for for margin expense, and we'll take it where it makes more sense to drive more pace. We'll do that as well. Looking for a balanced approach. You know, no different than what we've been doing. It's just responding to the current market conditions. In place in front of us sales office by sales office. Trevor Allinson: Thank you for all the color. Good luck moving forward. Operator: Thank you. The next question will be from Rafe Jadrosich from Bank of America. Rafe, your line is live. Rafe Jadrosich: Hi, good morning. Thanks for taking my questions. As we head into spring selling, can you compare the market today versus, say, a year ago in terms of the demand and inventory that's out there? Paul Romanowski: I I don't know that there's a direct parallel to be drawn. We are encouraged by the fact that we've still got people out there looking to buy a home. There's there's certainly not a lack of interest. I think it's it's breaking through the consumer confidence and seeing people feel feel good about their their decision to move forward. We are encouraged by the traffic we see out there today. I do believe that if you look at today over last year at this time, there's a little more balance of inventory. Certainly, we see that. Across our communities and think you see that, across the industry. So set up we believe we are in good position as we move into the spring selling season. Comfortable with where we're positioned with our communities, our community count, our inventory, and most importantly, our people in the field, taking care of buyers as they come into our models. Rafe Jadrosich: K. Thank you. And then on the stick and brick side, I I think you said Pete, that in the fiscal first quarter, Stick and Brick costs were down 1% quarter over quarter. And I think you're guiding for it to be flattish quarter over quarter in the second quarter. Is it flattening out now Or is there still opportunity to take more cost out Where are you in the process of sort of clawing back some margin from the you know, either the trades or or or building product or distributors? Paul Romanowski: We we believe there's still opportunity there, and and our reduction in starts was intentional, to give us the opportunity to meet with our trades, our vendors, or suppliers and, you know, look at the reality of of the market in front of us. So although our guide is too flat and and not seeing significant reduction in, stick and brick, Part of that too is it's a percent of of or it's based on a square foot basis, which is a little harder sometimes to measure based on mix and product and sizing. But we certainly feel like there's opportunity to continue to see some reductions in the cost of homes that we're putting. Rafe Jadrosich: Great. Thank you. Operator: Thank you. The next question will be from Susan Maklari from Goldman Sachs. Susan, your line is live. Susan Maklari: Thank you. Good morning, everyone. My first question is thinking about the conditions that you that you've talked to and your ability to continue to hold on to that improvement that you've seen in cycle times and the efforts that you're realizing with your suppliers, if we do see somewhat of a lift in demand as we go through this year? Do you think you could continue to maintain that flexibility that you've realized? Michael Murray: We've had long relationships with these trade partners. The last time we had a really significant production disruption was with partially labor, Largely, it was due to materials. Shortages. That is something we do not expect at all this time at all. Materials are in great shape. Product is available. And the relationships we've had with labor trades, you know, in in several markets going back thirty and forty years, consistently paying the bills on time, consistent starts cadence, and and a consistency of product deployed has been really helpful in maintaining you know, our our partnership with those trade bases. Susan Maklari: Okay. And then maybe turning to the growth side of things, can you talk about what you're seeing in terms of some of the they're feeling today, your ability to perhaps leverage further M and A as an element of growth that you're looking to achieve Paul Romanowski: We continue to look at opportunities that are in the market, and I think that that our focus has been more on the the tuck in opportunities to either expand our capacity in a particular market and or an entry into a market But, you know, we continue to evaluate those as they come towards us, and I think if see anything in the future, it'll be similar to what you've seen over the last several years. With the smaller builders that give us a solid platform and are a good fit to us in in markets. Susan Maklari: Okay. You. Good luck with the quarter. Operator: Thank you. The next question will be from Ken Zener from Seaport Research. Ken, your line is live. Ken Zener: Thank you. Good morning, everybody. Operator: Morning, Ken. Ken Zener: Paul, with the orders of 3%, there's a community count effect there. But there's a lot of details asked today. My basic question is this. Demand is there. You need to offer some incentives, but it's demand is there amid very low job growth. For example, Dallas, you're familiar with, The job growth is around 30,000 year over year. It's it's well less than half the long term rate, yet you're still seeing demand. Can you talk to like where that demand is coming from amid such low job growth that we're seeing know, it's not just Dallas. It's in many different markets, yet you guys are still seeing activity. Is that we really need job growth to normalize to get your margins you know, in a more stable upward slope? Oh, I think job growth is is always gonna be key to, you know, overall household formation. And the demand side of of our business. There's no question there. I I do believe that, you know, we've our seeing continue to see, some pent up demand. And and as people, you know, grow and especially for our buyers, the first time homebuyer, that have delayed that home purchase decision and and making the decision today to come out of an apartment and or out of, their parents' home. Makes it a little less reliant on seeing just pure job growth to create household formation in some of the MSAs that we operate in. So I I do think it's a balance. I think long term, we absolutely need to see job growth and continued job growth. If we wanna see growth in in overall housing demand. Ken Zener: Right. And I can you kinda comment that I mean, it's you know, AI and many different things today in the ten years up five or six basis points again. But do you feel like we're really pulling forward just from that quote you know, end up demand that didn't occur? Because it's it's quite odd that we're seeing demand so strong when job growth has been so weak. And it it begs the question if right, What if it stays weak? Do you pull you know, have you tapped essentially your demand that was there not tied to JobThroak? I'm just trying to figure it out because I would like do you know what your what do your people say when you don't have really good job growth yet Housing demand is there. Jessica Hansen: Well, I think it's why we continue to prefer our focus on the entry level and first time buyer because they're a need based buyer. Everyone needs a place to live. And so if we can strike that right affordability, balance, they might need a little bit of help in terms of gift funds. From parents or relative. We continue to see just shy of 20% of our buyers utilizing our mortgage company are utilizing gift funds to to make that purchase. But the lower the price point we can put houses on the ground at, you know, the the more buyers that that are out there. Because once again, a first time buyer needs a place to live. If we can be competitive with rents, they're they're still interested in that home purchase. Ken Zener: Thank you. Operator: Thank you. The next question will be from Jade Rahmani from KBW. Jade, your line is live. Jade Rahmani: Thank you very much. If rate do move lower, do you think homebuilders will choose to pass along that saving to buyers rather than take in the hopes that that would stimulate demand further? Michael Murray: I think we continue to see a balance to meet the consumer where they are to the rate environment. And it would be a, you know, you spur additional demand and drive more pace, more units if that's gonna be the most incrementally positive lever we can pull on returns, then we would go that direction. If it's a community where there's more scarcity of supply, you know, it might result in an improvement in margins. Jessica Hansen: Even with our increased incentives going to December, we kept our lowest thirty year fixed rate offering at $3.09 9. And so we would have the ability, to Mike's point, you know, we could always choose to go lower if rates move lower and it could cost us the same. Or if demand is just picking up and we don't need to move lower on that rate offering, we won't. But we did in the December stay with $3.09 9 as the lowest thirty year fixed rate buy down we were offering. Jade Rahmani: And what's sixty four percent first time homebuyer in your mortgage company, Could you give any color as to whether you think an allowance of four zero one k savings to be used for deposit, down payment would move the needle at all? Could that be material, or do you think it's, unlikely to be so? Paul Romanowski: I think anything that opens up the ability of people to either get to a monthly payment and or get to a down payment, which is a two things especially for a first time homebuyer that we need to solve for. Right? It's getting to a monthly payment that they're comfortable with, can and should afford, as well as the down payment that they need to purchase a home. So we absolutely think it it will be helpful to what level. We'll see what gets put forward in terms of policy and how that plays out. But anything that that we see to help get people moving, not just in the new home market, but in the resale market as well. We believe is accretive to, to our performance. Jade Rahmani: Thanks. Operator: Thank you. And the next question will be from Alex Barron from Housing Research Center. Alex, your line is live. Alex Barron: Hi. Good morning. I just wanted to confirm the volume guide you guys are giving, is that just for the wholly owned communities, or does that also include the homes you guys are doing in rental communities? Jessica Hansen: Sure, Alex. Our our home closings guide for the year is for by our homebuilding operations, so it does not include single-family rental, but our revenue guide for the full year is consolidated revenues. It would anticipate our rental revenue included in that. Alex Barron: Got it. And, I wanted to ask on the on the margin guidance. Was that mainly driven by you know, offering higher incentives in the way of rate buy downs or more, like, in the way of price cuts? Michael Murray: Mostly, incentives, based on buydowns and based on the level of, buydowns and incentive costs we were seeing as we exited Q1, really driving the the Q2 levels. Alex Barron: Okay. And if I could ask one last one. Are you guys starting to feel any impact from tariffs and materials costs? Jessica Hansen: No. We we still haven't taken any significant or notice increase in in a material due to a a tariff. Alex Barron: Okay. Thank you, and best of luck. Michael Murray: Thanks, Alex. Operator: Thank you. This does conclude today's Q and A session. I will now hand the call back to Paul Romanowski for closing remarks. Paul Romanowski: Thank you, Paul. We appreciate everyone's time on the call today and look forward to speaking with you again to share our second quarter results on Tuesday, April 21. Congratulations to the entire D.R. Horton family on achieving a solid first quarter. We are honored to represent you on this call and greatly appreciate all that you do. Operator: Thank you. This does conclude today's conference. You may disconnect your lines at this time. Thank you for your participation.
Operator: Ladies and gentlemen, thank you for standing by. The conference will be starting in just a few minutes. It is recommended that you use a landline phone if you are going to register for a question. We thank you for your patience. Ladies and gentlemen, thank you for standing by. Welcome to the 3M Company's Fourth Quarter Earnings Conference Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question and answer session. As a reminder, this call is being recorded Tuesday, January 20, 2026. I would now like to turn the call over to Chinmay Trivedi, Senior Vice President of Investor Relations and Financial Planning and Analysis at 3M Company. Thank you. Chinmay Trivedi: Good morning, everyone, and welcome to our quarterly earnings conference call. With me today are Bill Brown, 3M Company's Chairman and Chief Executive Officer, and Anurag Maheshwari, our Chief Financial Officer. Bill and Anurag will make some formal comments, then we will take your questions. Please note that today's earnings release and slide presentation accompanying this call are posted on the homepage of our Investor Relations website at 3ms.com. Please turn to Slide two and take a moment to read the forward-looking statements. During today's conference call, we will be making certain statements that reflect our current views about 3M Company's future performance and financial results. These statements are based on certain assumptions and expectations of future events that are subject to risks and uncertainties. Item 1a of our most recent Form 10-Q lists some of the most important risk factors that could cause actual results to differ from our predictions. Please note throughout today's presentation, we will be referencing certain non-GAAP financial measures. Reconciliations of the non-GAAP measures can be found in the attachments to today's press release. With that, please turn to Slide three, and I will hand the call off to Bill. Bill? Bill Brown: Thank you, Chinmay. Good morning, everyone. We delivered solid results in Q4, including organic growth of 2.2%, operating margin of 21.1%, earnings per share of $1.83, and free cash flow conversion of over 130%. These results capped a strong year with organic sales growth exceeding 2%, outperforming the macro environment and accelerating from 1.2% organic growth in 2024 and negative growth in 2023. This growth was underpinned by the strong commercial excellence foundation we have established and our focus on reinvigorating innovation. We delivered significant margin expansion with a full-year adjusted operating margin of 23.4%, up 200 basis points year on year at the high end of our guidance range and on top of over 200 basis points expansion in 2024. Adjusted EPS grew double digits to $8.06, and free cash flow conversion was slightly above 100% for the year. Our 2025 financial results reflect the progress we are making, and we are tracking ahead of the medium-term commitments we made at the Investor Day last year. 2025 was an important year for 3M Company, where we implemented fundamental changes in the company, building a foundation for our future growth through commercial excellence and innovation. We previously described the three pillars of commercial excellence: improved sales effectiveness and pricing governance, stronger collaboration with channel partners, including joint business planning and cross-selling, and increased customer loyalty. And we are making progress across all of them. We have implemented greater rigor across our Salesforce and sales management, tightened pricing controls, and developed over 600 joint business plans and closed on nearly $50 million of annualized cross-selling wins with a robust pipeline of opportunities. Innovation is the lifeblood of the company, and we successfully launched 284 new products in 2025, up 68% versus 2024, exceeding our initial target and more than double the launches in 2023. We expect this growth to continue with 350 launches in 2026. These new products are vital for our long-term growth and are already contributing to our top line. Sales for products launched in the last five years were up 23% in the full year, exceeding our high teens target and exiting Q4 at 44%, giving us momentum into 2026. Our new product vitality index, or NPVI, a measure of the freshness of our portfolio, ended at 13%, about two points above where we started the year. It was also a year where we saw operational excellence become embedded across the enterprise as we drove better service levels for our customers and stronger operating rigor in our factories and across our enterprise functions. I have been describing our performance across three important metrics, OTIF, OEE, and cost of poor quality. OTIF ended the year above 90%, 300 basis points above the prior year, and the best we have achieved in decades. We sustained that rate for seven months in a row. This improvement is translating into a better customer experience that is helping us win shelf space and reduce churn. OEE, our asset utilization metric, ended the year at about 63%, up over 300 basis points across assets covering 70% of production volume. Cost of poor quality also improved considerably last year and is now at 6% of the cost of goods, down 100 basis points year on year. We are focused on key areas of inefficiency like frequent or ineffective changeovers and late detection and material defects, leading to raw material yield loss, scrap, and quality credits issued to customers. We are leveraging Kaizen events, visual inspection systems, automation solutions, and AI-enabled models to optimize changeovers to improve quality, with a target of 5.4% cost of quality in 2026 and less than 4% over time. Meanwhile, we continue to deploy capital effectively for our shareholders, returning $4.8 billion through dividends and buybacks in the year, progressing well in our commitment to return $10 billion to shareholders as part of our multiyear capital allocation strategy. The key to making this all work in the long run is our relentless focus on building a performance culture and delivering excellence everywhere, every day. This means greater speed and urgency, a deeper sense of accountability, challenging the status quo, and finding ways to get better every day in the spirit of continuous improvement. Our performance is a direct result of the cultural and operational changes we are driving across the enterprise that improve how we develop, produce, and deliver products and build a strong foundation for the future. Slide four is a chart we have used for the past few quarters connecting macro trends to our organic growth. The macro remains soft and largely unchanged from Q3, but due to our strong execution, we have outperformed. General industrial, safety, and electronics, collectively about 65% of our business, came in better than expected with exceptional year-on-year strength in the second half in electric markets, aerospace, and self-contained breathing apparatus, all of which were up low double digits. Abrasives, industrial adhesives and tapes, and electronics were all up mid-single digits, abrasives accelerating from low single digits in the first half, IATD holding steady through the year, and electronics not softening as previously anticipated. Auto and auto aftermarket remain soft as expected, while our consumer segment and roofing granules business were weaker than expected. Despite the macro headwind, organic sales growth accelerated to 2.7% in the second half from 1.5% in the first, due to the breadth of our portfolio and our strong execution. Turning to our outlook on Slide five, our team's constancy of purpose and execution rigor allowed us to finish 2025 strong, and we are carrying that momentum forward into 2026. This year, we expect organic sales growth of approximately 3%, adjusted operating margin expansion of 70 to 80 basis points, and earnings per share of $8.5 to $8.7, and free cash flow conversion greater than 100%. We are planning for the macro to be similar to 2025, but it is still early to put too much weight on market forecasts. We expect most of our industrial businesses to continue to perform well in '26, with watch items including the pace and timing of a US consumer recovery, auto build rates, especially in geographies where we have higher content, and consumer electronics. While we will closely monitor macro trends, we are going to continue to execute our game plan and control the controllables. Lastly, I want to turn your attention to slide six, which is the framework by which we will create value for shareholders over time. The three phases are not meant to be sequential but evolve together with shifting emphasis. They build on what we outlined at Investor Day and reflect how we view these elements as interconnected and essential to building a stronger company operationally and financially. It started with a back-to-basics, focus-on-fundamentals approach, which is all about building a sustainable foundation. I have been talking to you about these initiatives and how we track them since I joined 3M Company twenty-one months ago and did so again today. These core elements are focused on commercial and innovation excellence, operational excellence, and reinvigorating our culture with accountability and agility, creating a solid platform from which to grow. As we have gained confidence in our execution in this foundational stage, we are beginning to shift our emphasis to the next phase of value creation, which is more transformational in nature. Like we previewed at Investor Day, this phase includes reengineering the structural cost base that underpins our supply chain network and business processes, simplifying and standardizing core activities, and embedding an AI-first mentality as we shift from a holding company model to an integrated operating company. We described this program at a high level last quarter as a thoughtful, strategic, long-term effort paced at the ability of the team to execute well. Transformation also includes proactive steps on risk reduction and effectively managing the litigation docket. Anytime we can take care of risk at an appropriate price and with suitable protections, we will be prepared to act like we did last year with the State of New Jersey. And as our organic machine begins to turn faster and our risk profile comes down, we will be prepared to execute on our portfolio management strategy to pivot the company towards higher growth and margin potential priority verticals that help us accelerate value creation for the company. This is a multiyear journey, and progress will not be linear. But with a successful 2025 behind us, we are accelerating the transformation of 3M Company and building the runway for performance beyond 2027. The 3M Company team is energized and motivated, and I want to thank them for their dedication and focus on delivering improvement day after day. And with that, I will turn it over to Anurag to share the details of the quarter. Anurag Maheshwari: Thank you, Bill. Turning to Slide seven, we had a strong finish to the year across all financial metrics. We delivered another quarter of sales growth above macro, continued margin expansion, strong earnings growth, and robust cash flow generation. Starting with the top line, in a continued muted environment, we delivered organic sales growth of 2.2% driven by our commercial excellence initiatives and new product launches. The growth was driven by strength in safety, electronics, and general industrial, which more than offset the softness in consumer, roofing granules, and auto markets. All three of our business segments delivered sustained auto momentum, which contributed to a higher ending backlog compared to last year, giving us confidence as we go into 2026. Fourth-quarter adjusted operating margins were 21.1%, up 140 basis points, and operating profit increased double digits or $125 million driven by continued disciplined operational performance. This included a $275 million benefit from volume growth, broad-based productivity, and lower restructuring costs, partially offset by approximately $50 million of growth investments, a headwind of $100 million from gross tariff impact, and stranded costs. Collectively, this contributed $0.17 to earnings, which was partially offset by $0.02 from non-operational below-the-line items. Our strong operating performance resulted in adjusted EPS of $1.83, an increase of 9%, and exceeded the top end of our guidance range. I also want to mention that we took a $55 million charge in the quarter as we continue to make transformation investments to redesign our manufacturing, distribution, and business process services and locations. Similar to last quarter, these charges will be excluded from our adjusted results. Adjusted free cash flow in the quarter was $1.3 billion, with a conversion of approximately 130% as we benefited from strong earnings growth and working capital efficiency. Turning to Slide eight, I will provide an overview of our business group performance for both the fourth quarter and full year 2025. First, in Safety and Industrial, we delivered another quarter of strong organic growth as we continue to gain traction on commercial excellence initiatives and realize benefits from new product launches. Fourth-quarter organic sales increased 3.8% driven by strong performance in safety, which grew high single digits through enhanced channel engagement and new product launches. Industrial Adhesives and Tapes growth accelerated to high single digits as we continue to win share globally in electronics and general industrial from new product introductions and improved manufacturing throughput. Abrasives continue to improve, delivering another quarter of mid-single-digit growth benefiting from sustained focus on sales force effectiveness. Collectively, this strong growth more than offset known weakness in automotive aftermarket and incremental weakness in roofing granules due to the slow housing market and weak consumer sentiment. For the full year, SIBG grew 3.2%, with growth accelerating from 2.5% in the first half to 3.9% in the second half on the back of strong execution. Turning to Transportation and Electronics, fourth-quarter organic sales increased 2.4% driven by continued momentum in Electronics and Aerospace. These gains more than offset weakness in auto, which in our organizational structure includes commercial vehicles, which was down high teens in the quarter. Electronics continued to gain share supported by commercial excellence initiatives and strong demand for our film technologies and optically clear adhesives. We also expanded our presence in the mainstream market by partnering with leading consumer electronic brands to deliver solutions aligned with their portfolio needs. Aerospace delivered another strong quarter driven by growing demand for space materials and continued strength in defense-related markets. We have seen sustained growth in this portfolio where sales have doubled over the last four years. For 2025, transportation and electronics grew 2%, with second-half growth of 3% versus the first-half growth of 1% driven by continued focus on commercial excellence and the ramp-up of new product launches. Finally, Consumer fourth-quarter organic sales were down 2.2%. For the first nine months of the year, the business was up 0.3%, and we had expected the fourth quarter to be similar. But weaker consumer sentiment and sluggish retail traffic in the U.S. resulted in lower point-of-sale trends on discretionary categories where we compete. This market weakness was partially offset by new product introductions, increased advertising, and promotional investments in the U.S., and overall business growth in Asia and Latin America. As a result of the fourth-quarter weakness, CBG revenue declined by 0.3% for the full year. On Slide nine is a summary of the full-year 2025 performance. Overall, a strong fourth quarter capped a successful 2025 with organic sales growth of 2.1%, margin expansion of 200 basis points, EPS increase of 10%, and free cash flow slightly above 100%. Sales growth strengthened from 1.5% in the first half to 2.7% in the second, exceeding the 2.5% we mentioned in our July earnings call. This momentum underscores the impact of our commercial excellence initiatives, enhanced service levels, and successful new product launches, positioning us well to accelerate our performance going forward. By geography, all areas delivered growth in the year. China grew mid-single digit from strength in general industrials and electronics bonding solutions, supported by a strong focus on key accounts. This momentum more than offset the fourth-quarter shift in smartphones from China to other parts of Asia. In the rest of Asia, we grew low single digits led by strong performance in India, which grew mid-teens on account of progress in commercial excellence across all businesses. After a couple of years of decline, Europe grew low single digits due to strength in general industrial and safety, which more than offset the weakness in consumer and auto aftermarket. Despite soft consumer and auto aftermarket, the U.S. grew low single digit for the year on the back of commercial excellence initiatives in the general industrial and safety businesses. Productivity initiatives drove strong margin expansion every quarter in 2025, resulting in full-year operating margins of 23.4%. Operating profit growth of approximately $650 million at constant currency was driven by $200 million from volume growth and $550 million of net productivity across supply chain and G&A. This was partially offset by $100 million in headwinds driven by $185 million in growth and productivity investments in addition to ongoing stranded costs and tariff impacts, year-on-year lower restructuring costs. The strong operational performance contributed $0.96 of earnings, which was offset by approximately $0.20 of non-operational items for total EPS of $8.6. This 10% EPS growth was better than our expectations and above the initial guidance at the start of the year. We returned $4.8 billion to shareholders in 2025, including $1.6 billion in dividends and $3.2 billion through gross share repurchases. Overall, 2025 laid the foundation for our strong operating culture, grounded in excellence, accountability, and a fast operating tempo, enabling us to overcome external factors to drive profitable growth. We have momentum as we enter 2026, and I will walk you through the guidance on Slide 10. We expect organic sales growth to be approximately 3%, earnings per share ranging from $8.5 to $8.7, and free cash flow conversion of greater than 100%. We expect sales to accelerate for all business groups. SIBG and TEBG grew 2.7% combined in 2025, and we expect this growth rate will accelerate in 2026, supported by ongoing commercial excellence initiatives, strong service levels, and continued new product introductions. We expect Consumer to return to growth in 2026. The business groups combined will expand margins over $450 million or 100 basis points, including $875 million from volume growth and net productivity across supply chain and G&A. This will be partially offset by headwinds from PFAS, stranded costs, and tariff impacts, as well as an increase in growth and productivity investments to $225 million. This is on top of the incremental investment over the past two years, bringing the total investment from 2024 to over half a billion dollars. Corporate and other income will be lower by $50 to $75 million, or 20 to 30 basis points, largely from the wind-down of transition services agreements related to Solventum. Overall, we expect total company income to grow by $400 million at the midpoint of our 70 to 80 basis points margin expansion guide. Adjusted free cash flow conversion is expected to be greater than 100%, driven by strong operating income growth and a focus on working capital management. We plan to deploy capital effectively, including a gross share repurchase of approximately $2.5 billion in 2026. Slide 11 provides a look at earnings growth drivers, which is primarily driven by strong operations consistent with our 2025 performance. Regarding cadence, we expect the rate of sales growth to increase through the year, with margin and EPS equal between the two halves. In the first quarter, the sales growth in SIBG and TEBG combined is expected to be higher than 3%. We will continue to monitor the recovery in our consumer business. Volume, productivity, and slight favorability in FX will more than offset the stranded costs, gross tariff impact, and increase in investments, resulting in high single-digit year-on-year earnings growth. Before we open the call for questions, turning to Slide 12, I want to take a minute to highlight the progress we have made so far. We are trending ahead of our Investor Day targets we laid out a year ago. Our organic sales growth is accelerating due to our investment in growth and commitment to commercial excellence and innovation. Our relentless focus on operational excellence is resulting in strong operating margin expansion and sustained earnings growth despite pressures such as soft macro, tariffs, and stranded costs. We continue to be a consistent generator of cash that allows us to effectively return capital to shareholders while maintaining a healthy balance sheet. Not too long ago, our growth rates were trailing the macro. Now we are progressing ahead of our medium-term commitments of a billion-dollar growth over macro and a 25% operating margin by 2027. While we are focused on executing these commitments, we are also broadening our horizons to the out years, ensuring our transformation efforts position the company not only for the short term but for sustained profitable growth well past 2027. This strong performance is a credit to the expertise and the commitment of the 3M Company team, and I thank them for their hard work and dedication. With that, let's open the call for questions. Operator: Ladies and gentlemen, if you would like to ask a question, please press 1 on your telephone keypad. If your question has been answered and you would like to withdraw, please press 2. If you are using a speakerphone, please lift up on your handset before entering your request. Please limit your participation to one question and one follow-up. Our first question comes from the line of Jeff Sprague with Vertical Research. Jeff Sprague: Please proceed with your question. Hey, thank you. Good morning, everyone. I have two questions, one longer-term and one shorter-term. Hey, Bill. Just back to your slide six, as you said, you know, all these things are going on to varying degrees simultaneously. But the pivot to priority verticals, you know, sort of jumps out to me, obviously, not the first time we have heard that. But I just wonder if you could put into context how much of that pivot is sort of addition by subtraction versus sort of investment focus growing and bulking up sort of the areas that you view as the priority and maybe sort of what percent of your current revenue base or business base would you say is in that priority bucket? Bill Brown: Good morning, Jeff. Great question. So we have been talking about our priority verticals going back a year, actually, to February. You know, it is a little bit north of 60% growing. Frankly, because of the investments we are making. I put it in two pieces. One, we spent the last year and a half focusing a lot of our internal investments on the priority verticals. Now probably 80% of what we spend on R&D is aligned to NPI in the priority verticals. And of course, you know, they are defined as ones that are growing faster where we, you know, have good margin potential as well in the business, where technology brings differentiation or right to win. That has been the pivot in the organization. Over time, as we think about what the portfolio is going to look like for us to get to a much better sustainable organic growth rate for the overall company, we have got to structurally adjust the portfolio, which means some pieces coming out. We have been talking about some of those pieces. We have said before, you know, about 10% of our company would be in places that are more commodity-like, and you know, we will probably think about what we want to do with those businesses over time. But as we do that, we will be pivoting both organically as well as inorganically towards our priority verticals. Which is the nature of that chart. It shows that that is an evolution over time and again. It is not necessarily sequential, but that is kind of the overall flow of how we think about creating value here at 3M Company. Jeff Sprague: Yeah. And then just thank you for that. Just on the very near term, you know, the flat view on US IPI, you know, it is kind of a tough slog out there. Right? But your industrial businesses do seem to be performing well, right? Abrasives and some of the adhesives, electrical businesses. So I guess there is some outgrowth there. But I guess just the nature of my question is, just a little more color on how you see the year kind of starting out. Anurag gave a little bit of color, but you know, did we start soft here in January and, you know, do you see things sort of kind of picking up off a low base here as we exited the year? Bill Brown: Yes. So last year, I mean, the exit rate was pretty solid actually across the businesses. And you know, Anurag and his comments talked about the acceleration from a 2% to 3.6% across TEBG and SIBG as we went from the first half into the second half. Yes, IPI is softening both in the US as well as in China, those important markets for us. Certainly. But we do expect our overall industrial businesses to remain pretty solid. I pointed out a couple of watch areas. One is in auto builds. You know, auto builds were around 3.8% last year. A little weaker in Q4. A lot of it was China. But overall, it will be says right now down 0.3% as much as you can believe the numbers, you know, and not so good across the, you know, all of the So that auto was a little bit softer. We have to watch that. Consumer electronics are looking a little bit more flattish in terms of the overall macro forecast. Of course, we believe in our business electronics will continue to grow. We still see that to be overall electronics up mid-single digits for the year. And, of course, you know, we are watching very carefully what happens in the US consumer market. Right now, it feels subdued. We had a very, very good December, although Q4 came in down 2.2%. So it dropped the year to being negative for consumer, but December we typically see the third month pretty good, but it was up double digits over the prior year in December and, you know, early in January. Again, it is early this year, you know, we are looking okay. So, you know, that is sort of the landscape, but I do see that even though IPI is coming down, you know, our commercial initiatives, our NPI initiatives, it is going to allow us to get to outperform that macro, and we expect that to accelerate in '26 from what we have experienced in '25. Jeff Sprague: Great. Thanks for that. You bet, Jeff. Sure. Operator: Our next question comes from the line of Scott Davis with Melius Research. Please proceed with your question. Scott Davis: Hey, good morning, guys. Good morning, Scott. Thanks. Thanks for the detail. I guess, I do not think you mentioned inventory levels, customer inventory levels in the prepared remarks. And just as we exited 2025, where is your sense of where your customer inventory levels were or are? I guess now kind of point of reference kind of pre-COVID post-COVID kind of the new normal versus kind of pre-COVID? Just a little color around that, I think, would be helpful. Bill Brown: Sure. That is a good question. So on the industrial channels, it is pretty normalized. You know, it is in the sort of sixty-day range, you know, a little bit more than that. But as we would expect it to be, you know, as we were selling out in Q4, we do watch POS out of our channel partners, and they were selling through. So even though we had good sales into the channel, we also saw good sales out of the channel. So pretty good actually on the industrial side. That is good. On the consumer side, you know, on the CPG side, it was a little bit elevated early in the quarter, but we had very strong growth in December. And inventory started to come down and normalize. Still a little bit elevated as we exited the year, but not as concerning as we were sort of at the beginning of the quarter. So overall, industrial pretty good, consumer getting normalized as we speak. Scott Davis: Okay. Fair enough. And then guys, what is the pricing strategy right now? I mean, it kind of when just listening to the prepared remarks, sounds like new products is where you lean in on price or at least try to get a positive mix shift there. But is there also a pricing strategy around getting an annual bump up perhaps that maybe you did not get historically, but going out with pricing increases on January 1, particularly where you are going through distribution? Bill Brown: So, yes, good question. So for the year, we had expected to be about 70 basis points last year stepping up first half, second half. As we are covering some of the tariff headwind. We saw that in the third quarter, and the fourth quarter was a little bit lighter because of the consumer market and the promos and discounts that we provided there to stimulate that business. So overall, we were a little lighter on pricing last year than we had expected, but still very solid. The place where you get pricing generally speaking is in SIBG, and that was solid. That remains strong. We can continue to see good pricing movement here going into 2026. You know, we expect it will be about eighty basis points more or less in 2026. A lot of it is SIBG. There are a couple of threads here. One is we do continue to cover material inflation. You know, two, we continue to tighten down our pricing governance, making sure across all of the industrial businesses, that when we give pricing discounts, we get the volume we would expect in giving those discounts. And then third, as you pointed out, Scott, is the pricing we should expect to get when we are launching new products. This is an area of opportunity for us over the medium and longer term. I think we are okay on this, but we could be a lot better. There are pockets where we are very thoughtful in pricing to value, but I would not say that today that is over all of the NPI we are launching. I think it is a long-term opportunity for the company. Scott Davis: Alright. Best of luck this year, guys. Thank you. Thank you. Thank you, Scott. Operator: Our next question comes from the line of Julian Mitchell with Barclays. Please proceed with your question. Julian Mitchell: Hi, good morning. Maybe first off, I just wanted to understand the degree to which, if any, there was a back-end loading, in the guide. It seems like you are expecting about 6% EPS growth year on year in the first half. So not that different from the full year. Just wanted to check that and how you are starting out in the first quarter. Should we expect the consumer business to still be down, for example, and then that picks up steam through the year? Anurag Maheshwari: Right. Thanks, Julian. Anurag here. So I would say in terms of EPS growth, expect the first half and second half to be equal. So as I said in my prepared comments, the EPS will be equal between the first and second half, which implies a similar growth rate as well. And if you look at what I said is in the SIBGTE, given the exit rates, we do expect revenue to be over 3% in the first quarter. The CPG is an area we will watch out, and you will probably see that part of the revenue go through the course of the year. But materially do not expect the rate of growth to be significantly different between the first half and the second half. And if I look at productivity as well, it is pretty even loaded across the four quarters. So I think as we sit here today, we feel that it is a fairly even loaded quarterly cadence for both revenue as well as EPS. Julian Mitchell: That is very helpful. Thank you. And then just my follow-up would be around that sort of interplay, and it has been touched on a couple of times, but between the macro and the self-help initiatives. So when we are thinking about the guidance for a deceleration in IPI in the U.S. this year, but an acceleration somewhat in 3M Company's own organic growth rate. Is there an impression that that is really all self-help initiatives that you mentioned and the outgrowth or the acceleration in the second half of 2025? Is your impression that that was all self-help driven as well with nothing from the macro? Just to understand how much you are sort of putting on your own shoulders versus relying on the external environment for this year? Bill Brown: So Julian, for the question. Let me maybe frame it by talking about a little more granularity, the billion dollars over macro. Talked about over at the investor day over the next three years, and Anurag mentioned it in 2025, the you know, our growth came in at 2.1%. You know, we look at the overall macro to be around a point and a half. That is IPI GDP with some sectors that were a bit weaker. You know, was where we see it. So we saw ourselves with about 60 basis points of help performance versus the macro. If you just run the math that gives you about $150 million. So a little bit better than we had expected to be a 100 million over macro last year. You know, and the majority of that probably 75% of it or more was commercial excellence. Less of that was new product introductions. But we did say that that would start to even out in an or innovation would take over in that third year. And that is in fact what we are seeing in 2026. So we are guiding here at 3%. You know, we expect the macro, in 2026 to be a little bit better one five, maybe one seven range, something like that. So you know, our outperformance, you know, this year versus the macro is more like $300 million or more. And that is roughly half and half between NPI and commercial excellence. So that is how we see this playing out. Yeah, the back half of the last year, you know, did show that. We did outperform the macro. A lot of it was that your phrase, Julian, was carrying it on our shoulders. And you know, we expect to see more of that, you know, coming into 2026. We are launching more projects, which is very good. We are getting a lot more granular tracking the incremental revenue coming from class threes, fours, and fives. And as we look out into next year, you know, we are pretty confident that those are going to start to move the needle for the company, which is why we feel good about the outgrowing the macro here in '26. Julian Mitchell: Great. Thank you. You bet. Operator: Our next question comes from the line of Joe O'Dea with Wells Fargo. Please proceed with your question. Joe O'Dea: Hi, good morning. Thanks for taking my questions. Good morning, Joe. Wanted to start on footprint optimization and if you can give a little color between factories and distribution centers, how you are thinking about targets for footprint reduction or consolidation in 2026? Both in terms of kind of number of facilities and as well as op profit impact. And then any color around segments and regions where we would see the biggest impact there? Bill Brown: So look, that is all part of our broader transformation agenda. We are just starting on that as we speak. We did see some announcements at the back end of last year. We announced one small facility last week in our network. You know, we ended the year around about 108 factories. We have several, about seven coming out with the sale of precision grinding and finishing. So call it about 100 factories. You know, that will come down over time. I cannot size it for you today. You know, we will be making some investments in '26 to restructure that network. But keep in mind, things are three, four, five-year payback. So we will start on it, accelerate into '26, accelerate in '27. But this is really about building that margin runway to grow beyond 25% in '27 on in terms of operating margin. So you know, we will consolidate this network. It will be factories and distribution centers. We are making some progress on DCs as well. But I will not be able to size it for you today in terms of the specific numbers. But that is the plan that is the trajectory we are on here. Joe O'Dea: And then just wanted to touch a little bit more on consumer. If you could elaborate on what you tracked over the course of the quarter, kind of early into this year, sort of a step down in demand trends versus what maybe was a little bit more transitory and just kind of how that is pacing. And then separately, just with the focus on memory chips out there, I think you said consumer electronics, we expect to be up mid-single digits, but any impact you are seeing in the market tied to that? Bill Brown: So on the consumer market, as I mentioned earlier, we as we entered for first of all, for the first nine months of the year, we are about 30 basis points of growth in each quarter, which was pretty consistent, and that was above what we saw the macro. It was a good time to return to growth because it felt very positive about that. And we had expected that we would see the similar trajectory going into the fourth quarter. That did not happen. We saw October and November being a little bit light. Your sell-through the channel was a bit light, POS was light. So inventory started to come up a little bit. We started to see that reverse a little bit in December. So December, the orders were okay. You know, growth was double-digit over the prior year, December. Holiday season was a little bit muted, I would say. You know? So overall for Q4, we came in at down 2.2%. And as I said, as we turn the corner into, you know, into January, it is very, very early. We are only a couple of weeks in. You know, we are trending as we would expect it to be. So I cannot really comment too much about that. We will say more over time, but that is a consumer. Again, I would just characterize it as being relatively soft, like bumping around, you know, flattish as we ended the fourth quarter. So on electronics, overall we have, so it is consumer electronics business, we provide adhesives, we provide films into that area for foldable devices, for debondable devices, a lot of NPI going into that space. We are focusing on growing our position in the mainstream market. 3M Company as a whole in consumer electronics is more like 80/20 or 70/30 premium to mainstream, and the markets, the opposite of that. You know, we do see an opportunity to grow and penetrate mainstream. Some of that is in China and we are making good progress. So a lot of the NPI that we are launching we are penetrating into a lot of China OEMs and Asia OEMs. In that mainstream market. And I think we are starting to gain some share there. So that is why we see that business for us when we add in electronic in semiconductor, data center, all electronics to be up mid-single digits here coming into 2026, similar to what we saw last year. Joe O'Dea: Thank you. Operator: Our next question comes from the line of Steve Tusa with JPMorgan. Please proceed with your question. Steve Tusa: Hi, good morning. Hey, good morning, Steve. Just on that electronics point, so the reported revenues were down sequentially and also year over year. There do we just adjust that back to get to that mid-single digit for the fourth quarter? I mean, you said it was strong, but what was kind of the organic rate of growth? It is tough to tell from the sub-segment disclosure. Bill Brown: Yeah. It was in the mid-single digits. You know, what we are looking at in the tables is with PFAS. We exclude the PFAS out of the results. So when you exclude that, it is mid-single digits. Steve Tusa: Okay. And then when you are expanding into this mainstream area, is there any dilutive impact to margins at all? Or you kind of make up for it in the other end by being more efficient with some of the initiatives you are working on? Bill Brown: No. We are not seeing it being more margin dilutive. As we innovate here, develop products designed to cost, it is an important push that the team is making is designing more cost-effective products. Now we are not seeing any margin degradation. And so far, it has been good. It is early. You know, but it is the push we are making. And again, a lot of NPI in that space. Steve Tusa: Okay. Sorry. One more just for this year, the $500 million in I guess, litigation costs in 2025, how do you expect that to trend in that adjustment to trend in 2026? Bill Brown: It is probably going to be in line with that. I cannot really tell you if it is going to be up or down. I mean, it depends on what happens in the overall docket, but I would expect it to be, you know, pretty similar to that. Steve Tusa: Okay. Great. Thanks a lot. Operator: Our next question comes from the line of Andrew Obin with Bank of America. Please proceed with your question. Andrew Obin: Hi, guys. Good morning. Hey, good morning, Andrew. On SIBG, growth in 26, I think last quarter you had the slide five that showed SIBG growth correlation to improving OTIF, new product introduction, and you sort of can see in the fourth quarter on a two-year stack clearly, is more momentum. So given that comps in the first half are going to be easier than in the second half, but at the same time, we have seemingly good momentum with self-help. Should we see first half stronger growth than second half, or should the growth be fairly steady year over year throughout the year? Bill Brown: So, Andrew, it is a very, very good question. We do see really good momentum in SIBG as it went from the first half to the second half. And you know, I could see where you are going, and I will pass that message on to Chris. I am sure he is listening as well. You know, the reality is there is good momentum. Really good progress on commercial excellence. We are launching more projects there. You know, the only caveat is, you know, we as I talked about earlier, you know, we do see a US IPI a little bit softer. We know the roofing business, you will experience a trough really in Q4. It was weaker than we would expect, quite a bit weaker than we would expect. And that is a small piece of the SIBG business. I think that weakness will drag into the front half of this year. So there are going to be some offsets, but yeah, I mean, largely, I think you are heading in the right direction. I think you know, SABG is performing really well. We would expect to continue that trend here in 2026. Andrew Obin: Thank you. And just to follow-up on electronics. You sort of talk about expanding into mainstream and this sort of echoes strategy from the days of George Buckley. The pyramid strategy. Is this just the focus on consumer electronics? Or are you thinking of sort of you know, tweaking it and implementing it beyond consumer electronics the sort of mainstream strategy? Bill Brown: No. I am speaking today basically on electronics. And, you know, I think you have commented before that this strategy was embarked upon in the past. You know, look, this has to be a very thoughtful way of going at this. We have to make sure that all of our infrastructure, our designs, our sourcing, how we manufacture, how we ship, how we price, all is geared towards going after that segment, which is quite big, you know, but making sure we do it profitably. So it is a bit of a business model shift as well. So I draw you back to what we are trying to do in our transformation agenda. A lot of this business model shift is shifting our cost structure both G&A as well as on the factory side. And if we do that and we bring that cost out, that does allow us to lower the water level of our cost and attack these interesting and growing segments, you know, at profit rates that we have today. So that is where we are going. We are pushing ahead in consumer electronics. Could it go beyond that? We will see. But right now, the comments are specific to consumer electronics. Andrew Obin: No. Thank you very much. Nothing wrong with that strategy or stock kind of outperformed under George Buck. Thanks a lot. Yep. Operator: Our next question comes from the line of Amit Mehrotra with UBS. Please proceed with your question. Amit Mehrotra: Thanks. Morning, everybody. Good morning, Amit. Anurag, I guess I wanted to ask about incremental margins for this year. The implied is sort of in the low 40%, which is not that much above the 30 to 40% kind of, you know, core or organic. So on the growth. So I am just kind of curious, you know, what the productivity assumption is, what the offsets are from stranded costs. Maybe I am double counting. Maybe some of that is already included in the 30, 40%. But you can unpack that for us, I think that would be helpful. And then on the first quarter specifically, you said high single digits. Not to be nitpicky, but are we kind of above $2 share in one Q? Like, any finer point would be helpful. Anurag Maheshwari: Okay. Great. Thanks for the question, Amit. Just firstly, you look at both volume and productivity in 2026, it is going to be higher than what it was in 2025. Yeah. So in '25, between volume and productivity, we had about $750 million of operating income increase, and that was a 2.1% organic revenue growth. With 3% growth, the $200 million of volume will now become closer to $250 million, and productivity actually goes up from $550 million to about $600 million. So overall, we are going to see about a 125 to $150 million increase between volume and productivity in '26. And the productivity is going up on three real buckets around there. First is on supply chain. We expect half of that to come out of the supply chain, which is continued cost of poor quality, bringing it down, procurement, you know, managing a four-wall spend in the factory and logistics. There is about a $150 million of indirect expenses. We did a good job in '25. We will continue to do that in '26. And another $150 million in G&A efficiency as we look at our processes of optimization and so on. So overall, I would say that the incrementals between volume, between productivity, and the volume growth is going to be higher. What is offset in '26 is the half a billion dollars, which is being offset in '26. One is a pickup in investments. Last year, we did $185 million. We are going to do an incremental $225 million this year. The stranded cost goes up from $100 million last year to $150 million this year. So I would say those are probably the two biggest buckets, which would obviously, we have half a year of tariff as well, which is under $140 million. So you put these three together, that is half a billion dollars of it. Obviously, as we go into '27, a couple of them will not recur, but the incrementals overall are pretty good for 2026. Now on your first quarter, it is a very specific question that you are asking me. What I would say is that as I spoke about volume and productivity, I said about $875 million, $900 million for the year. The first quarter is almost 25% of that. Right? So if you kind of run the numbers through and, you know, there will be a little bit of FX favorability in the first quarter given where we were last year. We run all of that through, it will be high single-digit EPS growth. Amit Mehrotra: Okay. Thanks. And then just maybe a longer-term question for Bill. You have obviously given us a lot of metrics, whether it is OTIP or OEE. And I am kind of intrigued by this move to this design-to-cost approach in the R&D function. NPI is helpful, but it does not really capture kind of how the addressable market is changing based on incremental NPI side. I would be curious, one, how do you hold the R&D function kind of accountable to this cultural shift? And what can you kind of share with us in terms of the NPI coming out? How effective that is in going after the 80% of the market that, you know, you are kind of not there in at the moment. Bill Brown: So, Amit, I mean, good question. I will just hit it briefly. I think there are two pieces of it. One is the value engineering efforts that we are stepping up dramatically this year on to take costs out of products that are on the market today, which does require additional engineering work, disqualification work, there are things that have to happen generally speaking, to get those initiatives taking hold. You know, we also we had to drive that back into the overall design mindset in thinking of cost, you know, as we start developing products. And that is the push we are making is thinking about early in the design process, which is the best time to be thinking about that. How we hold people accountable in R&D or anywhere through the company, product leaders, general managers, even me, is the quality of the business cases and making sure that the business cases are developed, you know, rigorously from the ground up with a good sense of what the costs happen to be, and you start with the design-to-cost mentality and holding people accountable to the results of what we are investing in, you know, based on these business cases where we are going to be pushing the company more this year. Thank you. Operator: Our next question comes from the line of Nicole DeBlase with Deutsche Bank. Just wanted to circle back on China. I think you guys have embedded 4% IPI growth in '26 and that compares to like 6% in '25. I know '25 was like a pretty good year for you guys in China. You could just elaborate a little bit on what you are seeing in the region and where that deceleration is coming from for next year? Bill Brown: So thanks for the question. China actually had a very good year for us, good couple of years. In '24, we were up double digits. Last year, we were up mid-single digits. It was a little bit lighter in Q4, but only because of, as Anurag had mentioned in his prepared remarks, the shift out of China smartphone production when you exclude that, the market, you know, the China business for us remained mid-single digits. And as we turn the corner to this year, yeah, the macro is softening a little bit. You know, what we are expecting, I think two points down year over year on IPI. At least as we see it today. And the forecasts see it again, this could go in lots of different ways. You know, but we see that market to be more low to mid-single digits this year. Still growing, maybe not as robustly as we saw last year, but still low to mid-single digits. You know, the bottom line is we run China a little bit differently in the company, just like we do India. It is a hybrid model. So we have global business groups and a really strong, dedicated, driven local team. We are driving a lot of localization of R&D, localization of sourcing, we are attacking the market. We have got six factories there, 5,000 people, and we have got people lined up to really drive that business. And I think we are performing well. And I would say we are outperforming it. I expect the same thing here in '26. Nicole DeBlase: Thanks, Bill. That is helpful. And then obviously, had quite a bit of new noise from a tariff perspective. Over the weekend. So can you just confirm the tariff headwind that you guys are embedding in 2026 does not include any of this potentially new tariffs from Europe? And have you guys tried to quantify what that could mean to your business if they are enacted? Thank you. Bill Brown: So, Nicole, great question. So what we are embedding in our guidance is the carryover effect of the $0.20 of gross impact that we saw last year. That is in and Anurag mentioned that is mostly in the first half of this year. That is what is in the guidance because that is what is in law. That is what is in practice today. And we are moving. Now the pieces that at least the president is now talking about relative to Greenland and new different tariffs on Europe. It is about eight countries. You know, they are talking about 10% in February, another 25% you know, mid-year or something like that. You know, for us, the trade flows between the US and Europe is around a billion dollars. We are a net exporter. So we export $700 million into Europe. We import back about $250 million. You know, if you just run the numbers at 10% and then growing up to 25%, you know, you can get to something in the order of $60, $70 million. But that is as it over the course of the year, you know, we will see some of that going in inventory. We will see some of that dragging into 2027. So if that plays out exactly as we expect and evolve the trade flows I mentioned, you know, it could be a $30 million, $40 million impact this year. But again, you know, we are a long way from that becoming an executive order. So we will see. We are watching it. As everybody else is. That is not yet in our guidance. Nicole DeBlase: Thank you, Bill. I will pass it on. Operator: Our next question comes from the line of Chris Snyder with Morgan Stanley. Please proceed with your question. Chris Snyder: Thank you. I wanted to ask about consumer. Bill, I think you said December was up double digits. So with the quarter down 2%, I guess October November would be down high single. So really sharp positive rate of change there. I guess, is there anything to call out with the comps? Did December just have a really easy comp? Because it does not seem like you guys expect much of that strength to continue into Q1. Maybe, you know, one month does not make a trend, so too early. But any color there would be appreciated. Thank you. Bill Brown: Yeah. We typically see, you know, seasonality within the quarter in CBG to be, you know, lower in the first couple of months and then higher in the third month. We saw that pattern play out each quarter last year, including in Q4. This one was a little bit different. It was a little bit weaker in October, November than we would have expected. Then a little bit stronger in December than we would have expected. I think part of it was, you know, the team pushing pretty hard, a lot of really good work that the team did in promotional programs with our large retailers who also were, you know, striving to drive their growth. And that combination, I think, paid some dividends in December. So we grew a little bit better than expected in December, a little bit weaker in October, November. You know, I would not read too much into the trend so far in the first couple of weeks. Now let's see how the next, you know, number of weeks and maybe a couple of months go. But at least it seems to be holding okay to what we had expected in the first couple of weeks. So I would not read too much into that at this moment, Chris. Chris Snyder: Thank you. I appreciate that. And then if I could follow-up on the US IT assumption, you guys are calling for flat in '26, after 1% growth in '25. You know, when we look at the quarterly US industrial numbers, they seem to be strengthening as '25 went along. You know, you guys are obviously calling for things to soften. You know, do you see anything, you know, out there that is softening? You know, is there just some conservatism in that assumption? Thank you. Bill Brown: So you are right. I mean, if you look at IPI through the course of last year, you know, what we are seeing backward looking, it did improve sequentially over the course of the year. It was a little bit stronger in the back half than it was in the front half. You know, according to forecast, it looks like it is flattish in 2026. So we are reading those numbers. You know, for us, you know, as I mentioned before, we do our industrial businesses to continue to perform very well. You know, the two areas within industrial that we are watching, one is in auto aftermarket. Looks like it is still remaining relatively soft or expected to be soft on repair claims, both in the US and Europe. As well as in the roofing granules business because of the housing market, consumers not looking to replace the roofs right now. You know, that business has been a little bit soft. In fact, it was very soft in the fourth quarter. We expect some softness in the beginning of this year. But again, I just come back to with the execution of the team in commercial excellence and NPI, I think they are doing a very good job. I expect it will outperform that industrial macro as we get into '26. Chris Snyder: Thank you. I appreciate that. Operator: Our next question comes from the line of Andy Kaplowitz with Citigroup. Please proceed with your question. Andy Kaplowitz: Hey, good morning, everyone. Hey, good morning, Andy. So as you said, you originally forecast N25 averaging high teens growth from that rolling five-year new products. You averaged closer to mid-twenty percent. It is obviously one of the metrics leading to your market outgrowth. But what could it average in 26%? And does it suggest you get higher than that $300 million or higher as you just said in terms of market outgrowth? Bill Brown: So we do see a higher in '26 than '25 in terms of market outgrowth, and it is exactly from the progress made on innovation and five-year new product sales coming up. You know, again, when we look at the '26 numbers, you know, we assess the macro as it affects 3M Company to be on the order of around 1.7%. We are projecting growth of the company, organic growth of 3%. You know, that delta, that outgrowth is over $300 million above the macro. Half of that is coming from new product introductions, both those that were launched at the '25, we had a very good back half. As well as those that we expect will launch in 2026. So I feel really good about the trajectory we are on and the momentum we are building here. This is really, I think, moving the needle, you know, with a little market tailwind, we will see even greater pickup, but I feel good that we will outgrow the macro next year. At this year at '26 as a result of some of the initiatives we have in place on NPI and commercial excellence. Andy Kaplowitz: Got it. And then you were able to essentially hold the line, I think, all year in '25 in consumer in terms of growing margin nicely. Despite flat sales. And the understanding that Q4 organic sales, it seemed like you still had a relatively significant degradation in margin performance. So could you give us more color on that? Was it mostly just the increased advertising promos that you talked about? And can you talk about your confidence level? And growing consumer margin or at least holding up in '26? Bill Brown: Yeah. So good question. It was the promos and discounts that were offered. I think for the whole year, we did very well. We were up 130 basis points. We were down 110 in the fourth quarter. But again, for the year, good. The team is doing an excellent job of focusing on the priority brands and appropriately investing in Admir's, the NPI launches in CBG were really good, up double year over year. And I would expect margin growth as we get into 2026 as well as a really level out the business. So I feel pretty good about the structure that we have in place in CBG and the strategy that is being executed. And with a little bit of consumer recovery, you will see that coming through in a CBG business this year. So I appreciate that question. Thank you. Andy Kaplowitz: Thanks, Bill. Operator: This concludes the question and answer portion of our conference call. I will now turn the call back over to Bill Brown for some closing comments. Bill Brown: Well, thank you, everybody, for joining again today. And thanks to all of the 3Mers for their efforts, for their dedication, in executing against our priorities and delivering value to both our customers as well as our shareholders. Thank you and have a good day. Operator: Ladies and gentlemen, that does conclude today's conference call. We thank you for your participation and ask that you please disconnect your line.
Operator: Welcome to the U.S. Bancorp Fourth Quarter 2025 Earnings Conference Call. Following a review of the results, there will be a formal question and answer session. If you would like to ask a question, please press star then 1 on your phone. If you wish to withdraw your question, please press star then 1 again. The call will be recorded and available for replay beginning today at approximately 11 AM Central Time. I will now turn the conference over to George Anderson, Director of Investor Relations for U.S. Bancorp. George Anderson: Thank you, Julianne, and good morning, everyone. In our boardroom today, I'm joined by our Chief Executive Officer, Gunjan Kedia, and Vice Chair and CFO, John Stern. In a moment, Gunjan and John will be referencing a slide presentation together with their prepared remarks. A copy of the presentation, our press release, and supplemental analyst schedules can be found on our website at ir.usbank.com. Please note that any forward-looking statements made during today's call are subject to risk and uncertainty. Factors that could materially change our current forward-looking assumptions are described on Page two of today's earnings presentation, our press release, and in reports on file with the SEC. Following our prepared remarks, Gunjan and John will be happy to take any questions that you have. I will now turn the call over to Gunjan. Gunjan Kedia: Thank you, George, and good morning, everyone. I will begin on Slide three. This quarter, we delivered strong earnings per share of $1.26, an increase of approximately 18% year over year on an adjusted basis. Net interest income this quarter increased 3.3% year over year, supported by strong consumer deposit growth. Fee revenue grew 7.6% year over year with broad-based strength across most of our fee businesses. For both the fourth quarter and the full year, we posted record net revenues of $7.4 billion and $28.7 billion, respectively. More specifically, in the fourth quarter, total net revenue grew 5.1%, and we delivered meaningful positive operating leverage of 440 basis points as adjusted. John will provide more details on our financial performance in his opening remarks. Moving to Slide four. A clear focus this year has been on restoring investor confidence in our ability to deliver strong and more consistent financial results. For the second consecutive quarter, more focused execution on our three key priorities resulted in us operating within all of our medium-term target ranges. On Slide five, we highlight steady progress against our expense management priority. Four signature productivity programs have helped us deliver nine straight quarters of largely stable expenses. This has meaningfully contributed to our ability to deliver positive operating leverage of 370 basis points for the full year of 2025. Our expense initiatives continue to generate sustainable productivity in our operations and will remain foundational disciplines going forward. In 2026, we will make strategic investments necessary to drive our growth, particularly in technology, sales, and marketing. As such, we expect revenue growth to be a stronger driver of continued positive operating leverage for the year. Slide six highlights our strong fee growth and improving mix. For the full year, fee income represented 42% of total net revenues for the company and grew 6.7% year over year. A highly diversified mix of fee revenue business is a core differentiator for our franchise. Our organic growth strategy has focused on the principle of interconnected product solutions that have created unique value propositions and deeper relationships with our 15 million clients. In '26, we will remain highly focused on executing the initiatives that we launched in 2025. In addition, we are excited to close on our acquisition of BTIG and capture the considerable revenue synergies offered by that combination. On Slide seven, we recap the strategic rationale for this bolt-on acquisition. We've had a ten-year partnership with BTIG and have completed 350 deals or more together in that time frame. Last week, after we announced, I heard from many of our clients who applauded this next step in our partnership, which gives us confidence around the cultural fit between our two organizations and our ability to build an extraordinary capital markets franchise that can support an even broader array of client needs. We look forward to updating you on our progress there at a future analyst conference. Let me turn to Slide eight. We briefly spotlight our global fund services business, which generated strong fee revenue growth for the company this year. GFS is a highly capital-efficient business that serves our institutional clients, in particular private capital, and asset managers across the U.S. and Europe. The products offered by GFS attract high-quality operational deposits, money market assets under management, and capital markets business such as foreign exchange. BTIG capabilities will further support growth in this business. As you can see from the chart on the left, GFS total net revenue has grown at a healthy 11% CAGR since 2021 and grew at 12% in 2025. We have some unique product capabilities for start-up and first-time ETFs and have onboarded nearly half of all new U.S. ETF launches in 2025. The underlying drivers of performance within this business are continuing to gain momentum as ETFs stay in favor with investors for their cost efficiency and recent favorable regulatory changes. And we continue to innovate in areas like digital assets and derivative-based ETF products. Moving to Slide nine. Our payments transformation is a strategic and long-term priority for the company. Today, a payments product is oftentimes the first and the most frequent engagement with clients, especially with Gen Z. Embedded interconnected payments capabilities are fundamental to retaining, deepening, and growing our future client franchise. The chart on the left shows the steady strengthening of growth rates for our payments businesses as we execute our transformation. With our payments leadership team now fully in place, we have hit our stride on execution. In '26, we expect to maintain momentum on our transformation and add additional focus on the small business segment for both card and merchant. Turning to Slide 10. Net interest income and margin are both improving. We delivered record consumer deposits this quarter. The effectiveness of products like BankSmartly, more sophisticated pricing capabilities, and a significant overhaul of skills, training, digital tools, and incentives together with investments in our branches, drove our performance. Additionally, commercial real estate loans also showed modest growth after eleven quarters of decline. Today, our balance sheet is poised for continued NII growth. On the loan side, we will drive commercial and credit card loans to deepen client relationships. On the deposit side, we'll drive consumer and operational deposits to improve our funding mix. Turning to Slide 11. Operating within our medium-term target ranges has resulted in leading EPS growth as adjusted in 2025, even with more modest buybacks as compared with the industry. Let me now turn the call over to John, who will take you through more details of the quarter. John Stern: Thank you, Gunjan, and good morning, everyone. This was another strong quarter for us, driven by continued new business momentum and an improving macroeconomic environment. If I could turn your attention to Slide 12, I'll start with some highlights for the quarter followed by a discussion of fourth-quarter earnings trends. As Gunjan mentioned, we reported earnings per common share of $1.26 and achieved record net revenue of $7.4 billion this quarter. Revenue growth benefited from improved spread income, and all fee categories performed well. Key credit quality metrics improved both sequentially and on a year-over-year basis. As of December 31, our tangible book value per common share increased 18.2% on a year-over-year basis. Slide 13 provides our key performance metrics. This quarter, we delivered a return on tangible common equity of 18.4%, a return on average assets of 1.19%, and an efficiency ratio of 57.4%. All improvements on a year-over-year basis. Slide 14 provides a balance sheet summary. Total average deposits increased 0.7% linked quarter to $515 billion as we continue to emphasize growth in our consumer and relationship-based deposits. Noninterest-bearing deposits increased both sequentially and year over year, as we gained traction across several institutional fee businesses, like treasury management and Global Corporate Trust. Our percentage of noninterest-bearing to total average deposits remained stable at approximately 16%. Average loans totaled $384 billion, up 1.4% from the prior quarter, on accelerating year-over-year growth in our focus areas of commercial and credit card loans, which grew 10% and 15.7%, respectively. On an ending basis, these loans now represent approximately 48% of total loans for the bank, compared to approximately 45% last year. The ending balance on our investment portfolio as of December 31 remained at $171 billion. Turning to Slide 15. Net interest income on a fully taxable equivalent basis totaled $4.3 billion, an increase of 1.4% on a linked quarter basis, primarily driven by favorable deposit mix shift. Net interest margin increased two basis points sequentially to 2.77% as we look to achieve greater margin expansion in the medium term. Slide 16 highlights fee revenue trends within noninterest income. Total fee income was approximately $3.05 billion, an increase of 7.6% on a year-over-year basis with broad-based growth across our payments, institutional, and consumer fee businesses. For the full year, fee income increased 6.7% compared to the prior year. In 2025, we benefited from high single-digit growth in our institutional fee businesses, continued strength within Impact Finance, and stronger payments revenue. Turning to Slide 17. Noninterest expense totaled approximately $4.2 billion, up 0.7% linked quarter as FDIC expense favorability was partially offset by severance charges. Slide 18 highlights improved asset quality trends. This quarter, our ratio of nonperforming assets to loans and other real estate was 0.41% at December 31, an improvement of two basis points linked quarter and seven basis points year over year. The net charge-off ratio improved to 0.54%, a two basis point decrease sequentially, while our allowance for credit losses of $7.9 billion represented 2.03% of period-end loans. Turning to Slide 19. As of December 31, our common equity Tier one capital ratio was 10.8%, or 9.3%, including AOCI. On Slide 20, we provide a comparison of our fourth quarter and full-year results to our previous guidance. For the fourth quarter, net interest income, fee revenue, and noninterest expense all exceeded our previous guidance. Taken together, this resulted in another quarter of meaningful positive operating leverage for the company. For the full year, revenue growth of 4% hit the midpoint of our full-year guidance expectations, while positive operating leverage meaningfully outperformed our full-year 2025 outlook. Moving to Slide 21, I'll now provide full-year and first-quarter 2026 forward-looking guidance. Starting with the full year of 2026, we expect total net revenue growth to be in the range of 4% to 6% compared to the prior year. We expect to deliver positive operating leverage of 200 basis points or more for the full year. Our guidance excludes the impact of the BTIG acquisition, which is expected to contribute $175 million to $200 million of fee revenue per quarter. I have provided some additional details on page 30 of the appendix. Let me now provide first-quarter 2026 guidance. Net interest growth on a fully taxable equivalent basis is expected to be in the range of 3% to 4% compared to 2025. Total fee revenue growth is expected to be in the range of 5% to 6% compared to 2025. And we expect total noninterest expense growth of approximately 1% compared to 2025. Turning to Slide 22. We continue to operate within our medium-term target ranges. Our consistent execution against these ranges will remain a key focus entering 2026, and we have a high degree of confidence in our ability to strengthen our performance and build on these results over time. Let me now hand it back to Gunjan for closing remarks. Gunjan Kedia: Thank you, John. We are wrapping up 2025 with a significant leadership transition behind us and strong momentum going into 2026. The banking industry will likely see meaningful shifts in capital supervision, digital assets, AI, and novel banks in the coming years. Our scale, business mix, and culture position us for success. We remain focused on executing our priorities to drive organic growth, high returns, productivity, and strong risk management. Finally, I would like to offer a special thanks to many of you for your well wishes for Minneapolis, where we are headquartered. With all the challenges this community is facing, we remain focused on our clients and our teams. With that, we will now open the call for your questions. Operator: At this time, as a reminder, if you would like to ask a question, press star and the number one on your telephone keypad. And our first question comes from Scott Siefers from Piper Sandler. Please go ahead. Your line is open. Scott Siefers: Let's see. John, let's thought I'd start with you. Can you please speak to how you might think about the pace of share repurchase as this year plays out given you're increasing the capital ratio toward the 10% CAT two target? You'd, of course, dipped your toe back in at the end of last year, but would love to hear your thoughts on the go forward. John Stern: Sure, Scott, and good morning. In terms of share repurchases, we've made a tremendous amount of progress in our capital build over the last several years, and we obviously have business momentum behind us. And of course, our first priority is going to be client and loan growth as we move forward with obviously then a focus on capital return to our shareholders. But knowing all that, our intention is to grow our share repurchase amount starting this quarter in a gradual way. Likely go from $100 million or so to $200 million and then the commitment to glide into our 75% payout target that we have over time. Scott Siefers: Terrific. Okay. Good. Thank you. And then just sort of a broader question. Given all the noise regarding whether it's credit card rate caps and then, you know, newer chatter regarding the Credit Card Competition Act. Could you speak to how you all are thinking about how, I guess, how USD is thinking about these possible responses in you know, how how are these granted they're all sort of in flight, but, you know, what what are you all thinking about at this point? Gunjan Kedia: Scott, good morning. You know, our estimate is that 90 plus percent of our clients will see a detrimental impact if there was an across-the-board 10% rate cap on credit cards. The impact to 50% of the clients will be crushed as it will be for the economy. We have observed that just in the last few days, the conversation around the rate cap has shifted more productively to options for customers to help them in the short term. So just as a reminder, our shield credit card offers twenty-four months of 0% APR for consumers. And in fact, most card issuers have some product of that sort. So we think that's a productive conversation and we are thinking of ways to increase communications, financial education to try and make sure people know what options they have. But that's sort of the momentum. The CCCA, as you asked, has come and gone many times. There are very credible reasons why that would be very costly for many small merchants and not achieve the goal intended. So at this point, we continue to it, but it is not a meaningful planning that we are focused on. Scott Siefers: Gotcha. Okay. Terrific. Thank you very much for the color. Operator: Our next question comes from John Pancari from Evercore ISI. Please go ahead. Your line is open. John Pancari: Morning. I just wanna ask a bit around the revenue growth expectation of 4% to 6% for 2026. I appreciate the color you gave around the first quarter. In terms of the spread income versus the fee growth expectation. Could you possibly help us and kind of how that think about how that could play out for the full year in terms of some of the, you know, the balance sheet dynamics in terms of the growth expectations and your margin outlook. Then the same thing on the fee side, how should we think about the breakout of that total revenue when you look at '26? John Stern: Sure. It's John. Thanks, John. So the way we think about the revenue growth this year, obviously, we gave you the 4% to 6% on that side of the thing. But given the momentum that we have and what we see today, we think that mid-single-digit growth is appropriate for both net interest income and fee revenue growth. So maybe just to break it out a little bit. So on net interest income, as an example, we expect that to strengthen over time. We have 3% to 4% here in the first quarter. But with the increase in loan pipelines that we see as well as NIM expansion as that continues, we do expect that to grow. And then fees, we expect that to have a more consistent approach and performance as we look through the course of the year. Of course, that's gonna be led by many of our key businesses like trust capital markets, impact finance, and payments. So overall, we see a lot of momentum in the businesses. We've had several good quarters here in a row, our job is now to continue to execute on the strategy. John Pancari: Got it. Alright. Thanks for that, John. And then, Gunjan, you mentioned that revenue rather than expenses may be a bigger driver of the expected positive operating leverage in 2026. If revenue doesn't cooperate, can you discuss the flexibility that you still may have to achieve the 200 basis points plus and positive operating leverage? Like, what what are your levers and do you have flexibility around the strategic investments that you that you emphasized? Gunjan Kedia: John, good morning. The short answer is yes. Our productivity and expense management is being created in a very fundamental way. You'll remember that for six years, we have been investing very heavily in digital capabilities. Nearly all back-end platforms have been upgraded, and that creates a lot of productivity once you start getting the operations aligned. You add to it the AI boost we are seeing in big expense pools. So we are very confident about expense management. We have aggressive plans to invest back in the business, just to drive the revenue growth, especially fee revenue growth in businesses like capital markets and payments that attract more expenses. But we have a lot of ability to flex that. Those are not long-term investments. Things like sales and marketing are quarterly investments. So we are very committed to our meaningful positive operating leverage, and we expect it to come from revenue. But something happens in the macroeconomic environment, we have levers on expenses. John Pancari: Great. Thank you. Gunjan Kedia: Thank you. Thanks, John. Operator: Next question comes from John McDonald from Truist. John McDonald: Thanks. Good morning. I was wondering, John, if you could expand a little bit about your outlook for balance sheet growth in 2026 and any mix shifts or trade-offs that you want to highlight between loans within loans and also loans earning assets. You had given a forecast last year, early last year about balance sheet growth by the end of the year and it had had some mix shift. So I just wanna get an update on that. John Stern: Sure. Good morning, John. Yeah. So largely, I think you're talking about the slide that we had in the first quarter of last year, talking about our asset growth and things like that. I think that still holds. We still feel like that's that range is the appropriate range for our balance sheet. Maybe just to go into some of the pieces, you know, we do expect loan growth to be stronger this year. Probably more in the 3% to 4% loan growth area led by commercial and card again. But, you know, we also see that commercial real estate is starting to grow, and we expect that to be a help in terms of growth there. We do expect that deposits will continue to grow consummate with loans. That should be kind of one for one in the way we're looking at it. And in terms of other assets, I expect the investment portfolio to kind of flex based on if loan growth is faster, we'll probably have fewer investment portfolio and other earning assets. And if it's less, then perhaps we kind of keep the balances the same. So those are going to be kind of as we go manage through the quarter, we'll go and see how that progresses. But all this is to say that the mix is improving in the balance sheet, and that's going to continue throughout 2026, and that's what gives us confidence in the NIM expansion as well. John McDonald: Great. And maybe just on that note, you could give us your updated thoughts on the timeline for the NIM expansion, you know, to get to 3% over the next year or two. And in addition to that loan mix shift, what are just an update on some of the fixed asset reprice drivers. Thank you. John Stern: Sure. Yeah. So, I think, first of all, there's no change to our outlook. We still feel there's definitely a path to 3% in 2027. The drivers of net interest margin are going to be the mix that I just mentioned as well as the fixed asset repricing. What I would say there on the fixed asset repricing is that we'll have slightly or we'll have more balances that should reprice this year than last year. But it'll be likely at a lower spread just because the nature of long-term rates have come down over the course of the year, and based on our forecast. So those are kind of the pieces. And then the deposit mix is gonna continue to improve with the focus on consumer deposit growth, which we've been very successful at growing this year, as well as commercial deposits that are tied to strong fee categories like treasury management, institutional businesses, and things like that. So that's all, again, a big focus for us as we look into 2026 and continued NIM expansion. John McDonald: Okay. Thank you. Operator: Our next question comes from Ebrahim Poonawala from Bank of America. Please go ahead. Your line is open. Ebrahim Poonawala: Good morning. I guess good morning. Maybe, John, just hey, John. Following up on the slide 10 on the deposit growth, just spend some time talking about drivers of deposit growth. You're having the mix towards consumer deposits. What's driving that net net? Is that accretive as we think should we continue to think about that mix shifting to the consumer side? And how accretive is that when we think about either deposit margin or the overall margin? Thanks. John Stern: Sure. So, you know, on the deposit, a couple of things are going on in the deposit growth. This over the course of the year, we saw steady growth in the consumer deposits. And as that Slide 10 illustrates, we continue to believe that that is accretive and it is helpful to bring in new accounts and clients to the bank typically that are younger, more affluent base that we have, and this is particularly in our BankSmartly product, which is a savings and a card tied together. We've seen very good success in growing that savings product over the course of the year. We find these clients to be stickier, and that's going to be overall long periods of time. That's gonna be very helpful from our funding cost perspective. The other thing we're focused on on the commercial side is a reduction in CDs. We reduced our CD count by $6 billion this quarter. We are at the lowest point in CD usage in the last ten quarters. So that has been that will be helpful going forward to our mix. In our wholesale and institutional balances are gonna be really driven by our core institutional and, like, fund services, corporate trust, treasury management, and other middle market and other type of accounts that that's gonna give us. So the mix is gonna be very important for us as we move forward. Gunjan Kedia: And, Ebrahim, I can just add that we are very intentional about using the balance sheet to drive deeper relationships and fee-based businesses. An expansion in the core client franchise brings a lot of payments and card revenue and merchant revenue at the back end of it. So it's very accretive in the long run and very strategic for us as well. So the focus is very much on consumer deposits and operational wholesale deposits, which come with expansion of treasury management, investment services, and some of the fee-based products. That's one of the reasons we wanted to highlight the global fund services business. While it's, you know, billion-dollar-like business for us, so not huge enough with it's a very important source of operational deposits. Ebrahim Poonawala: That's helpful. And just a separate question, I guess, I think last quarter you all established a digital assets organization. Just talk to us. You put out a few press releases. A lot of energy around tokenization. Is there a role for USB to play there? And is that a needle mover as we think about either fees or deposit growth outlook for the bank? Gunjan Kedia: Yes. Thank you. So let me just describe the world here a little bit from our perspective. We are obviously taking it seriously as an industry shock. That's why we stood up an organization called Digital Assets and Money Movement, and it's led by a very seasoned payments executive for us. We have seen progress in two very distinct areas. The first is on capital markets where the investment side around cryptocurrency stablecoins is leading to demand for core custody type of capabilities. We have almost $12 trillion in assets there. We were very quick to stand up a cryptocurrency custody offer. Last year, we stood up a stablecoin custody offer. Ibrahim, I'll tell you, last year has been a very brisk place of new ETF launches, and a large majority of them have been to take advantage of the digital assets. And we are seeing the revenue model come through in a very real way. And we think that's real and there's momentum. On the bigger conversation of payments, it's more speculative. So we do press releases because there's a lot of interest every time we actually conduct a stable coin transaction with some partner platforms. We have done many of those. I can't point to a specific revenue-generating use case. The demand specifically from the client base is not very strong or real yet, the revenue model is still to be figured out. There's enough momentum there, both from a supervisory and commercial side that we expect to be very front-footed as this world evolves around payments. Ebrahim Poonawala: That's good color. Thank you. Gunjan Kedia: Thank you. Operator: Our next question comes from Mike Mayo from Wells Fargo. Please go ahead. Your line is open. Mike Mayo: Hi. Well, you announced the acquisition of BTIG. And I think there's a little confusion. Is that the reason why you're slowing down buybacks? And just more generally, there's a few covered U.S. Bancorp for a while, and this is over two decades after you spun off Piper, and now you're you know, going back into the capital markets business a little bit more than you you're already there. So if you can also just talk about the investments that you'll be making with BTIG, the business lines, what else that requires. I imagine this is kind of like a link and leverage deal where you buy a firm and you leverage it over your entire franchise, but I'm not sure. On the other side, this, you know, what do you expect in terms of cap to market fees? Other opportunities for balance sheet growth? Thank you. John Stern: Sure, Mike. I'll start on your share repurchase comment, then maybe I'll Gunjan will comment on the other side of questions that you had. There's no impact to our buyback. In fact, as I mentioned earlier, we'll be increasing our share repurchases from $100 million to $200 million this quarter. And then, thereafter, we'll glide into our eventual target of 75% that we've talked about. And so, this transaction is a 12 basis point impact on the CET one ratio. No more, no less. That's, that will be the impact no matter what the earnout or anything else. So, we feel really good about the financials, and it's not material to EPS. This year, simply because there will be some merger-related costs that will offset any revenues for this or margin. So as we look to the following year, that will shift. Gunjan Kedia: Mike, good morning. I'll just step back and maybe recap the strategic rationale. You know, our clients use both bank balance sheets and capital markets to manage their own balance sheets. We have had a lot of success with the fixed income side of our capital markets business that has grown organically over the last fourteen years or so, and it's now grown to about $1.4 billion in revenues for us. It's a sizable business. The last gap in our product lineup was the BTIG set of products. We've had a partnership with them for ten years. And it is true twenty years back Piper Jaffray was acquired. And just as a reminder, we retained all of the wealth and asset management sites of Piper Jaffray, and those have become sizable businesses for us today with a lot of cultural fit. The capital markets wasn't appropriate for us at the time. It is very much more culturally aligned with what we do plus we know the property. On your balance sheet question, I think the issue is you're already deploying a very sizable balance sheet today against our commercial and corporate clients. And a broader lineup of fees leverages that balance sheet more. We do not expect the BTIG business in itself to be a big driver of additional sort of balance sheet usage. But otherwise, lots of revenue synergies across our IS business, across our family office business. And we'll report on that more to you once the deal closes. And we give better guidance on what the economics of that deal will be like. Mike Mayo: Alright. Thank you. Operator: Our next question comes from Erika Najarian from UBS. Please go ahead. Your line is open. Erika Najarian: Yes. Thank you. Good morning. First question, period end assets ended at $692 billion for the year. And I guess this is a two-part question. First is, as you understand it, you know, how do the tailoring for proposals or the removal of tailoring proposals in you know, Washington, how would that positively impact that $700 billion crossing? And additionally, you know, as we think about John, that path to 3%, does that consider the currently more stringent liquidity requirements that you would need to adhere to if nothing changed on tailoring? John Stern: Sure, Erica. Thanks for the question. So on the asset side, yes, we're continuing to grow. Obviously, as you know, it's a four-quarter average of assets that is the deciding factor in how when you trip into category two. You know, we're running our business without any regard to that level. We are growing our loans consummate with the industry. We wanna make sure we're there for our clients. Any rule that happens or change to the tailoring rules over this process will take in stride. We understand there's obviously been chatter about that. As folks on, in the regulatory spheres have talked about those perhaps being reindexed, but we don't know that for sure. So in the meantime, we're gonna continue to do what we need to do on the growth and supporting our clients through that. And then, in terms of the consideration that you had, I'm just trying to remember your second question. It was on the LCR that you LCR. I'm sorry. Yeah. Thank you. On the LCR, there is no impact to that. We have that fully loaded into our calculus here as we think about the NIM. So, as we jump from a more modified LCR to a full LCR, there's no impact, and that's all incorporated into our guidance. Erika Najarian: That was very helpful. Thank you. And just as a follow-up question, Gunjan, during prepared remarks, you talked about, you know, faster evolution of the banking industry and also in your, you know, responses to the other analyst questions, it seems like, you know, you have a very nimble organization in terms of how you're responding to these changes. And, you know, as we think about the investments that you have to make you know, in terms of moving the continuing to move the company forward, you know, is there just enough productivity savings that you can identify where you can continue to invest for the future, whether it's nearer term like capital markets or medium term like you know, the digital asset transformation, you know, and still deliver on that positive operating leverage, you know, of 200 plus that it has been clear message to your investor base. Gunjan Kedia: Thank you, Erica. Good morning. It's a very thoughtful question. And let me start really by the new investments in AI and stablecoin. They are actually very capitalized. There is so much support that is being provided to us from a whole suite of sort of partners who really like our business mix, our payments, and capital markets. You know, we are unusual in having sizable capabilities on both of those. And we've organized that data. As you know, we are on the cusp of category two transition, and that has given us a lot of imperative over the last two or three years to have better data. Collectively, we are a very important partner. So we are getting a lot of support when we do these pilots on stablecoins. They're not huge investments yet. However, we stand ready to invest as needed when the market flexes. You have to learn. You have to have your products set ready. So I would say to you that for some time, at least, you're getting a lot of benefit of industry-wide investments to just scale up our product capability. The real investments we are making is to support our fee business growth. We are doing bigger deals, they come with more upfront cost. The payments transformation, if you think about the revenue model of payments, we are looking at acquired, but not installed business. We are looking at sales pipelines, and the revenue model follows twelve to eighteen months after you sold the business. So we are very prepared for that kind of expense inflection. But also creating productivity. So I feel very comfortable with both investing heavily for organic growth and delivering a positive operating leverage. And again, I always want to remind when you spend 5 or 6 billion upgrading your digital investments, which we did over the last six years. You have a long runway to drive productivity out of them. Which we will. Erika Najarian: Got it. Thank you for that. Operator: Our next question comes from Ken Usdin from Autonomous Research. Please go ahead. Your line is open. Ken Usdin: Thanks. Good morning. A follow-up on that last point. So as you've made these all these investments, it's nice to see a little bit of improvement year over year in payments business fees in aggregate. I was just wondering just what's the pace of improvement that we could expect as you think about next year and to John's prior point about mid-single-digit growth on the fee side overall? How much does payments play a part of that? If you can kind of just talk through each of the each of the three businesses areas there. Thanks. John Stern: Sure. Thanks. Appreciate the question. You know, absolutely, payments has a role in our mid-single-digit call for fees overall. But take it piece by piece, you know, card, we have a lot of progress with the Smart Leap program and other cards that we've introduced into the market. There's a tremendous focus on small business that we are very much focused on internally. So we have a lot of momentum there. We do expect mid-single-digit growth in this business for the year of 2026. On the merchant side, as we talked about on our strategy, at a recent investor conference, we talked about, you know, increasing our margins through more distribution, and direct model, really being thoughtful about what verticals that we want to be a part of. And really focusing on that embedded software, and having that be a key component of our growth. And so, again, here, we think that mid-single-digit growth for the year is appropriate for this business as well. And then on the corporate payment side, clearly, you know, we saw improvement this year on a year-over-year basis, but it's still negative growth. Just given the spend levels on the government side as well as just some caution just on the corporate T and E side of the equation. That will likely continue into the first half of the year, but should overall strengthen as we get through that. And that will, by the time we exit that, that will be more in the mid-single-digit range. So overall, single-digit for this business is what we should expect, and we're looking forward to executing our strategy. Ken Usdin: Okay. Great. Thanks. Thanks, John. And just one follow-up on the credit card side on and charge-offs. That loss line has really settled down a little bit. Are we at kind of a new I know there's some seasonality, but, like, what's your expectations for card losses? You know, versus where we kinda ended the year and averaged for 25? John Stern: Yeah. Thank you. So, you know, card, if I think about there's seasonality, so you should expect a little bit higher charge-off rate on card in the first half of the year just given that seasonality. But overall, if I just kind of look big picture on card 25 versus 26, we expect stability in that charge-off rate based on what we know today. Ken Usdin: Okay. Got it. Alright. Thanks, John. Operator: Our next question comes from Gerard Cassidy from RBC. Please go ahead. Your line is open. Gerard Cassidy: Good morning, Gunjan. Good morning, John. John Stern: Good morning. Gerard Cassidy: John, you talked about the commercial loan growth, and you talked a bit about commercial real estate. I think you said maybe the first time in the November, it may have seen a little bit of growth. Can you expand upon that for 2026 along with the commercial loan growth? Are the 10% year over year is quite nice. And can that continue, do you think, in 2026? John Stern: Thanks, Gerard. Short answer is yes. On the continuation on the commercial side of the equation. But let me start with the commercial real estate side. Since you talked about that, I'll mention that we do expect growth in the real estate line. As you said, the first growth that we've had in eleven quarters in that line item, which is great to see. I think what we're seeing here is the continuation of the pipeline building, particularly as it relates to multifamily and industrial. I think those have been strong areas of growth. And I would also say that paydowns have actually slowed down as well. Our office numbers, our CRE office has dropped $3 billion over the last three years and at a pretty rapid pace. And so that has started to slow down. So that has been helpful. I'll also say that this growth is not driven by data centers and things like that. We have less than a billion dollars of data centers in our portfolio, and we do select high quality in that sense. So that's kind of the story on real estate. On the C&I side, we're just seeing growth in a number of different areas. I'd just say it's very broad-based. Even though utilization has been pretty flat, we've seen growth in subscription lines, supply chain, some of the M&A activity is picking up with our clients. And so there's just core growth on that side of the equation. We've also been going into business banking and SBA, seeing very strong growth as well as our expansion markets and middle markets. So a combination of all these things, we think, persists into 2026, and so we're looking forward to that growth. Gerard Cassidy: Very good. And Gunjan, one of your peers in asking this question called me a curmudgeon. So I'll try to ask the question a little less negative. But the setup for you folks and your peers is really good this year. Investors see that. But being bank people that we are, we're always looking over our shoulders. Aside from the obvious geopolitical risks, do you guys keep your eye on just, you know, in case of a surprise comes up that we're not expecting right now? Gunjan Kedia: Well, thank you, Gerard. I will not call you a curmudgeon. We worry about what's coming around the corner as much as you do. You know, the economic backdrop going into 2026 is broadly constructive. The consumer did very well through the holiday cycle, and that was all ranges of FICO scores and across discretionary and spending. As John just described, the delinquencies are coming down. While the employment picture is a little bit muddy, it's still strong, and we are not yet seeing the impact of the one big beautiful bill and some of the new tax provisions like tips and overtime, etcetera, will come into the consumer's balance sheet. So we expect that to be good. The sentiment on the corporate side too has moved to sort of more M&A and real CapEx rather than just sort of a pause and replacement CapEx waiting for tariff uncertainty. I would say the economic backdrop feels like tailwinds rather than headwinds going into the year. So our attention really is on unexpected policy changes. In front of us is a very big capital bill. In front of us are some real discussions around stablecoin bank industry, novel charters. And so I would say our attention is really focused on the policy side with some relief on the economic front. Gerard Cassidy: Very good. Thank you. Operator: Our next question comes from Betsy Graseck from Morgan Stanley. Please go ahead. Your line is open. Betsy Graseck: Hi. Good morning. Gunjan Kedia: Good morning. Betsy Graseck: I had one question on BTIG. I know we talked about it earlier in the call. But I wanted to get an understanding of how much of a capital call do you think this piece of the business will be? And just from my vantage point, it feels like it's a little bit less than what the fixed income would be, which you already have. But I'm not sure how much you're looking to lean in and grow, what they have and increase the balance sheet items associated with the equity book. So some color there would be helpful. Thank you. John Stern: Sure, Betsy. So maybe just as a starting point for BTIG, they have a very low balance sheet. There's not a lot of loans and balance sheet with that. I think that potentially could be one of the synergies that's not built into our current forecast. We think the synergies are really gonna be around areas like our fund services, our capital markets as well as our ICG or our institutional client group. There could be loans associated with that. But, you know, we'll treat that in the context of the entire capital market suite. And so this will be just another component of how we manage and have grown in the capital markets space methodically over the last fifteen years. This is another component of that journey, and so we'll grow as the market allows, and we'll be taking it into consideration with our risk management framework. Betsy Graseck: Okay. And is it a self-funded capital call or does it pull from other parts of the organization? John Stern: Yeah. It's self-funded. I mean, we are there's no other parts of the organization. It's all contained here at the bank. Betsy Graseck: Okay. Thank you. Operator: Our next question comes from Saul Martinez from HSBC. Please go ahead. Your line is open. Saul Martinez: Hi. Thanks for taking my question. I'll ask also on this is more of a clarification. John. It's expected to close in the second quarter. You mentioned there are some merger costs embedded in the guidance. For it being PPNR neutral. But with that, I guess, can we surmise that it will be PPNR accretive by year-end and into early 2027, especially considering, you know, some of the synergies that you just mentioned in your response to Betsy's question. John Stern: Yeah. Thanks, Saul. The answer is yes. We expect merger-related costs to happen in the next quarter or two. And so as that occurs, that will keep the EPS neutral. And so, after that, then we expect to have some, obviously, we'll see margin expansion in this business once we get through those costs. Saul Martinez: Okay. That's helpful. And then, you know, I hate maybe beating a dead horse here would be the question on BTIG, and you kind of addressed this. But it does really change the composition of your capital markets business adding equities and I think, you know, one of your competitors said that this really isn't a business that makes a lot of sense. For a large regional bank. It's what we've given that, at least in their view, it really does require massive scale and there's more suitable for, you know, for a larger bank. Guess, what makes you think that these businesses, especially equity makes sense for U.S. Bancorp and that you why are you confident that you'll be successful in extracting value with that business under your umbrella? John Stern: Yeah. I thanks for the question. You know, I think I'll and Gunjan, you can add on here. But, you know, our view is that these businesses, we added because we had an opportunity here with a partner that we know, a known that fits into our risk management. But, also importantly, it's what our clients have been asking for. We have had very good reach out from clients across the board that have wanted to have us participate more in their financings, have us participate more in their broader activities, but have not been able to give that to us freely, in terms of the full spread and wallet share that they would have liked or intended to do. So this is something that's really gonna, it's something that our clients have asked for. It fits well within our risk management profile as that has been built up internally here over the last several years. And so it is a great fit for us. Gunjan Kedia: You know what I'll add, Saul, that you have to look at our track record in growing the fixed income book, which not all regionals have been able to do. So everybody has a different strategy here. Our confidence in leaning in heavily into the capital markets comes not just from the client conversations. From the real success we have seen just holding our own. The market is not uniform. There's a lot of need for family offices, for middle market clients that are unique, that require high touch, and so we think at our size, we definitely have the ability to carve out a very nice business given the size of our balance sheet here. Saul Martinez: Great. That's helpful. Thank you. Operator: Our next question comes from Steven Chubak from Wolfe Research. Please go ahead. Your line is open. Steven Chubak: Hi, good morning, and thanks for taking my questions. So I wanted to start off with one on Global Fund Services, and I appreciate the additional disclosure that you provided in the slides. You noted you're seeing strong growth in GFS. You outlined the strength of the ETF servicing capabilities. I was hoping you could speak to the competitive landscape in that area. How much of the growth that you've seen since '21 is tied to organic efforts versus some of the rate and market tailwinds that transpired and just how that informs what you believe is the sustainable growth rate or outlook over the medium term relative to the mid-single-digit guidance that you offer at the firm level? Gunjan Kedia: Steven, thank you for that. Let me start. GFS has a very niche specific set of products for highly complex small boutique type of firms around private capital, private credit. So you have to play the game right. We have done this for now many, many years, and there's a very sustainable competitive path for this business going forward. We do like to highlight smaller businesses don't get airtime. Just to teach you last quarter, we just gave you some visibility to our impact finance business. So we see this being a real engine of growth as the whole world of investments overall growth. Obviously, when you have good strong equity markets, do slightly better. In other times, you do slightly worse. But the core organic growth and market share gains here are very real. Steven Chubak: That's great. And for my follow-up, on deposit mix, looking at noninterest-bearing deposits, you saw solid growth 4%, sequential increase on average. Recognizing some of that is gonna be seasonal. But do you feel we've reached a sustained inflection in noninterest-bearing deposits? And within the NII guidance for the full year, what are you assuming for deposit remixing and shrinkage in time deposits? As well as betas with some of the upcoming rate cuts. John Stern: Sure. Thanks. Appreciate that. In terms of noninterest-bearing, and yes, we have grown both sequentially and on a year-over-year basis. That year-over-year basis has not been achieved in quite some time. So it was very nice to see that. And we do expect that to continue into 2026. So in our call here for growth, on both loan and deposit, I would anticipate it's both a mix of interest-bearing and noninterest-bearing deposits with roughly the mix probably being in the same area that it is today is kinda how we think about it. You know, in terms of deposit mix and rates and things like that, I'm just gonna kinda go back to, you know, we're focused very much on growing our consumer business as well as these key areas that are gonna help us grow in our fee revenues, the treasury management areas, the institutional businesses, and several and select corporate clients. So that's gonna be our focus as we think about deposits this upcoming year. Steven Chubak: That's great color. Thanks for taking my questions. Operator: Our next question comes from Matt O'Connor from Deutsche Bank. Please go ahead. Your line is open. Matt O'Connor: Good morning. I was hoping you could give a quick update on your branch strategy. Your branch count, I think, is down about four or 5% versus a year ago. I think you've talked about kind of not being that interested in bank deals. So kind of bringing that all together and in lieu of some other banks maybe announcing branch expansion strategies. You know, just talk about the branch strategy and, you know, again, if there's any change on the M&A, I think. Thanks. Gunjan Kedia: Matt, thank you. Let me begin. So just for historical context, U.S. Bank had a very, very heavy presence in in-store branches. And before our digital tools, that's what provided servicing access to people over the weekends and after hours. You don't need that anymore. So the vast majority of our branch closures is really these small servicing units. What we are building instead is multi-client hubs that have many products represented in more hub-like branches. We invest about $200 million in our branches. We find that to be a very effective channel, continuing to be a very effective channel. So our strategy, though, is to try and get to top five market share in the places that we are in and create sort of modern interconnected branches in those areas. So for example, in Denver, we've just finished the renovation of all our branches into the new format. We are continuing to lean in on branches as a source of growth and client service. It's just our starting point was slightly different. So we have to close all these sort of in-store branches and then rebuild from that point onwards. And on your second question, there's no change in our strategy. We are very focused on our organic growth opportunities and seeing a lot of momentum there. Matt O'Connor: Okay. That's all helpful. And then so if we strip out the in-store branches. Any numbers on kind of the remaining branch network, and then from your perspective, like, how much more refurbishing or retrofitting is there still to do for the traditional branches? Thanks. John Stern: Sure. So on how much to do, you know, the $200 million is going to be kind of a consistent always-on approach to remodeling, to adding and branches and things of that variety. So we've had several hundred branches remodeled this year. We expect to have that occur next year as well, and that'll be just a continuation of our strategy that Gunjan just laid out. Gunjan Kedia: Matt, it's very much always on, you know, because you refresh these formats over and over again. So it's not sort of one and done. But the message here really is we are investing very much in our branch. It's an important channel for us. Matt O'Connor: Okay. Thank you. Operator: Our last question will come from Chris McGratty from KBW. Please go ahead. Your line is open. Chris McGratty from KBW. Your line is open. Chris McGratty: Oh, sorry about that. Was on mute. John, when you look at your top five goal for market share, and across your footprint, the metro market, where would you not be where you need to be? Where do you need to invest a little bit more to get the market share? John Stern: You know, in terms of are you speaking more on the consumer side or on the commercial side? Chris McGratty: Consumer side? John Stern: Sure. So, you know, like Gunjan just laid out, the Denver area, we've certainly been making investments here in our hub here in headquarters here in Minneapolis, Nashville, Arizona, areas, of course, in California, given the Union acquisition where we've combined, where locations were very close to each other and obviously, took the premier spot or refurbished those areas. So, what we're doing is really we're refurbishing and we're building branches in areas where there's high growth in those MSA areas. So not every area is, of course, the same, so you have to go kinda market by market. But that's been the course of our strategy over the last couple of years. Chris McGratty: Great. And my follow-up would be on just consumer checking account growth. It's gotten a lot of attention this quarter. You guys had good consumer deposit growth in the quarter. Can you share any statistics about the checking account growth over the past, you know, year or two that would give you optimism? It's gonna be this could continue? John Stern: Thank you. Yeah. So I think the important thing is really, I mean, accounts are good, of course, and we watch that. But it's really about the balances is what we're really focused on. And so our consumer amounts were up two and a half percent, or $7 billion or so this past year. Not many peers grew consumer deposits this year. It's a very competitive market. And I think what's important for us is we've developed a very nice set of products that can meet a number of different clients. And we have pricing capability tools that we've been building over the last several years that have helped us in this regard as well. So the combination of all that is really, I think, is what is giving us strength in that consumer number. As well as our capability digitally to compete anywhere across the country. So it doesn't have to be just our footprint. That is necessarily the case. So all those are leading factors to where why we think that consumer growth will continue. Gunjan Kedia: I'll just add that the branch performance has inflected very nicely too with all of the investments that we have made, all the tools that we've put in the hands, all the AI-powered next best solutions, you know, collectively that has created a fair amount of momentum, and we've been building towards those capabilities all of 2025. And beginning to show up in our results here. Chris McGratty: Great. Thank you so much. Operator: There are no further questions at this time. Mister Anderson, I turn the call back over to you. George Anderson: Thank you, and thank you to everyone who joined our call this morning. Please contact the Investor Relations department if you have any follow-up questions. You may now disconnect. Operator: This concludes today's conference call. You may now disconnect.
Operator: Good morning and welcome to the Mercantile Bank Corporation 2025 Fourth Quarter Earnings Results Conference Call. All 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 Nichole Kladder, Chief Marketing Officer of Mercantile Bank. Please go ahead. Nichole Kladder: Hello, and thank you for joining us. Today, we will cover the company's financial results for 2025. The team members joining me this morning include Raymond Reitsma, President and Chief Executive Officer, as well as Charles Christmas, Executive Vice President and Chief Financial Officer. Our agenda will begin with prepared remarks by both Ray and Chuck and will include references to our presentation covering this quarter's results. You can access a copy of the presentation as well as the press release sent earlier today by visiting mercbank.com. After our prepared remarks, we will then open the call to your questions. Before we begin, it is my responsibility to inform you that this call may involve certain forward-looking statements such as projections of revenue, earnings, and capital structure as well as statements on the plans and objectives of the company's business. The company's actual results could differ materially from any forward-looking statements made today due to factors described in the company's latest Securities and Exchange Commission filings. The company assumes no obligation to update any forward-looking statements made during the call. Let's begin. Raymond Reitsma: Thanks, Nichole. Our results for 2025 continue to build on the theme of commercial expertise generating a strong return profile. The consummation of our purchase of Eastern Michigan Bank on 12/31/2025 represents execution of our strategic objectives around PASA and loan growth and margin stability, paired with strong asset quality and overall financial performance. We continue to demonstrate top quartile ROA performance relative to our peers built upon the following traits. Trait number one, strong and durable net interest margin. Over the last five quarters, SOFR ninety-day average rate has dropped 68 basis points while our margin increased by two basis points to 3.43%. This illustrates effective execution of our strategic objectives to maintain a steady margin by match funding our assets and liabilities and refute the notion that we have an asset-sensitive balance sheet despite the relatively large portion of floating rate assets. Trait number two, very strong asset quality. As do loans remain at low levels, typical of our company at 11 basis points of total loans. Nonperforming loans to total loans over the last six years averaged 12 basis points. The allowance for credit losses stands at 1.21% of total loans as of 12/31/2025, providing very strong coverage relative to past due and non-performing loans. These numbers demonstrate our long-standing commitment to excellence in underwriting and loan administration. Trait number three, improved on-balance sheet liquidity and loan-to-deposit ratio. Our loan-to-deposit ratio stands at 91%, compared to 98% on 12/31/2024 and 110% on 12/31/2023. Our deposit mix includes 25% noninterest-bearing deposits, and 24% lower-cost deposits, an increase from 20% in the prior quarter which has contributed to the stability of our net interest margin. Our acquisition of Eastern Michigan Bank contributed positively to these measures. Trait number four, strong deposit and loan compounded annual growth. Our recent focus on deposit growth is not new to our bank. In fact, the last five year-end periods demonstrate a deposit compounded annual growth rate of 9.2%. Over the same time period, total loans demonstrate a compounded annual growth rate of 8.6%. Loan growth will continue to be impacted by an elevated level of loan payoffs compared to historical norms in 2026. However, as of 12/31/2025, commitments to make loans totaled $297 million. The commitments to make commercial and residential construction loans totaled $271 million. Each of these represents historically high levels. We expect that growth for 2026 will fall within the range of previously defined expectations of mid-single digits. Trait number five, continued strong growth in key fee income categories. Growth in commercial deposit relationships has supported growth in treasury management services, resulting in a 19% increase in service charges on accounts during 2025. Our payroll service offerings continue to report very consistent growth, and the current year's growth of 14% is consistent with prior periods. Our mortgage team continues to build market share and generate a high portion of saleable loans contributing to a 6% growth in mortgage banking income compared to the respective 2024 period. Trait number six, stability in commercial loan portfolio mix. We have maintained discipline in our approach to commercial loan growth, maintaining a 55-45 split between C&I and owner-occupied CRE loans combined with other commercial loan segments and prudent concentration in categories such as office, retail, assisted living, hotel, and automotive exposures. In sum, these traits have allowed us to report a year-over-year EPS growth rate of 11%, a 1.4% return on average assets, and a 14.1% return on average equity for 2025. Additionally, our tangible book value per share compounded annual growth rate of 9% and five-year earnings per share compounded annual growth rate of 15.1% historically places us in the top of our peer group. We remain excited about our recently completed combination with Eastern Michigan Financial Corporation. Integration of operations is underway. The cultures have meshed very well in the early stages of the process. That concludes my remarks. I will now turn the call over to Chuck. Charles Christmas: Thanks, Ray. This morning, we announced net income of $22.8 million or $1.40 per diluted share for 2025 compared with net income of $19.6 million or $1.22 per diluted share for 2024. Net income during all of 2025 totaled $88.8 million or $5.47 per diluted share compared to $79.6 million or $4.93 per diluted share for all of 2024. Growth in net income during both time frames largely reflected increased net interest income and noninterest income, lower provision expense, and reduced federal income tax expense which more than offset increased overhead costs. Interest income on loans declined during the fourth quarter and all of 2025 compared to the prior year periods, reflecting a lower yield on loans that was not fully mitigated by loan growth. Our yield on loans during 2025 was 26 basis points lower than in 2024 largely reflecting the aggregate 75 basis point decrease in the federal funds rate during the last four months of 2025. Average loans totaled $4.63 billion during the fourth quarter of 2025, compared to $4.57 billion during 2024, an increase of $62 million. Interest income on securities increased during the fourth quarter and all of 2025 compared to the prior year period, reflecting growth in the securities portfolio and the reinvestment of lower-yielding maturing investments. Interest income on other earning assets, a large portion of which is comprised of funds on deposit with the Federal Reserve Bank of Chicago, declined during 2025 compared to 2024, reflecting a lower average yield that more than offset a higher average balance. Interest income on other earning assets increased during all of 2025 compared to all of 2024 reflecting a higher average balance that was partially offset by a lower yield. In total, interest income was $200,000 lower and $8.7 million higher during the fourth quarter and all of 2025 compared to the respective prior year periods. Interest expense on deposits decreased during 2025 compared to the prior year period, in large part due to a lower average cost of deposits reflecting the aforementioned decline in the federal funds rate that more than offset growth in average deposits. Average deposits totaled $4.83 billion during 2025, compared to $4.52 billion during 2024, an increase of $302 million. The cost of deposits was down 32 basis points during 2025 compared to 2024. Conversely, interest expense on deposits increased during all of 2025 compared to all of 2024. Although the cost of deposits declined 23 basis points, growth in average deposits between the two periods of $483 million resulted in a net increase in interest expense on deposits. Interest expense on the Federal Home Loan Bank of Indianapolis advances declined during the fourth quarter and all of 2025 compared to the prior year periods, reflecting a lower average balance. Interest expense on other borrowed funds declined during the fourth quarter and all of 2025 compared to the prior year period, largely reflecting lower rates on our trust preferred securities due to the lower interest rate environment. In total, interest expense was $2.9 million and $1.3 million lower during the fourth quarter and all of 2025 compared to the respective prior year periods. Net interest income increased $2.7 million and $10 million during the fourth quarter and all of 2025 compared to the respective prior year time period. Impacting our net interest margin over the past couple of years has been our strategic initiative to lower the loan deposit ratio, which generally entails deposit growth exceeding loan growth and using the additional monies to purchase securities. A large portion of deposit growth has been in higher-yielding money market and time deposit products while the purchased securities provide a lower yield than loan products. Despite that strategic initiative, and the aforementioned decline in the federal funds rate, our quarterly net interest margin has been relatively stable over the past five quarters ranging from a high of 3.49% to a low of 3.41% averaging 3.46%. We remain committed to managing our balance sheet in a manner that minimizes the impact of changing interest rate environments on our net interest margin. Basic fund management practices such as match funding, combined with scheduled maturities of lower-yielding fixed-rate commercial loans, and securities, and higher-rate time deposits, along with scheduled rate adjustments on our residential mortgage loans should provide for a relatively stable net interest margin in future periods. Our net interest margin increased two basis points during 2025 compared to 2024. Our yield on earning assets declined 28 basis points during that time period largely reflecting the aggregate 75 basis point decline in the federal funds rate during the last four months of 2025 while our cost of funds declined 30 basis points primarily reflecting lower rates paid on money market and time deposits, which more than offset an increased mix of higher-cost money market and time deposits. While average loans increased $62 million during the fourth quarter of 2025, compared to 2024, average deposits grew $302 million during the same time period providing a net surplus of funds totaling $240 million. We used that net surplus of funds to grow our average securities portfolio by $160 million and reduce our average Federal Home Loan Bank of Indianapolis advances portfolio by $73 million. We recorded a negative provision expense of $700,000 and a provision expense of $3.2 million during the fourth quarter and all of 2025, respectively, compared to provision expense of $1.5 million and $7.4 million during the respective 2024 periods. The fourth quarter negative provision expense was primarily comprised of improved economic forecasts and changes in loan mix and reflects relatively low net loan growth due to larger than typical commercial loan payoffs. The full year 2025 provision expense primarily reflected a $1.9 million reserve increase related to changes in the economic forecast, a $1.8 million net increase in specific allocations driven by a $5.5 million allocation for a commercial construction loan relationship that was placed on nonaccrual during 2025, and a $1.5 million net increase in qualitative factors. These were partially offset by a $2.3 million and $1.3 million reduction related to a shorter average duration of the residential mortgage loan portfolio resulting from faster prepayment speed and changes in our baseline loss rates, respectively. The reserve balance decreased $900,000 during 2025 reflecting the negative $700,000 provision expense and net loan charge-offs of $2.6 million partially mitigated from a $2.4 million increase associated with the acquisition of Eastern. The reserve balance increased $3.7 million during all of 2025, reflecting provision expense of $3.2 million and a $2.4 million increase associated with the Eastern acquisition, which more than offset net loan charge-offs of $1.9 million. The reserve balance equaled 1.21% of total loans as of year-end 2025, compared to 1.18% at year-end 2024. Excuse me. Noninterest expenses were $2.9 million and $10.2 million higher during the fourth quarter and all of 2025 compared to the respective prior year time period. The increases during both time periods largely reflect higher salary and benefit costs, including annual pay increases and market adjustments. Higher data processing costs also comprise a notable portion of the increased noninterest expense levels, primarily reflecting higher transaction volume and software support costs along with the introduction of new cash management products and services. Costs associated with the acquisition of Eastern totaled $1.2 million and $1.8 million during the fourth quarter and all of 2025, respectively. Allocations to the reserve for unfunded loan commitments largely reflect a sizable increase in the level of committed and accepted commercial loans increased $1.1 million and $1.6 million during the fourth quarter and all of 2025 compared to the respective prior year time periods. Excuse me. Despite increased pretax income during the fourth quarter and all of 2025, compared to the respective prior year periods, we were able to reduce our federal income tax expense by $4 million and $4 million, respectively. The reductions largely reflect the acquisition of transferable energy tax credits during 2025, providing for reductions in federal income tax expense of $1 million and $3.5 million during the fourth quarter and all of 2025, respectively. Our federal income tax expense was further reduced by net benefits associated with our low-income housing and historical tax credit activities, which equals $800,000 and $1.8 million during the fourth quarter and all of 2025, respectively. Recording of these tax benefits resulted in fourth quarter and full-year 2025 effective tax rates of about 12% and 14%, respectively. Additional acquisitions of transferable energy tax credits may be made from time to time, subject to our investment policy, tax credit availability, and tax credits derived from our low-income housing and historical tax credit activity. We remain in a strong and well-capitalized regulatory capital position. Mercantile Bank's total risk-based capital ratio was 13.8% at year-end 2025, $213 million above the minimum threshold to be categorized as well-capitalized. Eastern Michigan Bank's total risk-based capital ratio was 15.3% at year-end 2025, $520 million above the minimum threshold to be categorized as well-capitalized. We did not repurchase shares during 2025. We have $6.8 million available in our current repurchase plan. Our tangible book value per common share continues to grow, up $3.64 or almost 11% during 2025. On slide 26 of the presentation, we share our latest assumptions on the interest rate environment and key performance metrics for 2026 with the caveat that market conditions remain volatile, making forecasting difficult. This forecast is predicated on no changes in the federal funds rate during 2026. Although we believe our net interest margin will remain relatively stable in a changing interest rate environment, as it did during 2025, we are projecting loan growth in a range of 5% to 7% annualized during each quarter, which encompasses a strong commercial loan pipeline as well as expected meaningful payoffs over the next several months. We are forecasting our first quarter 2026 net interest margin to increase from the 2025 net interest margin in large part reflecting the Eastern acquisition and further steady increases throughout the year as we benefit from maturing relatively low-yielding fixed-rate commercial real estate loans and investments along with higher-yielding time deposits. We are projecting a federal tax rate of 17% which encompasses continued growth in net benefits from our low-income housing and historical tax credit activities along with additional but lower levels of transferable energy tax credits. Expected quarterly results for noninterest income and noninterest expense are also provided for your reference. Noninterest expense projections reflect personnel investments that were made in the latter part of 2025 and expected during 2026 to support expansion in Southeast Michigan as well as to support operational areas as we switch core and digital banking providers to enhance the durability, efficiency, and experience for customers and employees. The noninterest cost projections also include quarterly core deposit intangible amortization of $900,000. In closing, we are very pleased with our operating results and financial condition during 2025 and believe we remain well-positioned to continue to successfully navigate through the myriad of challenges and uncertainties faced by all financial institutions. That concludes my prepared remarks. I'll now turn the call back over to Ray. Raymond Reitsma: Thank you, Chuck. That concludes the prepared remarks from management, and we will now move to the question and answer portion of the call. Operator: Thank you. We will now begin the question and answer session. To ask a question, please press star one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, press star one again. At this time, we will pause momentarily to assemble our roster. The first question comes from Daniel Tamayo with Raymond James. Please go ahead. Daniel Tamayo: Thank you. Good morning, Ray. Good morning, Chuck. Raymond Reitsma: Good morning, Danny. Daniel Tamayo: Hey. Yeah. Maybe starting on the margin guidance, Chuck, just for clarification, just want to make sure you do have the December rate cut in the guidance. And then curious if you could pull out kind of the purchase accounting accretion that's baked into the increase in the first quarter. Talked a lot about kind of stability, even though the forecast or the guidance is going up by about five basis points a quarter next year. Ex the rate cuts. But just curious what that core margin forecast is looking like next quarter? Charles Christmas: Yeah. Confirming that, you know, we used the rates as of year-end '25 to put the projections together. The purchase accounting in the loan portfolio is about $125,000 net per quarter. I believe that's per quarter. You know, there's also I don't have the numbers, but there's also significant benefit relatively speaking, from the securities portfolio as there was a net unrealized loss in that portfolio at the time of consummation. So I would say when you look at Mercantile's legacy margin of low 3.4%, I would expect it at a relatively steady margin going into 2026. So kind of the difference between say, the low, excuse me, low maybe touching the mid three fours, getting up to 3.55% to 3.65% in the first quarter, a lot of that's reflecting of the Eastern consummation. Daniel Tamayo: Okay. Thanks for that. It's helpful. And then, you know, I guess in terms of the assumptions baked into the margin guidance after that, five basis points a quarter expansion, again, ex rate cuts. Are you assuming any kind of change in noninterest-bearing concentration? You know, if we guess there's no cuts in that, but assuming we get a trend down in rates, you guys have been a little bit higher historically from a noninterest-bearing perspective. Are you assuming that in the guidance? Charles Christmas: No. The assumption with noninterest balances is what we typically do. Is we tie any change in that balance to the growth in commercial loans, which is in that 5% to 7%. So I think that's reflective of probably a 6% growth in noninterest balances. Daniel Tamayo: Got it. Okay. And then lastly, just a clarification on the loan growth. You mentioned the 5% to 7% commercial. There's, I guess, the offsets and potentially buybacks and any kind of runoffs in other portfolios. The total number, you think closer to five next year for loan growth, or is five to seven still the right way to think about it? Charles Christmas: No. I think five to seven is the right way to show. We're showing commercial growth of probably, you know, it's probably in the six to 7%. And then we're expecting the residential mortgage portfolio to stay relatively steady. Daniel Tamayo: Okay. Alright. Great. Alright. Thanks for taking all my questions. Appreciate it. Charles Christmas: You're very welcome, Danny. Operator: Your next question comes from Brendan Nosal from Hovde Group. Please go ahead. Brendan Nosal: Hey. Good morning, folks. Hope you're doing well. Raymond Reitsma: Hey, Brendan. Brendan Nosal: I just wanted to dig into kind of the margin and balance sheet impacts of Eastern a little bit more, particularly around their securities portfolio. Just kind of curious, how much liquidity deployment of Eastern Michigan are you baking into that margin outlook? And kind of what does that imply for the overall balance of average earning assets as we move through the year? Raymond Reitsma: Yeah. I think we're not using all of the excess liquidity that we're gaining from Eastern. We're definitely using part of that. I think when you look at our overall numbers, we ended the year including at about a 91% loan-to-deposit ratio. We are expecting that to go up during the year. Just based on our overall strategy and what we think is going to take place in the loan portfolio. So, you know, we're operating two separate banks, and the way that we're getting, you know, functionally, the way that we're getting that money is Eastern is depositing some of their excess liquidity into Mercantile Bank. Certainly keeping more than sufficient funds at the Federal Reserve for their daily liquidity needs as well. So we're definitely using part of it. But from a functionality standpoint, it's hard to use all of it. And so the banks do merge a little over a year from now. Brendan Nosal: Yep. Okay. That's helpful. One more from me just changing topics here to Southeast Michigan. I think you mentioned in your prep remarks that there were some team ads in that market late in the year, which impacted expenses. Just can you offer some color on what you've added to date down there? And then additional appetite for team edge or lift outs just given the M&A dislocation we're seeing in Detroit? Raymond Reitsma: Yeah. This is Ray. We've added a lending team down there that has gotten off to a very nice start, added to our backlog. And we continue to be in the market for more lending talent. Southeast Michigan is a vast area, and adding one team does not come anywhere near covering it. So we'd be willing to continue to add the right sorts of people to our team to accomplish our objectives there. Brendan Nosal: Okay. Fantastic. Thanks for taking my questions. Raymond Reitsma: Thanks, Brendan. Operator: Your next question comes from Nathan Race with Piper Sandler. Please go ahead. Nathan Race: Hey, guys. Good morning. Thanks for taking my question. Raymond Reitsma: Good morning, Nathan. Nathan Race: Chuck, on the expense guide, when I look at what Eastern's been running at relative to the 4Q level, it doesn't imply that there's cost that is coming through from Eastern relative to the target laid out in the deck from last year. So just curious, are some of those cost saves being reinvested in some of the hires that were just touched on, or can you just kind of unpack if there's any other reinvestments going on? Charles Christmas: Yeah. I think, you know, the plan from any cost saves from the Eastern acquisition on the personnel front is really going to be kind of later in 2027. By keeping the banks separate, we really needed everybody, you know, that was part of Eastern at the time of consummation to stay, you know, in very large regards. And so, you know, most of the cost saves or the cost saves associated with Eastern are more of a 2027 event. And I think that kind of builds on what we see for 2026, kind of touching on, you know, with the last question and Ray's response in regards to expanding our presence in Southeast Michigan. You know, the people that we hired in the latter part of last year, obviously, continuing for a full year this year. Our desire to hire additional folks there, you know, that's a lot of investment, and we expect, you know, solid loan growth in that market. But, clearly, that will come down the road. So, you know, there'll be some investment impact there. You know, we'll definitely look at, you know, adding some additional facilities in that as we grow out that market. I don't really expect any cost from and really any significant cost in 2026 associated with that part of the expansion. That'll be more of a 2027 impact. But then tying that into which is also tied into the acquisition of Eastern is our switch on our core processor, which will take place in February 2027. And there'll be some pretty significant cost saves and just as importantly, some very, very nice efficiencies internally, and a better and much higher durability than what we've had with our current setup. And a better experience, not only for our employees internally but also for our customers. So I won't call this the year of investment, but, clearly, what's being reflected in our thoughts for 2026 are those expectations and still expect a very solid year. But the investments will be there and are laid out in our numbers. Nathan Race: Understood. It's really helpful. And then, Chuck, can you just update us with Eastern in the fold now and, you know, some of that excess liquidity deployment that you alluded to earlier, what the sensitivity is around margin to any 25 basis point cut that we would have on the short end? Charles Christmas: Yeah. We think that, you know, any changes in the interest rate environment, we think we're pretty well protected from those. You know, as we say all the time, we want to be agnostic with changes in interest rates. We here firmly don't believe in anything. Any part of our operation, but also interest rates is that hope is not a strategy. We want to be purposeful in what we do. And make sure that we've got the fundamentals and the discipline to manage our balance sheet in a way that if rates go up, down, or don't change, you know, any change in the margin will be I won't call it nominal, but will be mitigated in large regard. Clearly, we want to work at strengthening the margin on an overall basis without getting away from the tenets of managing through interest rate risk. And you see some of that with our projections for the margin for the rest of this year. As we unwind some of the balance sheet from investments and loans that were made in a much lower interest rate environment. But on an overall basis, you know, we think our margin is pretty well insulated from changes in interest rates. Nathan Race: Gotcha. And on that last point, Chuck, in looking at slide 19, can you update us just in terms of the repricing of the two billion in assets in terms of how much that reprices over the next four quarters or so? Charles Christmas: Which part? I was looking for the page, or I missed some of your questions. Sorry. Nathan Race: The two billion in asset repricing on the bottom of slide 19, how much of that reprice over the next four quarters? And by Charles Christmas: Yeah. I would say probably about a third of it over the next year, but I think what's most important in that number is when you look at the existing yields on those assets, this year and next year, there's a lot of repricing opportunities. We had the same last year. And that carries forward this year. And into next year as well. And so the assets that are fixed rate that will mature in 2028 and beyond are more likened to current rates. Nathan Race: Okay. Great. I appreciate all the color. Thanks, guys. Charles Christmas: You're very welcome. Operator: Your next question comes from Damon Del Monte with KBW. Please go ahead. Damon Del Monte: Hey, good morning, guys. Hope you're doing well, and thanks for taking my questions. First question just on the loan growth outlook. Fourth quarter was on an organic basis was pretty modest. Just talk a little bit about what's giving you the optimism to kind of have that 5% to 7% you know, for an annualized number in 2026? Is it more a function of the pay downs slowing or is it more that the appetite from customers is moving higher? Raymond Reitsma: Hey, Damon. This is Ray. The level of funding that we've had over that period of time that you referenced has been pretty solid. And as you referenced, the payoffs were high in the fourth quarter. And we expect that to continue to be true in the first quarter, but the backlog is at almost a historically high level. So if we don't hit exactly in the first quarter what we project will, you know, make that up in quarters after that. So we feel really comfortable with our ability to be able to originate loans. The payoffs have been high for the last five quarters, actually. And we expect that to settle down later in the year. And so overall, feel pretty comfortable that we'll be able to hit that number. Damon Del Monte: Got it. Okay. That's helpful. Thank you. And then just update us with your thoughts on capital management. I know there's a small amount of buybacks left. I think it's like $6.8 million. But just curious as to your thoughts with now that the deal is closed, your capital levels remain very strong. I was wondering what you're thinking about the buyback and any appetite as we go into 2026? Charles Christmas: Yeah, Damon, this is Chuck. I would say our appetite is I would term it as stronger appetite than we've had over, say, the last twelve to eighteen months. Obviously, a lot going on with our company specifically. You know, everybody sees the markets are call it, turmoil almost every morning, it seems. So you know, we've been pretty cautious in how we manage capital. But I think as we, you know, put the Eastern, get that consummated, we see where we're at. We see the comfort with our projections on the earnings side and that continue, which is very important, that continued expectation for strong asset quality. You know, we look at, you know, perhaps getting more into the buyback arena. You know, clearly, the stock price itself and, you know, multiples of that will come into play. So I don't I'm not making any promises, but I would say we have a bigger appetite going forward with buybacks than we've had more recently. Damon Del Monte: Got it. Okay. And then just lastly, just to clarify on the Eastern securities portfolio. Did you actually liquidate that and you're reinvesting that? Or did you just mark it at the time of close and you carry it at a higher yield now? Charles Christmas: Yeah. It was the latter. It was marked to current market and it's carried at a higher yield. And the duration on that portfolio was relatively short. So it provides us for some nice improvement on the margin especially this year and into next year. Damon Del Monte: Got it. Okay. Great. Thank you very much. Charles Christmas: You're welcome, Damon. Operator: A reminder, if you would like to ask a question, please press 1 on your telephone keypad. To withdraw your question, press 1 again. Your next question comes from the line of John Rodis with Janney. Please go ahead. John Rodis: Hey, good morning. Charles Christmas: Morning, John. John Rodis: Hey. Just back to expenses, Chuck. Just to be clear, so your guidance on page 26, you know, minimal cost saves for this year, and then I think you said but that does include the CDI amortization of roughly $900,000 a quarter. Is that correct? Charles Christmas: That is correct. Yep. John Rodis: Okay. And then I guess as we look to next year, to 2027, I know it's a long way away, but how should I mean, just big picture, how should we think of expenses? I mean, is it low to mid-single-digit growth and then add in some cost saves and, you know, you just talk about how much you would expect in cost saves next year either on a percent or dollar basis? Charles Christmas: I think the difficulty there is, you know, what we do with personnel investments not only in Southeast Michigan, which Ray mentioned, you know, obviously, it's a very big market for us. But other markets as well. You know, there are some cost saves coming from Eastern. They're not massive. Relative to the size and the needs that we have over there. We are expecting some meaningful reductions in the data processing area. Especially with the new contract with our new provider. I would say, you know, we would look to put you know, we would like to save some money but that might be a very nice avenue for us to continue to pay for, if you will, any expansion with personnel and or facilities. With being able to, keep overhead relatively stable. But certainly show some solid growth on the balance sheet side. Which would, you of course, have the net result would be a very positive impact on net income. So you're right. It's pretty far out there. But there we know there's cost saves coming. In 2027. We'll just see how that has to play out. But, clearly, you know, we've always believed that this company has a lot of opportunity to grow. For lots of different reasons through its life. And going forward, the environment will continue to change. But we want to make sure that we're taking advantage of the opportunities that we have. And it maybe gets a little bit lumpy from time to time. As we make those investments and as we get those benefits in future periods. But we you know, there's a lot of opportunity. We're in solid markets. We have some great opportunities in the Southeast of Michigan and certainly feel very positive about what the future holds. John Rodis: Okay. Thanks for your thoughts, Chuck. I appreciate it. Charles Christmas: You're welcome. Operator: This concludes our question and answer session. I would like to turn the conference back over to Raymond Reitsma for any closing remarks. Raymond Reitsma: Thank you for your participation in today's call and for your interest in Mercantile Bank. That concludes today's call. 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 the Fifth Third Bancorp Fourth Quarter 2025 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you would like to withdraw your question, again, press 1. Thank you. I'd now like to turn the call over to Matt Curoe, Senior Director of Investor Relations. You may begin. Matt Curoe: Good morning, everyone. Welcome to Fifth Third's fourth quarter 2025 earnings call. This morning, our Chairman, CEO, and President, Timothy N. Spence, and CFO, Bryan D. Preston, will provide an overview of our fourth quarter results and outlook. Timothy N. Spence: Please review the cautionary statements in our materials, which can be found in our earnings release and presentation. These materials contain information regarding the use of non-GAAP measures and reconciliations to the GAAP results as well as forward-looking statements about Fifth Third's performance. These statements speak only as of January 20, 2026, and Fifth Third undertakes no obligation to update them. Following prepared remarks by Tim and Bryan, we will open up the call for questions. With that, let me turn it over to Tim. Good morning, everyone, and thank you for joining us today. At Fifth Third, we believe great banks distinguish themselves not by how they perform in benign environments, but rather by how they navigate uncertain ones. Our priorities are stability, profitability, and growth in that order, which we achieve by obsessing over the details in our day-to-day operations while consistently investing for the long term. This disciplined approach has delivered shareholder returns that rank among the best in our peer group over the last three, five, seven, and ten-year time frames. Today, we reported earnings per share of $1.04 or $1.08 excluding certain items outlined on Page two of the release. We achieved an adjusted return on equity of 14.5% and adjusted return on assets of 1.41% and an adjusted efficiency ratio of 54.3%. All among the best of all banks regardless of size who have reported thus far. Adjusted fourth quarter revenues rose 5% year over year driven by 6% growth in net interest income, 8% growth in commercial payments fees, and 13% growth in wealth and asset management fees. Fourth quarter average loans increased 5% year over year, driven by 7% growth in consumer loans and 7% growth in market and business banking C&I loans. Average core deposits grew 1% year over year driven by 5% growth in consumer DDA and 3% growth in commercial DDA. Net charge-offs were 40 basis points for the quarter, the lowest level in the past seven quarters. And nonperforming assets decreased for the third consecutive quarter. Our CET1 ratio increased to 10.8% and tangible book value per share grew 21% year over year, thanks to strong earnings performance and the continued pull to par of our AFS portfolio. The fourth quarter capped a year of milestones for Fifth Third. In the Southeast, we opened 50 new branches, including our 200th branch in Florida and our 100th branch in The Carolinas. To put this in context, if Fifth Third Florida were a standalone bank, it would have the 44th largest branch network in the US. And Fifth Third Carolinas would have the 78th largest. Our De Novo branches continue to deliver deposit growth that is 45% higher than peer De Novo branches. Net new consumer households grew 2.5% year over year, with the Southeast growing households by 7%, highlighted by 10% growth in Georgia and 9% in The Carolinas. Our sustained investments in digital transformation continue to set Fifth Third apart as well. In 2025, our consumer mobile app was recognized by J.D. Power as the top mobile banking app for user satisfaction among regional banks. We shipped over 400 updates to the app during the year, including features such as direct deposit switching, a financial wellness hub with cash flow insights and spending analysis, and free estate planning capabilities through our partnership with Fintech Trust and Will. In small business, a little over a year ago, we asked our Fintech to provide to lead all of small business for Fifth Third. Since then, Fifth Third has become a top 20 national SBA lender for the first time anyone can remember and finished number two in J.D. Power's 2025 national small business banking satisfaction study ahead of all other regional banks. In commercial payments, our software-enabled managed services Big Data Healthcare, Expert AR and AP, and DTS Connect, and our embedded payments platform, NewLine, continued to grow rapidly. One in every three commercial clients we added in 2025 was a payments-only client with no credit extension. Newline revenues more than doubled compared to the fourth quarter of last year, and deposits increased by $1.4 billion. Newline's product team also finished the year strong launching a model context protocol server to enable secure, standardized access to our API and documentation to AI agents. This is a key building block to support future AgenTek commerce applications and a first among US banks. In commercial, we delivered new quality relationships, granular loan growth, and recurring fee revenue in the middle market as we continue to add our own talent in strategic growth markets and to benefit from hiring in prior years. New client acquisition increased 40% across all regions compared to 2024. Our emphasis on the Southeast, Texas, and California markets led to a 12% increase in RMs producing 14% growth in C&I loans. In wealth and asset management, fourth quarter wealth fees increased 13% and assets under management reached $80 billion for the quarter. The strong performance was broad-based. Fifth Third Wealth Advisors' AUM and fees increased 50% from a year ago. Fifth Third Securities generated record fees. And our private bank had its second-highest level of gross AUM flows recorded in history. We continue to deploy technology and apply lean manufacturing to drive savings and enhance scalability. In 2025, our value streams approach $200 million in annualized run rate savings. Cross-functional teams continue to be focused on reducing waste and improving quality, which strengthens our execution and provides funding for continued investment in our growth strategies. We are excited about our momentum as we enter 2026. Or as our partners at Kennesaw State like to say, there's a lot of action at the fraction. As we announced last week, we have received all material regulatory and shareholder approvals to complete our merger with Comerica. 99.7% of Fifth Third votes and 97% of Comerica votes cast were in favor of the merger, an overwhelmingly positive result and a recognition of the value this combination will create. We expect to close on February 1. 2026 will be a busy year as we focus on successful conversion and delivering $850 million in expense synergies. Looking ahead, I'm even more confident in our ability to realize the benefits of the combination, which will support continued peer-leading returns and efficiency in 2027 and beyond. I'm also excited to get to work delivering more than $5 billion in revenue synergies over the next five years, across four areas of focus: First, scaling Comerica's middle market platform and vertical expertise. Second, deepening Comerica's commercial and wealth management client relationships to reach Fifth Third levels of client wallet share. Third, building out Comerica's retail banking business with the Fifth Third playbook and 150 Texas De Novo branches. And fourth, creating a differentiated innovation banking business by combining Comerica's second life sciences vertical and Fifth Third's Newline platform. Before I turn it over to Bryan, I want to say thank you to our team both at Fifth Third and our new Comerica colleagues for the way you support our customers and our communities and for your commitment to getting 1% better every day. I'm grateful to everyone who will work so hard in the coming months to ensure 2026 is a success for the bank and its clients. I also want to say thank you to those individuals from both companies whose hard work brought us to this point who will not be continuing with us on this journey. All of you combined are what has made our company the special place that it is. With that, I'll turn it over to Bryan, who will provide more detail on the quarter and on our outlook for 2026. Bryan D. Preston: Thanks, Tim, and good morning. Our results show what disciplined execution delivers in an uncertain environment. Record full-year NII of $6 billion and $9 billion in total revenue, improving asset quality, and top quartile returns and efficiency. With a resilient balance sheet and an operating model built to deliver repeatable organic growth and scale benefits, we are positioned to generate growth and shareholder value as we integrate Comerica. Diving into our fourth quarter performance, we achieved an adjusted return on assets of 1.41%, our highest level since 2022, and a return on average tangible common equity, excluding AOCI of 16.2%. Disciplined expense management resulted in an adjusted efficiency ratio of 54.3%, a 50 basis point improvement from 2024. Adjusted PPNR for the quarter was over $1 billion, a 6% increase from the prior year. Our strong profitability enabled us to return $1.6 billion of capital to our shareholders in 2025 while also growing our tangible book value per share, including the impact of AOCI, 21% compared to the previous year. Looking at the balance sheet and NII, net interest income was $1.5 billion for the quarter, a 6% increase over last year. As net interest margin expanded 16 basis points finishing the year at 3.13%. Loan growth, proactive liability management, and repricing benefits on fixed-rate assets contributed to the strong NII performance throughout the year. Average loans grew 5% year over year. In commercial, average loans grew 4%, and excluding CRE categories, increased 5% year over year. Improving the granularity of our loan portfolio remains a priority. In middle market, we continue to add relationship managers in high-growth markets, which contributed to the 7% year-over-year increase in average middle market loans. In small business, we have extended the technology of Provide to all of small business lending. This expansion, combined with its core practice finance activities, drove a $1 billion increase in balances over last year. While on a sequential basis, commercial average balances were flat due to a decrease in utilization, commercial production accelerated during the fourth quarter, rising 20% sequentially to a multiyear high. Indiana and The Carolinas led regional growth, and in our verticals, production was strongest in technology, healthcare, and metals material and construction. The utilization decrease coincided with the government shutdown during October and November but stabilized in December at 35%, down from 36.7% in the third quarter. Corporate banking and CRE were the primary drivers of this decrease in utilization. Industry loan growth continues to be lending to non-depository financial institutions, which represented approximately 60% of total industry loan growth and virtually all non-real estate and non-consumer-related loan growth in 2025. We continue to prioritize granular relationship-based middle market and small business lending. Shifting to consumer, loans grew by 6% on an average basis compared to last year. Auto and home equity lending accelerated in 2025, growing 11% and 16%, respectively. In the fourth quarter, we achieved the number two origination market share in HELOC within our footprint, up from number four in the prior year, driven by improved branch performance and digital engagement. We expect home equity production to remain robust due to the strength of home prices, lower front-end interest rates, and low housing turnover. Turning to deposits, average core deposits increased 1% over last year, driven by 4% DDA growth, partially offset by slower growth in interest-bearing products. As we've managed funding costs in 2025, interest-bearing deposit costs were 2.28% in the fourth quarter, down 40 basis points year over year, representing a 50% beta during 2025. As I mentioned on last quarter's call, we are focused on strong deposit growth as we prepare for the close of the Comerica merger. This resulted in a 3% sequential increase in average transaction deposits due to our growth bias and normal seasonality. As Tim highlighted, consumer household growth remained robust at 2.5% and continues to translate into strong consumer DDA performance, which increased 5% in 2025. Our proactive balance sheet management has enabled us to maintain a strong liquidity position and reduce overall funding costs as we prepare to integrate Comerica's balance sheet, which has a lower concentration of retail deposits. Growth in granular insured deposits provided flexibility to reduce wholesale funding, which declined 14% sequentially. This favorable mix shift lowered the cost of interest-bearing liabilities by 17 basis points. Our Southeast De Novo investments continue to deliver high-quality, low-cost retail deposits. Southeast consumer deposits increased by 4% sequentially, accounting for over 50% of the total consumer deposit growth for the quarter. Overall, our total cost of deposits in the Southeast is below 2% and generates a spread of more than 175 basis points relative to the Fed funds rate. We opened 50 Southeast branches in 2025, including 27 branches in the fourth quarter. Additionally, we have now secured all locations for our Southeast De Novo program. We also have 43 locations in Texas with letters of intent either complete or in process as we begin to transition our De Novo program to these new high-growth markets. We ended the quarter with full category one LCR compliance, at 123%, and our loan to core deposit ratio was 72%, down 3% from the prior quarter. Now on to fees. Adjusted noninterest income, excluding security gains, and the other items listed on Page four of our release, grew 3% sequentially and year over year. Wealth fees increased by 13% over last year, driven by $11 billion in AUM growth and strong retail brokerage activity. Capital markets capital market fees increased 5% sequentially, reflecting seasonal strength in M&A advisory. Commercial payment fees increased 8% year over year and 6% sequentially. This fee performance was driven by core treasury management activity and new line-related fees. New line-related deposits reached $4.3 billion, up $1.4 billion from a year ago. The securities losses of $5 million were from the mark-to-market impact of our nonqualified deferred compensation plan, which is offset in compensation expense. Moving to expenses, Page five of our release details certain items that had a larger impact on our noninterest expenses this quarter, including a $50 million contribution to the Fifth Third Foundation, $13 million in merger-related expenses, and a $25 million benefit from the adjustment to the FDIC special assessment during the fourth quarter. The larger contribution to the foundation this year relates to increased community investments we will make as part of the Comerica merger and tax planning in response to tax law changes impacting 2026. Adjusting for these items, noninterest expense increased 4% compared to the year-ago quarter and 2% sequentially, reflecting ongoing strategic investments in technology, branches, marketing, and sales personnel. Savings from our value stream programs, through automation and process redesign, continue to help fund these investments. As Tim mentioned, our value streams reached $200 million in annualized run rate savings. Our normal course daily focus on these operating disciplines has resulted in a 54.3% adjusted efficiency ratio in the fourth quarter and a 55.9% efficiency ratio for the full year while still investing for growth and maintaining strong regulatory standing. Shifting to credit, the net charge-off ratio was 40 basis points for the quarter, in line with our expectations and an improvement of six basis points from the fourth quarter of last year. Portfolio NPAs were down $4 million sequentially, and the NPA ratio remained at 65 basis points. Since the first quarter of last year, portfolio NPAs are down 20% and commercial NPLs are down 30%, consistent with our expectations from early 2025. Commercial charge-offs were 27 basis points, down five basis points from the prior year. Overall, we are seeing stable trends across industries and geography in our commercial portfolio. Consumer charge-offs were 59 basis points, down nine basis points from the prior year with improvements across nearly all asset classes. The overall consumer portfolio remains healthy, with nonaccrual and over 90 delinquency rates stable to improving across all loan ACL was the percentage of portfolio loans and leases, remained at 1.96% and the ACL as a percentage of nonperforming assets was also stable at 302%. Provision expense included a $6 million reduction in our allowance for credit losses primarily reflecting the small decrease in end-of-period loan balances. Our baseline and downside cases assume unemployment reaching 4.78% in 2026. We made no changes to our scenario weightings during the quarter. Moving to capital, CET1 ended at 10.8%, up 20 basis points, reflecting the strength of our capital generation and our decision to pause share repurchases until the Comerica transaction closes. The pro forma CET1 ratio including the AOCI impact of the securities portfolio, stands at 9.1%. Since the first quarter, our unrealized loss on the AFS portfolio has decreased by 20% despite only a four basis point decrease in the ten-year treasury rate. This outcome is the result of our strategy to invest in bullet or locked-out structures which represent 60% of the fixed-rate securities in our AFS portfolios. We expect continued improvement in the unrealized losses given the high degree of certainty to our principal cash flow expectations as a result of our investment portfolio strategy. While 2025 was a more eventful year from a macroeconomic and policy uncertainty perspective than we expected, we are pleased with our disciplined operating performance and our ability to deliver on our financial commitments. Our full-year net interest income of $6 billion is 2.5% above our prior record. And our full-year operating leverage of 230 basis points is above the range we projected entering the year. We open 2026 with strong business momentum and a clear focus on the critical actions necessary to deliver a successful integration of Comerica. Now moving to our current outlook, as we announced last week, we expect to close the Comerica transaction on February 1. With systems conversion anticipated around the end of the third quarter. Additionally, our outlook uses the forward curve at the January, which assumed 25 basis point rate cuts in March and July. We expect full-year NII to range between $8.6 and $8.8 billion. As part of the integration, we expect to take actions to better position the combined balance sheet within our rate risk appetite including investment portfolio and hedge repositioning. We do not expect material one-time charges related to these actions. Based on the current rate outlook, and our planned balance sheet actions, we expect NIM to increase approximately 15 basis points upon the close of the transaction. That increase is driven by four to five basis points of pickup from discount accretion on marked investment securities we will retain, another four to five basis points from repositioning the remaining securities with new positions, and three to four basis points from cash flow hedge repositioning. The remaining two to three basis points of improvement is driven by a combination of funding synergies and balance sheet mix. We also aim to accelerate retail deposit growth, with targeted analytical marketing in the legacy Comerica branches to improve the combined company's funding profile. We expect full-year average total loans to be in the mid $170 billion range. This increase is primarily driven by broad-based improvement in C&I. Our outlook assumes that commercial revolver utilization remains relatively stable throughout 2026. Full-year adjusted non-interest income is expected to be between $4 and $4.4 billion, reflecting continued revenue growth in commercial payments, capital markets, and wealth and asset management. We expect full-year noninterest expense to be between $7 and $7.3 billion, excluding the impact of anticipated CDI amortization and the $1.3 billion in estimated acquisition-related charges. This guidance assumes the realization of 37.5% of the $850 million of annualized run rate expense in 2026. In total, our guide implies full-year adjusted revenue and adjusted PPNR excluding CDI amortization, to be up 40 to 45% over 2025. And another 100 to 200 basis points of positive operating leverage. We expect to exit 2026 at or near the profitability and efficiency levels consistent with the 2027 targets we announced with the acquisition. Moving to credit, we expect 2026 net charge-offs to range between thirty and forty basis points reflecting ongoing normalization of credit trends and the impact of the incorporation of Comerica's loan portfolio. Finally, turning to capital, we currently expect CET1 capital post-close of the Comerica acquisition to remain near our 10.5% target. Subject to final purchase accounting marks, and the timing of one-time merger-related charges. We continue to believe 10.5% is an appropriate target for our CET1 ratio for the combined company. Our capital return priorities remain paying a strong, stable dividend, organic growth, and then share repurchases. We expect to resume regular quarterly share repurchases in 2026, with the amount and timing dependent on balance sheet growth, final purchase accounting marks, and the timing of merger-related charges. Given the magnitude of the impact of the merger on the first quarter, we are not providing first-quarter guidance at this time. We will provide our customary outlook on our first-quarter results in early March. In summary, we are excited about the opportunities to drive growth and profitability in 2026. As we continue our strategic investments and successfully integrate Comerica. These actions position us to deliver best-in-class performance in 2027 and beyond, creating lasting value for our shareholders and our clients. With that, let me turn it over to Matt to open up the call for Q&A. Matt Curoe: Thanks, Bryan. Before we start Q&A, given the time we have this morning, I ask that you limit yourself to one question and one follow-up. And then return to the queue if you have additional questions. Operator, please open the call for Q&A. Operator: Thank you. We will now begin the question and answer session. Your first question today comes from the line of Ebrahim Poonawala from Bank of America. Your line is open. Ebrahim Poonawala: Hey. Good morning. Good morning. I guess, Tim, maybe just going back to Comerica, from the outside in, it feels like there are three or four areas of optionality for Fifth Third, and you can choose to answer whatever you think is most impactful. But when we stack rank, being able to do more with Comerica clients, the Texas expansion, and then leaning into their tech and life science practice. Just give us a sense of where the biggest opportunity is, what's more near term versus longer term. Thank you. Timothy N. Spence: Yeah. Great question, Ebrahim, and thanks for it. I think you have to think about these things in terms of time frames. Right? Because what I would say the most immediate near-term opportunity is gonna come from some of the things we can do tactically in both leaning into Comerica's existing customer base as well as what our deposit marketing-driven deposit marketing and product strategies will allow us to do in Comerica's branch network, followed by this sort of medium-term opportunity here, which is the build-out of the Texas markets from a retail distribution perspective. And then what I'll say is a medium to long-term opportunity, but a very exciting one, which is the ramp-up of the innovation banking business. So I had the opportunity in the fourth quarter to do five different in-person town halls with Kurt Farmer. And at those town halls, we saw probably a quarter of Comerica's total employees. And then Kurt and Peter Sefcik and the other business leaders were kind enough to make certain that I had the opportunity to meet several of the top client coverage people in each of the markets. And I will tell you, in every conversation, there was an example of a place where either funding constraints or competition for investment dollars on the technology front or otherwise had inhibited the ability of Comerica to get the sort of natural growth they're capable of generating. You actually see that when you look back at the period prior to March Madness. They were generating pretty solid top-line growth and C&I balance growth. When they were not in a period where they were making some of these investments to get to be a category four bank. Or in a position where they were making hard trade-offs as it related to balance sheet size and margin and otherwise? So day one, when we get through legal day one, on February 1, we are literally doing a bottoms-up review name by name to say where are their places that the broader balance sheet capacity or the ABL and equipment leasing and product capabilities will allow Comerica to lean more. Where are their places where their investment committee policies at Comerica's clients that were inhibiting the amount of corporate cash could come on the balance sheet. Where there are places where there were technology investments that Fifth Third have been able to make that support commercial payments that we'll be able to get near-term growth. And as we go through that first annual renewal cycle, that sort of natural renewal cycle that happens in C&I, I expect we'll see that a lot. Second thing, the branch distribution's an important part of the strategy. It's the third, obviously, but it's one of three legs of the stool. The other two being the disruptive product offerings that we have and the digital marketing. Digital and direct marketing, excuse me, because mail continues to play a prominent role in what we do. But we're gonna drop a million pieces of mail within the first two weeks of legal day one, to support consumer deposit marketing across Comerica's Western markets. And it'll be the first million of what'll probably be 13 or 14 million pieces of mail that will go out over the course of the year. That'll be the first consumer deposit marketing campaign that the Comerica branches have seen in more than a decade. And we've demonstrated the ability that we have to use rate as a mechanism to drive early connectivity with new households. And then to be able to manage margin over time across the Southeast. And that is gonna happen quickly. I think the third thing I just would highlight here is the point Bryan made in his script, which is we have over 40 of the 150 locations we intend to build already secured. Because the development partners have been such a big part of the Southeast build-out, people who are doing the strip center developments that are anchored by grocers like Publix, as an example, are also doing the new strip centers that are being anchored by high-end grocers like HEB and others across Texas. And because of the success we've had with them in the Southeast, they came to us after the announcement and gave us a lot of early opportunities. So that the brick and mortar will come out of the ground faster in Texas than it did when we started the Southeast expansion. And it's all the same models, the same selection criteria, the same discipline, around what we're willing to pay relative to what we think we can generate over the first five to six years that the branches are open that are driving all of those decisions. So that's gonna be the early stuff. The blue sky opportunity here is innovation banking because that will continue whether it's tech and technology, AI, software, the things that are coming out of the valley, or life sciences and the transformation that's gonna go on and help care over the course of the next decade. Those factors really are the driver of the American economy. We think we have a unique value proposition there because of the payments capabilities and the broader balance sheet's gonna allow us to grow that business without creating a concentration risk issue. So I wouldn't be surprised to see that business become materially larger than it is today. We just have a little bit of work that we've gotta do to ensure that we have the right guardrails around it, the right product offerings, and the right level of coverage. Ebrahim Poonawala: Thank you. That was an in-depth answer. I'll step off. Thank you. Operator: Your next question comes from the line of Gerard Cassidy from RBC. Your line is open. Gerard Cassidy: Hi, Ken. Hi, Bryan. Hey. Timothy N. Spence: Morning. Gerard Cassidy: Tim, following up on your Comerica comments, can you give us an update on the integration? How is it progressing? And when will the customer conversion occur? Now that the legal closing has occurred, I think it was two months ahead of schedule, just what the timeline is. Timothy N. Spence: Yeah. Great question. Thanks, Gerard. We are way ahead of where I think we had hoped to be at this stage. And frankly, way ahead of where we were at the same time, you know, with MB. The big driver here, obviously, is that we received all the critical regulatory approvals less than seventy days after filing our application. So that is what is making it possible for us to get to legal day one at the February. There really haven't been any surprises that have come out, which I think is you would hope that given the thoroughness of the diligence that was done. But we feel really good on that. And then the other thing that I don't know that I appreciated would have the impact that it has had is the First Republic process was a sobering one for us because it came together so quickly. And when First Republic didn't work out for Fifth Third, we decided we were gonna make sure that in the event that another opportunity materialized, that we'd be ready. So we did some work on what we called two x-ing the bank. Which focused on both systems capacity but also manual processes. Right? With the real question being, would anything break if the bank doubled in size? And then also just started the work to close the gap assessment that we had done on category three readiness. And, obviously, Comerica doesn't double us, but it's a big step larger. And the things that we needed to make sure that we got done in order to support that and we're already done. So that's a long way of saying we're gonna get closed earlier. In a good position from the systems and processes perspective. I think we're gonna move the conversion up to Labor Day. From, you know, what would have otherwise been a mid-October time frame. That's gonna be super important because we just wanna be able to get the benefit of all Fifth Third technology and both revenue and expense synergies. But it's also, I think, gonna be really useful for you all because the same way that the fourth quarter at '25 was like the last clean look that you were gonna get at what the old Fifth Third was capable of delivering. The '26 should give you a very clear look at what the new Fifth Third is capable of delivering and, in fact, as Bryan referenced, I think we're confident we can hit the return targets that we laid out in the deal model for full year '27. In the fourth quarter at 26. In terms of the return on tangible common equity of 19% and efficiency ratio that was 53-ish percent or maybe a little better given seasonality. Gerard Cassidy: Very helpful. Thank you. Yeah. Timothy N. Spence: And your artist is giving you any more perspective. I think the only thing that Jamie's marked excited about than my indirect Red Hawk basketball being undefeated in the top 25 is the progress that we've been making on the integration. So things are going really well with me. Gerard Cassidy: That's good. That's good to hear. Good. And then as a follow-up, maybe going back to the existing business, Tim, you guys talked about the success you're having in the middle market commercial area, hiring new managers in growth markets. You know, new technology. You also pointed out, I think you said, one out of three of the payments customers, the commercial customers don't have commercial lines of credit with them. Can you give us a view on the C&I loan growth? I think you said also that the average balances were flat in the quarter due to decreased utilization. What do you see when does the turn more favorable? And what do you see for the C&I loan growth? Timothy N. Spence: Yeah. That's right. There are sort of the puts and the takes in this one. Right? The good news is production's been great. And middle market utilization dipped during the government shutdown, but rebounded nicely through the end of the quarter. I consider the fact that people are actively seeking to take us out of CRE exposure to be a market strength. It's just reflective of the quality of what we've originated there. The big decline in utilization, as Bryan mentioned, came from the corporate banking portfolio. What we're hearing anecdotally which is supported by, you know, the sort of early returns this year, is that a lot of that was cleaning up balance sheets in an effort to get into a position where you could get our corporate banking clients could get borrowing costs down in the anticipation of either making big capital investments this year because of the tax reform or even more prominently to be able to support M&A activity. So, you know, the and it's probably worth mentioning in the first couple of weeks here, we've seen C&I loan balances come up. Call it 8 or $900 million, already since January 1, which really is being driven by utilization and some of the fourth quarter production, you know, funding that up. The wild card here at the end of the day is gonna be what I for lack of a better term, we're calling chronic postponement syndrome internally. Which is the tendency for our clients to postpone really large capital investments. In the face of uncertainty. So they all feel, I think, on balance. I don't they feel the same or better about twenty-six than they did about twenty-five. And I think they're all excited about tax reform. Rates have been helpful, but they really have been sort of a salve to the, you know, accumulated increase in costs. You know, more than anything else in terms of the business. But they wanna believe that they're making multiyear investments into an environment where the rules of the road are gonna be stable. And so the question really is gonna be, do they feel like they have that stability, or do they feel like there's a risk that the window closes to make those investments? Or do we just continue to deal with this chronic postponement syndrome as a, you know, a drag on broader utilization and C&I activity? That's sort of where we are. You didn't ask it, but normally you do. I think the other drag for us was the NDFI balances were actually down $600 to $700 million in the fourth quarter, where they were the principal driver of growth for C&I across the banking sector. So we started with low exposure actually that declined as opposed to getting growth from that category. Gerard Cassidy: I appreciate all those insights. Thank you, Tim. Timothy N. Spence: Yep. Operator: Your next question comes from the line of Scott Siefers from Piper Sandler. Your line is open. Scott Siefers: Hey. Bryan, thank you for all the detail on the actions you're taking with the balance sheet at the close. Maybe could you talk about what the company's rate sensitivity is going to look like after those actions you discussed around the close? And then I guess just as the follow-up, will those immediate post-close actions kinda get you to 100% of where like the balance sheet to be, or would it take a little more time from there just given the need to more fully kinda transform Comerica's deposit base? In other words, how does that all evolve in your mind? Bryan D. Preston: Thanks, Scott. You know, we're always targeting to be relatively rate neutral. Especially in a normal environment. We're just not in a position where we feel like we wanna make big bets. Certainly, the balance sheet becomes the natural balance sheet becomes a lot more asset sensitive. Given the merger. You think about our C&I loans, we're gonna go from about two-thirds of our C&I portfolio floating rate to close to 80% of our commercial portfolio floating rate. So we are gonna take some action through some swaps and some hedges. We'll probably still be a little bit asset sensitive when all is said and done. But we'll be in a good manageable position that will be in line with our rate outlook. The work clearly won't be done at that point. We've talked a lot about the balance sheet mix that we've been striving for over the last couple of years. We talk about a 60/40 commercial to consumer mix from a loan perspective and 60/40 consumer to commercial, mix perspective on the deposit front. Both of those areas are going to continue to take a lot of investment to get us back to those levels. And that will be a multiyear journey for us. And it's part of the reason you hear us talking, in particular, on the deposit front around the investments in marketing and in the build-out of the Texas franchise. Because those will be big drivers for us. Today, the Southeast is contributing to almost half of our consumer deposit growth, and we're confident that Texas is gonna be able to deliver a lot of long-term consumer deposit growth for the franchise. And so we feel good about the positioning. The balance sheet is going to continue to grow. And put us in a stable position that gives us a lot of optionality to manage the rate environment. Timothy N. Spence: Yeah. I just Brian and I were talking before the call. Like, our expectation going in we're gonna grow Texas households at north of 10%. On an annualized basis. It may take a couple of quarters to post conversion to get the ramp, but there is no reason why we can't grow Texas at least the rate that we've grown the Southeast given the starting points are remarkably similar if you look back in time at where Fifth Third started. So there's the power of the DDA growth in our company between the Southeast and Texas and Direct Express. And what we can get done on commercial payments is gonna be huge in terms of managing the balance sheet for that strong profitability. Scott Siefers: Yep. Okay. Perfect. Tim and Bryan, thank you both very much. Timothy N. Spence: Thank you. Operator: Your next question comes from the line of John Pancari from Evercore ISI. Your line is open. John Pancari: Good morning. Timothy N. Spence: Morning. John Pancari: Just on the deal, just wanna see, you know, if there's have you made any changes to your initial assumptions tied to the Comerica transaction outside of timing? But any changes to the assumptions that you provided at the announcement, the cost save expectation, the restructuring charges, or the related marks or P&L impacts? Bryan D. Preston: No, made no material changes to any of the assumptions inherent in the transaction. I'd say the only major items were the timing of close, pulling forward the conversion date. We do think that ultimately, we're going to likely be able to deliver a little bit better than the 37.5% of the 850 in 2026 given some of those timing changes. But we also do intend to invest a little bit more in growth as well. So we might be approaching $400 million of in-year expense saves in 'twenty-six if all goes well, but we're hoping to reinvest maybe $40 million of that. The original expectation was gonna be around $320 million of expense saves in 2026. So we're obviously feeling very good about what we're seeing from a progress perspective on the integration. And beyond that, the loan marks and the balance sheet marks are all very similar to what we would have expected. John Pancari: Got it. Alright. Thank you for that, Bryan. And then separately, on the loan growth side, I appreciate the color you gave on the decline in the line utilization in the quarter. That decline seems more pronounced than more than many of your peers. And I hear you on the shutdown and some of the balance sheet cleanup but anything company-specific that you'd say that exacerbated that? And then just separately, also on the loan growth front, you know, if you could maybe give us a little more color around the greatest drivers of growth that you see in the commercial portfolio after the combination is completed with the commercial? Timothy N. Spence: Yeah. Good question. I mean, John, it's gotta be a little bit idiosyncratic and a little bit compositional. Right? Like, at this time last year, we had a big uptick in line utilization in the fourth quarter. When other people didn't have it, and we tried to talk down enthusiasm on what that meant for '25 and we gave back a little bit of the utilization in the first quarter and other people kinda got it. I think there are two visible things. One, NDFI as a percentage of total commercial loans is way lower here than it is for most of our peers. And the NDFI loans tend to fund and stay funded at a level that's higher than what, you know, standard working capital revolving lines of credit would be secondarily, leverage lending here has continued to decline over time, and that's funded term debt principally. You know, for most of the industry and a smaller share of the overall balance sheet. And then I think lastly, when we've talked about this, but we are clearly believers in the of technology to transform the business. It's transformed the way Fifth Third operated. But we're also very aware of the fact that there's literally never been a tech infrastructure build-out where there was an overbuilding, whether it was cell towers or fiber or e-commerce distribution centers during COVID. And so we've been a little bit more cautious about just how broadly we were willing to play in data center and data center-linked activity. And there again, that's funded up pretty quickly, you know, in places where the loans are being made. So I think there's a possibility there's some of that. But one way or the other, utilization is not a thing we control. What we can control is originating high-quality credit and making sure we have the right team on the field. So that's the thing that we've been focused on. John Pancari: Okay. Great. Thanks. And as we think about the where do we see the growth coming from with the Comerica acquisition? It really is an extension of the middle market play that has been driving success for us for the last couple of years. We've been growing middle market loans consistently, and even this year, middle market 7% as we highlighted in our prepared remarks. And we just see so much opportunity there as well as leaning into the specialty verticals where Comerica has just had so much success historically. There's just some great synergies there between their core business and our core business on the things that we're good at. That's gonna create a lot of opportunity for us as we think about what loan growth could look like going forward from here. John Pancari: Got it. Alright. Thanks, Bryan, and thanks for the color, Tim, as well. Operator: Your next question comes from the line of Mike Mayo from Wells Fargo. Your line is open. Mike Mayo: Hey, Mike. Hi. Bryan D. Preston: Hey. Mike Mayo: So it sounds like you're all pulled up on your merger prospect. Now it's just a matter of executing, I guess. But just to clarify, you said you look to get your 2027 targets in the '26 now? Is that right? Timothy N. Spence: Yes. Mike Mayo: Okay. Okay. So you have earlier closing, earlier targeted conversion, earlier metrics, so is there any change in your targeted EPS accretion this year? I think you just said kind of maybe just a little bit accretive, and then you get the big accretion in 2027. Any changes to those numbers would seem like that would be implied to go higher? Bryan D. Preston: It would be it would basically be achieving the accretion earlier. So we are expecting we talked about 9% EPS accretion in 2027. We would expect to be able to deliver 9% EPS accretion from the deal in 2026. Mike Mayo: Okay. And then I'm just you know, it's maybe your middle name is, you know, Tim Digital Spence. You know, Tim might think of you as, like, the digital banker. Then I hear you talk about 13 million pieces of mail. I mean, that sounds very last century of you. You're gonna you have billboards too, and, like, it sounds very old school. So does that still work? It's just kind of intriguing. Timothy N. Spence: There may be a billboard or two out there, Mike. The benefit of direct mail is that you can literally pick down to the individual household who receives the offer and who doesn't. Right? Whereas in a digital environment, you have a lot more data on that folks, but you are still at the end of the day optimizing around the segments of the population and to some extent some path dependency around traffic. So we actually have a JV that we have been running with one of the leading digital marketing firms to help us think through the way that we deliver a best-in-class digital acquisition funnel. It's a significant share of new household origination. Like, if you look at marketing link, household origination, it's probably fifty-fifty digital and direct mail today. But when it comes to rate offers, you want to basically get in front of the people that you want to communicate with and not necessarily just the rate shoppers. Which is what you tend to find at the affiliate marketing websites when you're leading purely with rate and not a broad value proposition. And we can't frankly go digital until we get through conversion with Comerica because they don't have the ability to open digital accounts online. So there's nothing we can do with the Comerica brand until we get there. But mail still works. It works in credit cards. It works in checking. It's the reason that you see the JPMorgan's of the world continuing to use it in addition to folks like Fifth Third. And there may be a billboard or two somewhere, but I promise you if we have one, it'll be a digital billboard. How about that? Mike Mayo: No. I mean, whatever works. I mean, I guess you're saying it's digital, it's branches. So for those last 110 branches that you need to secure, seems like, you know, you kinda telegraphed that and made the I don't know. How long will that take to get your other 110 or the 150 De Novo branches? Timothy N. Spence: Oh, it's the opposite of the slowly but suddenly. I think in this case, it's suddenly and then slowly because what we the benefit we have here is we have been building for so long in the Southeast with strip center developers who are also doing a lot of building in Texas that we were gonna see a lot of the low-hanging fruit fast because we have these development partners who saw the announcement and picked up the phone and said, hey. I'm doing four of these in Dallas and two in Austin. And one in Houston and otherwise. And do you guys want the outlot? So they know our specifications. They know what we expect from the zoning perspective. They know how well we perform as a strip center tenant. And what we expect in our contracts for ground leases or purchases. And therefore, we were always gonna get more locations earlier. We're not gonna compromise the selectivity. And as we fill in hotspots on the map, by definition, it just takes a little bit longer to get the last handful of these locations. But it's a robust market. It's just stunning to think that an MSA the size of Dallas or Houston could be growing at the rate that they are. And all that new development creates lots of opportunities, like, to build branches where you would wanna have them today versus where they were when they were built thirty years ago. Mike Mayo: I look forward to the Investor Day in Dallas in a year or two. Timothy N. Spence: Yeah. Operator: Your next question comes from the line of Erika Najarian from UBS Financial. Erika Najarian: Hey, Erica. Erika Najarian: Hey. Just one quick follow-up question for me, and I really want to know what Jamie's middle name is if yours is digital Tim. Timothy N. Spence: On the depository hawk. What that's worth. Red Hawk. It's Red Hawk in the middle. Erika Najarian: So, Bryan, I'll make yours liquidity. Then. And speaking of you know, we heard a lot about the longer-term and medium-term deposit plans. But just wondering, you know, what we should how we should think about average deposits that's underpinning your net interest income outlook for the year. And how we should think about, you know, given Tim's comments about targeted rate offers, how we should think about, you know, deposit costs underpinning the 2026 outlook. Bryan D. Preston: Yeah. I would tell you that, 2026 is really gonna be a remixing year for the combined company. I think you're gonna see something that looks very similar to what we've been able to deliver on the Fifth Third franchise, which is targeted growth from a DDA and an iBT perspective in particular consumer iBT. And what we'll be looking to do is some balance sheet optimization, funding cost optimization, from the Comerica balance sheet as it comes on. You know, there's a number of things that they've had to do. Since March 2023 when they had more significant liquidity stress that we would be looking to clean up as it comes on board. For us, on a stand-alone basis, what it's going to mean is a continuation of what we saw in the fourth quarter, which is our betas look a little bit lower for the kind of Fifth Third legacy markets than they would have been in the past as we're more balance-oriented. But what it's going to do is bring down overall funding costs for the combined franchise as we put the things together. So we do think as I touched on in my NIM discussion, that there's a couple of basis points of NIM pickup that's just gonna be attributable to the funding synergies as well as some overall balance sheet mix changes. Erika Najarian: Got it. Thank you. Operator: Your next question comes from the line of Ken Usdin from Autonomous Research. Your line is open. Ken Usdin: Oh, hey, guys. I know this is gonna get cleaned up over the course of time. But just on the overall guidance, you know, you gave the PAA in the revenue side. Can you can you just if you have it, can you give us what the CDI add from the deal is on the Comerica side so we can kinda square the total overall? Thanks. Bryan D. Preston: Yeah. Sure, Ken. It should be about $20 million a month in 2026 when the deal closes. And then it'll be a sum of the year digit approach, so you should expect to see a $20 to $30 million reduction as you roll on the year two of the amortization. Ken Usdin: Perfect. Thank you. And just a step back question also, I know it's all kind of in the total guide, but how would if you step back before you look at pro forma, how would you think just, like, stand-alone Fifth Third momentum is as you just think about, last year's results on the stand-alone side versus kind of the momentum on the stand-alone Fifth Third side. And whatever way you can kind of put it into context, revenue momentum, loan deposit momentum, etcetera. Bryan D. Preston: Yeah. Absolutely. We continue to feel good about what we were seeing from the core Fifth Third franchise. You know, we would have we would have been talking about mid-single-digit loan growth if you would have looked fourth quarter twenty-six to fourth quarter twenty-five. Comparison in terms of what our core business is driving. And that's really a continuation of continued strength in the middle market that would drive mid-single-digit C&I growth as well as continued strength out of the home equity and the auto businesses being big drivers from the loan front. We would have we would have still been talking revenue growth in that mid-single-digit mid-upper single-digit growth rate perspective. And another 100 to 200 basis points of positive operating leverage which would have taken our efficiency ratio down into the low 55s on a full-year basis. So overall, feel very good about what the core trend is for our company, which was already one of the more one of the most profitable, amongst the peers, and as Tim highlighted amongst, you know, basically banks of any size this quarter. So we felt really strongly about that momentum. And then on top of that now, the 200 basis points of pickup that we were expecting from an ROTCE perspective and efficiency ratio perspective, we're going to deliver those amounts even now given the timing, being able to pull forward the close and the conversion. Associated with the Comerica transaction. So a lot of things that are stacking up that are really gonna drive a nice financial outcome for 2026 and beyond. Ken Usdin: Thanks, Bryan. Operator: Your next question comes from the line of Manan Gosalia from Morgan Stanley. Your line is open. Manan Gosalia: Hey, good morning. I wanted to ask about the 19% plus ROTCE target. I mean, it looks like you're already at $19.06 as of April. Are there any areas that you think you're overearning here? I mean, it seems that the core business is delivering nicely. The Comerica acquisition should be accretive in twenty-seven. You're gonna resume buybacks in the 19% plus number in 2027, but just wanted to see if there's any offset that we should be thinking about. Bryan D. Preston: Yeah. The two things that I would point out is just, one, the normal seasonality of our profitability. So one, the first quarter tends to be a seasonally low quarter for us from a profitability perspective. Because of seasonal compensation items. And the fourth quarter tends to be a seasonally high quarter for us from a profitability perspective. So that's just one thing to keep in mind as you're looking at those numbers. And the second component was we did have a small release. This quarter from an ACL perspective. In a normal environment where we would expect to see continued loan growth, we would expect to see a little bit of a build every quarter. So those two items have an impact on that comparison that you're looking at. Manan Gosalia: Alright. Perfect. And then just on Direct Express, can you tell us what's in the numbers for Direct Express in 2026? And does that hit full run rate by the fourth quarter? Or is there more growth you expect as you get out into 2027? Bryan D. Preston: Given the merger, the full run rate is in our numbers and is in the guide then for the fourth quarter, just given that we're assuming that we're maintaining the business as we do the merger. The only thing that's missing right now is one month of activity for the month of January. So Comerica stand-alone activity in the month of January is the only thing that would not be in our 2026 numbers. And that continues to operate in that $3.6 to $3.7 billion deposit range as well as a 100-ish million a year in expenses and fees. That's continuation of that is what's resident in the guide that we've provided other than the month of January activity. Timothy N. Spence: Yeah. The upside there as we get into '27 and beyond, Manan, is I like, in my head, I associate the direct program with Social Security payments because it's the super majority of the funds that are loaded onto those cards. But the Direct Express program is the Bureau of Fiscal Services mechanism to help all government agencies get off paper checks. In places where customers do not have a bank account that they are registering for ACH deposits. So the president signed an executive order directing agencies across the government to eliminate paper check distributions. For the sake of reducing fraud. And we do believe that as we get on to our tech platform, as we broaden the functionality that's available to direct participants. We're gonna be able to play a little bit of offense here and actually work with the Bureau of Fiscal Services to go agency to agency. Help them understand how they can make use of Direct Express as a mechanism to fulfill the executive order. And there, is where we're gonna find more meaningful upside out of that program in terms of growing it. Manan Gosalia: Got it. Is there a time frame in which you can do that, or is that? Timothy N. Spence: Yeah. We gotta get the conversion done and the feature builds. That job one is to take care of existing program participants. So that'll be the majority of that work this year. Because we will be moving on to a different tech platform. And that is being developed with Fifth Third and Fiserv. And once we're there and we've got the existing program converted, we'll focus on how we expand the program. Manan Gosalia: Great. Thank you. Operator: And your final question today comes from the line of Christopher Edward McGratty from KBW. Your line is open. Christopher Edward McGratty: Great. Thank you. Hey, Tim. Going back to capital, I noticed in your prepared remarks, you talked dividend, organic growth, buybacks, didn't hear anything about inorganic growth. I'm wondering if the timing the sooner closed conversion changes at all about your timing about when you would consider another bank acquisition, although I know you've been clear about getting this one first. Timothy N. Spence: Yes. That is the last thing on my mind right now for what that's worth. The upside opportunity here is really and there's a lot of work in front of us. So the focus doesn't change the timing in terms of how we would think about it. The focus really is on making sure that we get the Comerica customers converted and taken care of, that we make the company from an employee perspective feel like one company. And we get the expanded capabilities that both Fifth Third, Legacy Fifth Third customers and Comerica customers are gonna benefit from. To market. We got plenty to work on as it is. Christopher Edward McGratty: Okay. Very clear. Thank you. And then the follow-up would be just on investments. You talked about, I think, $40 million going back into the business with the sooner cost takeout. Can you just help us with tech spend pro forma, you know, rate of growth, what you're spending, you know, how you measure it. I think some of your peers have been walking that number up, but just interested in your thoughts on tech spend. Timothy N. Spence: Yeah. I mean, we've grown for several years now tech spend in the sort of high single-digit to low double-digit range. Right? Call it seven to 10%. On an annualized basis. I anticipate we're gonna continue to do it. What we've been artful about here is we've been able to fund the franchise investments about half of them, right, through other cost reductions. Like, the number itself, you'll see in our disclosures on that is a good example of this. Like, if you look year over year, from December 25 back to '24, that headcount was flat at Fifth Third, but underneath the surface, line of business and engineering resources and tech actually grew 2%. And then the staff roles came down and operations roles came down 3%. As the investments we've made in automation and the value streams and otherwise actually play their way through. So we're we will continue to make those investments. I think it was one of our fellow category three banks who made the comment in their call that you're either on offense or defense. And we are on offense here and tend to continue to be on offense for the foreseeable future. Christopher Edward McGratty: Alright. Perfect. Thank you. Operator: And we have reached the end of our question and answer session. I will now turn the call back over to Matt Curoe for closing remarks. Matt Curoe: Yeah. Just one last thing before I hand it over to Matt to the thanks, Tim. And thank you, Rob. And thanks, everyone, for your interest in Fifth Third. Please contact the investor relations department if you have any follow-up questions. Rob, you may now disconnect the call. Operator: This concludes today's conference call. Thank you for your participation. You may now disconnect.
Operator: Good day, ladies and gentlemen, and welcome to Hancock Whitney Corporation's Fourth Quarter 2025 Earnings Conference Call. [Operator Instructions] As a reminder, this call may be recorded. I would now like to introduce your host for today's conference, Kathryn Mistich, Investor Relations Manager. You may now begin. Kathryn Mistich: Thank you, and good afternoon. During today's call, we may make forward-looking statements. We would like to remind everyone to carefully review the safe harbor language that was published with the earnings release and presentation and in the company's most recent 10-K and 10-Q, including the risks and uncertainties identified therein. You should keep in mind that any forward-looking statements made by Hancock Whitney speak only as of the date on which they were made. As everyone understands, the current economic environment is rapidly evolving and changing. Hancock Whitney's ability to accurately project results or predict the effects of future plans or strategies or predict market or economic developments is inherently limited. We believe that the expectations reflected or implied by any forward-looking statements are based on reasonable assumptions but are not guarantees of performance or results, and our actual results and performance could differ materially from those set forth in our forward-looking statements. Hancock Whitney undertakes no obligation to update or revise any forward-looking statements, and you are cautioned not to place undue reliance on such forward-looking statements. Some of the remarks contain non-GAAP financial measures. You can find reconciliations to the most comparable GAAP measures in our earnings release and financial tables. The presentation slides included in our 8-K are also posted with the conference call webcast link on the Investor Relations website. We will reference some of these slides in today's call. Participating in today's call are John Hairston, President and CEO; Mike Achary, CFO; Chris Ziluca, Chief Credit Officer; and Shane Loper, Chief Operating Officer. I will now turn the call over to John Hairston. John Hairston: Thank you, Catherine. Happy New Year to everyone, and thank you for joining us today. The fourth quarter of 2025 was a strong finish to a remarkable year. We saw year-over-year improvement in EPS of 8%, PPNR growth of 6% and tangible book value per share increased 12%. As we look forward to 2026, we remain focused on growing our balance sheet and continuing to improve profitability. As part of our multiyear organic growth plan, we expect to hire up to 50 additional revenue-generating associates this year. Additional offensive players will meaningfully support growth targets while improving profitability through a focus on full relationship clients. We are pleased to announce today that we completed the bond portfolio restructuring last week, which is detailed on Slide 7 of the investor deck. On an annual basis, we expect the restructuring exercise to benefit NIM by 7 basis points and EPS will improve $0.23 per share. Mike will give more details on the restructuring in his remarks. We provided guidance on Page 22 for what we believe will be a very successful new year. This guidance reflects our organic growth benefits as well as impact from the bond portfolio restructuring. Now for a few notes on the fourth quarter. We had another quarter of very solid earnings with an ROA of 1.41% and an efficiency ratio under 55%. Fee income growth again continued this quarter and expenses remained well managed, including thoughtful investments supporting revenue-generating activities. Net interest income continued to grow as we reduced the cost of funds and enjoyed higher security yields. NIM was relatively flat, down 1 basis point from prior quarter as a decline in loan yield outpaced our higher yield on securities and lower cost of funds. Loans grew $362 million or 6% annualized. As shown on Slide 11 of the investor deck, our production was quite strong. Our increase in production this quarter more than offset an increase in prepayments, which produced a net growth of mid-single digits. With the investments we're making into new revenue producers, we expect this trend to continue and loan growth in '26 will be mid-single digits compared to the previous year-end. Deposits were up $620 million or 9% annualized, largely driven by seasonal activity in public fund DDA and interest-bearing accounts, which increased $417 million. As a reminder, we usually experience seasonal public fund outflows in the first quarter of each year. Our interest-bearing transaction balances were up $223 million with higher balances driven by competitive products and pricing. Retail time deposits decreased $90 million due to maturities during the quarter and DDA balances were up $70 million, inclusive of a $191 million increase in public fund DDAs. DDA mix ended the quarter at a strong 35%. We expect our investments in financial centers and revenue producers will support our guidance for deposits, which we anticipate will increase low single digits from 2025 levels. As previously announced, we fully exhausted our share buyback authority last quarter, which impacted capital ratios. Despite enhanced repurchase volume, we ended the quarter with TCE a little over 10% and a common equity Tier 1 ratio of 13.66%. Our Board approved a new 5% buyback plan that will be effective through the end of '26. We are very optimistic as we look forward to the coming year. Our work over the past several years has resulted in solid capital levels, a robust allowance for credit losses, superior profitability, ample liquidity, benign asset quality and now positive trends in balance sheet growth. We are excited for the opportunities in the coming year and believe we are positioned well for a successful and growing 2026. Lastly, I would like to introduce you all to President of Hancock Whitney Bank and Chief Operating Officer, Shane Loper. He will be joining us on our earnings calls going forward. With that, I'll invite Mike to add additional comments. Michael Achary: Thanks, John. Good afternoon, everyone. Fourth quarter's earnings were $126 million or $1.49 per share compared to $127 million or again $1.49 per share in the third quarter. PPNR for the company was down slightly from the prior quarter to $174 million. Expressed as a return on average assets that continues to be a solid 1.96%. NII increased 1% this quarter, driven by favorable volume and mix for both average earning assets and interest-bearing liabilities, partly offset by a slightly lower NIM, which decreased or narrowed 1 basis point this quarter. As John mentioned, our fee income business had a solid quarter and expenses were up due to continued investments in revenue-generating activities. Our efficiency ratio was 54.9% for the quarter and 54.8% for the year. That was down 58 basis points from 2024's 55.4%, reflecting our net interest income growth, strong fee income performance and well-controlled expenses. Fee income grew in each of the 4 quarters this year, totaling $107 million in the fourth quarter. We enjoyed solid performance across each category with the increase this quarter driven by higher specialty income. We expect fee income will be up between 4% and 5% in 2026 with a continued focus on core deposit account growth that often delivers multiple categories of fees. As mentioned, expenses remain well controlled, up only 2% from the prior quarter. Much of this increase was from investments that we believe will enhance our revenue-generating capabilities in 2026. We expect expenses will be up between 5% and 6%, including an impact of about 185 basis points from the execution of our organic growth plan and a full year of expenses related to our acquisition of Stable Trust Company. Expense growth year-over-year was well controlled at only 3.6%, inclusive of ample reinvestments. The 1 basis point contraction in our NIM was driven by lower loan yields on both new fixed and variable rate loans and existing variable rate loans following the 2 rate cuts this quarter. Partially offsetting this was higher bond yields, lower cost of deposits and a favorable mix and rates for other borrowings. Our overall cost of funds was down 7 basis points to 1.52% due to a lower cost of deposits and better funding rates and mix as we ended the quarter with lower FHLB advances. Our cost of deposits was down 7 basis points to 1.57% for the quarter, with the cost of deposits down to 1.53% in the month of December. Following the rate cuts in October and December, we reduced promotional rate pricing on our interest-bearing transaction accounts and retail CDs. In 2026, we expect CDs will continue to mature and renew at lower rates, which will support improvement in our cost of deposits. The yield on the bond portfolio was up 6 basis points to 2.98% due to cash flows of $213 million rolling off at 3.55% and reinvestment in $290 million of bonds at a yield of 4.45%. In addition, we had a $0 loss bond swap of $230 million with a yield pickup of 45 basis points. As John mentioned, we completed a bond portfolio restructuring in the first 2 weeks of January 2026. We sold $1.5 billion of bonds at a yield of 2.49% and reinvested the proceeds in bonds carrying a yield of 4.35%. We're expecting the annual impact will support our NII and NIM growth in 2026 and will contribute 7 basis points to our NIM, $24 million to NII and about $0.23 to earnings per share. Our forward guidance for 2026 is on Slide 22 of the earnings deck and includes the expected impact of the bond portfolio restructuring, but excluding the pretax charge of $99 million. We are assuming 2 25 basis point rate cuts in April and July of 2026. We expect NII will be up between 5% and 6% from 2025 with modest NIM expansion, and our PPNR guide is to be up between 4.5% and 5.5%. Our efficiency ratio is expected to fall in the range of 54% and 55% in 2026. For the fourth consecutive quarter, our criticized commercial loans improved, decreasing $14 million to $535 million. Nonaccrual loans decreased $7 million to $107 million. Net charge-offs came in at 22 basis points. Our loan loss reserves are solid at 1.43% of loans. We expect net charge-offs to average loans will come in at between 15 and 25 basis points for the full year 2026. Lastly, a comment on capital. Our capital ratios remain remarkably strong, even with the full exhaustion of our share repurchase plan, where we bought back about $147 million of shares in the fourth quarter of 2025. Our Board reauthorized a new 5% repurchase plan in 2026, and we expect share repurchases will occur at a more even pace across 2026. Changes in the growth dynamics of our balance sheet, economic conditions and share valuation could impact that view. I will now turn the call back to John. John Hairston: Thanks, Mike. Let's open the call for questions. Operator: [Operator Instructions] The first question is from Michael Rose, Raymond James. Michael Rose: Noticed that the fourth quarter loan production was up about 7.5% Q-on-Q, but paydowns were also up. Maybe Mike or John, if you can just talk about what your expectations are for kind of gross production versus expected paydowns as we move through the year, inclusive of those 2 cuts. Michael Achary: Thanks, Michael. I'm going to ask Shane to start with that answer. Go ahead, Shane. D. Loper: Okay. Thanks, John. And really, what I'll do is I'll try to cover just kind of where the production came from and then tie out with what we see into the future. But first, I'd just like to say thanks to the entire team for delivering a good year of operating results and just thanks for that contribution to the success. I think it's important to note that loan production increased for the third consecutive quarter with nearly $1.6 billion of production in the fourth quarter. You typically, we'll see 35% of all that production funded and then grow to around about 40%. In the fourth quarter, the team produced an additional $260 million in production over the third quarter, which contributed pretty significantly to that 6% growth that we're talking about. Geographically, the banking teams delivered growth across all of our core markets in Texas, Louisiana and Florida. And this is also important because as we intentionally improve our commercial and middle market segment mix, that's going to deliver higher spread relationships. that may offset some of the thinner spreads in the specialty segments. Commercial real estate continues to deliver consistent production, which will fund up once that initial equity burns off in those deals. And we expect to experience sustained fundings that really have occurred with production over the last 18 to 24 months throughout the year in 2026 with expected and planned paydowns as a headwind to CRE growth. And I don't think that's anything new that we're talking about there. A lot of those paydowns will get to lease-up, CO and go maybe to the permanent market. CRE production for 2026 looks to continue to be steady as the 2025 production funds up. Looking at health care, that team continues to deliver growth with current and new banker adds. The production delivers good NII, but that's one of those slightly thinner spreads than the commercial and middle market segments. And I expect health care to continue to deliver as we've shifted our focus more to health care real estate and a selective focus on senior care sponsor operators. Commercial finance, which is our equipment finance and ABL teams, they also continue to deliver strong production and balance growth. We're experiencing good deal flow there so that we can screen credit and are considering and executing on capital -- those companies that are considering and executing on capital investments. As I said about health care, these balances produce positive NII, but are at a little bit lower spread. We saw some consumer loan growth for one of the first times, and it grew about $5 million in the quarter, led by HELOC production. Fourth quarter '25 was our first HELOC growth quarter in '25, about $15 million and a 3-year high of applications in the quarter. So we believe HELOCs will continue to be a solid consumer product into '26, and we get about 40% line utilization there. And finally, kind of wrapping up on growth, I'd like to call out our business banking team. They produced a strong $36 million in growth this quarter at our highest spreads. We recently recruited an accomplished executive from the super regional bank to lead our business banking segment and have high expectations of that team concerning loan and deposit growth throughout 2026. Our goal is to be the best bank for privately owned businesses in the country, and we're committed to delivering on that aspirational goal with quick credit execution, market-leading deposit products and sophisticated wealth management for both businesses and business owners. So if I look forward to 2026, I believe our team is calling on the right clients and prospects to deliver on a better segment mix and deliver on our mid-single-digit growth guidance. So kind of wrapping up, when you look at paydowns, I think we can expect paydowns in CRE. I think we can still expect some entrant of private credit and other lending opportunities like that with some of our clients. But right now, we feel like we've got a fairly stable base to work from, and it's all about generating business going forward. Michael Achary: Michael, any follow-up? Michael Rose: It's a very detailed response. So I appreciate all the color. Maybe just as my follow-up question. So it looks like the ROA target has been moved a little bit higher from last year, but the TCE ratio is also higher. Can you just walk us through some of the other assumptions that kind of underlie meeting some of those targets for your CSOs? I know you have the Fed funds rate at 3.25%, but would just love some other colors around kind of the base case expectations. Michael Achary: Sure, Michael. This is Mike. I can add some color to that in a few comments. I think the biggest thing is this notion of consistent balance sheet growth, organic balance sheet growth over the next 3 years. Our guidance for loans has stepped up this year to the mid-single digits from what we achieved last year, which was akin to more low single digits. So kind of continuing this notion of consistent balance sheet growth over the next couple of years is really important. You called out the rate environment. We're assuming just to keep the assumptions straightforward, Fed funds at 3.25%, which is where we expect Fed funds to end at the end of this year. We'll continue to reinvest back in the company. So I would expect expense growth to be something on par with what we're guiding for this year, which if you kind of strip away the investments that we're kind of calling out in the guidance and the annualized impact of Sabal is still a pretty reasonable run rate of somewhere around 3.5% to 4%, so that kind of continuing for the next couple of years. And then look, we've been tremendously successful in terms of kind of upscaling our fee income businesses. The guidance for next year is in the 4% to 5% range. So to kind of continue that going forward is equally important. We'll grow the deposit side of the balance sheet somewhere over the next couple of years, I think, in low to mid-single digits. And the NIM expansion will follow along with NII growth. So those are the main things. Now in terms of the TCE guide of 9% to 9.5%, we're well north of that now at just over 10%. You can assume that we'll continue buybacks at the levels we've done both in '25 and again, what we're guiding for '26. So I think the combination of continuing a pretty robust buyback program, along with addressing the dividend and organically growing the balance sheet should help us get our TCE down to those levels. So those are kind of the main assumptions. John Hairston: Michael, this is John. Just to -- I'll add very little to it. But I think if we kind of step back to or step up to 60,000 feet and you take what Mike and Shane both shared, the ROA guidance being a little bit steeper than where we are today doesn't seem like a tall task if we weren't reinvesting back in future years' revenue like we are today and what we guided to. But our goal is not to just become a very -- or be a very high profitability organization. It's also to deliver on pretty reliable balance sheet growth year in and year out. So investors see PPNR continuing to grow, but still maintain a pretty profitable book. And that's a hatrick to pull all that off at the same time. And just for a bonus, maintain excellent to very solid credit quality. So if we slowed the expense growth down some through reinvesting less, then our profitability guide would have been higher. But our goal is to add bankers and add offices perhaps the latter part of the year next year and continue growing a bigger balance sheet and higher-growth markets so that on an overall basis, investors are going to see that value build over time. So I hope that helps you kind of bring all those pieces together. Operator: The next question comes from Catherine Mealor from KBW. Catherine Mealor: A question just on the margin. You talked about seeing modest NIM expansion in '26, but we're getting 7 basis points immediately upfront from the bond restructure. Do you -- kind of walk us through kind of what you're thinking about the margin kind of outside of that onetime event? Is it -- do you kind of still see a core margin having upside? Or is it -- or is really that modest expansion coming from the bond restructure and outside of that, we're kind of stable once we hit that new rate? Michael Achary: Sure. I'd be glad to, Catherine. So I think the main underpinnings of what we're referring to in terms of our ability to widen the margin and grow NII next year is really around the balance sheet. So we've got the loan growth pegged at mid-single digits. So if you assume that's somewhere between 4% and 5%, that should add a healthy amount of volume to our balance sheet and certainly coming with that will be an intended increase of average earning assets. So I think, first and foremost, it's organically expanding the balance sheet. Then you called out the bond portfolio restructure. So that will contribute 32 basis points in terms of the bond yield and about 7 basis points on the NIM. But related to the bond portfolio, we also have about $1.150 billion of cash flow, principal cash flow coming back to us next year. That will be coming back at about 3.75% and going back on the balance sheet, call it, between 4.25% and 4.5% depending where rates are. So that's a significant improvement on top of 32 basis points related to the bond restructure. So that could be as much as somewhere between 45 and 50 basis points of bond yield improvement from the fourth quarter of '25 to the fourth quarter of '26. So that's significant. Then in terms of our cost of deposits, we're assuming the 2 rate cuts next year, one in April and one in July. So given that, we've got anywhere from about 25 to 30 basis points improvement in our cost of deposits from fourth quarter to fourth quarter. A lot of that's coming from our continued ability to reprice CD maturities. We've got about $8 billion of CD maturities next year. Those will come off at about 334. The assumption is that they'll go back on at about 280 or so that is inclusive of about an 81% renewal rate. So the organic growth of the balance sheet, the securities yield improvement, our ability to continue to reduce our cost of deposits. Those are the main tailwinds, if you will, toward NIM improvement next year. Probably one of the headwinds would be we do expect with a couple of rate cuts next year, our loan yield will continue to decline a bit next year, but I think at a slower pace than what you saw over the course of the fourth quarter. I think you put all that together and our NIM improvement, call it, somewhere between 12 and 15 basis points, maybe a little bit north of that, again, with 7 coming from the bond restructure. So that's how we're kind of thinking about the NIM and NII next year. Catherine Mealor: And by next year, you mean '26. Michael Achary: '26, yes, I'm sorry. This is the fourth quarter comment. Catherine Mealor: That was really helpful, Mike. And then maybe just as a follow-up back to the revenue producer and hiring plans that you have. You've hired, I think you said 22 new bankers third quarter '24 through fourth quarter '25, so call it, over the past year, and we're now going to do 50 in '26. So we're doubling the amount of bankers that we're hiring. I know part of -- you kind of gained momentum in that plan, I know throughout the course of the year. But maybe just walk us through kind of what gives you confidence in being able to hire that many more bankers this upcoming year versus last year and maybe kind of the pace that we should expect that to come on board as we move through the year? D. Loper: Sure. Catherine, this is Shane. Thanks for that. So we're confident in it. However, hiring is competitive as every bank is looking to hire from a limited pool of bankers. And the reason we're confident is we've significantly enhanced our banker hiring discipline to really look just like our client acquisition process. Our goals are to hire probably a split of 60% business bankers, 40% commercial bankers of that up to 50% in '26. And those folks really are targeted to intentionally generate a better portfolio mix, a little more granular business. The enhanced recruiting process is yielding expected results. We're out of the gate strong in the first quarter. We began this early fourth quarter, and it's a process that is really pretty tight in terms of ongoing meetings, pipeline review of potential hires and where they are and what their skill sets are. And we're following up on that on a very regular basis. So I think the strength of that process has been greatly enhanced. And as I've said before and we've said before, this organic hiring plan is designed to be like a flywheel with bankers hired in previous years and quarters ramping up production as those current year bankers are oriented to our sales and credit processes. So we're getting the production from those folks that the 22 that we've hired last year as we're hiring up to the 50 this year. And really, to date, the bankers hired are performing as expected and contributing to our growth, and we monitor that performance on an ongoing basis to ensure that we're getting what we expect. We're also going to continue to be opportunistic in hiring bankers in our specialty segments. So CRE, health care, equipment finance and ABL. So at this point, given the enhanced processes and the work that's going on, the pipeline, if you will, of potential candidates to bring into the company is good. I feel very good about getting that up to 50 in '26. Operator: Up next, we'll take a question from Casey Haire from Autonomous Research. Casey Haire: So I wanted to touch on fees. The fee guide, I know 4% to 5% seems like a lot, but it's -- you didn't have Sabal, which closed in the middle of the year. And it just doesn't -- it feels a little conservative because if I run rate this fourth quarter here, you're already at that 425% level. So I'm just wondering if there's -- if we're missing something or if it's just a little conservative. D. Loper: Thanks. This is Shane. I'll take that one, too. So fee income across all our banking segments and products, as you just articulated, continues to deliver in the fourth quarter. We've grown consumer DDAs in the fourth quarter and throughout the year. That's contributing to service charges, which will contribute even more as a full year of those accounts are on the books. Mobile openings have increased by 20% year-over-year as well as 80% of our new checking accounts are digitally active. So that really makes them very sticky in kind of primary accounts. Business service charges continue to perform, and those are reflective of the book that we have and our strong treasury service products and services. And as we improve our overall execution in business banking, as I mentioned before, I would expect those deposits and deposit fees to follow along that improvement curve. Card fees right now are generally holding flattish in a trajectory quarter-over-quarter. But I think there's an opportunity there to grow in 2026 through our purchasing card and business card growth. Merchant is another area where we have solid opportunity to grow as that business banking execution improves and our product bundling strategy gains momentum there. Mortgage fees, again, continue to perform, and we're ready for anything that may happen in the mortgage market with our direct-to-consumer digital offering that we have there. You mentioned the Sabal Trust fees. Wealth management continues to contribute and their strong execution with the Sabal team to retain clients and grow the base there. Annuity sales are a little softer in the fourth quarter, but have remained historically strong for us with our managed money contributing recurring fees at about $15.6 billion of AUM. So given those things and our focus on growing core deposit accounts, continuing to deepen wealth management, I think the fee income target of 4% to 5% is solid, and we should be able to chin that bar. Michael Achary: So Casey, this is Mike. One item just for consideration. Certainly, the 4.5% or 4% to 5% might look a little anemic compared to what we were able to do this year, '25. But certainly, you have the impact of Sabal year-over-year, which kind of distorted the '25 numbers a bit. And certainly, '25 was an absolutely outstanding year for something like annuity fees, which is just hard to imagine that that's going to repeat at that same level in '26. The other reminder, I think, is we have a pretty healthy specialty -- series of specialty lines of business in our fee income book. Those things are very unpredictable quarter-to-quarter and even year-to-year, things like BOLI, SBA fees, derivatives, very dependent upon the rate environment, syndication fees, SBIC fees. So if you dig into the quarter, one of the things that really drove the quarter, the fourth quarter was we had a really healthy quarter in terms of SBIC fees, which again is one of those things that's really hard to predict and really hard to count on year-to-year. So I think overall, we feel pretty good about the 4% to 5%. And certainly, we'll look at adjusting that if necessary as we go through the year. Casey Haire: All right. Great. That's super detailed. Okay. And then I just want to finish up on on the M&A question. You guys are doing all the right things and upping the buyback this quarter and pulling up your TCE ratio and clearly making a lot of hires and committed to the organic strategy. But when you talk to investors, there's -- for whatever reason, there's just a lot of concern that you guys are still in the M&A market and open to a deal even though you're saying you're not focused on it. So I guess just what would you say to that concern regarding M&A appetite? Michael Achary: Well, I think the most important thing for us to say is really consistency with what we've been saying in the last couple of quarters, which is really what you just kind of repeated in terms of not something we're particularly focused on. And I think the best way to describe our stance is really opportunistic. And I don't know what else to say about it other than to describe it that way. Again, as we've mentioned before, we're aware of the things that are going on around us. We're not sticking our head in the sand. So we pay attention to those things and talk to folks just as an effort to get to know folks and let them get to know us. But at the end of the day, opportunistic is really, I think, the best way we can describe how we look at that. Hopefully, that helps. Casey Haire: It does. I just -- when you say opportunistic, is there an opportunity above a 3-year earnback? Is that something that's not an opportunity for Hancock? Or is that something that you guys would consider? Michael Achary: I mean, look, in today's world, I think that this threshold of not exceeding a 3-year earnback is something that if we were to go that route, we would not cross that line. But look, that comment does not mean we're doing anything other than just approaching this from an opportunistic point of view. It doesn't mean we have something out there ready to reveal. That make sense? Operator: The next question comes from Brett Rabatin from Hovde Group. Brett Rabatin: I wanted to start on the purchases of securities during the quarter and the $1.4 billion at $435. -- can you talk maybe about what kind of securities those were? And then will that change the effective duration of 3.9 that you had at the end of the year? Michael Achary: It will not, first off, Brett. And in terms of the securities that we bought and sold in the bond restructure that we announced, those were almost entirely commercial mortgage-backed securities. The vast majority of the bonds that we sold, as you can imagine, were bought kind of in the 2020 and 2021 vintage, some in 2019, but almost exclusively commercial mortgage-backed securities. In terms of the no loss bond swap that we did during the quarter, that was also entirely commercial mortgage-backed securities. In terms of the bonds that we bought during the quarter, it was a variety of commercial mortgage-backed, some residential, some SBA. Brett Rabatin: Okay. So you effectively didn't change the duration of the portfolio. It was more just an opportunity you felt like with capital to improve the yield. Michael Achary: Yes. Certainly, we have the capital to invest in something like this. So we decided to pull the trigger on the $100 million. It felt like the right time, the markets at the time were behaving. I'm sure glad we did that when we did it instead of commencing that in the current environment. So we're very fortunate in terms of that timing. But yes, I think so. It was just an opportunity to enhance our NII, enhance our NIM and improve the yield on our bond portfolio. Brett Rabatin: Okay. And then the other question I had was just around deposits. Obviously, solid flows in the fourth quarter, some of that somewhat seasonal. If you look at last year, deposits didn't grow. They were down slightly. And it sounds like from the comments you've made so far, you're expecting to price down CDs and be fairly aggressive with managing funding costs in '26. I'm just curious how you guys think you're going to grow the deposits. Is -- will there be categories where you're more aggressive? Or is there anything in particular that would drive deposit growth relative to what we saw last year? Michael Achary: I'll start just real briefly. But again, the guidance for next year for '26 related to deposits is low single digits. That means 1% to 3%, I guess. But in terms of how we get that, I'll let Shane answer that question, but I think it has all to do with the new hires that we're planning for next year. D. Loper: Yes, Brett, it has some to do with new hires. It has to do with our business banking segment really getting traction in '26. We believe that quick credit execution there brings a multiple of those credit balances and deposits. You heard me talk a lot about the growth that we're experiencing in our geographies. That's core business in new relationships as we bring new bankers on and are calling on different types of clients that bring enhanced deposits. So we are adding -- we talked about investments. We're adding new capabilities in terms of treasury services, which will also be attractive to clients to bring additional deposits to us. So I think it's a combination of new bankers, good calling efforts in our core markets and additional investments that will be attractive to clients to bring additional deposits to us. Operator: Ben Gerlinger from Citi has the next question. Benjamin Gerlinger: I just wanted to -- I know we talked through the hires quite a bit in the notable step-up on '26 expectations. I just kind of curious, do you have any sort of mandate when the new bank kind of signs the bottom line, do they expect to have a loan within amount of time frame or be profitable in a certain time frame? Because I think 50 bankers is great for '26. But in reality, is it fair to think that, that a much stronger '27 and '28 for growth expectations? Michael Achary: Go ahead, John. John Hairston: I was going to say, Ben, your question is about like time to breakeven, time to get to target operating model. Is that the question? Benjamin Gerlinger: Exactly. D. Loper: Yes, Ben, this is Shane. All new bankers, whether they're business banking, commercial or middle market, we measure their effectiveness by risk-adjusted revenue. And we look at that from a total managed and self-originated perspective. And I think it's been said on previous calls, typically, we'll see kind of median breakeven at that 24- to 26-month range. So when you look at new bankers hired last year, a lot of those folks are approaching halfway through where their breakeven point is. And then this year, of that 50, I would think by the end of '27, they would be producing very well on a risk-adjusted revenue basis. And we measure that typically in multiples of the cost of that banker. Benjamin Gerlinger: Got you. That's helpful. And then is there any kind of mandate on -- whether it be the legacy core team you have today or new bankers being added on deposit gathering efforts specifically given the new kind of rate environment? Or how do you think about both sides of the balance sheet when you hire somebody in? Michael Achary: The question is around kind of our expectations on deposits versus loans? Benjamin Gerlinger: Correct. Michael Achary: I have a little trouble hearing you. I'm sorry to ask you to repeat. You want to tackle that one, Shane. Deposit expectations versus loans. D. Loper: Yes. I think it's -- for all of these bankers, we're expecting a blended portfolio. We're not interested in bringing on bankers that are just going to generate loan balances. I mean that's great, but we need the full relationship because with the full relationship, when I talk about that risk-adjusted revenue, you get the credit for the deposits, you get the additional fee income that comes through treasury and card and other activities like that. So when you think about how we are asking our folks to go to market, it's -- obviously, you're going to have to have a credit relationship at some point maybe to get into a new relationship, but we are expecting a full service to include treasury card and all the other fee products to include our sophisticated wealth management products for those business owners that I spoke about. John Hairston: Yes. Ben, this is John. I'll add some color, which I think may be helpful in what you're looking for. We've invested a tremendous amount of money and time over the last decade with tools that help our bankers understand what the implications are of their own portfolio balance sheet. So for example, if in a specialty line that generates credit, but really doesn't have the capacity to generate deposits, then their portfolio under their view is transfer priced on the lending side, risk adjusted for credit and credit degradation or improvement. So they really sort of are the balance sheet manager for their portfolio and their conversations with leadership around their goals look almost like an overall corporate balance sheet discussion in our ALCO meeting. It's a very sophisticated model that took us a long time to put together. And that really was the secret sauce to the improvement. We had an overall cost of funds while pivoting to loan growth last year and what we're expecting in '26. So it's a very balanced assessment. So I wouldn't call it as much a mandate as it is an overall risk-adjusted revenue target for the year and based on their tenure with the company, if that's a building revenue set over time, then the core folks really have to produce liquidity to keep up the funding requirement for the new folks if they're credit focused. But ultimately, their time to generate fee and deposit income will have to continue. So when we say risk-adjusted revenue, that's literally, as Shane said, that's deposits, fees and loans, offset by the risk. Does that make sense? Benjamin Gerlinger: Absolutely, that's helpful. Operator: We'll take the next question today from Gary Tenner from D.A. Davidson. Gary Tenner: I have 2 quick follow-up questions. I guess, the first, Mike, on your comment about NIM improvement, that 12 to 15 basis points you mentioned. I just wanted to clarify to me that sounded more like a 4Q to 4Q number, not necessarily not full year over full year. Is that the right way to think about it? Michael Achary: Yes, that's exactly right. Fourth quarter of '25, the fourth quarter of '26. Gary Tenner: Okay. And then the second, just in terms of the buyback, I don't want to put words in your mouth. But based on what you're talking about it being on a more level basis over the course of the year, subject to maybe leaning in if there were to be some kind of sell-off, it doesn't sound like there maybe is a great deal of price sensitivity at this point. It's more about working down the capital ratios a little bit. Is that also fair? Michael Achary: Well, I think it's fair to say that we're cognizant of the price sensitivity. So that's something we'll certainly consider as we execute that program over the year. the comment was really meant that you will not see a big aggregation or be unlikely to see a big aggregation of buybacks in one quarter like we did in '25. I think it will be all things equal, a little bit more spread evenly across the year. I mean that be literally be across the year. Operator: Next, we'll take a question from Christopher Marinac from Janney Montgomery Scott. Christopher Marinac: Just want to dig a little bit into credit quality. And just was curious if there's anything on the commercial charge-offs in Q4 that would sort of be more just temporary from year-end cleanup? Or would you see perhaps a slightly higher trend going into '26? Michael Achary: Thanks, Chris, for the question. We'll wake up Ziluca to answer that. Christopher Ziluca: Yes. Thanks for the question. Appreciate it. Yes. So from a credit quality perspective, actually, we really are quite pleased with what we see as kind of a very resilient portfolio. Over the past really a couple of years, we've fine-tuned our underwriting and portfolio management processes. So we feel that, that's helping us kind of navigate any sort of specific issues. And as you can see, with both nonaccruals and criticized going down in the quarter, we saw a lot less inflows in general this quarter, which kind of helped with that situation. And then on the charge-off side of things, if I look at, for instance, like the top 4 charge-offs in the quarter, they're really in many different industries. There's not a single industry in there that is similar to the others. So they really are very situationally specific. And in many instances, we had some reserves in place, some specific reserves in place on those matters that were already in our criticized and nonaccrual book. And so that's one of the reasons why you see -- if you go into the more details, specific reserves actually did come down a little bit this quarter because we made a decision to charge those off. Christopher Marinac: Great. So I guess the question, I think is, is there room for you to let the reserve kind of run down over this next year? I mean you're still having low losses relative to a 3- or 3.5-year maturity for the whole book. I'm just curious if you've got cover to kind of gradually lower that over time. Michael Achary: Yes, Chris, this is Mike. I mean, admittedly, we're fairly high where we are at 143 basis points. So I think the short answer is, yes, there's probably a little bit of an opportunity, but we're very cognizant of not letting that ratio get too low. So I don't know that you would see us below 125 or 130 basis points. And again, by making that comment doesn't mean that we're trying to get to that level. It just means all things equal, I don't think we would go below that threshold. Christopher Ziluca: Great. And then as this year plays out, depending on how many we do or don't get in terms of Fed rate cuts, how does that impact this kind of risk-adjusted pricing as you think about it? I know the nominal returns are coming down or nominal yields are coming down, but is the risk-adjusted you think going to be stable? Or maybe that's more internal than you share with us, but just curious how you think about it. Michael Achary: Yes. I don't think it'd be at least stable compared to where we are now, even with a couple of rate cuts. Again, from Shane's comments, and I'll let him add some color if he'd like to. But we're very deliberate in terms of the kind of new loan growth we're trying to add to the balance sheet, very deliberate in terms of the credit quality that we consider. So the risk-adjusted spreads should not, all things equal, compress considerably. D. Loper: Yes. I think we can get better at our pricing and overall deal execution to improve the overall loan yield. I know you're asking about risk-adjusted spread. But I think the better we can execute, the better we can price. And one of our strategic initiatives for 2026 is to calibrate how we actually price and our pricing models to win business and to put some positive pressure on loan yields. And that calibration is going to require intentional focus given potential rate reductions, competition for new deals and pressure on current clients. So I feel like we have an opportunity to put that positive pressure in and Emory Mayfield, who's our new Chief Banking Officer, will be leading that strategic initiative as we go into the year. Operator: [Indiscernible] and everyone, at this time, there are no further questions. I'll hand the conference back to Mr. John Hairston for any additional or closing remarks. John Hairston: Thanks, Lisa, for moderating the call. Thanks, everyone, for your attention. Have a wonderful new year, and we look forward to seeing you on the road. Operator: Once again, this does conclude today's conference. We would like to thank you all for your participation today. You may now disconnect.
Operator: Thank you for standing by, and welcome to Interactive Brokers Fourth Quarter 2025 Earnings Conference Call. At this time, participants are in a listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 11 on your telephone. To remove yourself from the queue, you may press star 11 again. I would now like to hand the call over to Nancy Stuebe, Director of Investor Relations. Please go ahead. Nancy Stuebe: Thank you. Good afternoon, and thank you for joining us for our fourth quarter 2025 earnings call. Joining us today are Thomas Peterffy, our Founder and Chairman, Milan Galik, our President and CEO, and Paul Brody, our CFO. I will be presenting Milan's comments on the business and all three will be available at our Q&A. As a reminder, today's call may include forward-looking statements, representing the company's belief regarding future events, which by their nature are not certain and are outside of the company's control. Our actual results and financial condition may differ, possibly materially, from what is indicated in these forward-looking statements. We ask that you refer to the disclaimers in our press release. You should also review a description of risk factors contained in our financial reports filed with the SEC. In the fourth quarter, we continue to demonstrate the power and leverage of our diversified, fully automated global platform, which serves the full spectrum of investors from those new to the markets buying their first fractional share of a magnificent seven stock in a cash account, through sophisticated traders benefiting from low cost and geographical reach, to professionals using our APIs and algorithms to execute advanced quantitative strategies in portfolio margin accounts. Many clients start gradually and evolve into active sophisticated traders, and our platforms are designed to support that entire journey, supporting their growth with us along the way at every stage. We continue to see strong international interest in the global securities markets on a secular basis as people around the world seek higher returns on their assets as interest rates decline, and as other financial institutions pay them less. In 2025, we added more than 1,000,000 net new accounts, an annual record for the firm. Client equity rose 37% to $780 billion, an increase of more than $200 billion year over year and the first time we have ended a year with over three-quarters of a trillion dollars in client assets. Cyclically, rising markets and expectations for lower interest rates drive increased client engagement. Clients traded actively, grew more comfortable taking on risk, increased their market exposure, and made greater use of leverage through margin loans. They also expanded beyond equities into other asset classes, including options and futures. Our client-centric focus, by which we mean delivering global market access at extremely competitive pricing on state-of-the-art platforms, is best reflected in one simple measure: our client's performance. In 2025, the S&P 500 rose 17.9%. By comparison, our clients outperformed. Individual investors here were up on average 19.2%, or 130 basis points above the S&P 500. Financial advisers were up 20.57% on average, or 267 basis points above the market. Hedge fund clients were up 28.91% on average, a full 11 percentage points ahead of the S&P. This performance is the direct result of our focus on empowering clients through low trade and margin pricing and less drag from costs, superior trade execution, advanced order types and algorithms, the advantage of attractive interest rates on cash and short proceeds, as well as the many advantages of our platforms, from AI and research tools to comprehensive educational offerings. It is why clients come to us. No gimmicks. No games. Just the best prices and the most comprehensive platforms. It is why the best-informed investors choose Interactive Brokers. That client focus, combined with strong global demand for investing, translated into exceptional financial results. Quarterly adjusted pretax income reached a record level of more than $1 billion for the fifth consecutive quarter, despite lower interest rates. For the full year, we generated more than $6 billion in net revenues for the first time. We continually invest in improving our platform from front to back end, supported by a global team of programmers who deliver new functionality, ongoing enhancements, and client-driven improvements, while also meeting the diverse regulatory requirements across the many market centers and currencies we support. Throughout 2025, we introduced a wide range of new products and enhancements worldwide, guided by deep engagement with a strong understanding of the needs of our diverse client base. This year, we expanded market access to Brazil, Taiwan, the UAE, and Slovenia, with additional countries planned for 2026. We continue to add to our ever-growing list of country-specific tax-advantaged funds. We offer traditional and Roth IRAs in the US, as well as Canadian RRSPs and TFSAs, UK ISAs, French PEAs, and Hungarian TBSCs. This year, we added Swedish ISKs, Japan's NISAs, and Canadian FHSAs. We now have several billion dollars of client assets in these accounts and are able to support individual investors at all stages of their investment journey. From a funding perspective, clients can now fund their accounts using Stablecoin, making cross-border account funding easier and available 24/7. We doubled the amount of cash eligible for our FDIC suite program from $2.5 million to $5 million for individual accounts and from $5 million to $10 million for joint accounts. In October, we teamed with Carta to introduce our premium charge card globally. The Carta Visa Infinite card allows eligible clients to link their accounts and access their cash instantly anywhere in the world with no foreign transaction fees, an especially compelling benefit for our global client base. And it comes with premium cardholder benefits. Platform-wise, our Global Trader 2.0 mobile platform was launched with a comprehensive UI/UX revamp and an all-new look and feel. Quick access trading tools accessible via a swipe or long press were added. Watch list management was streamlined, and AI news summaries incorporated. Our leading-edge IBKR desktop platform delivered several highly requested enhancements this year, including multi-monitor support with independent windows for charts, option chains, and more, multiple new screener filters, a named strategy selector for clients to quickly access popular combo strategy types, and a new Linux beta installer, extending IBKR desktop into the Linux ecosystem and addressing another long-standing client request. We introduced connections where clients can enter a company's ticker and explore its broader investment ecosystem, including options, ETFs that hold the stock, forecast contracts, related economic indicators, competitors, and more. This feature is already seeing strong engagement. We have embedded artificial intelligence throughout our organization, benefiting both clients and employees. We launched AI-powered investment themes, allowing clients to enter a concept such as nuclear energy or quantum computing and instantly receive a list of actionable investment ideas, significantly streamlining the research process. We also launched AI-generated news summaries, receiving FINRA approval midyear. These summaries deliver timely, relevant news directly tied to clients' portfolios, helping them stay informed more easily. Across our platforms, we launched the first version of Ask IBKR, an innovative AI-powered tool that lets our clients interact with and ask questions in plain English about their portfolios. Clients can ask about performance and allocation analysis, track their activity, and get performance attribution. They can ask to compare their performance versus various benchmarks, find their top dividend payers, calculate their capital gains and losses, and analyze sector exposure. Performance can be analyzed across flexible time frames: one year, one month, period to date, etc. Staying on top of an active portfolio with rapid access to a wide breadth of data is critical for successful investors. Beyond these highlights, we have delivered a wide range of enhancements and new features. I encourage you to explore our platforms on our website. Or better yet, request a demo. Seeing our offerings firsthand across a broad range of client types and experience levels is the best way to appreciate what we have accomplished. In other areas of our business, to further enhance execution quality, we expanded our network of liquidity providers across bonds, options, overnight trading, international stocks, and ETFs and ADRs. And to further support our non-US client base, we translate our investor education courses and webcasts into multiple languages, making it easier for clients around the world to get started on investing on our platform. Trading volume during our overnight hours continues to grow rapidly, up 76% from last quarter and more than 130% from the fourth quarter of last year. Providing deep liquid markets that are not constrained by US regular trading hours is critical to meeting the needs of a globally active client base. And finally, a note on ForecastX. We created this exchange, which is regulated by the CFTC, to support trading on consequential predictions that have measurable third-party verified outcomes. ForecastX traded 286 million pairs this quarter, up from 15 million pairs in the third quarter, and now has four members quoting into the exchange, which has over 10,000 listed instruments. Our pipeline of new business, new initiatives, and enhancements remains as strong as ever, and our platforms resonate with people around the globe. We are not stopping here to rest on our achievements. We have many projects to work on, which we will look forward to sharing with you once they become a reality. With that, I will turn the call over to our CFO, Paul Brody. Paul? Paul Brody: Thank you, Nancy. Welcome, everyone, to the call. We will start with our revenue items on page three of the release. We are pleased with our financial results this quarter as we produced near-record net revenues and pretax income for the quarter and record results in all the major financial categories for the year. Commission revenues rose to a record $582 million this quarter. For the full year, commissions were $2.1 billion, up 27% from last year, driven by higher trading volumes across the major product categories. Net interest income reached $966 million for the quarter, and a yearly record of $3.6 billion despite multiple rate cuts in nearly all major currencies. The continued risk-on environment during most of the year led to a significant increase in margin borrowing, while strong net customer deposits led to higher segregated funds balances. These revenues were partially offset by the interest we paid to our customers on their cash balances. We saw fewer hard-to-borrow names in securities lending than in the third quarter, but their presence across the second half drove full-year results well over the prior year. Other fees and services generated $85 million for the quarter, and $291 million for the year, both up modestly versus the prior year period. This is primarily driven by higher payments for order flow from options exchange mandated programs and higher FDIC suite fees, despite reductions in risk exposure fees. Other income includes gains and losses on investments, our currency diversification strategy, and principal transactions. Note that many of these non-core items are excluded in our adjusted earnings. Other income was $10 million as reported, and $37 million as adjusted, primarily driven by a loss in our currency diversification program. Turning to expenses, execution, clearing, and distribution costs were $91 million in the quarter, down 21% from the year-ago quarter, primarily due to two factors. First, we had a full quarter of an SEC fee rate at zero. In 2024, SEC fees were $22 million. And second, higher volumes meant we earned higher rebates at exchanges as a result of our smart order routing optimization, particularly for options. These costs and rebates are largely passed through to customers, so these reductions do not have much impact on our profitability. But they are components of our clients' profitability, and this execution quality is one of the reasons they choose to execute with us to maximize their returns. As a percent of commission revenues, execution and clearing costs were 11% in the fourth quarter for a gross transaction profit margin of 89%. We calculate this by excluding from execution clearing and distribution dollars $23 million of non-transaction-based costs, predominantly market data fees, which do not have a direct commission revenue component. Compensation and benefits expense was $153 million for the quarter, for a ratio of compensation expense to adjusted net revenues of 9%, versus 10% of the prior year quarter. As always, we remain focused on expense discipline as reflected in our moderate staff increase of 6% over the prior year. For the full year, this ratio was 10%, down from 11% in 2024. Our headcount at December 31 was 3,182. G&A expenses were $62 million, up 5% from the year-ago quarter, primarily from increasing spending on advertising. For the full year, G&A was $247 million, down from last year, which included a legal settlement that added $78 million and a one-time charge of $12 million to consolidate our European operations. Excluding those items, G&A for the year was up 10%, predominantly on higher advertising expense. Our pretax margin matched the third quarter record of 79%, and achieved a new record of 77% for the year, both as reported and as adjusted. Income taxes of $99 million reflect the sum of the public company's $39 million and the operating company's $60 million. The public company's effective tax rate was 12%, below its typical range, primarily due to tax benefits we were able to capture in 2025. Moving to our balance sheet on page five of the release, our total assets ended the year 35% higher than the prior year at $23 billion, with growth driven by higher margin lending and segregated cash balances. New account growth also helped drive our record customer credit balances. We continue to have no long-term debt, and profit growth drove our firm equity up 23% for the year, to exceed $20 billion for the first time. We maintain a balance sheet geared towards supporting growth in our existing business and helping us win new business by demonstrating our strength to prospective clients and partners while also considering overall capital allocation. In our operating data on pages six and seven, we have record customer activity in options, with our contract volumes up 27% over the prior year quarter, and up 26% for the full year, in line with industry volumes. Futures contract volumes rose 22% for the quarter to a near record and were up 12% for the full year, well above industry volumes. Stock share volumes rose 16% for the quarter, and 38% for the full year. Stock share volume generally increased versus last year, as clients gravitated to larger, higher quality names, and traded relatively less in pink sheet and some other very low-priced stocks. Growth in the notional dollar value of shares traded in the quarter was significantly higher than the growth in share volumes, combined with the rise in major equity indices worldwide. On page seven, you can see that total customer DARTs were 4 million trades per day in the quarter, up 30% from the prior year. Commission per cleared commissionable order of $2.64 is down from last year, primarily due to a mix of smaller average order sizes in stocks and futures and slightly higher in options, and the previously mentioned SEC fee rate moving to zero, which lowered commissions as well as execution and clearing expense. Page eight shows our net interest margin numbers. Total GAAP net interest income was up 20% from the year-ago quarter to $966 million, just $1 million shy of the third quarter's record, despite benchmark rate cuts in multiple countries. Adjusted for NIM presentation, net interest income was just over $1 billion for the first time. We include, for NIM purposes, certain income that is more appropriately considered interest, but that for GAAP purposes, is classified as other fees and services or as other income. Our net interest income reflects strength in margin loan interest and securities lending, partially offset by a modest increase in interest expense on customer cash balances despite lower benchmark interest rates. Many central banks, including the UK, Canada, Hong Kong, and the US, reduced rates this quarter, while others, including Australia, Europe, and Switzerland, held steady. Year on year, the average US Fed funds rate fell 75 basis points, or by 16%. Despite this decline, our margin loan interest was up 17% and our segregated cash interest was down only 3%, both bolstered by higher balances. The average duration of our investment portfolio remained at less than thirty days. During this quarter, the US Dollar yield curve remained flat to inverted from the short to medium term. So we continue to maximize what we earn by focusing on short-term yields, rather than accepting the lower yields and higher duration risk of longer maturities. This strategy also allows us to maintain a relatively tight maturity match between our assets and liabilities. Securities lending net interest was higher than last year, and we did not see as much activity in hard-to-borrow names as in the third quarter. Contributors to annual growth included several factors: our growing account base, which increases our inventory of attractive stocks to lend, including international securities; the interest we pay on short cash balances, which makes us attractive to investors who utilize short selling; our fully paid lending program, which shares proceeds with clients generally on a fifty-fifty basis, appealing to investors looking to maximize the return on their portfolios; and finally, activity has picked up in some of the typical drivers of securities lending, including IPOs and merger and acquisition activity. As most benchmark interest rates are now sufficiently above zero, a portion of what we earn from securities lending is classified as interest on segregated cash. We estimate that if the additional interest earned and paid on cash collateral were included under securities borrowed and loaned, total net revenue related to securities lending would have been $290 million this quarter, up 58% over the prior year quarter. Fully rate-sensitive customer balances ended the current quarter at $24.7 billion versus $19.1 billion in the year-ago quarter. Now, for the estimates of the impact of changes in rates, we estimate the effect of a 25 basis point decrease in the benchmark fed funds rate to be a $77 million reduction in annual net interest income. Note that our starting point for this estimate is December 31, with the fed funds effective rate at 3.64% and balances as of that date. Any growth in our balance sheet and interest-earning assets would reduce this impact. About 29% of our customer interest-sensitive balances is not in US dollars, so estimates of the US rate change exclude those currencies. We estimate the effect of a 25 basis point decrease in all the relevant non-USD benchmark rates would reduce annual net interest income by $31 million. In conclusion, we posted another financially strong quarter in net revenues and pretax margin, leading to a record year. This reflects our continued ability to grow our customer base and deliver on our core value proposition to customers while simultaneously scaling the business. Our business strategy continues to be effective: automating as much of the brokerage business as possible, continuously improving and expanding what we offer, while minimizing what we charge. And with that, we will turn it over to the moderator and open up for questions. Operator: We will now open for questions. You will need to press 11 on your telephone. To remove yourself from the queue, you may press 11 again. First question comes from the line of Brennan Hawken of BMO Capital Markets. Your line is open, Brennan. Brennan Hawken: Hi. Thanks for taking my question. I was curious about the pull on the customer credit balances. It seemed as though the decline in the amount paid, the yield did not come down quite as much as we were looking for. Just some color around some of those dynamics, and what might have caused the lower rates not to flow through and whether or not there might just be some more on the come here in the next quarter or two? Paul Brody: Yes, sure. So obviously, the net interest income and the major segments there being segregated cash, and margin loans and because of our credit balances, all operate a little bit differently. So for SEG cash, when the rates come down, even though we have a relatively short duration, there is a little bit of tail out there. And we retain somewhat higher rates while we pay lower rates on our credit balances during that period because they are based on the overnight rates. The rest is balanced changes. So our very strong performance in the margin lending balances vastly overcame the drop in the general benchmark rates. Brennan Hawken: Okay. Got it. So we got a, basically, a repricing lag on some of the asset side. That makes sense. And for my follow-up, I believe the comment period for your bank charter application ended today. Could you maybe update us on that process, what you have heard back from the regulators, and what kind of impact we should expect if the bank charter is approved and you go forward with the bank? Paul Brody: So we have been in contact with the OCC for a while. The way this process works is you are in contact with them. You talk to them. You present the business plan. They point out what they do not like or what you would like to receive more information on. Once you get through this stage, they give you the go-ahead to officially file the application, which we did. And they acknowledge that, then there is a several months long time period that they have to actually approve your request. There are others applying for the National Trust Charter Bank. I do not know exactly where we are in the queue. But my expectation would be to be operational by the end of this year. Now exactly what that means for us is as a broker-dealer, the regulations do not permit us to custody assets of mutual funds and exchange-traded funds. A trust charter bank will allow us to do that. So that is the rationale behind our application. Brennan Hawken: Thank you for taking my questions. Operator: Thank you. Our next question comes from the line of Patrick Moley of Piper Sandler. Please go ahead, Patrick. Patrick Moley: Yes. Good afternoon, and thanks for taking the question. I had one on prediction markets. There has been a lot of speculation recently about whether regulators or the US courts will allow prediction market platforms to continue offering sports contracts. I was just hoping to get an update from you on how you maybe see this all playing out between the platforms and the sports books. And then with ForecastX launching NFL contracts in the fourth quarter, just wondering, you know, if there what you would need to see from regulators or the courts that would make you comfortable offering contracts like that to IBKR customers or if this is an aspect of prediction markets that you just think is, you know, will never make sense to commingle with your existing customer base? Thanks. Paul Brody: So, I do not know if you are aware that Massachusetts just came out with a ruling against Kashi. So the judge ruled against Kashi, and that probably means that Kashi will no longer take customers from Massachusetts. But, you know, this is certainly not the final word, so we, you know, your guess is as good as ours as to what will happen here. And so, luckily, you know, we Interactive Brokers does not rely on sports. We do believe that these contracts will have enormous applicability to many, many things about the future, and they will be very, very successful. And it does not really have to depend on sports. Patrick Moley: Okay. Great. And then just as a follow-up, you are sitting on a healthy pile of excess cash. Any updated thoughts on the appetite for M&A and capital return priorities? And then on M&A specifically, I know in the past, you have said that with traditional brokerage models, it has been difficult to make the deal map work with your pricing model. But in an emerging asset class like prediction markets, I am just wondering if M&A could make sense here for you. Thanks. Paul Brody: Anything is possible, but we are not going to buy a firm that is doing sports betting. And there is nothing else out there at the moment. Right? Thomas Peterffy: It is not only that. We have our own platform for aspect. It is growing nicely. Mid-December of last year, we had rolled out forecast specs on a 24/7 trading schedule. We added liquidity providers. ForecastX now lists over 10,000 different instruments, and the trading volumes have increased significantly. So no reason for us to look for an acquisition in this space. Patrick Moley: Alright. Thanks so much for the answer. That is it for me. Operator: Thank you. Our next question comes from the line of James Yaro of Goldman Sachs. Please go ahead, James. James Yaro: Thanks for taking the question. So you touched a little bit on the OCC, National Trust Bank Charter. I was hoping you might be able to touch a little bit on the aspirations for a European banking license. And if so, where you are in the process of looking to get one of those? Paul Brody: We have not started the process. Having a bank license in Europe would come with some benefits. Milan Galik: It is not urgent for us to have one. We will eventually have a license in Europe. The most likely place for us to acquire it would be in Ireland, where our broker operations are already regulated by a banking regulator with whom we have a very good relationship. James Yaro: Okay. Excellent. I just wanted to ask a follow-up on prediction markets. I was hoping, Thomas, you might be able to just update us on the institutional adoption of prediction markets so far. How you plan to cater to this client set specifically, versus on the retail side? And over what period, in your view, will institutional prediction markets fully develop? Thomas Peterffy: So our most frequently traded contracts are temperature contracts. We are currently working on tying up these temperature contracts with the electricity contracts and the natural gas contracts. And as you know, it is basically the utilities that have to every day make a judgment about the next day's use of electricity. So we are working on approaching those, and I think that sometime in the course of the year, you will see them onboarding. James Yaro: Okay. Thank you so much. Thomas Peterffy: Thank you. Operator: Our next question comes from the line of Craig Siegenthaler of Bank of America. Your line is open, Craig. Craig Siegenthaler: Good evening, everyone. Hope you are all doing well. My first one is on your expanding crypto offering. How should we think about the appetite for adoption across your base? And I am especially interested in the individual investors in the direct and the iBroker channel. You know, do they want crypto trading, and do they want it from IBKR? Milan Galik: Please tell the revenues are at the moment small relative to the overall company's revenues. Most clients who actively trade cryptocurrencies were already doing so before we entered the space. So we are not yet a major brand in the cryptocurrency space. You asked about the iBrokers. The answer is no. They have not been asking for access to crypto. I am not sure why that is. Our pricing is, we explained, over a number of earnings calls, is superior to our competitors in the United States and outside. We added crypto to our offering to round it up, particularly targeting investment advisers and multi-asset clients who wanted limited exposure to the assets. Our offering is competitive, we continue to add capabilities. New geographies, namely Europe, is currently the focus. I would expect us to go live with our offering in this quarter. And then I am hopeful that after transfers, once we support after transfers, some crypto assets will migrate to our platform and take advantage of our superior pricing. Craig Siegenthaler: Thanks, Milan. And just for my follow-up, it is one I have asked, I think, two quarters in a row now about account growth. Still very strong, worth at 30%. Thomas, any specifics on how long you can keep this up? Because your comments at that May conference, as long as I am alive. Thomas Peterffy: No. That is my answer. No. I do not see any reason why our account growth would slow down. It will continue at the rate that we have been going. You see, the benefit that we have is our platform is attractive to many people. Craig Siegenthaler: Okay. I will stop you. Thanks for taking my questions. Operator: Thank you. Our next question comes from the line of Dan Fannon of Jefferies. Please go ahead, Dan. Dan Fannon: Thanks. So just another question on growth, but more just in terms of investment and spend. As you think about all the initiatives you have entering this year, do you think the level of spend is growing? Is it consistent with the last couple of years? Or how should we think about, you know, overall expense growth? Milan Galik: The overall expense growth, I think, has been consistent over the past many quarters over the last few years. We have been cautiously adding to our headcount as we needed. This past year, it was around 6% growth. Our compensation went up by 10% or so. I would expect for us to see similar growth in the future. Of course, we have a number of AI initiatives in process, and those initiatives may affect the rate at which our expenses will grow in the future. Dan Fannon: Understood. And then just another one on account growth. In terms of the account growth today and where it has been coming from here in, you know, the latter part of '25 versus maybe where you think there is a growth going to change or other areas that could grow faster next year? Just trying to get a sense of what is different, in terms of where you are seeing more success or more markets are more mature versus less? Milan Galik: We have been universally doing well. We have been attracting large accounts, small accounts. Very active accounts, less active accounts. Retail, professional, institutional. They all come to us for the same reason. The technology works. Pricing is fair. Access is global. No need to rely on promotions or incentives. Dan Fannon: Understood. Okay. Thank you. Operator: Thank you. Our next question comes from the line of Benjamin Budish of Barclays. Please go ahead, Benjamin. Benjamin Budish: Hi, good evening, and thank you for taking the question. Maybe tying a couple of these previous questions together. I think, Thomas, in the press you made some comments about the US mid-elections later this year potentially juicing account growth. Can you maybe talk about the, and I think you have mentioned in the prepared remarks, the advertising spend is up a little bit. Even though I think a lot of your growth comes from word-of-mouth. Can you maybe talk about your plans to get or drive more engagement on Predictive Markets either through the Interactive Brokers platform onboarding more FCMs? How are you thinking about that opportunity coming up later this year, to kind of boost account growth even more? Thomas Peterffy: Advertising is certainly a key. We are getting better and better at advertising. And we are also increasing our advertising spending to some extent. So that is what it is. Benjamin Budish: Okay. Understood. We will not let our account growth go lower. Thomas Peterffy: Love the confidence. Maybe just one more question on prediction markets. You talked earlier about institutional interest. I am just curious, when we look at some of the institutional products offered at CME and ICE, we tend to see very, very large notional amounts and larger, you know, fees per contract, but less relative to the size to the notional amount of exposure. Just curious, onboarding insurance companies, electric utilities, these sorts of institutions, does that require any change to product design, or do you think it is more a matter of education, making sure the liquidity is there, and then it will, you know, be you will be able to onboard those kinds of customers. Paul Brody: Thank you. It is not a product design question. It is a matter of selling it. Benjamin Budish: Okay. Thank you very much. Fair enough. Operator: Thank you. I would now like to turn the conference back to Nancy Stuebe for closing remarks. Madam? Nancy Stuebe: Thank you, everyone, for participating today. As a reminder, this call will be available for replay on our website, and we will also be posting a clean version of our transcript on the site tomorrow. Thank you again, and we will talk to you next quarter-end. Operator: This concludes today's conference call. Thank you for participating. You may now disconnect.
Operator: Greetings, and welcome to the Fastenal Company Fourth Quarter and Annual 2025 Earnings Results Conference Call and Webcast. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. We ask you to please ask one question and one follow-up. As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to Dre Schreiber. Please go ahead. Dre Schreiber: Welcome to the Fastenal Company 2025 Annual and Fourth Quarter Earnings Conference Call. This will be hosted by Dan Florness, our Chief Executive Officer, Jeffery Watts, our President and Chief Sales Officer, and Max Poneglyph, our Chief Financial Officer. This call will last for up to one hour and we'll start with a general overview of our annual and quarterly results and operations, with the remainder of the time being open for questions and answers. Today's conference call is a proprietary Fastenal presentation and is being recorded by Fastenal. No recording, reproduction, transmission, or distribution of today's call is permitted without Fastenal's consent. This call is being audio simulcast on the Internet via the Investor Relations homepage, investor.fastenal.com. A replay of the webcast will be available on the website until March 1, 2026, at midnight central time. As a reminder, today's conference call may include statements regarding the company's future plans and prospects. These statements are based on our current expectations, and we undertake no duty to update them. It is important to note that the company's actual results may differ materially from those anticipated. Factors that could cause actual results to differ from anticipated results are contained in the company's latest earnings release and periodic filings with the Securities and Exchange Commission. We encourage you to review those factors carefully. I would now like to turn the call over to Mr. Jeffery Watts. Jeffery Watts: Good morning, everyone, thank you for joining Fastenal's fourth quarter 2025 earnings call. Before we get started, I do want to take a moment to thank the Fastenal Blue team and our employees across the world for their performance and dedication both this quarter and throughout the year. Your commitment and attention to customer needs have played a major role in making 2025 such an exceptionally successful year for Fastenal. So for that, thank you very much. Now let's jump into our results. Fastenal delivered a strong fourth quarter, capping an impressive 2025 recovery. We achieved double-digit growth in Q4 with daily sales up just over 11% and we continue to gain market share despite a sluggish industrial economy. This marks our second consecutive quarter of double-digit growth, but our success is not just about favorable comparisons; it's driven by continued progress on our strategic objectives, and they start with increasing our sales effectiveness. We are winning with key accounts and new contracts. Our focused sales strategy is yielding share gains. We're signing more national and global contracts and we're deepening relationships with existing large customers. In 2025, our total contract customer count improved by 241 or just over 7%, reflecting solid new customer signings and expansions. These partnerships with big customers are a core driver of our growth. When we think about enhancing our services, we've continued to expand our suite of value-added services, particularly our digital insight solutions. In 2025, we significantly grew our installed base of FMI devices and strengthened our digital footprint, which combines our e-commerce industrial within programs. By focusing and investing in these platforms, we're improving the customer experience and increasing retention. In fact, nearly half of our Q4 sales were transacted through FMI technology or other digital channels, really underlying how crucial these services have become to our customers. This is a key competitive advantage for Fastenal. It makes us stickier with our customers and more operationally efficient. It also provides our customers with ongoing insight regarding product consumption, insight uniquely able to provide in a wide range of locations. Lastly, expanding our market reach. During Q4 and really over the course of the year, we continued to win new sites, new markets, and we strengthened our presence in manufacturing, construction, government, and the transportation sectors. We've also continued to grow the range of services and products we deliver through our solutions suite. Thanks to these strategic efforts, Fastenal's Q4 financial performance was strong. We grew net sales to $2.3 billion in the quarter, like I said, an increase of 11% from Q4 of last year. The top-line growth combined with disciplined cost management led to strong bottom-line results. Q4 net income increased 12.2% year over year to $294.1 million with earnings per share of $0.26. For the full year of 2025, we achieved record annual sales of $8.2 billion, up close to 9% versus '24, and net income of $1.26 billion, up 9.4%. We also generated robust cash flow and improved our operating margin slightly in 2025, even as we invested in growth in technology. More importantly, we accomplished this while maintaining a balanced approach to pricing and cost. In Q4, we saw pricing contribute roughly 310 million 340 basis points of our sales growth. The pricing actions helped to offset inflationary pressures but still kept us essentially neutral on price cost for the year. Max will touch a little bit more on this later in the deck. We also leveraged our operating expenses. For example, SG&A as a percentage of sales declined to 25.4% in Q4 from 25.9% a year ago. This cost discipline, along with volume growth, allowed us to improve our operating margin year over year despite a different gross margin due primarily to timing factors. The bottom line is that we're controlling what we can control: pricing, costs, capital allocation to deliver more profitable growth. Now turning to slide four. This momentum with our customers is clearly reflected in our site growth. Site growth metrics for Q4. The number of active 50k+ sites rose 14% year over year, those ultra-high spend sites now account for just over half our revenue. We also saw solid growth in the 10k+ customer category, which was up roughly 8% to just over 11,700 sites in the quarter. These figures demonstrate that we're growing with our largest and most strategic customers, exactly what we're focusing our efforts on. At the same time, though, we did see a decline in the count of smaller customer sites, the under 5ks, which was not unexpected. But I do think it's important to point out that we did see growth in our 2ks to 5ks customer sites. But 94% of the under 5ks decline was in the under $500 per month customer sites and almost 55% came from the under $100 customer sites for the year. Our strategy deliberately emphasizes key account growth and driving deeper engagement at large accounts with significant spend potential rather than chasing low-volume transactional business. This strategy is paying off in higher growth, more resilient performance against the weak backdrop, and really more efficient focus on our sales talent. In manufacturing end markets, for instance, our heavy and other manufacturing customers grew double-digit rates in Q4, far outpacing general industrial production. We're winning with big manufacturers because of our service model, including the FMI technology, on-site service, and our extensive product range that really creates value for them. Likewise, in construction and other segments, our focused approach has led to share gains where competitors are just more constrained. We're going to continue to develop these customer partnerships and expand the Fastenal footprint of customer sites as it's a proven formula for sustainable growth. On to Slide five. This slide highlights how our investments in technology are contributing to our performance. Fastenal has long been a leader in industrial vending. We continue to expand those capabilities while also showing great progress on our new business, further strengthening our bonds with customers and also enhancing our efficiency. In Q4, we installed thousands more FMI technology devices at customer locations. We signed over 5,900 weighted FMI devices in the quarter, and that signing pace is slightly below the exceptionally strong Q4 of last year, but was still roughly 14% above our five-year average signing rate. For the full year of '25, we signed approximately 25,900 devices. As a result, our installed base of active FMI devices grew 7.6% year over year to about 136,600 units. We have a great team leading this initiative, and our capabilities keep getting stronger. The impact on our sales is significant, though. In Q4, 46.1% of our sales were dispensed or managed through FMI technology. That's up from 43.9% in Q4 of last year. Nearly half of our Q4 revenue flowed through Fastenal's vending or bin device at a customer site. This is a powerful indicator of how deeply embedded Fastenal has become in our customers' daily operations. It creates a sticky relationship, and this is a key part of our long-term growth model. The more we integrate with customers through on-site and digital solutions, the more indispensable we become. Our digital footprint extends beyond physical devices as well. We offer a robust suite of e-business solutions from EDI integrations with large enterprise customers to our e-commerce web platform. In Q4, our e-business sales grew 6.4% year over year. Our e-business now accounts for about 30% of our sales, 29.6% actually in Q4 to be exact. When you combine e-business and FMI, which together form what we call our digital footprint, these digitally enabled channels represent 62.1% of total Q4 sales. Over the past decade, we've steadily grown this number, and now roughly two-thirds of our business comes through this high-tech efficient channel. The remaining one-third is through traditional branch and direct sales, which is still very important. But the trend is clearly toward a more digital and connected service model. Overall for the year, Fastenal gained market share, grew much faster than the industrial sector, and we strengthened our foundation for years ahead. We closed out the year aligned as an organization with strong momentum, thanks to our focus on customers and the hard work of our people. I'm really incredibly proud of our team's dedication and the trust we've built with our customers. With all that said, I'm pleased to introduce our new Chief Financial Officer, Max Poneglyph. As many of you know, Max joined Fastenal in November, and this is his first earnings call as CFO. Max brings a tremendous amount of experience and fresh perspective to our finance and leadership team. With that said, Max, welcome aboard, and the floor is yours. Max Poneglyph: Thank you very much, Jeffery, and I'm excited and thankful to be part of this team. Good morning, everyone. Today, I'll cover our business and market trends, our fourth quarter results, as well as a few points about where we're thinking on 2026. Let's start with the business trends and market drivers slide. Looking at the broader operating environment in the fourth quarter, the U.S. economy continued to send mixed signals, especially in the industrial sector. While some areas showed resilience, others faced continued headwinds that impacted demand and supply chains. U.S. PMI and industrial production remained mixed in Q4, with heavier manufacturing segments showing relative weakness. PMI average was in the low 48s for the quarter, while industrial production was close to flat compared to last year, although with some improvement late in the quarter. Despite the softness, as Jeffery mentioned, our daily sales rate remained strong in Q4, up slightly over 11%. This growth was driven by several factors: new customer wins, increased share of wallet with existing customers, and our continued focus on operating more effectively overall. Importantly, customer sentiment remained favorable, even against the backdrop of trade and tariff uncertainty that has characterized much of 2025. As in prior years, the timing of the December holidays had a meaningful impact on our Q4 results. Just like last year, Christmas and New Year's fell mid-week, resulting in a similar pattern of extended customer shutdowns and compressed shipping windows. This led to, for a second year in a row, below normal sequential growth in December, as the industrial customers paused operations for longer stretches around the holidays. Sales to our manufacturing end markets outperformed other markets on a relative basis, led by growth in key accounts. Other segments such as construction, education, healthcare, transportation, and data centers also saw positive momentum. Our fastener product line growth outpaced non-fastener categories again this quarter. This was driven by several factors: successful signings of large customers, improved product availability due to strategic and thoughtful inventory investments, and targeted pricing actions that balanced competitiveness with profitability. Turning now to pricing. Our approach during the fourth quarter remained disciplined and responsive to the market. We implemented targeted price adjustments across select product categories, bringing our year-over-year price increase impact to approximately 3% for the quarter on matched product. These actions were designed to offset higher input costs, which they did, while remaining competitive in a challenging environment. We also continue to use data-driven pricing tools to identify opportunities for tailored increases, ensuring we maintained customer loyalty and minimized volume attrition. To summarize this slide, while the macro environment remained unpredictable, our diverse customer base, our focus on key accounts, and specific strategic initiatives allowed us to capture growth opportunities and strengthen our market position. Now I'll move to our margin performance and drivers slide to talk about profitability. Gross margin decreased 50 basis points in 2025 compared to last year, driven by timing elements within our cost of goods sold. These timing factors included the relief of certain inventory-related working capital, which caused related costs to move through the P&L more heavily in the fourth quarter. Additionally, the timing of supplier rebates negatively impacted gross margins. It's important to note that these effects do not indicate a change in our underlying cost structure. Related to tariffs and pricing, our net price cost impact was nearly neutral for the quarter, coming in at 10 basis points negative. Our teams actively manage tariffs and input costs to defend profitability, using a combination of data analytics and sourcing strategies. Throughout the year, our fastener expansion project was our largest positive contributor to gross margin, allowing us to maintain flat gross margin levels year over year on a full-year basis. This project will anniversary in 2026. As a reminder, this project did a number of things: helped us capture higher margin business, and it drove cost savings initiatives, such as price negotiations, consolidating purchases with preferred partners, and optimizing sourcing. These actions directly reduced costs and increased efficiency. The benefits from the fastener expansion project mitigated the dilutive effect on gross margin of the ongoing shift toward larger customers. As discussed in the past, these accounts tend to generate higher volumes but at lower gross margin rates. We're comfortable with this trade-off, as these relationships provide long-term stability, open doors for cross-selling, and deeper integration. The negative impact at the gross margin level is offset at the operating margin level through efficiency gains and cost leverage. Regarding 2026 gross margin, please remember that our fastener expansion project will anniversary after Q1, so the modest annual gross margin contraction that we've seen historically should be considered in thinking about our 2026 performance. However, we believe this modest contraction will be offset within SG&A as we find efficiencies and further leverage our fixed costs. Now back to 2025. SG&A was 25.4% of net sales in Q4 of 25% compared to 25.9% in the previous period. This demonstrates strong ongoing cost discipline as we more than offset the reload of incentive compensation and our ongoing investments in technology, analytics, and sales support. In addition to our strong sales growth and disciplined expense management, we increased our return on invested capital by 90 basis points on a trailing twelve-month basis, reflecting our approach to capital allocation and our commitment to maximizing asset productivity. In total, our performance demonstrates that we can invest for growth while maintaining a sharp focus on profitability, even as our mix evolves and we pursue larger, more complex accounts. Turning to the cash flow and capital allocation slide. Operating cash flow is approximately $370 million, representing 125% of net income. Cash generation remains strong, even as we added working capital to support growth but on a more efficient basis year over year. Accounts receivable and inventory rose 8.7% from last year, reflecting our expanding customer base, growth with existing customers, and our fastener expansion project. Accounts payable increased primarily due to inventory growth. Net capital spending for 2025 was $230 million, which was 2.8% of sales, with investments focused on strengthening our Fastenal Managed Inventory or FMI hardware capabilities, upgrading facilities, advancing IT infrastructure, and expanding our vehicle fleet to support field operations and deliver efficiency. Regarding CapEx for 2026, we will increase our investments to support our growth expectations. We plan to invest in hub capacity, additional FMI device purchases, and IT enhancements, with CapEx expected to be approximately 3.5% of net sales. These investments are designed to drive efficiency, scalability, and customer value. During 2025, we returned just over $1 billion in dividends for the full year, accounting for approximately 80% of net income, reflecting our confidence in cash generation and our commitment to returning value to shareholders. Overall, our capital allocation follows the same framework you've seen from us. We invest in FMI hardware and hub automation to drive throughput and accuracy. We invest in IT and digital capabilities to improve customer experience and sales productivity. We invest in fleet and facilities to sustain service levels. We return cash through a consistent dividend, and we remain opportunistic on buybacks. Our balance sheet remains capitalized, preserving flexibility to continue investing in growth. In closing, I'll just summarize my portion before turning it over to Dan. In 2025, we delivered continued share gains through our key account strategy and new contracts, expanded our FMI technology and digital footprint, and deepened our business in manufacturing and non-manufacturing segments. Gross margin was protected mainly due to our fastener expansion and supplier initiatives, while operating margin benefited from disciplined SG&A management. We generated strong cash flow with capital allocation focused on growth, technology, and shareholder returns. These accomplishments put us in a good position for continued success in 2026. Thank you. With that, I'll turn it to Dan. Dan Florness: Thanks, Max, and good morning everybody, and thanks for joining our call. Before I run through the yield summary and recap on Page nine, I just wanted to share a couple of thoughts. First off, for Jeffery Watts, I suspect all of you saw the announcement we made in late December. I want to say congratulations to Jeffery on being named our next CEO, taking effect in July. Max, we just heard from, congrats on being named Fastenal's CFO, and welcome to the Blue team. Just to let Max get off to a calm start on his first earnings call and for Jeffery to be CEO-elect, we decided to do a different type of call. You may have noticed that our scheduled earnings release date was yesterday, Monday. About ten days ago, using that keen tool called the calendar, we realized we were releasing earnings that we had set up a year and a half ago. We realized we had selected Martin Luther King Jr. Day, and the market would not be open. So we delayed it a day. The problem is that means Jeffery is on his way to Europe. So he's sitting in Kitchener, Ontario. Dan had a commitment, and he's sitting down in Southeastern United States. Max is by himself in Winona. So we hope the Q&A is not too jagged because we're not sitting in a room together. With that said, from a market outlook standpoint, as Max touched on and Jeffery touched on, the broader market conditions remain mixed. We see ongoing challenges in industrial production. Max did note a possible uptick in industrial production during the quarter. In all candor, we haven't seen it in our numbers. However, we did see some signs of positivity from some of our suppliers. I'll touch on that in a few minutes. But if there's a green shoot or two that's popping up, we would welcome it. It'd be nice to have the market give us a little lift as opposed to the Fastenal organization doing it solo. If I look at pricing neutrality and managed tariff impacts, we have continued to defend profitability through the year, struggling a little bit with that in the fourth quarter, and you see that in our numbers. It's really in the non-fasteners part of our business. As we talked earlier in the year, we were talking about how we're managing through the tariffs and the price cost perspective. Our covenant with our customer is we provide them a great resilient supply chain, great products, visibility to price, and the cost in that supply chain. When there are things that drive costs up, our obligation to our customer is to let them know what we're seeing in their pipeline to help them plan for the future. With fasteners, we are sourcing from the ultimate manufacturers, and it gives us a tremendous amount of visibility to manage that with our customer. As we touched on in our October earnings call, with the non-fasteners, it's a piece where we have that same kind of visibility. However, there is a big piece where we don't. And that's where branded suppliers come into play, particularly in the fastener and cutting tool arena, where there's a much different dynamic in the marketplace. There was a question asked on the call last quarter about how we react to that and how we see that. Where suppliers really focus on Q by Q what they're seeing based on the source supply of that part. The relationship works really well. Where customers, where suppliers try to move that across their landscape of products, that's where it becomes more problematic. And our lead time is different. So in the fourth quarter, we did feel a bit of a squeeze on that. And what I could tell you as we exit the quarter and move into the new quarter, a lot of things have been in motion in the latter half of the quarter. Things are in motion currently. They really center on a few things. One, from our supplier perspective, push back like crazy, especially when the increase in cost we're seeing isn't intuitive to the known source of supply by geography. In other words, don't blend it across everything when you have products that aren't tariff impacted as others. That's one. So push back on the supplier base really hard. Second is to have frank conversations with our customers. In that, we talk about this brand just raised their price X. Having that frank conversation. The third component is a really firm push towards product substitution where there's not willingness to move on price and the supplier is not willing to move on cost. So it's really balancing that. We have our work cut out for us. What I found in my thirty-year career with Fastenal is I always bet on the blue team to perform in circumstances like this. As Max and Jeffery also touched on, we have great momentum as we exit 2025. We anticipate double-digit net sales growth in 2026, supported by FMI technology and digital solutions, and feel really good about the momentum. I know there's probably some consternation about some of the sequential patterns in November and December. What I would tell you, regardless of the November and December sequentials being strong or weak, thirty years of experience in Fastenal has told me November and December don't matter. It's all about where we will be in January, what did we grow to in the September, October timeframe because that really tells me we're going to start off the New Year in January. In that regard, we had incredibly strong progress throughout the year. September, October was up double-digit from where we were in January. Frankly, they were in the low teens from where we were in January, but January was a softer number. I feel really good about momentum coming into the New Year. From a financial discipline standpoint, I'm really pleased with the way the organization managed our SG&A. I'll say it this way, and this is how I shared it with the Board. A few of the analysts have talked about our shock absorbers in our SG&A, the incentive comp, and how we reward for earnings growth. If you read through our proxy, you could really see how that story works and that thought process works throughout the organization. When I look at a year like 2024, our financial statements say our earnings were down $18 million. That's really not the case. We delevered in 2024, and our earnings were down about $40 million. But our incentive comp compressed, and we funded 55% of that and only reported 18% down. This year, if you look at the leverage in our business, our earnings on the financial statements say we grew about $145 million. That's actually not true. Our earnings grew just over $200 million, and we shared about 29% of that as our incentive comp expanded. So it really ate into our ability to get incremental margin in 2025. We only have one quarter of that as we move into '26. So I feel really good about our ability. But my compliments to the Blue team on managing SG&A despite the fact we had a reload of incentive comp. As Max pointed out, strong cash generation and our capital allocation is focused on growth, technology, and returning to shareholders cash that we don't need today in the business because our cash generation capability is so strong. I'm pleased to say our return on invested capital increased year over year by 90 basis points, coming in at around 31%. From a priority standpoint, continued investment in tools, technology, and analytics focusing on operational excellence, our customers' experience, any innovation, and employee engagement we can bring to the marketplace. Finally, from a strategic progress standpoint, I think one thing Fastenal does really well and Jeffery does particularly well is to our internal teams we point out the possible. If you think about Fastenal, we're really not an $8.2 billion organization. There are 240 districts within Fastenal that average around $34 million a year. We look at the business from the standpoint of those 240 business units. We see excellence and strength in that group, and we share the story with all that we see. What always is the growth differentiator from district to district is who has the best key account strategy. We impress upon everybody. That's why our bucket reporting is so key. We impress upon everybody the importance of that. I'm really excited about the new customer site wins that Jeffery talked about earlier in his talk. Finally, you see a sheet in there you've never seen before. This is an internal document, and you know Fastenal. Transparent. We share internal documents with our investors. It's how we think about the future. As Jeffery leads this next chapter of Fastenal, his challenge to the group is what do we look like when we're a $15 billion organization? What do we need to do to achieve double-digit market share gains in the marketplace? So regardless of what the market is doing to push us, how do we push ourselves into the future? It really centers on three key objectives: increasing our sales effectiveness every day, enhancing our service, and expanding the total addressable market. Most of that is through geography and products. We'll see what possible things like services might influence that. You see a thing on there, Blue Ops Fast Crib. We're not going to touch on that today. But look for us talking about it in the months and years to come. We see that as another leg growth driver for Fastenal in the future. With that, I'll turn it over to Q&A. Operator: Thank you. We'll now be conducting a question and answer session. Our first question is coming from David Manthey from Baird. Your line is now live. David Manthey: Thank you. Good morning, guys. Dan Florness: Hey, Dave. David Manthey: First off, double-digit net sales growth in 2026. It looks an awful lot like guidance. I'm just wondering, are you guys feeling okay up there? Dan Florness: It's not guidance, Dave. We look at momentum, and that's how we're thinking about the year. David Manthey: Well, so along those lines, Dan, let me peel that back a bit. You know, you've given us, of course, you're looking for large customer wins. You've given us this machine equivalent unit goal that you have. But I guess when we see that type of target, I guess putting it together with the 10% share gain and the price you're getting, could you just sort of peel it back for us and talk about the just the broader economic assumption that underpins that as well as what type of price contribution you're expecting? I hope that's not going too far, the sort of fundamental to what you're talking about here. Dan Florness: Yes. As we move, I'm not going to get too deep into the pricing piece, Dave. Because we've done such an excellent job of being wrong every time we talk about it. 2025, at some point, you learn the wisdom of not talking about it. With that said, there are cost increases that are flowing through the P&L. There are discussions we're having with our customer every day about price. Once as we move through the year, that piece will normalize. The piece we laid out there on that company strategy is really about gross margin and revenue growth. It's about having a great plan, but it's about having the attitude that this is what we're going to do. I feel really good when I look at the pieces of alignment with our sales team of our ability. The market is big. We've talked about that in the past. But feel really good about our ability to execute. We really have aligned the pieces, I believe, to do well in 2026. You know, we're probably, you know, like anything, you get a little bit after going through '23 and '24, it stunk. We were struggling to get our traction. We have our traction now, and we feel really good about momentum coming into the New Year. In fact, I was startled this morning because I had an email from Casey Miller that scared me. I was actually searching for something Kevin Fitzgerald had sent me because I was preparing for the call and not being in the room, you're feeling a little naked. I was reading this message from Casey, and it had one sentence: "Weather is killing us this month." Now we have snow in Houston and New Orleans. All of a sudden, I looked at it, and it was an email I saved from January 20, 2025. I just saved it. Sometimes you have these things you save for weird reasons. I'm glad to say we're not seeing that kind of weather issue, and others still time left in the month, but we feel good about our momentum. Now, I'm going to stop talking before I dig my hole any deeper. David Manthey: That's good to hear, Dan. Alright. Thank you. And then my follow-up on this, the rebate timing factors, could you talk about what exactly that is? What would be the impact, do you think, on the fourth quarter? And then does that unwind in the first quarter? Just the dynamics around that factor? Dan Florness: Let's do a two-part. I'm going to help Max on this. I'll talk about what it is. Max can tell, but impact. If you think about what it is, obviously, depending on growth, there are rebate programs that different suppliers have, and you estimate that as you go through the year. In all honesty, it came in a little bit lower than we were expecting. Now part of that is it's not an exact science. The other part is we saw something I don't want to say unique because we've seen it before, but usually, it's more of a bad thing and maybe not an optimistic thing. Oftentimes we get to the end of the year, and we'll have certain suppliers come to us because maybe a salesperson, maybe a division is trying to make a number, and they come to us sometimes with a deal you just can't say no to. I know we'll consider anything if we can get a return on it. We have the cash to do it. It was crickets this year. I asked our product, our supply chain folks, I said, "Why was it crickets?" Because in my mind, there's two reasons it's crickets. One is our suppliers are so far from hitting their numbers that they just throw in the towel and don't try to claw their way to a finish. The other is they've hit their numbers, and they're keeping their gunpowder dry for next year. The impression I received was it was more the latter than the former. Now that's anecdotal, Dave. But I think part of it is we didn't see a few of the deals in the third and fourth quarter that maybe we would some years see. That's probably a good thing for the health of our supply chain and the health of what our suppliers and customers are seeing. Max, do you want to touch on a little bit about the impact? Max Poneglyph: I will. Yes. So Dave, there's a couple of things to consider. First of all, this supplier rebate was a positive true-up last year; it was a negative true-up this year. Additionally, compared to the previous couple of quarters, typically these are annual amounts that we estimate earlier on in the year, and we bake those into our run rates. We had a little bit of a, call it, slight overstatement in Q2 and Q3 as well. This is, again, just a timing element; it's an estimate. Just to characterize the amount or the size for you, I mentioned in my talking points that the year-over-year drop of 50 basis points is made up of this as well as some inventory timing cost flows. The supplier rebate is the bigger of the two portions. With that, we expect this to completely normalize going forward. David Manthey: Alright, appreciate it. Thank you both. Operator: You're welcome. Thank you. Next question is coming from Ryan Merkel from William Blair. Your line is now live. Ryan Merkel: Hey, everyone. Thanks for the question. I wanted to start off on incremental margins for '26. I hate to lead the witness, but was thinking high 20s with double-digit top line and then lapping the reload of incentive comp. But curious for any color. Dan Florness: Ryan, from my perspective, that's not an unreasonable number. Once we get to the first quarter, we still have the anniversarying of our bonus ramp-up. Our incremental margin obviously is predicated on the top line doing what we're thinking about. Also predicated on our ability to manage the gross profit side of the equation, and we felt some pain of that in the fourth quarter. But your number doesn't make me uncomfortable. Ryan Merkel: Okay. That's great to hear. And then my second question is just back to price. It has built slower than I think you and we expected. I just want to be clear on why that's the case. Is it that the suppliers aren't raising as fast as you expected? Or are there other reasons? Dan Florness: Part of it is frankly fatigue. Part of it is this last piece being a little bit more heavily skewed towards the non-fastener is problematic. Part of it is it's not an exact science, and the dangerous part about us sometimes being so candid and telling you exactly what we think is that we don't know. We're speculating based on what we think is going to happen. As you saw, some of the things we thought about in the July and October timeframe, we were just wrong. Ryan Merkel: Okay. Alright. Thanks. I'll pass it on. Operator: Thank you. Next question is coming from Tommy Moll from Stephens. Your line is now live. Tommy Moll: Good morning and thanks for taking my questions. Dan Florness: Good morning. Tommy Moll: Dan, you made a comment that you would welcome a green shoot or two. I think it's safe to say we all would, but let me ask the question a different way here. Are you seeing any of your large heavy manufacturing markets, let's say, stabilizing or not getting worse? I'm just thinking auto, machinery maybe would be two worth unpacking. Dan Florness: I'm going to pivot that one. This one over to Jeffery. So I'm going to surprise him on the spot. Jeffery Watts: No, we're not seeing any real decline. It's really flat. We're not seeing a lot of, I mean, I did get the note that someone was mentioning that the economy was slightly improving. We're not really seeing that, but we're also not seeing any declines in our manufacturing as far as the year-over-year usage. Tommy Moll: Max, welcome to the call. We appreciate your commentary on some of the capital allocation framework. What I heard sounds very similar, maybe identical to what we've heard previously from Fastenal. But I'm just curious to the extent you can comment on any different priorities or frameworks you might bring to the role. We'd appreciate hearing a little bit. Thank you. Max Poneglyph: No, I would say at this point, you heard me exactly correct. There's not an adjustment in our thinking, but at the same time, I'm two months into the role. These are things that we'll look at, but I feel very comfortable, and we feel comfortable with our approach to capital allocation. There will always be tweaks. If I wasn't here, there would still be tweaks. We would continuously monitor and assess as we go. We'll share to the extent that those are material changes, we'd always want to share those. Tommy Moll: Sure. Thank you. I'll turn it back. Appreciate the time. Operator: Thank you. Next question is coming from Ken Newman from KeyBanc Markets. Your line is now live. Ken Newman: Good morning, guys. Thanks for taking the question. Dan Florness: Good morning. Ken Newman: Maybe first, Dan, I think you may have touched on this a little bit in your prepared remarks. But if I remember correctly, last quarter, one of the takeaways there was you did give up maybe a little bit of price to support some stronger volume growth and support some market share gains here. Just to clarify, is it correct to assume that you saw that a similar dynamic this quarter as well? And if so, maybe just some help on quantifying what that impact was. Dan Florness: You know, I think we've struggled to quantify that. Max might have some insight on that, but I'm not going to put him on the spot. But I will tell you philosophically, we love to grow first and foremost. We love to figure things out. When we're taking on new business and growing, we'll take in the short term, you know, that we have to challenge ourselves to figure out the supply chain for that customer. We'll take that opportunity on every day. Where you feel the frustration side sometimes is where you have existing business, and we could squeeze a little bit, and we need to step it up and push our team and push the market to readjust that. I don't know, Max, if you want to add anything, and if you don't, at this point, we'll have to punt on that a little bit, Ken. Sorry about that. Max Poneglyph: No, maybe at least I'm just summarizing a little bit of what Dan says, we don't need to. Right now. So this is a time and place assessment for us as we create value. We're feeling very good with our current approach. No need to get aggressive in that area. Ken Newman: Okay. That's helpful. And then for my follow-up here, Max, just you know, I think someone had mentioned a headwind to December sales just due to holiday timing. That's not too unsurprising since I think one of your other public peers had mentioned something similar. But I'm curious, Max, if you had any color on what that impact on holiday timing or extended shutdowns were to ADS in the month of December and how we should think about that maybe normalizing out in January? Max Poneglyph: Yeah. I wouldn't say we quantified it other than if you just take the sequentials. Dan did a nice job of explaining why we don't get overly worked up, particularly with the sequentials in November and December. But if you just take those sequentials, last year was like an 8.7%, and I think this year sequentially, November, December is like a 9.3% in that ballpark. You can back into that potential element there. But we also just saw less activity in the very latter part of December. We feel like that will just come back into play in January. We don't look at this as a structural change or touching on our confidence on where our sales are heading. Dan Florness: One thing I'll add, and we did this analysis last year, and we did it again this year. We looked at the first two weeks of December, and we looked at our vending activity. What we try to understand is what was our vending activity telling us? You know, when you have a facility with a thousand employees, 500 employees, you pick a number. We know on a given day and a given week how many swipes of a badge we expect to see that indicates there's activity in that facility. What we saw a year ago is we had Christmas and New Year falling midweek. So it wasn't, you know, touching on the weekend because it's on Monday or Tuesday. It wasn't touching on Friday. It was that Wednesday, Thursday, which is just purgatory for us. Because you have these partial weeks. What we saw this year is Christmas week was a little bit better as far as what percentage of customers were shut down Christmas week. Anecdotally, what we heard was a lot of companies that normally are shut down the 24th and 25th operated Monday, Tuesday, Wednesday, and shut down the 25th and 26th. The week of New Year's was totally different. We saw the number of customers that were shut down double from what it was in 2025 or 2024. Excuse me. When I say double, that's going from, say, 10% of customers shut down to 20% of customers shut down. That's the bad news. That cursed the end of our month. However, I'm pleased to say in the first two weeks of January, we've seen a complete normalization of shutdown facilities from what we saw in '22, '23, '24, and '25. Back to low single digits. So big shutdown over New Year's week, it's normalized. Ken Newman: Very helpful. Thanks. Operator: Thank you. Next question is coming from Chris Snyder from Morgan Stanley. Your line is now live. Chris Snyder: Thank you. I wanted to talk a little bit about price expectations in 2026. It seems like there will be incremental price coming. I know you guys maybe don't want to speak to specific numbers like the prior couple of quarters. But could you provide some color just on how material this potential next round of price to ask is? We obviously see metal prices pushing higher here. Is it fair to think 26 price, like, you know, for the full year average would be above 25 levels? Thank you. Max Poneglyph: Yeah. I'll take that one. Dan already said why we don't want to get very specific on this guidance, but I would just, I guess I'd invite you to look back at our '25 trends and just you can mathematically back into the fact that we will have some carryover pricing impacts. Yes, will that be substantial? No. Then we can also just say that, and Dan alluded to this already, we will continue to go after pricing. But at this point, it's just such there's so many moving parts. Based on the way that we've talked about strategizing, how we actually put price through the market, it depends on a lot of things. It's the input cost, and it's the customer behavior. So I would just again suggest if you look mathematically, we are going to have a positive compare, and then we'll, of course, go for more pricing as well. At that, I think that's where we'll leave it for now. As we go in through each quarter, I think we'll get a little bit better view of the world, and we'll try to share that as much as we can to the extent we have the confidence on the estimate. Chris Snyder: Thank you. I appreciate that. Then maybe if I could follow-up just on the macro. Obviously, a lot of choppiness in the data, whether holiday timing, channel dynamics the last couple of quarters. But when you kind of think back and look at the macro or customer end demand, do you feel like things in January are materially better or worse than they were three to six months ago? Are we kind of still in this mostly sideways pattern looking through some of the monthly volatility? Thank you. Dan Florness: Yes. I would tend towards sideways. I don't think we're seeing anything one direction or another. You're hearing some optimism from us probably because internally, we beat ourselves up so much in 2023 and 2024 as we were struggling. It feels good to be achieving success. It feels good to be paying bonuses to our employees again. Chris Snyder: Thank you. I appreciate that. Operator: Next question is coming from Stephen Volkmann from Jefferies. Your line is now live. Stephen Volkmann: Hi, good morning, guys. Maybe just a couple of quick follow-ups. I'm curious on Slide five, as you look at your e-business, those trends have been decelerating now for a while, and I guess it's been fairly flat as a percent of total. Do you expect that to start to reaccelerate going forward? Jeffery Watts: Yeah. I mean, that's definitely our thought process. I mean, we put a lot of time and resource into relaunching our website. We've put a lot of time not only in the e-business but how it actually relates to our FMI and our solutions side. So, I mean, it's a big focus for us next year, and we definitely see that becoming an increasing number as we move forward, especially in the latter half of '26. Stephen Volkmann: And how should I think about that impacting gross margin or EBIT margin going forward? Dan Florness: I'll help on that one. Within our e-business, the vast majority of it is what we call your eProcurement. Which is things like EDI, things punch out. It's where we have established larger customers that are sourcing it. It's really, in many cases, it's an extension of a great key account program. The piece that Jeffery just touched on, though, is on the e-commerce piece of it. Things like the website. That's actually a pretty small piece of our business. That component, it's going to depend on which customer is using it. But even when that component starts accelerating, it's still a relatively small piece that it doesn't really have that much ability to move gross profit up or down. Stephen Volkmann: Okay. Thank you. Operator: Thank you. Next question is coming from Chris Tinker from Loop Capital Markets. Your line is now live. Chris Tinker: Hey, good morning. Thanks for taking the questions, guys. I guess first one here, I'd point more at Max. I guess, just as we look at the first quarter gross margin, typically, we see a slight seasonal step up. Anything to keep in mind that would kind of nudge us off that typical seasonal movement in gross margin here? Max Poneglyph: No, this is an important topic because there are a couple of things. The step up is fine. Just bear in mind that some of what we talked about in our Q4 margins, the timing-related items. You take that as a factor in Q4 of '25, and then you take your normal step up. Then you can also compare against the prior, you know, prior year Q1 as well. That all should triangulate fairly well for you to give you a general idea, at least where we're thinking. Dan Florness: Because even the bonus reset, Chris, even the bonus reset, which can be a little potentially be a little confusing, is only a year-over-year impact. But not a sequential. Chris Tinker: I think you're thinking about it right. Got it. That's helpful. Then I'm not sure if it's more a Jeffery or Max question here, but thinking about some of the investment spending and investment into 2026, I guess anything one-time you need to call out? Maybe is the fleet refresh in good shape? How do we think about vending? Just anything kind of, you know, in the SG&A line to think about for '26 here? Max Poneglyph: Some of our bigger investments will be in the distribution space. Just as we increase both a bit the size of our footprint, but also the throughput. We definitely have some truck fleet items that we need to push through as well, but that would be less in size. Of course, distribute through a lot of tech areas like the FMI space. I would just say, to answer your question, a top side, it's getting distribution capacity and throughput ready for our future. Which is here. Chris Tinker: Got it. Well, thank you, and best of luck in twenty June. Dan Florness: Thanks. Operator: Thank you. So with that, we're four minutes before the hour. Thank you for tuning in on today's earnings call. I suspect a few of you might have watched the national championship game last night for football. I would like to give a call out, and that's to the University of Wisconsin River Falls. On January 4, the University of Wisconsin River Falls, my alma mater, won the Division III national title in football. So my congratulations to them. Best of luck to the women's hockey team. They won the national title the last two years running, and good luck on a three-peat. Thanks, everybody. Have a great week. Operator: Thank you. That does conclude today's teleconference and webcast. You may disconnect your lines at this time and have a wonderful day. We thank you for your participation today.
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