Hancock Whitney Corp (HWC) 2025 Q4 法說會逐字稿

(audio in progress) driven by seasonal activity and public fund DDA and which increased $417 million. As a reminder, we usually experience seasonal public fund health flows in the first quarter of each year. Our interest-bearing transaction balances were up $223 million with higher balances driven by competitive products and pricing.

Retail time deposits decrease $90 million due to maturities during the quarter, and DDA balances were up $70 million inclusive of a $191 million increase in public fund DDAs. DDA mix ended the quarter at a strong 35%. We expect our investments in financial centers and revenue producers will support our guidance for deposits, which we anticipate will increase low-single digits from 2025 levels.

As previously announced, we fully exhausted our share buyback authority last quarter, which impacted capital ratios. Despite enhanced repurchase volume, we ended the quarter with TCE a little over 10%, and a common equity Tier 1 ratio of 13.66%. Our Board approved a new 5% buyback plan that will be effective through the end of '26.

We are very optimistic as we look forward to the coming year. Our work over the past several years has resulted in solid capital levels, a robust allowance for credit losses, superior profitability, ample liquidity, benign asset quality, and now positive trends in balance sheet growth. We're excited for the opportunities in the coming year and believe we are positioned well for a successful and growing 2026.

Lastly, I would like to introduce you all to President of Hancock Whitney Bank and Chief Operating Officer, Shane Loper. He will be joining us on our earnings calls going forward.

With that, I'll invite Mike to add additional comments.

Thanks, John. Good afternoon, everyone. Fourth quarter's earnings were $126 million, or $1.49 per share, compared to $127 million or, again, $1.49 per share in the third quarter. PPNR for the company was down slightly from the prior quarter to $174 million, expressed as a return on average assets that continues to be a solid 1.96%.

NII increased 1% this quarter, driven by favorable volume and mix for both average-earning assets and interest-bearing liabilities, partly offset by a slightly lower NIM, which decreased or narrowed 1 basis point this quarter. As John mentioned, our fee income business had a solid quarter, and expenses were up due to continued investments in revenue-generating activities.

Our efficiency ratio was 54.9% for the quarter and 54.8% for the year. That was down 58 basis points from 2024's 55.4%, reflecting our net interest income growth, strong fee income performance, and well-controlled expenses. Fee income grew in each of the four quarters this year, totaling $107 million in the fourth quarter.

We enjoyed solid performance across each category with the increase this quarter driven by higher specialty income. We expect fee income will be up between 4% and 5% in 2026, with a continued focus on core deposit account growth that often delivers multiple categories of fees. As mentioned, expenses remain well-controlled, up only 2% from the prior quarter. Much of this increase was from investments that we believe will enhance our revenue-generating capabilities in 2026.

We expect expenses will be up between 5% and 6%, including an impact of about 185 basis points from the execution of our organic growth plan and a full year of expenses related to our acquisition of Sabal Trust Company. Expense growth year over year was well controlled at only 3.6% inclusive of ample re-investments.

The 1 basis-point contraction in our NIM was driven by lower loan yields on both new fixed and variable rate loans and existing variable rate loans following the two rate cuts this quarter. Partially offsetting this was higher bond yields, lower cost of deposits, and a favorable mix in rates for other borrowings. Our overall cost of funds was down 7 basis points to 1.52% due to a lower cost of deposits and better funding rates and mix as we ended the quarter with lower FHLB advances.

Our cost of deposits was down 7 basis points to 1.57% for the quarter, with the cost of deposits down to 1.53% in the month of December. Following the rate cuts in October and December, we reduced promotional rate pricing on our interest-bearing transaction accounts and retail CDs. In 2026, we expect CDs will continue to mature and renew at lower rates, which will support improvement in our cost of deposits.

The yield on the bond portfolio was up 6 basis points to 2.98% due to cash flows of $213 million rolling off at 3.55% and reinvestment in $290 million of bonds had a yield of 4.45%. In addition, we had a $0 loss bond swap of $230 million with a yield pickup of 45 basis points. As John mentioned, we completed a bond portfolio restructuring in the first two weeks of January 2026. We sold 1.5 million of bonds at a yield of 2.49% and reinvested the proceeds in bonds carrying a yield of 4.35%. We're expecting the annual impact will support our NII and NIM growth in 2026 and will contribute 7 basis points to our NIM, $24 million to NII, and about $0.23 to earnings per share.

Our forward guidance for 2026 is on slide 22 of the earnings deck and includes the expected impact of the bond portfolio restructuring, but excluding the pre-tax charge of $99 million. We are assuming two 25-basis-point rate cuts in April and July of 2026. We expect NII will be up between 5% and 6% from 2025 with modest NIM expansion, and our PPNR guide is to be up between 4.5% and 5.5%. Our efficiency ratio is expected to fall in the range of 54% and 55% in 2026.

For the fourth consecutive quarter, our criticized commercial loans improved, decreasing $14 million to $535 million. Non-accrual loans decreased $7 million to $107 million. Net charge-offs came in at 22 basis points. Our loan loss reserves are solid at 1.43% of loans. We expect net charge-offs to average loans will come in at between 15 and 25 basis points for the full-year 2026.

Lastly, a comment on capital. Our capital ratios remain remarkably strong, even with the full exhaustion of our share repurchase plan, where we bought back about 147 million of shares in the fourth quarter of 2025. Our Board reauthorized a new 5% repurchase plan in 2026, and we expect share repurchases will occur at a more even pace across 2026. Changes in the growth dynamics of our balance sheet, economic conditions, and share valuation could impact that view.

I will now turn the call back to John.

Thanks, Mike. Let's open the call for questions.

(Operator Instructions)

Michael Rose, Raymond James.

Notice that the fourth quarter loan production was up about 7.5% Q on Q, but paydowns were also up. You know, maybe Mike or John, if you can just talk about what your expectations are for, kind of, gross production versus expected paydowns as we move through the year, inclusive of those two cuts.

Thanks, Michael. I'm going to ask Shane to start with that answer. Go ahead, Shane.

Okay. Thanks, John. And really what I'll do is I'll try to cover just kind of where the production came from and then tie out with what we see into the future. First, I'd just like to say thanks to the entire team for delivering a good year of operating results and just thanks for that contribution to success.

I think it's important to note that loan production increased for the third consecutive quarter with nearly a $1.6 billion of production in the fourth quarter. Typically, we'll see 35% of all that production funded and then grow to around about 40%. In the fourth quarter, the team produced an additional $260 million in production over the third quarter, which contributed pretty significantly to that 6% growth that we're talking about.

Geographically, the banking teams delivered growth across all of our core markets in Texas, Louisiana, and Florida. And this is also important because, as we intentionally improve our commercial and middle market segment mix, that's going to deliver higher spread relationships that may offset some of the thinner spreads in the specialty segments.

Commercial real estate continues to deliver consistent production, which will fund up once that initial equity burns off in those deals. And we expect to experience sustained fundings that really have occurred with production over the last 18 to 24 months throughout the year in 2026 with expected and planned paydowns as a headwind to see our regrowth. And I don't think that's anything new that we're talking about there. And a lot of those paydowns will get to lease-up CO and go maybe to the permanent market.

CRE production for 2026 looks to continue to be steady as the 2025 production funds up. Looking at healthcare, that team continues to deliver growth with current and new banker ads. The production delivers good NII, but that's one of those slightly thinner spreads than the commercial and middle-market segments. and I expect healthcare to continue to deliver as we've shifted our focus more to healthcare, real estate and a selective focus on senior care sponsor operators.

Commercial finance, which is our equipment finance and ABL teams, they also continue to deliver strong production and balanced growth. We're experiencing good deal flow there so that we can screen credit and are considering and executing on capital -- those companies that are considering and executing on capital investments.

As I said about healthcare, these balances produce positive NII, but are at a little bit lower spread. We saw some consumer loan growth for one of the first times, and it grew about $5 million in the quarter, led by HELOC production. Fourth quarter of '25 was our first HELOC growth quarter in '25, about $15 million. and a three-year high of applications in the quarter. So we believe HELOCs will continue to be a solid consumer product into '26, and we get about 40% line utilization there.

And finally, kind of wrapping up on growth. I'd like to call out our business banking team. They produced a strong $36 million in growth this quarter at our highest spreads. We recently recruited an accomplished executive from the super regional bank to lead our business banking segment and have high expectations of that team concerning loan and deposit growth throughout 2026.

Our goal is to be the best bank for privately-owned businesses in the country, and we're committed to delivering on that aspirational goal with credit execution, market-leading deposit products, and sophisticated wealth management for both businesses and business owners. So I look forward to 2026. I believe our team is calling on the right clients and prospects to deliver on a better segment mix and deliver on our mid-single-digit growth guidance.

So kind of wrapping up, when you look at paydowns, I think we can expect paydowns in CRE. I think we can still expect some entrant of private credit and other lending opportunities like that with some of our clients. But right now, we feel like we've got a fairly stable base to work from, and it's all about generating business going forward.

Michael, any follow-up?

It's a very detailed response, so I appreciate all the color. Maybe just as my follow-up question, so looks like the ROA target has been moved a little bit higher from last year, but the TCE ratio is also higher. Can you just walk us through some of the other assumptions that kind of underlie, you know, meeting some of those targets, the three-year CSOs? I know you have the Fed funds rated at 3.25%, but we'll just love some other colors around kind of the base case expectations.

Sure, Michael. This is Mike. I can add some color to that in a few comments. I think the biggest thing is, you know, this notion of consistent balance sheet growth -- organic balance sheet growth over the next three years, you know, our guidance for loans has stepped up this year to mid-single digits from what we achieved last year, which was akin to more low-single digits, so kind of continuing this notion of consistent balance sheet growth over the next couple of years is really important.

You called out the rate environment. We're assuming, just to keep the assumptions straightforward, Fed funds at 3.25% which is where we expect Fed funds to end at the end of this year. We'll continue to reinvest back in the company, so I would expect expense growth to be something on par with what we're guiding for this year, which if you kind of strip away the investments that were kind of calling out in the guidance and the annualized impact of Sabal is still a pretty reasonable run rate of somewhere around 3.5% to 4%. So that kind of continuing for the next couple of years.

And then look, we've been tremendously successful in terms of kind of upscaling our fee income businesses. The guidance for next year is in the 4% to 5% range. So to kind of continue that going forward is equally important. We'll grow the deposit side of the balance sheet somewhere over the next couple of years, I think, in low- to mid-single digits. And the NIM expansion will follow along with NII growth. So those are the main things.

Now, in terms of the TCE guide of 9% to 9.5%, you know, we're well north of that now at just over 10%. You know, you can assume that we'll continue buybacks at the levels we've done both in '25 and again what we're guiding for '26. So I think the combination of continuing a pretty robust buyback program along with addressing the dividend and organically growing the balance sheet should help us get our TCE down to those levels. Those are kind of the main assumptions.

Michael, this is John. I'll add very little to it, but I think if we kind of step back to -- or step up to 60,000 feet and you take what Mike and Shane both shared, the ROA guidance being a little bit steeper than where we are today doesn't seem like a tall task if we weren't reinvesting back in future year's revenue like we are today and what we got it to.

But our goal is not to just become a very -- or be a very high-profitability organization. It's also to deliver on pretty reliable balance sheet growth year in and year out so investors see PPNR continue to grow but still maintain a pretty profitable book. And that's a hat trick to pull all that off at the same time. And just for a bonus, maintain excellent to very solid credit quality.

So if we slowed the expense growth down some through reinvesting less, then our profitability guide would have been higher. But our goal is to add bankers and add offices, perhaps the latter part of the year or next year, and continue growing a bigger balance sheet in higher growth markets so that on an overall basis, investors are going to see that value build over time. So I hope that helps you kind of bring all those pieces together.

Catherine Mealor, KBW.

A question just on the margin. You talked about seeing modest NIM expansion in '26, but we're getting 7 basis points immediately up front from the bond restructure. Do you -- walk us through what you're thinking about the margin outside of that one-time event. Do you still see a core margin having upside or is really that modest expansion coming from the bond restructure and outside of that we're stable once we hit that new rate?

Sure, I'd be glad to, Catherine. I think the main underpinnings of what we're referring to in terms of our ability to widen the margin growth NII next year is really around the balance sheet. So we've got the loan growth pegged at mid-single digits. So if you assume that's somewhere between 4% and 5%, that should add a healthy amount of volume to our balance sheet. And certainly, coming with that will be an intended increase of average earning assets. So I think, first and foremost, it's organically expanding the balance sheet.

Then you called out the bond portfolio restructure. So that'll contribute 32 basis points in terms of the bond yield and about 7 basis points on the NIM. But related to the bond portfolio, we also have about $1.150 billion of cash flow -- principal cash flow, coming back to us next year. That'll be coming back at about [$375 million]. and going back on the balance sheet, call it between4.25% and 4.5% depending where rates are.

So that's a significant improvement on top of the 32 basis points related to the bond restructure. So that could be as much as somewhere between 45 and 50 basis points of bond-yield improvement from the fourth quarter of '25 to the fourth quarter of '26. So that's significant.

Then in terms of our cost of deposits, we're assuming the two rate cuts next year, one in April and one in July. So given that, we've got anywhere from about 25 to 30 basis points improvement in our cost of deposits from fourth quarter to fourth quarter. A lot of that's coming from our continued ability to reprice CD maturities. We've got about eight billion of CD maturities next year. Those will come off at about [334]. The assumption is that they'll go back on at about [280] or so. That is inclusive of about an 81% renewal rate.

So the organic growth of the balance sheet, the securities yield improvement, our ability to continue to reduce our cost of deposits, those are the main tailwinds, if you will, toward NIM improvement next year. Probably one of the headwinds would be we do expect, with a couple of rate cuts next year, our loan yield will continue to decline a bit next year, but I think at a slower pace than what you saw over the course of the fourth quarter. I think you put all that together, and our NIM improvement, call it somewhere between 12 and 15 basis points, maybe a little bit north of that, again with seven coming from the bond restructure. So that's how we're kind of thinking about the NIM and NII next year.

And by next year, you mean '26?

'26. Yes, I'm sorry. This is the fourth-quarter call.

I understand. That was really helpful, Mike. Thank you so much. And then maybe just as a follow-up back to the revenue producer and hiring plans that you have. You've hired third-quarter '24 through fourth-quarter '25, so all over the past year, and we're now going to do 50 in '26, so we're doubling the amount of bankers that we're hiring.

I know part of -- we've kind of gained momentum in that plan, I know, throughout the course of the year, but maybe just walk us through kind of what gives you confidence in being able to hire that many more bankers this upcoming year versus last year. And maybe kind of the pace that we should expect that to come on board as we move through the year.

Sure. Catherine, this is Shane. Thanks for that. We're confident in it. However, hiring is competitive as every bank is looking to hire from a limited pool of bankers. And the reason we're confident is we've significantly enhanced our banker hiring discipline to really look just like our client acquisition process.

Our goals are to hire, probably a split of 60% business bankers, 40% commercial bankers, of that up to 50 in '26. And those folks really are targeted to intentionally generate a better portfolio mix, a little more granular business. The enhanced recruiting process is yielding expected results. We're out of the gate strong in the first quarter. We began this early fourth quarter. and it's a process that is really pretty tight in terms of ongoing meetings, pipeline review of potential hires and where they are and what their skill sets are and we're following up on that on a very regular basis.

So I think the strength of that process has been greatly enhanced. And as I've said before and we've said before, this organic hiring plan is designed to be like a flywheel with bankers hired in previous years and quarters ramping up production as those current year bankers are oriented to our sales and credit processes. So we're getting the production from those folks that the 22 that we've hired last year as we're hiring up to the 50 this year.

And really to date, the bankers hired are performing as expected. and contributing to our growth, and we monitor that performance on an ongoing basis to ensure that we're getting what we expect. We're also going to continue to be opportunistic in hiring bankers in our specialty segments. So CRE, health care, equipment finance and ABL.

So at this point, given the enhanced processes and the work that's going on, the pipeline, if you will, of potential candidates to bring into the company is good. I feel very good about getting that up to 50 in '26.

Casey Haire, Autonomous Research.

So I wanted to touch on fees. The fee got, I don't know, 4% or 5% seems like a lot, but you didn't have Sabal, which closed in the middle of the year. And it feels a little conservative, because if I run right this fourth quarter here, you're already at that that $425 million level. So I'm just wondering if we're missing something or if it's just a little conservative.

Thanks. This is Shane. I'll take that one, too. So fee income across all of our banking segments and products, as you just articulated, continues to deliver in the fourth quarter. We've grown consumer DDAs in the fourth quarter and throughout the year. That's contributing to service charges, which contribute even more as a full year of those accounts are on the books. Mobile openings have increased by 20% year over year, as well as 80% of our new checking accounts are digitally active, so that really makes them very sticky and kind of primary accounts.

Business service charges continue to perform, and those are reflective of the book that we have in our strong treasury service products and services. And as we improve our overall execution in business banking, as I mentioned before, I would expect those deposits and deposit fees to follow along that improvement curve.

Card fees right now are generally holding flattish in a trajectory quarter over quarter, but I think there's an opportunity there to grow in 2026 through our purchasing card and business card growth. Merchant is another area where we have solid opportunity to grow. as that business banking execution improves and our product bundling strategy gains momentum there.

Mortgage fees, again, continue to perform, and we're ready for anything that may happen in the mortgage market with our direct-to-consumer digital offering that we have there. You mentioned the Sabal Trust fees. Wealth management continues to contribute in their strong execution with the Sabal team to retain clients and grow the base there.

Annuity sales are a little softer in the fourth quarter but have remained historically strong for us with our managed money contributing recurring fees at about $15.6 billion of AUM. So given those things and our focus on growing core deposit accounts, continuing to deepen wealth management, I think the fee income target of 4% to 5% is solid, and we should be able to chin that bar.

So Casey, this is Mike. One item just for consideration. You know, certainly, the 4.5% or 4% to 5% might look a little anemic compared to what we were able to do this year, '25, but certainly you have the impact of Sabal year over year, which kind of distorted the '25 numbers a bit. And certainly '25 was an absolutely outstanding year for something like annuity fees, which is just hard to imagine that that's going to repeat at that same level in '26.

The other reminder, I think, is we have a pretty healthy specialty -- series of specialty lines of business in our fee income book. Those things are very unpredictable quarter to quarter and even year to year. things like BOLI, SBA fees, derivatives, very dependent upon the rate environment, syndication fees, SBIC fees.

So if you dig into the quarter -- one of the things that really drove the quarter, the fourth quarter, was we had a really healthy quarter in terms of SBIC fees, which again is one of those things that's really hard to predict and really hard to count on year to year. So I think overall, we feel pretty good about the 4% to 5%. And certainly, we'll look at it adjusting that if necessary as we go through the year.

All right. Great. That's super detailed. And then I just want to finish up on the M&A question. You guys are doing all the right things and upping the buyback this quarter and pulling up your TCE ratio and clearly making a lot of hires and committed to the organic strategy.

But when you talk to investors, there's -- for whatever reason, there's just a lot of concern that you guys are still in the M&A market and open to a deal even though you're saying you not focused on it. So I guess just what would you say to that concern regarding M&A appetite?

Well, I think the most important thing for us to say is really consistency with what we've been saying the last couple of quarters, which is really what you just kind of repeated in terms of not something we're particularly focused on. And I think the best way to describe our stance is really opportunistic. And I don't know what else to say about it other than to describe it that way.

Again, as we've mentioned before, we're aware of the things that are going on around us. We're not sticking our head in the sand. So we pay attention to those things and talk to folks just as an effort to get to know folks and let them it to know us. But at the end of the day, opportunistic is really, I think, the best way we can describe how we look at that. Hopefully, it helps.

It does. I just -- when you say opportunistic, the an opportunity above a three-year earn-back. Is that something that's not an opportunity for Hancock? Or is that something you guys would consider?

I mean, look, in today's world, I think that the threshold of not exceeding a three-year earn-back is something that if we were to go that route, we would not cross that line. But look, that comment does not mean we're doing anything . Other than just approaching this from an opportunistic point of view. It doesn't mean we have something out there ready to reveal. Does that make sense?

Brett Rabatin, Hovde Group.

I wanted to start on the purchases of securities during the quarter and the $1.4 billion at [435]. Can you talk maybe about what kind of securities those were? And then will that change the effective duration of 3.9 that you had at the end of the year?

It will not, first off, Brett. And then in terms of the securities that we bought and sold in the bond restructure that we announced, those were almost entirely commercial mortgage-backed securities. The vast majority of the bonds that we sold, as you can imagine, were bought kind of in the 2020 and 2021 vintage some in 2019, but almost exclusively commercial mortgage-backed securities.

In terms of the no-loss bond swap that we did during the quarter, that was also entirely commercial mortgage-backed securities. In terms of the bonds that we bought during the quarter, it was a variety of commercial mortgage bank, some residential, some SBA.

Okay, so you effectively didn't change the duration of the portfolio. It was more just an opportunity you felt like with capital to improve the yield

Yeah. Certainly we have the capital to invest in something like this, so we decided to pull the trigger on the $100 million. It felt like the right time -- the markets at the time were behaving. I'm sure glad we did that when we did it instead of commencing that in the current environment. So we're very fortunate in terms of that timing. But yeah, I think so. It was just an opportunity to enhance our NII, enhance our NIM, and improve the yield on our bond portfolio.

Okay. And then the other question I had was just around deposits. And obviously, solid flows in the fourth quarter, some of that somewhat seasonal. If you look at last year, deposits didn't grow. They were down slightly. And it sounds like the comments you've made so far, you're expecting to price down CDs and be fairly aggressive with managing funding costs in '26.

I'm just curious how you guys think you're going to grow the deposits. Will there be categories where you're more aggressive? Is there anything in particular that would drive deposit growth relative to what we saw last year?

I'll start just real briefly, but again, the guidance for next year -- or for '26 related to deposits is low-single digits. You know, that means 1% to 3%, I guess. But in terms of how we get that, I'll let Shane, you know, answer that question, but I think it has all to do with the new hires that we're planning for next year.

Yeah, Brett, it has some to do with new hires. It has to do with our business banking segment really getting traction in '26. We believe that quick credit execution there brings a multiple of those credit balances and deposits.

You heard me talk a lot about the growth that we're experiencing in our geographies. That's core business in new relationships as we bring new bankers on and are calling on different types of clients that bring enhanced deposits. So we're adding -- we talked about investments. We're adding new capabilities in terms of treasury services, which will also be attractive to clients to bring additional deposits to us. I think it's a combination of new bankers, good calling efforts in our core markets, and additional investments that will be attractive to clients to bring additional deposits to us.

Ben Berlinger, Citi.

I just wanted to – I know we talked through the hires quite a bit and the notable step up on '26 expectations. I was kind of curious, did you have any sort of, I'm going to say mandate, but when a new banker kind of signs on the dotted line? Do they expect to have a loan within X amount of timeframe or be profitable in a certain timeframe? Because I think 50 bankers is great for '26, but in reality, is it fair to think that that actually sets up a much stronger '27 and '28 for growth expectations?

Yeah, Ben. Go ahead, John.

I was going to say, Ben, your question's about, like, time to break even, time to get to target operating model. Is that the question?

Exactly, yeah.

Yeah, Ben, this is Shane. You know, all new bankers, whether they're business banking, commercial, or middle market, we measure their effectiveness by risk-adjusted revenue. And we look at that from a total-managed and self-originated perspective. And I think it's been said on previous calls, typically we'll see kind of median break even at that 24- to 26-month range.

So when you look at new bankers hired last year, a lot of those folks are approaching halfway through where their breakeven point is and then this year of that 50, I would think, you know, by the end of '27, they would be producing very well on a risk-adjusted revenue basis. And we measure that typically in, you know, multiples of the cost of that banker.

Got you. That's helpful. Is there any kind of mandates on whether it be the legacy core team you have today, or new bankers being added on? Any deposit gathering efforts, specifically given the new kind of rate environment? How do you think about both sides of the balance sheet when you hire somebody in?

Questions around kind of our expectations on deposits versus loans?

Correct.

I have a little trouble hearing you. I'm sorry to ask you to repeat. Do you want to tackle that one, Shane, deposit expectations versus loans.

Yeah. I think it's -- for all of these bankers, we're expecting a blended portfolio. We're not interested in bringing on bankers that are just going to generate loan balances. I mean that's great. but we need the full relationship because with the full relationship, when I talk about that risk-adjusted revenue, you get the credit for the deposits, you get the additional fee income that comes through treasury and card and other activities like that.

So when you think about how we are asking our folks to go to market. It's obviously you're going to have to have a credit relationship at some point maybe to get into a new relationship, but we are expecting a full service to include treasury card and all the other fee products to include our sophisticated wealth management products for those business owners that I spoke about.

Yeah, Ben, this is John. I'll add some color, which I think may be helpful in what you're looking for. We've invested a tremendous amount of money and time over the last decade with tools that help our bankers understand what the implications are of their own portfolio balance sheet. So for example, if they're in a specialty line that generates credit but really doesn't have the capacity to generate deposits, then their portfolio, under their view, is transfer-priced, and on the lending side, risk-adjusted for credit and credit degradation or improvement.

So they really sort of are the balance sheet manager for their portfolio. and their conversations with leadership around their goals look almost like an overall corporate balance sheet discussion in our ALCO meeting. It's a very sophisticated model that took us a long time to put together and that really was the secret sauce to the improvement.

We had an overall cost of funds while pivoting to loan growth the last year and what we're expecting in '26. So it's a very balanced assessment. So I wouldn't call it as much a mandate as it is, an overall risk-adjusted revenue target for the year. And based on their tenure with the company, if that's a building revenue set over time, then the core folks really have to produce the liquidity to keep up the funding requirement for the new folks if they're credit-focused.

But ultimately, their time to generate fee and deposit income will have to continue. So when we say risk-adjusted revenue, that's literally, as Shane said, that's deposits, fees, and loans. offset by the risk. Does that make sense?

Gary Tenner, D.A. Davidson.

I have two quick follow-up questions. I guess the first, Mike, on your comment about NIM improvement, that 12 to 15 basis points you mentioned, just wanted to clarify to me that sounded more like a 4Q to 4Q number, not necessarily, not full year over full year. Is that the right way to think about it?

Yeah. That's exactly right. Fourth quarter of '25, the fourth quarter of '26.

Okay. And then the second, just in terms of the buyback, because I don't want to put words in your mouth, but based on what you were talking about, it being on a more level basis over the course of the year, subject to maybe leaning in if there were to be some kind of sell-off, doesn't sound like there maybe is a great deal of price sensitivity at this point. It's more about working down the capital ratios a little bit. Is that also fair?

Well, I think it's fair to say that we're cognizant of the price sensitivity, so that's something we'll certainly consider as we execute that program over the year. The comment was really meant that you will not see a big aggregation or be unlikely to see a big aggregation of buybacks in one quarter like we did in '25. I think it'll be, all things equal, a little bit more spread evenly across the year. I mean, that'd be literally evenly, you know, very close.

Christopher Marinac, Janney Montgomery Scott.

I just want to dig a little bit into credit quality and just was curious if there's anything on the commercial charge-offs in Q4 that would sort of be more just temporary from year-end cleanup? Or would you see perhaps a slightly higher trend going into '26?

Thanks, Chris, for the question. We'll wake up Ziluca to answer that.

Yeah. Thanks for the question. Appreciate it. Yeah, so from a credit quality perspective, actually, we really are quite pleased with, you know, what we see as kind of a very resilient portfolio. You know, over the past, really, couple of years, we've fine-tuned our underwriting and portfolio management processes. So we feel that that's helping us kind of navigate any sort of specific issues.

As you can see, with both non-accruals and criticized going down in the quarter, we saw a lot less inflows in general this quarter, which kind of helped with that situation. And then on the charge-off side of things, if I look at, for instance, the top four charge-offs in the quarter, they're really in many different industries. There's not a single industry in there that is similar to the other.

So they really are very situationally specific. And in many instances, we had some reserves in place -- some specific reserves in place on those matters that were already in our criticized and non-accrual book. And so that's one of the reasons why you see, if you go into the more details, specific reserves actually did come down a little bit this quarter because we made a decision to charge those off.

Great. So I guess the question I think is, is there room for you to let the reserve kind of run down over this next year? I mean, you're still having low losses relative to a 3 or 3.5-year maturity for the whole book. And I'm just curious if you've got cover to kind of gradually lower that over time.

Yeah, Chris, this is Mike. I mean, admittedly, we're fairly high where we are at 143 basis points. So I think the short answer is, yeah, that's probably a little bit of an opportunity, but we're very cognizant of not letting that ratio get too low. So I don't know that you would see us below 125 or 130 basis points.

And again, by making that comment doesn't mean that we're trying to get to that level. It just means all things equal. I don't think we would go below that threshold.

Great. And then as this year plays out, depending on how many we do or don't get in terms of Fed rate cuts, how does that impact this kind of risk-adjusted pricing as you think about it? I know the nominal returns are coming down -- or nominal yields are coming down, but is the risk-adjusted, you think, going to be stable? Or maybe that's more internal than you share with us, but just curious how you think about it.

Yeah. I don't think it would be at least stable compared to where we are now, even with a couple of rate cuts. Again, from Shane's comments -- and I'll let him add some color if he'd like to, but we're very deliberate in terms of the kind of new loan growth where we're trying to add to the balance sheet, very deliberate in terms of the credit quality that we consider. So the risk-adjusted spreads should not, all things equal, compress considerably.

Yeah. I think we can get better at our pricing and overall deal execution to improve the overall loan yield. I know you're asking about risk-adjusted spread, but I think the better we can execute, the better we can price.

One of our strategic initiatives for 2026 is to calibrate how we actually price and our pricing models to win business and to put some positive pressure on loan yields. And that calibration is going to require intentional focus given, you know, potential rate reductions, competition for new deals, and pressure on current clients. So I feel like, you know, we have an opportunity to put that positive pressure in. And Emory Mayfield, who's our new Chief Banking Officer, will be leading that strategic initiative as we go into the year.

(Operator Instructions) And, everyone, at this time there are no further questions. I'll hand the conference back to Mr. John Hairston for any additional or closing remarks.

Thanks, Lisa, for moderating the call. Thanks, everyone, for your attention. Have a wonderful new year, and we look forward to seeing you on the road.

Once again, this does conclude today's conference. We would like to thank you all for your participation today. You may now disconnect.