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Operator: Good morning, and welcome to KeyCorp's fourth quarter 2025 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session. If you would like to ask a question during that time, simply press star followed by one on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the conference over to Brian Mauney, KeyCorp Director of Investor Relations. Please go ahead. Brian Mauney: Thank you, operator, and good morning, everyone. I'd like to thank you for joining KeyCorp's fourth quarter 2025 earnings conference call. I am here with Chris Gorman, our Chairman and Chief Executive Officer, Clark Khayat, our Chief Financial Officer, and Mohit Ramani, our Chief Risk Officer. As usual, we will reference our earnings presentation slides, which can be found in the Investor Relations section of the key.com website. The back of the presentation, you will find our statement on forward-looking disclosures and certain financial measures, including non-GAAP measures. This covers our earnings materials as well as remarks made on this morning's call. Actual results may differ materially from forward-looking statements, and those statements speak only as of today, January 20, 2026, and will not be updated. With that, I will turn it over to Chris. Chris Gorman: Thank you, Brian, and good morning, everyone. Our fourth quarter and full year results demonstrate the continued progress we are making with respect to our organic path to achieving consistently higher returns on capital. We reported fourth quarter earnings of $0.43 per share. Revenue exceeded $2 billion, growing 12% year over year on an adjusted basis, while expenses grew 2%. Both fourth quarter NIM and net interest income were above our previously communicated targets. Asset quality metrics continued to trend in a positive direction, with net charge-offs, NPAs, criticized loans, and delinquencies all declining sequentially. We have also committed to a more meaningful return of capital to our shareholders, which commenced in the fourth quarter. We repurchased $200 million of common stock, two times the original commitment we made in October, at an average price of $18 per share. In spite of stepped-up share repurchases, we continue to maintain peer-leading capital ratios. We ended the quarter with a 10.3% marked CET1 ratio. We intend to manage this ratio down to the higher end of our targeted capital range of 9.5% to 10% by 2026. Combined with our business momentum and meaningful ongoing capital generation, this puts us in a position to accelerate our repurchase activity further in 2026. We plan to buy back at least $300 million of stock in the first quarter and anticipate repurchasing similar amounts in subsequent quarters throughout 2026. The fourth quarter puts an exclamation point on what was a substantial year of progress for Key and positions us to achieve even greater going forward. We met or exceeded all of the financial targets that we communicated at the beginning of the year. We delivered full-year record revenue, which increased 16% compared to the prior year, with both net interest income and fee revenue growing greater than projected. Expenses grew 4.6%. As a result, we generated approximately 1,200 basis points of operating leverage and PPNR growth of about 44%. Loan growth outperformed, particularly C&I loans, which grew at 9%, and the recycling of lower-yielding consumer loans into commercial loans enabled us to manage our funding costs more proactively. Deposit dynamics were favorable, with client deposits up 2%, while we remained disciplined with pricing. Fee income growth was 7.5% as all of our priority fee-based businesses grew at a high single or low double-digit rate. Expenses were within our targeted range, even as we made meaningful investments in our franchise throughout the year and compensated bankers for our strong fee performance. We added nearly 10% to our frontline banker staff across wealth management, commercial payments, middle market, and investment banking. We invested an additional $100 million in technology, focused on customer-facing capabilities that make it easier for our clients to bank at Key. Lastly, we continue to maintain our strong risk discipline. Full-year net charge-offs were 41 basis points. Additionally, all leading indicators, nonperforming assets, criticized loans, and delinquencies all moved in the right direction. These results would not have been possible without the talented team we have in place driving our strong momentum. Together, we delivered record revenue, strengthened our balance sheet, and met every commitment we set at the beginning of the year. Our team continues to demonstrate focus, resilience, and dedication, navigating a dynamic environment and delivering value to the stakeholders we serve: our shareholders, our clients, and our communities. I want to thank each of our teammates for their contributions to our performance. As we turn the page to 2026, Clark will go through our financial guidance shortly, but I am confident we will deliver another year of outsized revenue and earnings growth and make substantial progress toward our commitment to achieve a 15% plus return on tangible common equity by year-end 2027. The current environment plays well to our strengths. We expect to continue to grow our priority fee-based businesses at a mid- to high single-digit pace as we capitalize on our strong pipelines and momentum. Additionally, we expect to see returns from our recent hires as they ramp up and further utilize our platforms, which we believe are underleveraged. Coming off the second-best year ever in investment banking, we continue to feel good about the trajectory of this business. Our pipelines remain at historically elevated levels. We raised nearly $140 billion of capital on behalf of our clients in 2025, retaining 20% on our balance sheet. The market environment remains favorable for continued new issuance in 2026. We anticipate middle market M&A activity to improve in 2026 after being muted for much of the past three years. We also expect financial sponsors who stayed largely on the sidelines with respect to middle market transactions last year, but typically generate a meaningful percentage of our fees, to be more active this year. In wealth, assets under management reached a record $70 billion. We achieved a third consecutive year of record sales production in our mass affluent segment. Since we launched this business in 2023, we have added 54,000 new households, nearly $4 billion of AUM, and $7 billion of total client assets to Key. In commercial payments, fee-equivalent revenue grew 11% in 2025 as the investments we made in bankers, new geographies, and scaling embedded banking capabilities continue to build momentum. With respect to NII, we continue to have substantial tailwinds from fixed-rate asset repricing, as $17 billion of low-yielding swaps, securities, and consumer mortgages are expected to mature or prepay this year. Our loan pipelines remain healthy. Our outstandings in 2026 should benefit from the 9% commercial commitment growth we generated in 2025. We remain well-positioned for a variety of forward rate curve scenarios. As a result, I am highly confident we will grow revenues at a high single-digit rate this year, with expenses growing approximately half that rate, indicating substantial operating leverage again this year. In summary, Key is very well-positioned as we enter 2026. Our trajectory has never been better. Current macro conditions and client sentiment play to our strengths given our differentiated business model and platforms. We anticipate that in 2026, we will successfully increase both our return on capital and our return of capital. And lastly, we will deliver another outsized year of revenue growth, earnings growth, and tangible book value growth. Before I turn it over to Clark, I want to cover some changes to our Board that we announced just this morning. These changes reaffirm our board's commitment to strong corporate governance and long-term shareholder value. First, the board will nominate Tony D'Spirito and Chris Henson for election as directors at KeyCorp's 2026 Annual Meeting of Shareholders. Both candidates have impressive backgrounds in the financial services industry and bring capabilities that are directly aligned with Key's priorities. Tony D'Spirito most recently served as global chief investment officer for fundamental equities at BlackRock. Tony has portfolio manager experience spanning over thirty years. He brings deep expertise in public markets, capital allocation, and long-term value creation. Chris Henson is a former senior banking executive with extensive experience leading large financial institutions. He most recently served as head of banking and insurance at Truist, and prior to that was president, chief operating officer, and chief financial officer at BB&T. We believe these additions will enhance an already highly engaged and very capable board as we drive the next phase of value creation for Key. Following the additions of Mr. D'Spirito and Mr. Henson, the board will have added eight new directors during my tenure as CEO. We also announced that the lead independent director role has transitioned from Sandy Cutler to Todd Vasos. Todd, who currently serves as the CEO of Dollar General, has served as director of Key since 2020. Todd has been an excellent contributor to our board, and I look forward to working even more closely with Todd in his new role. Sandy Cutler will continue serving as an independent director to ensure a smooth transition to Todd. I would like to thank Sandy for his exemplary service, dedication, and significant contributions to Key as our lead independent director. Sandy has been a steady and principled presence in the boardroom, providing independent oversight as Key transformed and navigated periods of significant industry change. Additionally, Carlton Highsmith and Ruth Ann Gillis have informed us of their plans to retire from the board, effective at the annual meeting. As we announced last week, David Wilson has retired from the Board, effective immediately due to health considerations. We are deeply grateful to David, Carlton, and Ruth Ann for their meaningful contributions and dedicated service to Key during their time on the board. With that, I'd like to turn it over to Clark. Clark Khayat: Thanks, Chris. Starting on Slide five. Our fourth quarter results demonstrated continued strong momentum across the franchise. As a reminder, the 2024 fourth quarter results were impacted by securities portfolio repositioning, and all comparable periods included FDIC special assessment impact. As such, all year-over-year comparisons are on an adjusted basis. Fourth quarter earnings per share were $0.43 or $0.41 when adjusted. Fourth quarter revenue was up 12% year over year, while expenses increased by 2%. Tax equivalent net interest income was up 15% year over year. Non-interest income increased 8% year over year, reflecting broad-based growth across our high-priority fee-based businesses. Loan loss provision of $108 million included net charge-offs of $104 million and a very modest $4 million build. The build was largely a result of increased commitments, partially offset by reductions in NPAs and criticized loans. The fourth quarter net charge-off ratio was 39 basis points. Tangible book value per share increased 3% sequentially and 18% year over year. Turning to Slide six. Chris touched on our full-year earnings performance earlier, but just to add a little more context, both net interest income and fees outperformed our guidance this past year. Net interest income increased by 23% versus our original expectation for 20% growth as commercial loan growth was stronger and deposits were better from both the balance and beta perspective. Fees grew 7.5% versus our original expectation for 5% plus as investment banking fees were up 13% even without the benefit of expected levels of M&A activity for much of the year. Wealth, commercial payments, and commercial mortgage servicing all grew at high single-digit to low double-digit rates this past year. Expenses grew roughly 4.6%, primarily due to the hiring of frontline producers and the strong fee momentum. We achieved nearly 1,200 basis points of total operating leverage, and 280 basis points of fee-based operating leverage in 2025, both better than we had expected coming into the year. Moving to the balance sheet on Slide seven. Average loans were relatively flat sequentially, reflecting a $1 billion increase in C&I loans offset by the intentional runoff of $550 million of low-yielding consumer loans as well as some net pay down activity in CRE. On a spot basis, commercial loans grew by about $1.2 billion with growth in both C&I and CRE. Growth was primarily from the power and utility sector and from broad-based middle market growth across all of our regions. C&I line utilization decreased by approximately 1% sequentially to 30% driven by an increase in commitments. C&I loan balances outstanding increased by $900 million. Turning to Slide eight. Average deposits increased by approximately $300 million sequentially, with $2 billion of commercial client deposit growth partially offset by a decline of $1.3 billion of higher-cost brokered CDs. Brokered CDs averaged $2.5 billion in the fourth quarter. Average non-interest-bearing deposits grew 1% sequentially and remained stable at 19% of total deposits, or 24% when adjusted for our high burn accounts. Total deposit cost declined by 16 basis points to 1.81%. Our cumulative interest-bearing deposit beta declined modestly as expected, to 51% through the fourth quarter, reflecting some impact from the recent Fed cuts that we would expect to pull through more fully in the coming months. We've taken proactive actions in repurchasing deposits this past year, by entering the year with a low loan-to-deposit ratio, limiting our incremental funding needs by remixing loans from consumer to commercial, by gathering lower-cost commercial deposits, particularly in payments, while managing deposit costs to consumers, we actively rotated maturing CDs in the money market deposits. Overall, interest-bearing funding costs declined by 22 basis points resulting in a cumulative interest-bearing funding beta of 67%. Slide nine provides drivers of NII and NIM this quarter. Tax equivalent NII was up 3% sequentially, driven by client deposit growth and continued balance sheet optimization efforts. We grew relationship commercial loans at relatively stable spreads to the existing book, or running off lower-yielding consumer loans. On the funding side, the commercial client deposit growth enabled us to allow the maturity of approximately $2.4 billion of higher-cost brokered CDs, long-term debt, and other short-term borrow. We exited the year with a net interest margin of 2.82%, an increase of seven basis points sequentially and above our previously indicated target of 2.75% to 2.8%. Our balance sheet remains positioned to be fairly neutral to additional Fed fund cuts as we move through 2026. Turning to Slide 10. Adjusted non-income increased 8% year over year. Investment banking and debt placement fees were $243 million, an increase of 10% year over year. Growth was driven by debt capital markets and commercial mortgage debt placement activity. Sequentially, M&A activity also picked up after industry middle market volumes have been tepid for the first nine months of the year. We're encouraged by our M&A pipelines and at this point, feel good about our ability to deliver investment banking fee growth in the first quarter off of what had been a record first quarter in 2025. Trust and Investment Services income grew 10% year over year reflecting record positive net flows and higher market values. Assets under management reached a new record high of $70 billion. Service charges on deposit accounts, and corporate service fees increased by 20% and 17% year over year, respectively. The increase in service charges was driven by momentum in commercial payments, which grew fee-equivalent revenue at 12%, while corporate services income was driven by higher loan commitment fees and client FX and derivatives activity. Commercial mortgage servicing fees were $68 million, flat year over year and down $6 million from the third quarter, reflecting the impact of lower rates on fees for lower interest-earning advances, and successful resolutions within our special servicing book. Beginning this quarter, certain of our clients have elected to collectively hold a little over $1 billion of escrow deposit balances with us in lieu of paying fees. This will have a de minimis impact on total revenue but will benefit net interest income and NIM with an offsetting impact of fees of approximately $40 million annually. We expect commercial mortgage servicing fees to run at about $50 million to $60 million per quarter in 2026. On Slide 11, fourth quarter noninterest expenses were $1.3 billion, up 7% sequentially and 2% year over year. There were roughly $30 million of unusually elevated expenses in the fourth quarter and therefore would not use this quarter as a run rate moving forward. Versus the year-ago quarter, growth was primarily driven by higher personnel expense related to frontline banker hires, higher employee benefits costs, and higher incentive compensation related to the strong revenue performance. Sequentially, expense growth was driven by investments in technology and talent, higher incentive compensation, seasonality in areas such as employee benefits costs, contractor, and professional services spend, and marketing, as well as certain elevated expenses in the quarter. As shown on Slide 12, credit quality is broadly improving. Net charge-offs were $104 million, down 9% sequentially and were an annualized 39 basis points of average loans. Full-year net charge-offs of 41 basis points were toward the better end of our full-year target range of 40 to 45 basis points. Nonperforming assets declined by 6% sequentially, and the NPA ratio improved by four basis points to 59 basis points. Criticized loans declined by $500 million or 8% sequentially with broad-based improvements across C&I and commercial real estate. Turning to Slide 13. Our CET1 ratio was 11.7% quarter-end as net earnings generation was offset by RWA growth associated with loan mix and commitments growth, and capital return from share buybacks and dividends. Our marked CET1 ratio, which includes unrealized AFS and pension losses, was flat sequentially at 10.3%. As Chris mentioned earlier, we plan to repurchase at least $300 million worth of shares in the first quarter and at least $1.2 billion for the full year 2026. Slide 14 provides our 2026 guidance relative to 2025, and reiteration of our medium and long-term targets. We expect revenue to be up about 7%, driven by net interest income growth of 8% to 10%, and non-interest income growth of 3% to 4%. Adjusting for recent business decisions that net-net will have no impact on earnings, we expect noninterest income to grow 5% to 6%. Within that, we expect investment banking fees to grow about 5%, wealth fees to grow in the high single digits, and commercial payments fees to grow in the low double digits. We expect expenses to be up 3% to 4% this year or half the rate of revenue growth, which implies substantial positive operating leverage of approximately 300 to 400 basis points in 2026. We expect average loans to grow 1% to 2% with commercial loans growing at about 5% as we continue to remix the run-up of consumer loans into higher-yielding relationship-based commercial loans. We expect the full-year net charge-off ratio to remain stable at 40 to 45 basis points. Finally, we expect the tax rate to be approximately 22% or 23% on a taxable equivalent basis. In summary, subject to the usual macro caveats, we're confident that we will deliver another year of outsized organic revenue and earnings growth for our shareholders. I will now turn the call back to the operator to provide instructions for the Q&A session. Operator: Thank you. If you would like to ask a question, please press star followed by 1 on your telephone keypad. If for any reason you would like to remove your question, please press star followed by 2. If you are streaming today's call and would like to ask a question, please dial in and then press 1. As a reminder, if you are using a speakerphone, remember to pick up your handset before asking a question. We will pause here to allow questions to register. Our first question will go to the line of Ebrahim Poonawala with Bank of America. Ebrahim, your line is open. Ebrahim Poonawala: I guess maybe first for you, Chris. So you talked about the capital plan. We the board changes to the board this morning, all very clear. As we think about just from your standpoint, what's sort of from an organic perspective, what's what are the strategic priorities as we think about where you are spending your time? Is it about getting to that 15% RoTE at a faster rate? Banker hiring? Like, just talk to us, like, where you're focused on as we think about 2026, which could lead to maybe better growth, better ROE for Key. Thanks. Chris Gorman: Sure. Well, thank you for the question. So first and foremost, I'm thinking about growing the business organically. And anytime we talk about that, we talk about really kind of the three key areas. One is middle market and payments. The other is our investment bank. And then lastly, wealth and specifically mass affluent. That's where we've made a ton of investments. We think we have a great opportunity. Frankly, there's a lot of market disruption that's there to be had. And so what I'm focused on is we sit down with our teams every single week is, you know, we've added all these people. We've onboarded them. We inspect what they do and making sure we're out there in the marketplace. We know we have a right to win, and we have a way to win, and we focus a lot on that. Next is, of course, you know, the return on capital. And as we've talked about, we have a lot of levers we can pull to get there. We've talked about 15%, but it's on the path to 16% to 19%. And a lot of that is mechanical, but there's a lot of things that we can do in terms of growing the business and generating those kinds of returns. Next, we obviously think about return of capital. And I think we were pretty clear this morning as to what our path is in terms of return of capital. So we're working on that. And then lastly is to continue to position the business for the next leg of growth. We've made all these investments. We announced some pretty significant changes to our board of directors today. We've hired a lot of people. We're in the marketplace right now. Hiring people. We're investing heavily in AI and technology. Our investments in tech and ops have gone from $800 million to $900 million last year to $1 billion this year. I think we're doing well with respect to implementing AI, but there's a lot more that we can do. We've done it in certain areas, like our call centers, in certain areas like internal things. But there's opportunities to really rethink our entire business. For example, loan underwriting and processing. We can look at those whole horizontal areas and apply a lot of technology. It'll be money-saving. And, by the way, it'll give you a better experience for our clients. So that's kind of what I'm focused on day in and day out. Thank you for the question. Ebrahim Poonawala: That's helpful. And I guess maybe one follow-up, Clark, I think you mentioned investment banking fees should be up from a year ago. It looks like you're resetting and just everything that you all have talked about, sponsor activity, middle market activity picking up. That investment banking should be much stronger. Your fee guide seems conservative. Just tell us, like, how the assumptions underpinning that fee guide and why investment banking in that in the low 200s or the low to 200 or mid-200 range per quarter is not a reasonable sort of run rate going forward. Thanks. Clark Khayat: Yeah. Thanks, Ebrahim. So maybe a couple of just specific comments on that area. So we talked about a 10% banker hire target for last year. We achieved just over nine. So, again, the 10 is a guidepost. We didn't want to hit 10 just to do it. We were picking the right people in the right markets at the right price. In investment banking, it was closer to five. And, again, that market, you know, we added some excellent people, but it's competitive, obviously, and heating up. So we didn't stretch too far for people that weren't the right fit for us. That goes to the 5% guide. And while we saw our first, I think, pop in middle market M&A here in the fourth quarter, and we'd expect that to roll into the first quarter, we don't have a ton of visibility throughout the rest of the year that that'll continue. If we see that, we think there's clear upside to that guide. But at the moment, we're a little bit hesitant because we just haven't seen that trend continue for more than a quarter at a time at this point. Ebrahim Poonawala: Yep. Operator: Thank you, Ebrahim. Our next question will go to the line of Ryan Nash with Goldman Sachs. Ryan, your line is open. Ryan Nash: Good morning, guys. Good morning, Ryan. Maybe as a follow-up to the last question, you know, obviously, 67% revenue growth, the exit run rate maybe looks a tad slower. You just talked in your remarks about hiring a handful of bankers. So can you maybe just expand on your expectations for growth? Do you think that we could see a pickup as these bankers start producing? Really just trying to get a sense for how you're thinking about conservatism of your growth guidance both in '26 and over the medium term? Thank you. Chris Gorman: Sure. So we've done a lot of hiring. We're gonna continue to hire. We've been very successful in doing that. We've always said that the burn-in is about twelve to eighteen months. But on and and by the way, we hired a bunch of people in the middle and late last year. Obviously, that will take a little bit of time. Having said that, for example, some groups that we brought on at the very end of 2024 were extremely productive in 2025. I think the market is gonna be hospitable to getting deals done. So I've looked for I looked at our backlogs, and I looked at the people we've hired. We have more people. We have more clients today than we've ever had. We have more people on the street with the Key business card than we've ever had. We have a pretty good market. And our backlogs are at historically high levels. So I am, I'm optimistic as we look forward. Clark Khayat: Hey, Ryan. So this is Clark. I might just add a couple maybe contextual points to that. So as I mentioned in the last answer, we hired just above 9%. If I break that out and about where we hired folks, in our consumer bank, that number would have been more low double digits. And what they're gonna drive is kind of 8% growth in the year across the areas of consumer that they drive. There's a bunch of fees in consumer that aren't connected to these hires. Wealth, as we said, up high single digits. And managed fees in wealth, which we're transitioning away from transaction fees to manage fees, should be up low double digits. So to give you a flavor for that, middle market and payments, up about 8%. We're gonna see FER growth fee equivalent revenue growth, and payments up low single or low double digits. And then as I said in investment banking, you know, 5% hires and up 5%. The one maybe maybe a little bit more color on what I said in the last response. You know, there are some elements of potential here that we haven't included. I mean, one, we haven't included a macro deterioration. But on the other side, we haven't assumed for the full year that middle market M&A will return. That is both a lending and a fee opportunity. We haven't incorporated any cuts beyond the two that are in the forwards today, and we really incorporated significant CapEx increase from things like the bonus depreciation. We've talked to clients about that. They're talking about it. We just haven't seen it manifest yet. If it does, I think there's a lot of opportunity there for us to grow a little bit faster. Ryan Nash: Got it. And Clark, maybe as a follow-up, when I look at the 4Q exit run rate guidance for net interest margin average earning assets, it looks like the run rate for average earning assets a little bit lower from the current level. Maybe just talk a little bit about what's causing that. Obviously, we know that there's the consumer runoff, but anything else? And when can we expect average earning assets to bottom and begin to grow again? Thank you. Clark Khayat: Sure. So we did show actual loan growth this year. So commercial will continue to be strong at five or so percent. We'll see 1% to 2% loan growth in the year. So I think we've seen the bottom on earning assets, and we'll start to see that elevate over time. Maybe two quick comments on just the composition of the balance sheet that I think are important. One, we've talked pretty frequently about the remixing of C&I loans, away from residential real estate primarily. So you know, long-dated, low fixed-rate assets into broad-based relationship, commercial assets, so that'll continue. And then secondly, on the deposit side, we continue to remix from brokered CDs and deposits into clients. Deposits. So you'll see deposit balances for the year relatively stable. But we will take broker deposits basically to zero by the middle of this year. And replace that completely with client deposits. So, again, it's really just creating much more efficiency in the balance sheet and sustainability. And I think the other component to your question, Ryan, is just the seasonality of the quarter. So every fourth quarter is our low point in NII. We'll see that again this year. We'll grow throughout the year. And I feel pretty confident that we'll exit the year with an NII that's, you know, $1.3 billion or more. So a little bit above, I think, the math you were doing there, but you know, that had that sort of owns the seasonality and growth throughout the year. Chris Gorman: Ryan, the only thing I would add to that is just to remind people, our business model is a bit differentiated from others. When the markets are wide open as they are right now, we only put about 20% of the capital we raise on our balance sheet, which obviously manifests itself in fees, but it certainly doesn't in balance sheet growth. So I would just add that. Ryan Nash: I appreciate that. Thanks for the call, guys. Operator: Thank you, Ryan. Our next question will go to the line of John Pancari with Evercore ISI. John, your line is open. John Pancari: Morning. As a follow-up to that, regarding your margin NII expectation, could you maybe give us your deposit beta assumption that underlies that margin exit rate to 3 to 3.05 by the end of the year? Clark Khayat: Sure. So right now, you know, we ended the year at a low 50s. That came down slightly from the third quarter as we expected just given the cuts in the fourth quarter and the timing it takes to get primarily some of the consumer rates through the system, we'd expect to pick that up this year. But we do expect kinda low to mid-fifties beta throughout the year. On a relatively stable deposit base as I said, but that is a remixing of brokered deposits into client deposits. And that brokered deposit balance in the fourth quarter average was about $2.5 billion. John Pancari: Okay. Thanks. And on the 15% proxy that you reiterated for your 2027, can you maybe give us some color on the components? Like how you're thinking about the margin underlying that? And then also, you talked about the growth dynamics impacting the balance sheet and the remix. Do you think about the pace of growth that gets you to that ROCE as you think about it for 2027 and maybe the thoughts on efficiency components as well? Thanks. Clark Khayat: Sure. Thanks, John. So we have guided to three plus NIM in fourth quarter 2026. Feel very good about that. Similarly, 3.25% plus in the '27. And really, I think about that as having three components. One would be just the stabilization as we bring on this remix of C&I loans at higher yields, and run off the consumer. So that's sort of the organic rotation in the loan book. There is a bunch of fixed-rate fixed-price fixed-asset repricing going on about $17 billion in 2026 and probably a similar amount in '27 that will roll over into better returns. So, you know, those two components. And then I think ongoing solid deposit growth and deposit management. I'd say about 75% of '26 growth is mechanical versus organic, and it starts to get a little bit closer to fifty-fifty as we move through that two-year cycle. But I think overall that, you know, the biggest driver of that is just the NIM expansion that we've talked about. Our view this year and there's some moving pieces on the fee side, but you know, fees basically growing in line with or slightly better than expenses. I think as you get into '27, we can continue to deliver positive fee-based operating leverage, which will drive a little bit more returns, and then we'll know, again, to manage expenses. We've talked about the capital return in '26. Haven't committed to what that looks like in '27 at this point, but presuming a constructive macro environment and expected performance in our credit book, you could see us pull some levers there that would allow us to comfortably get to that 15 or beyond. John Pancari: Thanks for all that color, Clark. Clark Khayat: Sure. Operator: Thank you, John. Our next question will go to the line of Mike Mayo with Wells Fargo Securities. Mike, your line is open. Mike Mayo: Hi. You made some several changes to your board. I guess you added Tony and Chris to your board. And you changed the lead director. And I just want to, I know you've covered this in the past, but as far as your appetite for a bank acquisition, you know, where is that given these board changes, different board just gonna different views. And then separately, as far as a nonbank acquisition such as to propel your capital markets investment banking, M&A business. And can you just clarify, do you have some visibility past the first quarter? I know you said first quarter should be up versus your record first quarter last year. How do you see that playing out? So a few questions in there. Chris Gorman: Sure. Thanks, Mike, and good morning to you. So a few things. Our capital priorities are unchanged. We've been pretty consistent about communicating them. I think I was unambiguous about our capital priorities at Goldman. And those are to, first and foremost, to support our clients. Secondly, to continue to invest in people and technology, and some of those are groups of people. I already touched on our investments in technology, which we're leaning into. Third is obviously to pay the dividend. That goes without saying. Fourth, our complimentary fee-based and capability-enhancing acquisitions, which was part of your multipart question, the answer is yes. We're keenly interested in adding groups of knowledge workers, whether those are group hires, individual hires, or boutiques. And you can assume that we're out there and having discussions and we see probably everything that goes on out there. And then lastly, what's left over, and we covered that today as well, are the buybacks. And, obviously, the buybacks were sort of a product. We're generating a lot of capital. And we had and we started with a lot of capital. So you can imagine, the ability to have a pretty aggressive buyback program is there. The last part of your question was visibility past the first quarter. I would say, look. It's the deal business. I would say we have very good visibility through quarter one. Also, our backlogs are at historically high levels. So our view on that, frankly, is rather conservative. In this business, you can't have a great year without having a great start. And we will get off to a great start, and we have good backlogs. Let's hope the markets stay in place, and we can revisit it as the year develops. Mike Mayo: And as far as the bank acquisition question, part of the... Chris Gorman: I thought I hit that head on twice. I'll do it again. We were unambiguous, Mike. That is not something we're focused on in spite of the fact that we have made some board changes. That doesn't change our philosophy of our of basically what our capital priorities are. Mike Mayo: And just one last follow-up. You're calling for middle market M&A has been muted for three years, all right? We see the biggest players know, they're really starting to go gangbusters. It hasn't really trickled down yet. You're saying it's trickled down. Sponsors should be more active. You have historically elevated levels. What's causing the delay, and why is it turning now? And why don't you have visibility past the first quarter if you think it's back? Chris Gorman: Well, I mean, we do have visibility. Just that it's the deal business, and there's just a lot of uncertainty. The reason it's been muted for three years is basically what we've all lived through. And a lot of it from the financial sponsor perspective was the assumption of rates. Obviously, the forwards had been so wrong for so long. Know, there were gonna be seven cuts, and then there were gonna be five cuts, and then there be three cuts. And that does not really facilitate a lot of financing. I think it's pretty clear now that the ten-year in spite of the turbulence even in a day like today, that the ten-year is kinda range-bound, call it four to four three, something like that. And you can transact very, very significantly there. So what happened last year is there was a lot of strategic deals, and then there were some very large financial sponsor deals. And what we see based on the actual discussions we're having both with the financial sponsors and at the Portco level is we think that's gonna break free. Know, as long as there's an inverse relationship between the holding period and the cash on cash return, I think there's gonna be a lot of people looking for liquidity this year. Clark Khayat: And, Mike, I just add that you know, last year, a lower percentage of our capital markets fees came from M&A advisory and financial sponsors as we would normally expect. We saw a little bit of a reversion to the long-term mean in the fourth quarter. And we would expect that again in the first quarter. The challenge in that market particularly given the prevalence of private equity has been more fund-to-fund transfers than actual outright sales. So you know, what we need to break is them not trading across funds or within funds, but actually moving the properties across GPs, basically. Operator: Alright. Thank you. Chris Gorman: Sure. Operator: Thank you, Mike. Our next question will go to the line of Gerard Cassidy with RBC Capital Markets. Gerard, your line is open. Gerard Cassidy: Hi, Chris. Hi, Clark. Clark Khayat: Hey. Good morning, Rick. Gerard Cassidy: Chris, can you share with us when you look at your average loan in slide seven, there's a nice pickup after the 2025, which of course, all the uncertainty around Liberation Day in the 2025, Can you share with us what your commercial C&I customers are feeling today versus, you know, nine months ago and their outlook, they just more comfortable living with the uncertainty that we're getting out of Washington when it comes to the policies this administration is pursuing? Chris Gorman: Well, it's a great question. I think there's a couple of things that have happened in the last nine months. One, people have gotten used to having a fair amount of uncertainty. And I think people have adjusted to that. But there's been some significant hurdles for middle market companies that have been clarified. The first was Liberation Day the tariff, absent what's going on this weekend, the tariff thing has sort of played out, and I think most companies are very comfortable with it. The second thing that has played out, and it played out, obviously, not until early July, was the new tax bill which allows you to pull forward all of this accelerated depreciation, which is CapEx. We constantly interview our clients, and 60% believe that their business will be helped by the tax bill that passed, in early July. So I think it's a combination of things. One, the recession that everyone had been predicting as imminent forever didn't happen. That's one thing. You got greater clarity with respect to tariffs. You got a tax break. In the meantime, these businesses, Gerard, are doing very well. They're generating a lot of cash. So you put all that together and actually pretty optimistic as we look forward. Gerard Cassidy: Very good. I appreciate that, Chris. And then, you also gave us good details on your NDFI portfolio, slide 19. And can you just remind us, I know the quality of it is very strong. But what are you guys seeing there in terms of growth? And are there has there been any changes in trends on quality? It doesn't appear to be that way, but about any further color on the slide 19? Chris Gorman: Sure. Just I'll give you a couple of comments, and I'm going to turn it over to Clark. One, the biggest piece of that is something we call SFL, which we've been in twenty years, and I think we've had one charge-off. Very, very high quality. The next biggest piece are investment-grade REITs, which we're lending to the entity, not to the project, which I think is a really important point, 40 something loan to value. The next piece of it is our a lot of insurance companies, and as you well know, insurance companies are sort of required, to keep a certain amount of capital. So I feel really, really good about the portfolio. You're asked about the trajectory of growth. Part of there is some growth there, but a lot of it is sort of a reclass in the way that we're reporting it. Clark Khayat: Yeah. And I would so I know you're familiar Gerard, with all the regulatory reporting changes. We did not see an enormous amount of growth, particularly in the second half of that book. And I would say it's largely because in our specialty finance lending business, we were turning away deals that we just did not think fit the structure. Integrity of what we're trying to do there. And if, you know, ahead of our business was here, he'd say he turned down more deals in 2025 than he has in the prior decade and a half to two decades. So you know, if we see a reversion to what we think the right standards are, you will see growth there. But to the extent we don't, we're happy to stay on the sidelines and wait to clean it up later. Gerard Cassidy: Very good. Thank you. Operator: Thank you, Gerard. Our next question will go to the line of Chris McGratty with KBW. Chris, your line is open. Chris McGratty: Good morning. Thanks for the question. Chris or Clark, the CET1 target, the 9.5% to 10 over time, I'm interested in the kind of the walk from where you are today at ten three, the consumption of it. Right? You talked about buybacks $1.3 billion plus this year. Would imagine at some point, there's going to be a handoff to on-balance sheet growth versus know, syndicating more out. But any thoughts there would be great. Thank you. Chris Gorman: Sure. So kinda from a perspective of where we are and where we're going, you're exactly right. On a marked basis, we're ten three. On a reported basis, we're eleven seven. We will burn down in 2026 from ten three to 10. Hence, the share repurchases. There will also be, as you know, we're finally gonna get some finalization on the capital rules. And this is a dynamic thing. We'll continue to revisit what we think is the right target for us at the right time. So that's, that's kind of the big picture. Clark Khayat: Yeah. And, Chris, the components I might just give you just you know, ten three to 10, call that half $1 billion. We'll distribute another $700 million or more throughout the year. So we will pay out likely above our target payout ratio of 70 to 80%, which is dividends. And buybacks in 2026. So again, that gets us to the top end of the range as Chris said, we'll keep an eye out for what changes occur on the regulatory front. The other two components or three components will be loan growth, which obviously is our top priority, and we'll continue to support that where it makes sense. The second will be just the macro environment and overall credit performance. So obviously, the capital is there to support any issues there. And then the third is you know, around just the rating agencies and where we need to be relative to that, although we feel, again, very good about where we sit today. So I think job one in 2026 is get us to the top end of that range and then take a look at where we are and how strong we feel about our own performance in the economy and then decide where we wanna be in that range going forward. Chris McGratty: Great. And on slide my be on slide 14. I you may have hit it, but I wanna make sure the walk between the 15 plus ROTC and four q of 27 and that's 16 to 19. I'm interested in kind of the timing. I don't think you've given a timing for that 16 to 19 and also what do you think the biggest what do you need to do to get, you know, into that range beyond the 15? Percent in the end of next year? Thanks. Chris Gorman: Sure. So the first answer to your first part of question, we have not given a time that we will hit to our long-term goal of 16 to 19. But I can tell you this, the big hurdles we say of half of it to get to 17. Is, to get to 15 is mechanical. Obviously, we go forward, more and more of that will have to be business generated. And we'll have to do that. And the other thing that you always have to do when you're talking about returns is we have to maintain our credit quality. There's nothing that and and by the way, I'm quite confident that we will based on our model. But that's the other thing we're focused on. Clark Khayat: Yeah. And I would just say, Chris, getting you know, we've been a little bit on this balance sheet optimization path for the last couple years that'll continue you know, for the most part in 2026. I think the two real opportunities are gonna be getting that more efficient balance sheet, which is, you know, reflected in the NIM that we'll like 3.25% plus and then growing the balance sheet from there sustainably with good client relationships. It's gonna be growing fees at or above our expense growth rate, which, again, I think provides a little bit more leverage then managing capital to the right level. So I think pulling all three of those dials as we go forward gets us gets us into that 16 to 19% range. Chris McGratty: Sounds great. Thank you. Operator: Thank you, Chris. Our next question will go to the line of Matthew O'Connor with Deutsche Bank. Matthew, your line is open. Matthew O'Connor: Good morning. It seems like commercial real estate broadly speaking, has inflected with the growth starting to pick up at least kind of industry-wide. And I was hoping you could talk about what you're seeing across your customer base there and how you think about the leverage to Key? And I understand it's both a lending and fee opportunity. Thanks. Clark Khayat: Yeah, Matt. Thanks for the question. And I actually think our real estate platform is probably one of our very best platforms. We have not seen loan growth per se. I think if you look at our guide, basically, what we're saying is that it'll be flat on an average basis this year, and it'll be up 3% from the '25 to the '26. That's a business that's an interesting one because we only have about $12 billion or so on our balance sheet. And we, in a typical year, would probably place even more than that into the markets. And so that's a business that I think is really poised to grow. And I think it's poised I think it's poised to grow because there really hasn't been a lot of transactional activity. Most of it's been refinanced. And I think we're at a point now where the bid and the ask are coming together, and I think you're gonna see a lot of activity. So that's, I think that's some upside for us as we look forward. Matthew O'Connor: Yeah. And I might Matt, just give you some high-level views. So we would think our CRE business in its entirety will grow, you know, price seven six, seven, 8% this year. I break that into our sort of traditional banking businesses, lending, and capital markets. And then just separate that from servicing, which we've talked a lot about and had a record year in 2025. That will be down this year just given a couple components. From a total revenue standpoint, it'd be roughly flat to down maybe low single digits. On the fee side, that will be down somewhat significantly owing really to three things. One is a movement of some deposits which were previously placed going to our balance sheet, which produces NII that's kind of a net neutral. We do see advance on rates on advances coming down as fed funds and so forth come down. So that does impact the business. And then obviously, as the market resolves, we see less special service and again coming off a record high. All in all, know, again, down for the year, but coming off a fantastic 2025. It's a business we love and feel very good about. We think to the extent CRE as a broad market player comes back, we'll have more and more opportunities to grow our primary service. But net-net, you know, we continue to love the commercial real estate business. I just wanna give a little bit context on the components. Matthew O'Connor: Okay. Thank you. That's good detail. Operator: Thank you, Matthew. Our next question will go to the line of Ken Usdin with Autonomous. Ken, your line is open. Ken Usdin: Thanks. Good morning. As you move past 2026, you mentioned you've done doing a lot of hiring this year and that puts against a really good revenue start because of the baked-in stuff you mentioned earlier. As you think about getting past this year when a little bit more of a fifty-fifty kind of baked in versus kind of just what the market gives, how do you think about just what the right natural expense growth rate of the company is? And, you know, given the pace at which you're really leaning into hiring this year? Thanks. Clark Khayat: Yeah. So we've thanks, Ken. We've talked about really long-term sort of 2% to 3% expense growth and that was is always gonna include some meaningful component of continuous improvement where we're finding efficiencies and then reinvesting them. You saw us at about four and a half in '25. We're talking about three to 4% this year, and I think we'll just step down over the next year or two get to that longer-term growth rate. Ken Usdin: Okay. And just one follow-up on consumer book. You mentioned that you still expect some runoff for the year. So relative to the $30 billion or so consumer loans at the end of the year, what do you have a view of, like, when and where that bottoms as your runoff comes to or, you know, heads towards the bottom. Thanks. Chris Gorman: So we've talked about this. Every quarter, we run off and, obviously, it depends what the rates are. Just to refresh everyone's memory, most of this runoff are mortgages to doctors and dentists. They yield about 3.3%. So we think that we think their money good, but, obviously, from a balance sheet perspective, we you know, the runoff is just fine. We think the runoff will be about, you know, as I said, about $600 million a quarter. And I would suspect it depends on rates, but I would suspect it would bottom out in the next couple years. Clark Khayat: That's, like, total for the consumer book. Okay. Yep. That's correct. Chris Gorman: And what we're doing just so you know, what we're doing what we're doing to try to get some consumer loan growth is we're really building out our home equity capabilities. 50% of our customers have significant equity in their homes. And so slowly but surely, we're replacing that mortgage product with home equity. And then the other thing that we have that will kick in at some point as the rate cycle plays out is we still have our student lending platform that refinances federally issued student loans. But, obviously, both the vintage the interest rates have to be right for that. Operator: Thank you, Ken. Our next question will go to the line of Erika Najarian with UBS. Erika, your line is open. Erika Najarian: Hi. I know it's a busy day for investors. So just one cleanup question. Clark, implied in the earlier questions is that the investor base is thinking that the guide is a little bit sort of softer than high expectations, no good deed goes unpunished. But just to level set, you did mention that there's a level of conservatism embedded in the guide in terms of the macro backdrop. And so know, it feels like you know, I guess that's a good conclusion to have that there's some conservatism or in the guide. Relative to what the macro could be in 26. Clark Khayat: Yeah. So maybe I'll make a couple comments and then you can tell me if I was responsive here. But you know, the first point, and I think you made it there is, know, the strength of our 25 results obviously impacts the year-over-year comparison. But what I would say is the guide we're providing here is a little bit better than we would have expected a quarter or two ago in terms of absolute dollars. The growth rate obviously you know, starts with where we ended the year. But I'd say, you know, overall, as we mentioned, we feel good about the numbers. There's obviously a lot of moving pieces for Key and the economy here. But as you saw last year, I think we're pretty dialed in on running these businesses. And with regard to our forecasting, you know, as pieces come into Clear Focus, we'll share the updates throughout the year. So as of now, this really reflects the visibility we have in front of us but our ability to outperform our guide last year was driven by the compelling trajectory of the businesses here and our ability to seize opportunities as we see them and we'll continue to do them. But I would just underscore that we continue to be very confident in the guide and very positive about the direction of travel. Erika Najarian: Got it. All I needed. Thank you. Operator: Thank you, Erika. Our next question will go to the line of Manan Gosalia with Morgan Stanley. Your line is open. Manan Gosalia: Hey. Good morning. So I just wanted to follow-up on all the comments made on the commercial loan growth side this morning. You know, it feels like there's some strong momentum there. Rates are lower. You know, 60% or more expect that they will benefit from the OVBAs. CRE starting to look better. Yeah. I think you noted in your deck that lines grew nicely in the quarter as well. So I guess the question there is, given the guide for commercial loans to grow at about 5% year on year next year, or in 2026. Is there room for growth to accelerate as we go through the year, and is there some upside there as well? Chris Gorman: Yes. I think there is. I mean, if you think about commercial at 5%, you've got C&I in there at that call it 7%. And I already talked about CRE. So I do think there's an opportunity for the guide to go up as the year develops, and we'll see how it plays out. Clark Khayat: Yeah. I might just add on from a, again, risk perspective. We are not adjusting our risk appetite. So we think we can achieve this growth with prudent underwriting just as we have. So, again, we're not boosting our standards to achieve this growth. Manan Gosalia: Great. And then Chris, you spoke about how much more there is to do on AI. And you also continue to hire more frontline bankers. I guess when we look at the expense guide of three to 4%, could you just break out what level of investment spend that includes and what the ongoing you're generating from the business are. Chris Gorman: Yeah. So it's too early to be able to claim a lot of efficiencies yet with respect to AI. But I can tell you, I said we've stepped up $100 million in each of the last three years. And we also, by the way, have found through continuous improvement about $100 million in savings each and every year. And so I think that it's one of those things as we properly reconfigure Key and start to look at these horizontal teams and use technology, I think we'll actually be able to fund a lot of it. So it's early to claim some kind of cost savings. Obviously, I could give you specific ones like a call to a call center costs 25¢ using AI. And if a human picks it up, it costs $9. Those are small, very focused things. We're focused really on more transformational activities. Manan Gosalia: That's all for me. Thanks very much. Chris Gorman: Yeah. You're welcome. Operator: Thank you, Manan. Our next question will go to the line of David Giaverini with Jefferies. David, your line is open. David Giaverini: Hi. Thanks for taking the question. So I had a follow-up on balance sheet growth over the medium term. So you're guiding to a flattish average earning assets. And in 2026, what's a reasonable growth rate in average earning assets as you hit your stride, say, over three years, is GDP plus the right way to think of it as your investment kinda take hold? Clark Khayat: Yeah. So the way we tend to think about that David, is in our four industry verticals, we like when the market is open and, you know, we like the risk profile, we think we can grow GDP plus because of our focus and expertise in those areas. I think broadly, commercial loan growth at sort of GDP with maybe a little bit of upside is right. And then consumer probably running slightly below GDP. So I think overall, your combined loan growth probably looks in that ZIP code of GDP. It's just that you'd have to break out the composition and probably understand which is moving in which direction. David Giaverini: Thanks for that. And then my follow-up is on credit quality. Good trends in non-assets and criticized loans. Remind us of your ACL comfort level and reserve build outlook and then any areas you're watching more closely. Clark Khayat: Yes. So let me start with the reserve and then Mo will maybe comment on the areas he's focused on. So generally, we've seen very good credit trends throughout the year. We had a very solid fourth quarter in terms of NPAs, NCOs, and Crick coming down. We built reserves over the course of the year, about $40 million. I think two things there. One, or maybe three. One is, you know, loan growth drives reserving in general. And we've had that on the C&I side. The rotation from residential to C&I over time will require a little bit more reserving because C&I loans are going to all other things being equal have a little bit more credit cost than our super prime consumer loans. And then the third piece is we just are still reflecting some macro uncertainty that continues to be out there. I think there is some potential for release throughout the year if we get more clarity on that or the economy just, you know, gets visibly more stable broadly. Things like geopolitical risks, etcetera. But that's really what's reflected in that reserving at this point. Mohit Ramani: Yeah. I think that's well said, Clark. And again, overall benign economic environment from our perspective. Just a few watch areas that we're considering consistent with our culture of early risk identification. So, you know, consumer discretionary, that's about a $5 billion portfolio. One of the areas we're watching, probably not surprising given probably what you all see also in the macro environment. Some parts of health care, again, had some, you know, ups and downs, but, again, we don't expect a lot of lost content. And then lastly, agriculture. Again, an area we're watching, but again, a relatively small portfolio. So overall, I think our outlook is still pretty sanguine. But again, consistent with a strong culture of early risk identification, we do have some areas that we're watching. David Giaverini: Thanks very much. Operator: Thank you, David. With no additional questions registered at this time, I'll go ahead and turn the call back over to you, Chris, for closing remarks. Chris Gorman: Certainly. That concludes our fourth quarter earnings call. Thank you for all of your interest in Key. To the extent people have additional questions, please do not hesitate to reach out directly to Brian Mauney. Thank you so much, and have a good day. Goodbye. Operator: That concludes today's conference call. Thank you for your participation. Enjoy the rest of your day.
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 April 2026 Earnings Conference Call. The floor will be open for questions following the presentation. Note this conference is being recorded. I will now turn the call over to Chris Hibbetts, Vice President of Finance and Investor Relations for Forestar Group Inc. Chris Hibbetts: Thank you, Jenny. Good morning, and welcome to our call to discuss Forestar Group Inc.'s first quarter results. Before we get started, I want to remind everyone that today's call includes forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. Although Forestar Group Inc. believes any such statements are based on reasonable assumptions, there is no assurance that actual outcomes will not be materially different. All forward-looking statements are based upon information available to Forestar Group Inc. on the date of this conference call, and we do not undertake any obligation to update or revise any forward-looking statements publicly. Additional information about factors that could lead to material changes in performance is contained in Forestar Group Inc.'s annual report on Form 10-K, which is filed with the Securities and Exchange Commission. The earnings release is on our website at investor.forestar.com, and we plan to file our 10-Q later this week. After this call, we will post an updated investor presentation to our Investor Relations site under events and presentations for your reference. Now I will turn the call over to Andy Oxley, our President and CEO. Andy Oxley: Thanks, Chris. Morning, everyone. I am also joined on the call today by Jim Allen, our Chief Financial Officer, and Mark Walker, our Chief Operating Officer. The Forestar Group Inc. team delivered a solid first quarter generating revenues of $273 million, a 9% increase from the prior year quarter on 1,944 lots sold. Our book value per share has increased 10% from a year ago to $35.10, and our contracted backlog remains strong with visibility towards $2.2 billion of future revenue. While affordability constraints and cautious consumer sentiment continue to impact the pace of new home sales, we are managing with discipline to balance inventory investments with liquidity and flexibility. We ended the quarter with $820 million of liquidity, approximately 75% of our investments this quarter were for land development and 25% were for land acquisition. We remain focused on turning our inventory, maximizing returns, and consolidating market share in the highly fragmented lot development industry. Our unique combination of financial strength, operating expertise, and diverse national footprint enables us to consistently provide essential finished lots to homebuilders and navigate current market conditions effectively. We will now discuss our first quarter financial results in more detail. Jim? Jim Allen: Thank you, Andy. In the first quarter, net income was $15.4 million or $0.30 per diluted share, compared to $16.5 million or $0.32 per diluted share in the prior year quarter. Our pretax income was $20.8 million compared to $21.9 million in the first quarter of last year. Our pretax profit margin this quarter was 7.6% compared to 8.7% in the prior year quarter. Revenues for the first quarter increased 9% to $273 million compared to $250.4 million in the prior year quarter. We sold 1,944 lots in the quarter with an average sales price of $121,000. Our average sales price this quarter was impacted by an outsized mix of lot deliveries from communities with higher price point lots. We expect continued quarterly fluctuations in our average sales price based on the geographic and lot size mix of our deliveries. Our gross profit margin for the quarter was 20.1% compared to 22% for the same quarter last year. The current year quarter was negatively impacted by a track sale with an unusually low margin. Excluding the effect of this item, our current year quarter gross margin would have been approximately 21.5%. Chris? Chris Hibbetts: In the first quarter, SG&A expense was $36.5 million or 13.4% as a percentage of revenues, compared to $36 million or 14.4% as a percentage of revenues in the prior year quarter. Our headcount decreased 3% from a year ago as we remain focused on efficiently managing our SG&A while maintaining our strong operational teams across our national footprint for future growth. We expect our headcount to remain relatively flat for the remainder of the year. Mark Walker: Demand for new homes continues to be impacted by affordability constraints and cautious consumer sentiment. However, mortgage rate buy-down incentives offered by builders are helping to bridge the affordability gap and spur demand for new homes, particularly at more affordable price points. Our primary focus remains developing lots for new homes priced to target entry-level and first-time buyers, which is the largest segment of the new home market. The availability of contractors and necessary materials remains solid. Land development costs and cycle times have stabilized. Our teams utilize best management practices and work closely with our trade partners to develop lots to drive operational efficiency. Jim? Jim Allen: D.R. Horton is our largest and most important customer. 16% of the homes D.R. Horton started in the past twelve months were on our Forestar Group Inc. developed lots, and 23% of their finished lot purchases over the same time frame were lots developed by Forestar Group Inc. With a mutually stated goal of one out of every three homes D.R. Horton sells being on a lot developed by Forestar Group Inc., we have a significant opportunity to grow our market share within D.R. Horton. We continue to work on expanding our relationships with other homebuilders. 16% of our first quarter deliveries, or 317 lots, were sold to other customers. This includes 146 lots that were sold to a lot banker who expects to sell those lots to D.R. Horton at a future date. We also sold lots to six other homebuilders. Mark? Mark Walker: Our total opposition at December 31 was 101,000 lots, of which 65,600 or 65% was owned and 35,400 or 35% were controlled through purchase contracts. 10,400 of our owned lots were finished at quarter-end, and the majority are under contract to sell. Consistent with our focus on capital efficiency, we target owning a three to four-year supply of land and lots and manage development phases to deliver finished lots at a pace that matches market demand. Jim Allen: At 24,100 or 37% of our owned lots were under contract to sell. Chris Hibbetts: $210 million of hard earnest money deposits secure these contracts, which are expected to generate approximately $2.2 billion of future revenue. Our contracted backlog is a strong indicator of our ability to continue gaining market share in the highly fragmented lot development industry. Another 28% of our owned lots are subject to a right of first offer to D.R. Horton based on executed purchase and sale agreements. Chris? Chris Hibbetts: Forestar Group Inc.'s underwriting criteria for new development projects remains unchanged at a minimum 15% pretax return on average inventory and a return of our initial cash investment within thirty-six months. During the first quarter, we invested $415 million in land and land development. Roughly 25% of our investment was for land acquisition, and 75% was for land development. Although we have moderated our land acquisition investment over the last twelve months, our team remains disciplined, flexible, and opportunistic when pursuing new land acquisition opportunities. Our current land and lot position will allow us to return to strong volume growth in future periods, and we still expect to invest approximately $1.4 billion in land acquisition and development in fiscal 2026, subject to market conditions. Jim Allen: We have significant liquidity and are using modest leverage to keep our balance sheet strong and support our growth objectives. We ended the quarter with approximately $820 million of liquidity, including an unrestricted cash balance of $212 million and $608 million of available capacity on our undrawn revolving credit facility. Total debt at December 31 was $793 million with no senior note maturities in the next twelve months. Our net debt to capital ratio was 24.6%. We ended the quarter with $1.8 billion of stockholders' equity, and our book value per share increased 10% from a year ago to $35.10. Forestar Group Inc.'s capital structure is one of our biggest competitive advantages and it sets us apart from other land developers. Project-level land acquisition and development loans are less available and have become more expensive in recent years, impacting most of our competitors. Other developers generally use project-level development loans, which are typically more restrictive, have floating rates, and create administrative complexity, especially in a volatile rate environment. Our capital structure provides us with operational flexibility while our strong liquidity positions us to take advantage of attractive opportunities as they arise. Andy, I will hand it back to you for closing remarks. Andy Oxley: Thanks, Jim. The Forestar Group Inc. team delivered increased revenues this quarter while maintaining strong liquidity and executing our disciplined investment strategy. As outlined in our press release, we are maintaining our fiscal 2026 revenue guidance of $1.6 billion to $1.7 billion and our lot delivery guidance of 14,000 to 15,000 lots. Our teams have a proven track record of adjusting quickly to changes in market conditions, and we are closely monitoring each of our markets as we strive to balance pace and price to maximize returns for each project. Our national footprint and more than 200 active projects are a strategic advantage and provide flexibility to allocate capital based on local market conditions. While we expect home affordability constraints and cautious consumers to continue to be near-term headwinds for new home demand, we are confident in the long-term demand for finished lots and our ability to gain market share in the highly fragmented lot development industry. Continued execution of our strategic and operational plans, combined with a constrained finished lot supply and a majority of our diverse national footprint, positions us for further success. With a clear direction, a dedicated team, and a strong operational and financial foundation in place, we are excited about Forestar Group Inc.'s future. Ben, at this time, we will open the line for questions. Operator: Thank you very much. We will now be conducting our question and answer session. If you would like to ask a question, please press star one on your phone keypad now. A confirmation tone will indicate that your line is in the queue. You may press star 2 if you would like to remove your question from the queue. For any participants using speaker equipment, it might be necessary. Please wait a moment while we poll for questions. Jim Allen: Thank you. Operator: Our first question is coming from Anthony Pettinari of Citigroup. Anthony, your line is live. Asher Sohnen: Hi. This is Asher Sohnen on Anthony. Just starting on gross margins, I think maybe even excluding the TRAX sale, the 21.5% gross margin might have been down 1Q and 1Q on year over year, maybe versus 4Q. Can you just talk about the puts and takes there and kind of what gross margins might look like over the next few quarters? Jim Allen: Yeah. The biggest impact on margin in the quarter was really due to mix. And there's always going to be an impact based on the mix of projects that are delivering lots in the quarter. And that was the case this quarter. The lots that delivered really just had a lower gross margin. Looking forward, at this point, we do not see any reason why our gross margins would not be in kind of in the historical range that we have seen, kind of 21 to 23%. Probably at the lower end of that range, just given our trying to match price and pace or balance price and pace in a slower demand environment. Asher Sohnen: Got it. Okay. No. That is really helpful. Then, following up on that. So, I mean, when it comes to like D.R. Horton and third-party customers, it sounds like you are getting some maybe pushback on price. I think, you know, last time we saw prices, like, push back on softer demand, there was a lot there was more pushback on maybe takedown schedules and slowing those down. So I am just curious if you could talk about what you are seeing from your customers. Jim Allen: So market to market, you know, we are continuing to meet with all of our customers. And, you know, there has been a movement away from large bulk takedowns, that had been sort of the norm in the post-COVID environment to more of a structured quarterly takedown. We have gone through most of that through fiscal 2025. There are probably a few pockets where that is still going on. But, we really have not seen a lot of change on price. You know, sometimes in a community where the pace is slower, you know, we will meet with our customers and work through some things. But it is largely gone back to what we would consider a normal market environment in terms of quarterly lot takedowns. Asher Sohnen: Okay. That is helpful. If you do not mind me sneaking one more in there. I think SG&A spend was pretty flat year over year on a dollars basis. Is that just kind of something we should expect for the next few quarters? Or are there any puts and takes to think about there? Jim Allen: Yeah. Our headcount is actually down a little bit from a year ago and from last quarter. And we expect our headcount to remain pretty stable for the remainder of the year. Headcount and labor costs are, you know, the majority of our SG&A. So we would expect, you know, we would expect it to be pretty stable. Asher Sohnen: Thank you. I will turn it over. Operator: Thank you very much. Just a reminder there, if anyone has any questions, you can still join the queue by pressing star 1 on your phone keypad now. Operator: Hey. I am not seeing any further questions in the queue. So I will now hand it oh, apologies. We do have a question. We have a question in from Paul Pescielski of Wolfe Research. Paul, your line is live. Paul Pescielski: Thank you, and good morning. I guess to start off, you mentioned that your ASP was up due to mix to higher-priced homes. Is that planned? Or is that more a function of market conditions and weak entry level? And then how would your inventory of developed lots or anything you could bring to the market over the next twelve months? How does it break out between entry level and move up? Andy Oxley: So it was planned. As we have grown our development platform in the West, they tend to have higher ASPs. And so you are starting to see some of that flow through. And so we think over time that will continue. Do not think it will be as much in the remaining quarters of this fiscal year as it was in Q1. And, also, it was kind of amplified due to just the lower volume of lot closings overall. And we are really not changing our strategy in terms of development plans for, you know, primarily the first-time homebuyer and entry level. That is the largest section of the market. And it is where our biggest customer focuses a lot of their attention. So we are very focused on maintaining affordability and think that that is the position to be in the marketplace. Paul Pescielski: Okay. Thank you. And then I guess, you know, Texas and Florida really have outsized exposure to those two states. Are you looking to maybe rebalance a little bit given higher resale inventory in those two markets? Or two states? Andy Oxley: Yeah. I mean, we look at that every on a month-to-month and quarter-to-quarter basis, and reallocate because, you know, our national platform allows us to do that. And, you know, right now, Texas and Florida are, you know, a couple of the more challenged markets, with inventory. So we are being, you know, very selective in what we are looking at and what we are doing there. And moderating our development activities there where appropriate to make sure that we do not have excess inventory. But those are still huge markets. They still have great in-migration. And so we think the fundamentals for those markets long term are real solid. And, but we will continue to evaluate on a quarter-by-quarter basis and make investments based on current local market conditions. Paul Pescielski: Then just the last one. I would assume that you are probably pulling back on the size of your phase developments. How does that impact your cost structure? Does that have any meaningful headwind to margin? Andy Oxley: There is no real impact on our cost structure. We do pull it back just based off the meet demand so we can meet sales absorptions. Really, we are seeing supply material and contractor availability is in really good shape. So we continue to work with this trade and governing jurisdictions to reduce cost and cycle times. It helps us reduce cycle times a bit when we pull back and reduce those phases. Obviously, we are trying to deliver lots to meet the market demand and just that continued increase in contract availability alongside cooperating with the government jurisdictions is really the key to driving those lower development costs and cycle times. Paul Pescielski: Okay. Alright. Appreciate it. Thank you. Operator: Thank you. Jim Allen: Thank you, Jenny, and thank Operator: was just closing up, and you beat me to it. Thank you very much. Jim Allen: I will hand it over to you. Operator: Thanks. Thank you, Jenny. Chris Hibbetts: Thank you to everyone on the Forestar Group Inc. team for your focus and hard work. Stay disciplined, flexible, and opportunistic as we continue to consolidate market share. 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. Operator: Thank you very much. This does conclude today's conference call. You may disconnect your phone lines at this time and have a wonderful day. We thank you for your participation.
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.
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.