US Bancorp Stock

Good morning, everyone. I'm Jerry Benson with Fidelity, and I have the pleasure of introducing U.S. Bancorp. U.S. Bancorp is a financial services company with international operations, and it's the parent company of U.S. Bank. It is headquartered in Minneapolis and the 5th largest commercial bank in the United States with $703 billion of assets at September 30. Presenting today for U.S. Bancorp is John Stern, the Senior Executive Vice President and Chief Financial Officer. John has been with the organization since 2000. And prior to becoming Head of Finance in 2023, he held various leadership positions within the company, including President for the Global Corporate Trust and Custody business as well as Corporate Treasurer.

Joining John today is Stephen Philipson, Vice Chair and Head of Wealth, Corporate, Commercial and Institutional Banking, or WCIB. Prior to becoming Head of WCIB in 2024, he led the Global Markets and Specialized Finance group within WCIB. He has more than 25 years of financial experience, including roles at Morgan Stanley in capital markets and fixed income trading as well as Director of the Financial Institutions Syndicate at Wachovia. Please join me in welcoming John and Stephen.

Thank you. Good morning, everyone, and great to be with you here this morning. Jerry, thank you so much for the introduction and having us here at this conference. It's great to see everyone out in the crowd. I'll just comment, obviously, on our disclaimer page in terms of forward-looking statements. You can see that for yourself. But as you know, U.S. Bank is a $700 billion company. We have 14 million consumer clients. We have nearly $1 trillion that go through our payment rails on an annual basis. And we have about $13 trillion in assets under custody and administration, all powered by the 3 key business lines that you see on this page in terms of the consumer, in terms of payments and WCIB.

And obviously, you can see the map in terms of where our branches are and client centers are across the country. We certainly are focused on our key strategies. Gunjan has laid this out. And so for several quarters in a row, we've been very focused on key execution in terms of our businesses. We'll be diving into 1 of our businesses here later this morning. But we are very much focused on organic growth from a revenue side perspective, expense management that goes along with that as well as the payments transformation. Obviously, you can see that has translated into strong financial results. We've been very proud of the results that we have provided this year.

And our goal here is, obviously, we are right in the range of where we need to be from a medium-term target perspective. Our goal is to obviously be consistent about it as well as improve upon our metrics. And that's something that we certainly want to see going forward. I'm going to comment on 2 of these metrics just before I jump off this page. The first is on the fee revenue growth side. You see that we had targeted mid-single-digit growth. And clearly, we are well beyond that. Part of that, of course, that 14.9%, about half of that, of course, is the BTIG acquisition, which we're very pleased about, and we'll talk more about this morning. And certainly, we just closed, this is our first full quarter with BTIG fully integrated into the bank.

The second is on the capital ratio that you see here. We're a little underneath where we want to be in terms from a fully loaded Cat II perspective. And as you know, we paused on share repurchases this previous quarter just because of unique circumstances in terms of heavy RWA growth we had at the Amazon card book that closed -- the small business credit card portfolio closed in August, as well as just higher interest rates had been a consideration. Since interest rates have come down and have more or less stabilized at this level, it gives us confidence that we'll be able to start up our share repurchases in a prompt fashion.

If I go on to the next page, you'll see that we have a very diverse set of businesses, and we have this fee complex that is unique to us and very strong in terms of fee generation relative to the size of revenues that we have. We have about 44% of our revenues come from the different fee categories. Clearly, you can see the different 4 categories. I won't read all those to you. I'm sure you're very familiar with it. Today, though, we're going to focus on the capital markets side of the equation, where we've had tremendous growth.

This is a business that we have grown organically for the last 15 to 20 years within our culture. It has been a very nice trajectory in terms of how we've grown and how we've gone to market. And of course, it has accelerated over the last couple of years in terms of growth with new products as well as the integration of BTIG. And so with that, I'm going to hand it over to Stephen Philipson, who's going to share a little bit more about our capital markets journey. Stephen?

Thanks, John. So I thought I'd start by just taking us back through the history of our platform and how we got into this business. So we first got into the capital markets business in its current form back during the financial crisis. We were building out a national corporate bank and saw the opportunity to build out these businesses alongside that. And we started with a very simple approach. It was focused on loan syndications and investment-grade bonds, where we're entering credit facilities, large corporate clients, moving up in those credit facilities, proving out our capabilities on the bond side. And as we became a lead lender, getting to that lead line on bond deals.

And we then added on interest rate derivatives and foreign exchange, a focus on that as a natural addition. You're leading the capital markets activity. You build credibility, so you can lead the hedging activity as well. And that was a nice steady growth trajectory for us. And then over the past 5 or 6 years, we focused a lot more on product expansion. We saw opportunities where clients were using certain products, certain capital markets products already. And we saw if we could add the right talent to build out those capabilities, our clients would give us our fair share of those products.

So we expanded into things like asset-backed securities, commodities, brokered CDs, and that's provided a really nice growth trajectory the last few years, and we have continued opportunities to expand in that product set. The 1 area that we knew we could not fill organically was equities and investment banking. And so with the acquisition of BTIG, we filled the last significant gap we had in the product set. Now we have meaningful scale with a $2.5 billion a year fee business. I'd also note, fixed income is about $1.6 billion in fees. It also provides some nice tailwinds for net interest income growth with the build-out that we've had in the last years in areas like subscription finance and structured credit and asset-based lending. So it is a real fulsome product set.

In terms of how we've grown, a big focus has been on growing market share, getting our fair share of the wallet out in the marketplace. And as you'll see on the left side, we started that by getting into large corporate credit facilities, going from participant to lead and quadrupling our share in the loan syndications market in terms of our lead managed market share. We found when we did that, when we got to that lead credit position, the resulting outcome would be we generate 3x to 4x the capital markets revenue that we did when we were a participant. And you see that in the middle graph there, and just 1 example of that in the investment-grade bond market, where we went from basically nonexistent share to 2.5% lead managed market share and growing in 2025.

And then BTIG has taken a very similar approach in growing market share. You can see on the right-hand side of the page, they went from in 2015 when they first started leading equity capital markets transactions, 41st in the league tables to 15th last year and 1.8% lead managed market share. What's notable about their market share growth is they've done that without balance sheet. They've done that through hustle, through relationships and intellectual capital. And we're really excited when you take the U.S. Bank balance sheet, the lending commitments that we have out, plugging in this capability provides a great opportunity for continued market share growth in the equity side of the business.

So in terms of where we're going, just sharing a slide that Gunjan talked to in earnings. We want to take these businesses from having capital markets fees comprise 8% of the bank's overall earnings to over 10%. And we've got a very clear path to doing that. 1 is continuing the core growth that has been part of both these businesses historically. The other is deepening the client bases, introducing BTIG's products into the legacy U.S. Bank, client ecosystem and introducing U.S. Bank's products into the BTIG client base. And then the last path is just continuing to expand our capabilities, something that we've done at both firms for many years and following that same formula of seeking out the products our clients are using, bringing in the talent, adding the capability and taking our share.

So in terms of deepening the shared client base, we see huge opportunities here. And since closing on June 1, have seen a continued uptick in activity. On the BTIG side, they're accessing the 47,000 U.S. Bank institutional clients and introducing the capabilities that they have. And we are getting calls every day from clients who want to put us on their share buyback programs, their equity raises, or are looking to tap into BTIG's research and capital introductions. And it's having a meaningful lift. In fact, since we closed on June 1, 3 of BTIG's biggest revenue days in their history have occurred since we closed the transaction on June 1. So it just speaks to the momentum that we're seeing from tapping into the shared client base.

We're also seeing the activity on the other side where BTIG clients are looking to access our fixed income capabilities. And as you can see on the bottom of the page, there's meaningful activity going in both directions, over 220 referrals into BTIG from the U.S. Bank team and over 130 referrals from the BTIG team into the U.S. Bank capabilities. And this is generating real revenue and it's generating real pipeline. What you don't see on this page, what doesn't come through in the numbers is the way that we're elevating our relationships.

So when you have a fixed income business, when you're providing credit and fixed income products with a client, you're typically talking to the finance staff. It's typically the CFO, the Treasurer, the Assistant Treasurer. CEOs care about their share price. They care about strategic activity. Now that we have these capabilities and we can advise them on the equity part of their capital structure, we can advise them on strategic activity. We're getting a whole new level of access and elevating the dialogue with our existing clients.

The other area that I wanted to mention, even though we're talking about capital markets today, the other big opportunity that we're seeing from the BTIG acquisition is in our other WCIB businesses like investment services and wealth. So we're seeing a lot of opportunities with our fund administration clients where we're able to refer them to BTIG for trading execution, for outsourced trading derivatives.

And similarly, BTIG is referring a lot of opportunities over to the U.S. Bank side of the house in these businesses. In fund administration, we're getting introductions that we didn't have access to before, multibillion-dollar fund complexes that BTIG does lots of execution and trading for, and they're referring us over to talk about fund administration and fund custody.

And those are long sales cycles, but they're going to produce some nice tailwinds for some time to come in these businesses. And we're even seeing very near-term impacts. A good example of that is in asset management, where for our First American Funds, BTIG has unlocked some new avenues of distribution. And we've actually seen $1 billion in inflows into our $200 billion First American Funds complex sourced from BTIG. So lots of lift across these businesses.

So in terms of the deepening on the capital markets side, we talk about it high level, I thought it might be helpful to provide a few real client examples that we've seen over the last several months. And the first one is a media client -- client in the media sector. This is a legacy client of BTIG. BTIG has advised them for many years in equities on investment banking. It's about a $4 million a year revenue client for BTIG.

So recently, they were doing an acquisition and BTIG referred them over to the fixed income team at U.S. Bank to advise on the acquisition financing. And not only were we invited into the credit facility at the lead line along with a couple of G-SIBs who've been advising them on the M&A side, we actually ended up left lead on the acquisition financing because they like the value-added advice that the U.S. Bank team had provided.

And beyond that acquisition financing, we're in dialogue with them around derivatives, foreign exchange. We're getting a $50 million deposit and adding some treasury management services. So this is going to go from a client that was a $4 million a year client for BTIG to one that's going to add an incremental $12 million in revenue for the bank going forward this year.

The next example is what I'd call the low-hanging fruit. This is the type of opportunity we knew was out there, and we knew was going to be there when we plugged in this capability. And this is an example of a tech company that was a legacy U.S. Bank client. So we provided credit. We were in their debt capital markets activity. We were their trustee. But when they would access the equity capital markets, we didn't have the opportunity to work with them. They didn't want to use a firm that wasn't in-house.

So as soon as we closed the acquisition, we got the BTIG team in front of them, and we were elevated to a bookrunner on their equity capital markets activity, a lead dealer in some other equity activity that they're active in. And we went from a very lucrative relationship that was generating $9 million a year to 2x to 3x that going forward with these equity capabilities in-house. And again, this was the low-hanging fruit. This is an example of the client, where we already have the credit out to them. It was just a matter of adding this capability to make sure that we're getting and accessing that part of their wallet, that share of their wallet that we didn't have access to before having the capability.

And then the last example I'd share is one of a shared relationship. So this is a client, a private capital client that was both a client of U.S. Bank and a client of BTIG pre-acquisition. On the U.S. Bank side, we had what I would call a participant level relationship. We were in some of their credit facilities, had some investment services business and a little bit of deposits, but weren't really seeing a lot of their deal flow and not in the strategic dialogue. BTIG, however, had a CEO-level relationship.

So as soon as we closed, we started getting the incoming calls from them and gotten invited into 4 transactions since close on the fixed income side of the house, some lead managed opportunities. We're now talking to them about deposits and payments capabilities at the portfolio companies. And this went from -- collectively, we're generating $4 million a year, and within a couple of months, we've already doubled that revenue stream. So this is, again, something that we're seeing a lot of in terms of that access in the C-suite that we didn't have prior to having the BTIG team on board.

So the other area beyond deepening where we see a lot of opportunities is the product expansion, continuing to add capabilities. And this is something that we have done at both firms throughout our histories in these platforms. And again, we talk to our clients. They talk about the products that we're not in where they like to see us get involved. And we look at where we can add the talent and if we add the capabilities, can we get our rightful share.

So on the right-hand side of the page, you see a number of products that are on our road map. Some of these have already launched, some of these are in process, some of these a little bit down the road. But these are areas where we see opportunities. Our clients want us to provide these services, and we think we can get our rightful share.

And one example of that is on the left-hand side of the page in the macro business. So the macro business, interest rate derivatives, foreign exchange, repo, historically, at U.S. Bank, we've only served our corporate and commercial clients in these businesses. But we have a lot of institutional clients between our Institutional Client Group, between our investment services platform and now several thousand more institutional clients with the BTIG team as well as global distribution with BTIG. So we see an opportunity to serve our institutional clients in this business. And we've been adding talent, and we're going to be adding more capabilities.

And this business, there's a $40 billion wallet in this business. Today, we have 1% share. We're highly confident with adding these capabilities and the talent with the customer base, the client base already in-house that we can easily double our market share in this business in the years to come. And these bubbles on the right represent many opportunities like that, where we're highly confident based on having done it for the last 15 to 20 years in both businesses that we can add the talent, add the capabilities and get our rightful share.

So just to close, in both businesses, we've got a great track record of being able to build the capabilities and drive the revenue in these capital markets businesses. By adding BTIG and executing on the product road map, both at BTIG and legacy U.S. Bank on the fixed income side, we think we have scale and a lot of runway for growth. When you look at the equity, fixed income and investment banking fee pools, today, we've got a little over 1.5% of the U.S. fee pool. U.S. Bank is 3% of the U.S. banking deposit system.

So there's no reason why we can't be north of 3% in these businesses, particularly when you consider that not many banks have the scale and product depth that we have and capabilities in these businesses. So we're very excited to grow them. We're very excited to demonstrate that growth, and we feel we have a lot of runway ahead of us in these businesses. Thank you.

Great. Thanks, Stephen. Maybe we could start off. I'll ask a few questions, and I'll open up to the audience. But maybe you had a great slide back there on client deepening opportunities with a number of different opportunities. Maybe we could start off on talking about which business segments are seeing the strongest early momentum in terms of referrals and mandates?

Yes. So where we're seeing the strongest early momentum is definitely the plain vanilla equity issuances, share buybacks, ATM programs for that vanilla equity capital markets capabilities where so many of our clients were using those and they were just waiting for us to have the capabilities in-house to be able to add that. And that's where we're seeing that big lift. That's where you're seeing those record revenue days at BTIG.

We're also seeing a lot, though, really good activity, as I mentioned, on the investment services side. And that's a longer sales cycle. A fund doesn't just change their fund administrator or custody provider overnight. But once you lock in that business, it becomes a nice annuity stream. And so I think we'll see more of a lift over time in those businesses, but incredible dialogue and unlocking a lot of interesting opportunities there.

Okay. And with all these opportunities, you have different sides of the house collaborating. There was a 10-year relationship prior to the acquisition. So maybe we can talk about how you're training, educating, incentivizing the bankers to offer the full suite of products and cross-sell.

Yes. And that 10-year relationship was very helpful. The one item that has not even been close to being a challenge has been culture. The 2 firms just knew each other so well. So that has been very helpful. And the way we've gone about the training is we have a global learning team at U.S. Bank that created training modules on every product on the U.S. Bank side, on the BTIG side. And both sides really starting from pre-close started going through those trainings to understand the capabilities on both sides of the house. And there's just been incredible excitement. It helps that there was really no overlap between these 2 firms.

So our relationship managers in the Institutional Client Group and commercial real estate at U.S. Bank have been so excited to be able to learn about the new capabilities and introduce them to their clients. And the BTIG team has been incredibly excited. I mean we've got investment bankers trying to push corporate trust and deposits, which says something to their culture that they've been very excited to embrace the whole product ecosystem at U.S. Bank.

And the incentive structure is one in which it is the same incentive structure BTIG had and was able to attract talent, but there's certainly qualitative considerations when a banker not only has brought in a bunch of M&A deals and equity deals, but is also driving deposit flow to U.S. Bank. That's a consideration in the compensation process.

Good. So a good corporate citizen is rewarded.

Yes, absolutely.

And you also had a great slide on the new product capabilities with a number of opportunities. Maybe you can just highlight the 1 or 2 where you see the most potential there.

Yes. So the macro opportunity on the fixed income side is very meaningful, and we're so excited about it because the clients are there. We have the capabilities. We just focus them on a different side of the house in terms of the clients. So very excited about that opportunity. And BTIG just unlocks so much potential there with the added institutional clients that have come into the bank as well as their global distribution. So that is definitely 1 of the most exciting opportunities we have.

I would say on the BTIG side, it's probably equity swaps, which is going to take a little bit of time to build. We're a swap dealer in the fixed income market and are very familiar with running and the risk management and technology and process around the swap business. But we need to build it out on the equity side, and we're excited for the opportunity when you think about areas like leveraged ETFs. So in our fund services business, we're the #1 fund administrator in the ETF space. BTIG is also very active on the execution side with these ETFs. The 1 product we can't offer them yet is that swap capability. So we're excited to be able to do that in the years to come.

And with the swap opportunity as well as others, have you already started the investment? And John, I don't know if you want to point to, is there an incremental expense uplift here?

Yes. I mean, this is an initiative that we have in the bank that's no different than other businesses that we want to make sure we're investing in. Clearly, we've been focused on operating leverage and making sure that we're very much committed to positive operating leverage. And so as the revenues have come, we've been able to increase our expense as well to invest in these businesses, and this is just an example of that. And when we think about it, it's not just the product set, you have to think about the complex and the support around it.

So risk management, making sure you have the right talent that is watching these sorts of activities as well as the systems and technology that's in place. And so obviously, the people that Stephen has talked about is super critical in terms of the culture that we build, how we build this out. So all that is really important, and it's in the context of how do you embed that expense within our run rate that we have. So there's nothing here that's different or unique than what we've communicated already in terms of our commitment to positive operating leverage.

Yes. And I'd just add in the markets businesses, we've made some meaningful investments in recent years. We put in a whole new operating and trading platform in our foreign exchange business. We built out a commodity platform and did that all within the corporate CapEx run rate.

Jerry, we've seen our expenses, we've been managing quite intentionally in terms of making sure we have efficiencies across all the other businesses so that we can make room for all these other investments. As you've probably seen in our financials, we have pretty tremendous growth in marketing and technology, and that's really where we spent a lot of our excess dollars is building up businesses like the capital markets space.

Okay. And how do you think about bolt-on acquisitions to just accelerate the whole product development?

Well, I'll take that. I mean, in the markets business, this was the most significant gap. This was where our focus was in terms of bolt-on acquisitions. But we certainly look at bolt-on acquisitions across products and in other areas of the business as well. We did PFM a few years ago in the asset management business and continue to look -- we're always open to opportunities across the broader businesses. But for the markets businesses, this was the significant gap that we couldn't fill organically.

We're good operators on bolt-on acquisitions. We know how to close them. We know how to integrate them very well. We look at it really as an extension of organic growth in a lot of cases. Capital markets, the investment services is where we look, but we can look in other pockets where we have these opportunities. We're not shy about that sort of thing.

Okay. Let me ask one more, and then I'll open it up. And this would be to you primarily, John, just kind of thinking about the incremental balance sheet that you think you need to deploy to support these clients and how you're thinking about that?

Sure. Yes. I think the beauty of this is that, as Stephen mentioned, there's a lot of clients we already extend credit to. And so we don't necessarily need to extend our balance sheet any further than what it is already. We think that there's a lot of room for us to grow without materially growing the balance sheet. Our view is that we'll grow our assets in the areas that we've been talking about, which is commercial loans, commercial real estate and credit cards.

I don't see this strategy as really outpacing anything there, and that's just going to be something that we'll move forward in terms of our journey of how we grow. But at this point, we have a lot of room and opportunity within our own confines of our current balance sheet.

Okay. Great. Thank you. Why don't we open it up, Vivek?

Stephen, a couple of questions for you. What percentage of BTIG's business is from APAC? Because I know they had quite a substantial -- quite a presence there. And what have you seen in terms of the revenue growth there this year because there's been so much activity in APAC? And what are you planning in terms of linking that with the rest of the franchise?

Yes. It's about roughly 5% of the revenues. The total global, outside of the U.S. in general, is about 10% of the revenues. And we're going to continue to, that's not where our growth is necessarily focused. There's such a huge opportunity in the U.S., but that's a huge important part of having distribution and having a platform in this business. And what we like about it is, 1, it has seen nice growth. 5% is probably up from a couple of percent just a few years ago. But it's also having that distribution and that market intel that allows us to be a better trading counterparty, but we're also going to leverage it for areas like fixed income where we'll be able to plug in that distribution, which has been a gap for us historically.

So the plan to take [indiscernible] internationally...

Well, leverage what BTIG already has on the ground. And we see similar opportunities in Europe. We have a big investment services business, a big payments business in Europe. We've recently added in the Institutional Client Group, a lending team in Europe to support clients over there. So again, being able to plug in BTIG's ECM team and the broader European platform as we grow those businesses is creating opportunities.

We're seeing investment services with ETFs taking off in Europe. We're able to plug that together with our investment services team and their execution team and see opportunities more broadly just as our natural business growth in those other businesses continues to take place.

Manan?

Hi. I'm Manan Gosalia, Morgan Stanley. Stephen, given the great examples you gave in terms of how you can get multiples of your current revenue per client, I guess, can you talk about how you measure the total wallet size, how you measure penetration per client? And if there are any numbers you can give around what the aggregate opportunity is for USB?

Yes. So our total addressable market just in the U.S., it's about a $150 billion wallet across the products that we're in. And so the way I look at it is it's a $2.5 billion business. So we're about 1.6% of that total addressable wallet. So we feel we should be at least double that. When you look at, as I shared the slide, BTIG having 1.8% lead managed market share. We have 2.5% on the investment-grade bond side. Those are just 2 products, but those should both be north of 3%. And there are areas like macro where we're only 1% today, we should be longer term north of 3%. So we see that as the near-term target that we want to be overall in these businesses and think it's very achievable.

Brent?

Brent Erensel. And this revenue synergy is very impressive. But are you guys operating now as a Category II bank? And do you have any aspirations to become a G-SIB?

So we're right on the cusp of Category II, as you know, it takes $700 billion of assets over a 4-quarter period. We're very close to that. We'll either likely trip that in the first quarter, which means we'll effectively be a Cat II bank in that third quarter, likely given the current rule set. And that's how we intend to operate and have been operating. Any thoughts on G-SIB and things like that is way premature at this point. We're focused on our organic growth opportunities that we have with all the different businesses, and we think that there's a tremendous amount of runway for us to achieve in that space.

Mike?

Well, congratulations. 24 years ago, you spun off Piper. And now today, you have the same percentage of capital market revenues again. So I guess what's changed in 24 years that gives you confidence? Then I have a follow-up.

So a few things have changed. Number one, we're a much larger institution than we were 23 years ago. 23 years ago, we didn't have these big institutional businesses, the scale. We weren't the #1 in the corporate trust business. We didn't have the scale we have in our fund services business. We didn't have a national corporate bank. So we didn't have these large corporate relationships that we had. The level of sophistication of the institution has increased meaningfully in 23 years. The level of sophistication of our client base has increased meaningfully, and the talent has increased meaningfully. I mean we built out this organically grown capital markets business over the last 17 years, proving that the institution has evolved and we can compete in these businesses.

So the other piece that's different than 23 years ago, because of that level of sophistication in the institution, the cultural integration has been seamless. And because we had worked with BTIG for close to a dozen years, the teams had worked together. The cultural integration has just been unbelievable in terms of both sides supporting each other, not running into any sort of clashes of personalities, and you're seeing that in the results.

Can I just double-click on that? The cultural aspect is super important here. To Stephen's credit, building out the capital market space and the culture and confines of the U.S. Bank culture has been tremendously impressive, and we've been able to grow the talent, the risk management, the infrastructure all around that. That was very different than the Piper Jaffray days where that was a much different institution. And of course, then the cultural aspects that you just mentioned in terms of BTIG working together for that dozen, 12 years before full integration. That has been a very key and intentional piece of the success that we've had here.

And then fix my numbers, but I think you're #7 in investment-grade loans, but only like #14 or #15 in investment-grade bonds and equity. So it seems like your clients, they like to, you date your clients, you date your clients, you date your clients. But when it comes time to go to the prom they go to somebody else for the high-margin stuff. So how are you going to get your clients to go to the prom with you?

Well, there's not necessarily a direct, that direct of a correlation between the investment-grade syndication table and the debt capital markets league table. When you think about the investment-grade bond market, there's a ton of self-issuance, right? A big percentage of the issuance are banks issuing their own bonds. So you're not going to necessarily compete to lead BofA and Wells Fargo's bond deals. So...

Gist of my question is you've already been extending a lot of capital, as you just said, these are existing clients. You've extended a lot of capital for many years. You're just not getting the high-margin business. So how are you going to win against the large investment banks that have been moving down market and your other competitors?

Yes. So we feel good about our ability to compete and win against larger banks. I mean we've been doing that in the bond business. And capital markets activity, it's going back to the, coming out of the financial crisis. Clients don't do their activity. They don't have 1 dealer. They don't even have 2 dealers. It's more of a democratized market where they like to have a large syndicate of dealers, whether it's leading a bond deal, leading an equity transaction or executing a swap or FX. They deal with multiple counterparties.

And the way we've been able to compete is bring in talent that's proven from the street, building deeper relationships. And also, we're sort of -- we're big enough to compete. We have the balance sheet that we can compete, but we're small enough that it's still relationship-driven and clients don't feel like they're on an assembly line from an execution standpoint. And that's really differentiated ourselves in these businesses.

And it's been -- where we've been able to win share, where we've been able to compete with larger banks is from that model being scrappy, bringing the focus and treating them with a level of sort of white glove service they don't necessarily get at bigger banks.

Scott?

John, I was hoping you could touch on capital management for just a quick second. You mentioned at the beginning, hopefully restart the repurchase in fairly short order. I guess my question is you've been sort of marching toward this destination that might be changing. So sort of fluidity around the, what the destination is. I guess you just have to manage based on the rules as they are today. But maybe if you could just speak to the cross currents and how you think about the different ones in there.

It is a pretty significant quarter in terms of timing of rules. And so we're obviously paying close attention to that. The Basel III endgame is clearly a piece of that potential of tailoring is another component. We are not planning on those things hitting. If they do, that's fantastic, but we're not, we're managing as if it's the current rules of the road. And so our view is let's grow our capital in a way in which we can glide into that, our target of where we want to be, and we generate enough capital over these several quarters where we feel we can achieve that.

And my comment in terms of being prompt in terms of returning to that repurchase was just based on where interest rates are and that sort of thing. So that's kind of how we're thinking about it. But ultimately, where we want to get to is once we complete and get to our target, we're at a space where we're able to return 70% to 75% of our total capital in the form of dividends and share repurchases. And that's our ultimate goal is to get into that run rate. We have some work to do, but we have some great businesses that are generating capital on a quarter-by-quarter basis, and we plan to continue to execute upon that.

I'm going to leverage off of, jump back in here and leverage off Mike's comment. I mean you did a good job articulating like the differentiating factor from a competitive perspective against large broker-dealers. I'm curious, what is the value proposition when you're out hiring and how competitive of a market is it?

Yes. So we've been able to attract really good talent, both on the legacy fixed income side and at BTIG. And the value proposition is, there aren't a lot of banks this size with this much sort of blank canvas in terms of being able to build a business. And talent has been very attracted to that, being able to come in and build out a product and truly have this entrepreneurial approach. There's not a lot of opportunities in the marketplace where you have access to an institution of our size, scale and the ability to build something and really build products from the ground up.

So we've had a great experience. And when you look at the talent that we've hired over the last few years, I mean it's from across the spectrum in terms of the largest and most sophisticated banks and broker-dealers.

And how is the retention with the BTIG bankers?

It's been fantastic. We've had near 0 regrettable attrition since we announced the transaction.

Okay. I'm going to try to sneak in 1 more, just to see if we, I'm just curious if you could provide a quick update on fourth quarter, how it's going for legacy USB FIC as well as BTIG.

Yes. So we're on track. October was a good month in the fixed income business. The rally in rates led to some sizable derivatives activity as well as some bond activity and commodities has remained very strong. And on the equity side and investment banking side and BTIG, also a solid, 1 month doesn't make a quarter, but we've had a good quarter on both sides of the business.

All right. Excellent. Please join me in thanking John and Stephen.

Welcome to the U.S. Bancorp Third Quarter 2026 Earnings Conference Call. [Operator Instructions] This call will be recorded and available for replay beginning today at approximately 10 a.m. Central Time.

I will now turn the conference call over to Brian Mauney, Director of Investor Relations for U.S. Bancorp.

Thank you operator, and good morning, everyone. Today, I'm joined by our Chairman and Chief Executive Officer, Gunjan Kedia; and Vice Chair and Chief Financial Officer, John Stern. In a moment, Gunjan and John will be referencing a slide presentation together with their prepared remarks. A copy of the presentation or 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 2 of today's earnings presentation, our press release and 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.

Thank you, Brian. Good morning, everyone. Beginning on Slide 3. We delivered another strong quarter, highlighted by record net revenue of approximately $8 billion and diluted earnings per share of $1.34, up approximately 10% from a year ago. Results in the quarter reflect strong execution against our 3 strategic priorities. Net revenue grew 8.7% year-over-year; disciplined productivity drove 240 basis points of positive operating leverage; and in payments, our transformation efforts continued to gain traction with total payments revenue growing 6.5% year-over-year.

Turning to Slide 4. Fees continued to grow nicely and contributed 44% of total revenue again this quarter. Our fee complex is diversified and deepens client relationships generates attractive returns and contributes to a more balanced earnings profile. While fee growth does come with higher expenses, productivity initiatives including from our AI programs helped improve our efficiency ratio and increased return on average assets year-over-year.

On Slide 5, the Spotlight Global Capital Markets an attractive growth opportunity across a range of economic scenarios. We closed the BTIG acquisition in June, and it contributed $226 million of fee revenue in the third quarter. The combined businesses are off to a wonderful start and already working very closely together to broaden how we serve our clients. We expect capital markets to grow from 8% to 10% or more of total company revenue over the next 3 to 5 years by focusing on 3 strategies. One, continue to drive robust core organic growth across both franchises in line with their historical performance. Second, deepen wallet share with our clients where we deploy significant balance sheet resources. The addition of BTIG strengthens our ability to serve a broader range of needs and capture greater fee revenue over time. And third, by adding product capabilities across both platforms.

We look forward to sharing more on our capital market strategy at a conference later this fall and are committed to providing more disclosures in due course as the business becomes a larger part of our revenue mix. With fees and expenses in a healthy place. This year, we have increasingly turned our attention to strengthening net interest income and margin. an important lever of this growth is expanding our consumer and small business franchise, which provides a highly attractive source of funding.

Slide 6 is a busy chart. It captures our footprint and expansion strategies. We are densifying our branch presence and leveraging client centers that have long supported our national businesses. We are supporting this ground game with targeted brand investments including through our NFL partnership and new brand ambassadors, such as Fernando Mendoza, Christian McCaffrey and most recently, Jessica Alba, for our small business segment.

Turning to Slide 7, we highlight small business banking. We serve more than 2 million small businesses through a scaled interconnected platform that contributes meaningfully to company revenue and is an invaluable source of stable, well-priced deposits. Over the past several years, we have built a unique foundation of banking, payments and cash management capabilities. This quarter, we launched several major initiatives to expand their reach with small businesses as we onboarded the Amazon co-brand partnership expanded the Business Essentials suite of products and establish new banking teams in expansion markets. We have a truly differentiated set of products and an enviable client footprint with small business, and this segment will be an important priority going into 2027.

Finally, on Slide 8, I want to spend a moment on corporate payments and treasury management. which together represent approximately 6% of our company revenues. The corporate payments landscape has the potential to be transformed by the growing convergence of treasury management rails like ACH and wires, card rails and new stable coins and tokenized deposits. These businesses have delivered a strong quarter benefiting from market share gains as well as tailwinds from fuel price increases in our fleet and freight businesses. Earlier this quarter, we launched our first USB DC stable corn pilot. While these trends are emerging, we are uniquely positioned to succeed in corporate payments, and we are investing to create interoperability across these rails to deliver both the benefits of new technologies and the safety and soundness of the banking system.

Let me now turn it over to John.

Thanks, Gunjan, and good morning, everyone. Third quarter results reflected another strong quarter and demonstrated continued execution against our strategic priorities, generating meaningful revenue growth and significant positive operating leverage. Results remain firmly within all of our medium-term target ranges.

If you turn to Slide 9, we provide highlights for the third quarter. We reported earnings per common share of $1.34, with approximately $0.07 impact from reserve build this quarter. This equates to 10% year-over-year EPS growth or 16% excluding the reserve build. Revenue was a record $8 billion, up 8.7% from a year ago or up 6.4% adjusting for BTIG and securities losses. Meanwhile, expenses grew 7.1% year-over-year or 2.0% excluding BTIG, implying 440 basis points of positive operating leverage, excluding BTIG. Balance sheet trends remain constructive. Loans grew 1.0% and deposits grew 2.2% sequentially, while the net interest margin expanded 5 basis points to 2.84%. Credit quality metrics remained healthy across the board. Linked quarter nonperforming assets declined 1.6%, and net charge-offs declined 2 basis points to 51 basis points. CET1 ratio remained stable at 10.8% and tangible book value per share was up 5.4% year-over-year.

Slide 10 provides our key performance metrics. Our profitability metrics continued to move up and to the right, while our efficiency ratio improved toward the better end of our medium-term target range.

Slide 11 provides a summary of our loan and earning asset mix evolution. Average loans grew 8.0% year-over-year and 1.0% sequentially. Versus the prior year, growth continues to be driven by C&I, credit card and commercial real estate, categories that typically deepen relationships and deliver incremental fee opportunities. The Amazon small business credit card portfolio contributed approximately $900 million and $1.7 billion to the third quarter average and period end loans, respectively. Importantly, our focus in these loan growth areas is naturally positioning our balance sheet to become more asset sensitive. For example, floating rate loans comprised 36% of earning assets as of quarter end, up from 32% 4 years ago.

Slide 12 provides a summary of our deposits and funding mix. Total average deposits grew 2.9% year-over-year and 2.2% sequentially. Growth was driven by another record quarter of consumer deposits, along with strong growth in relationship-based deposits in businesses like investment services. Importantly, we achieved growth while staying disciplined with respect to pricing. Deposit costs increased 7 basis points sequentially, with approximately 2 basis points of impact from the September Fed rate hike. Notably, our total funding costs are up just 1 basis point quarter-over-quarter as our funding mix continues to improve.

Turning to Slide 13. Net interest income on a fully taxable equivalent basis increased 5.6% year-over-year and 2.3% linked quarter. The increase was driven by continued relationship-based loan and deposit growth and improving earning asset and funding mix and ongoing benefits from fixed asset repricing. Net interest margin improved 5 basis points sequentially to 2.84%, driven by improving loan yields and fixed asset repricing benefits. We currently expect net interest margin to increase by a similar amount in the fourth quarter.

Slide 14 highlights fee revenue trend within noninterest income. Total fee income increased 14.9% year-over-year, with broad-based strength across most fee categories. Capital Markets growth of 69% year-over-year reflects a full quarter contribution from BTIG and approximately 10% growth across legacy capital markets.

Moving to Slide 15. Noninterest expense increased 7.1% versus the prior year reflecting BTIG and continued investment in growth initiatives, marketing, technology as well as compensation associated with the strong revenue generation for this quarter. These increases were partially offset by ongoing expense discipline across the bank.

Slide 16 highlights the broad-based favorable trends we are seeing in credit quality. On the right side of the page, we highlight the longer-term evolution of our credit card portfolio. Card balances have increased at a brisk pace in recent years as our payments transformation takes hold. At the same time, FICO bands have marginally improved and net charge-offs and delinquencies have trended lower. In short, we are growing the portfolio without compromising on underwriting standards.

Turning to capital on Slide 17. As of September 30, our common equity Tier 1 capital ratio was 10.8%, stable compared to the prior quarter. Adjusting for AOCI, the CET1 ratio declined 30 basis points to 9.1%.

On Slide 18, we break out the components that drove the sequential changes in the AOCI adjusted CET1 and tangible common equity ratios this quarter. As it pertains to the adjusted CET1 ratio, strong earnings generation, net of dividends, added approximately 30 basis points of capital. This is offset by $12 billion of risk-weighted asset growth associated with heavy loan demand in the quarter and impact from our recently onboarded strategic business partnership. Additionally, the significant increase in treasury rates and widening credit spreads during the third quarter impacted the ratio by an additional 40 basis points. Conversely, the tangible common equity ratio remained stable at 6.6% at quarter end. Strong earnings growth and lower ending assets offset the AOCI drag from higher rates. Despite a sharp move in rates this quarter, we maintained healthy capital levels and continue to have flexibility in how we manage the balance sheet. We expect our capital ratios to build from here, positioning us to resume share repurchases over the next quarter or 2.

Turning to forward-looking guidance on Slide 19 for the fourth quarter and full year 2026. For the fourth quarter, on a year-over-year basis, we expect net interest income growth of 6% to 7% on a fully taxable equivalent basis. Total fee revenue growth in the range of 13% to 14% with roughly half of the growth coming from BTIG and noninterest expense growth of approximately 8% or closer to 4%, excluding BTIG. For the full year 2026, we now expect total net revenue growth of 8% to 9% compared to the prior year or 6% to 7%, excluding BTIG. This has improved from our prior guidance range of 5% to 7%. We now expect to deliver approximately 300 basis points of positive operating leverage for the full year or approximately 400 basis points, excluding the impact from BTIG. This is up from prior guidance of 200 and 300 basis points, respectively.

Moving to Slide 20. This was another strong quarter for us, reflecting continued execution comfortably within all of our medium-term target ranges. We continue to see momentum across our business, which gives us confidence in our ability to build on these results and deliver consistent, sustainable returns over time.

Let me now hand it back to Gunjan for closing remarks.

Thank you, John. As we look to the end of 2026, we are executing well against the strategic priorities we outlined at the beginning of the year and seeing that progress translate into stronger performance across the bank. Our diversified business mix, customer-centric approach and disciplined execution position us to deliver attractive returns and long-term shareholder value.

With that, we'll now open the call for your questions.

[Operator Instructions] Your first question comes from the line of John McDonald from Truist Securities.

Gunjan mentioned the increased focus on growing net interest income and strengthening the margin. John, could you unpack some of the drivers of your NII outlook from here, including what you see ahead for loan growth and deposit trends?

Sure. We're going to see similar themes in the fourth quarter that we just saw in the third quarter. Loans have been strong, and they remain strong from a pipeline standpoint. So we expect similar type growth there. Of course, as a reminder, included in that, we have the Amazon small card book that we get the full quarter impact as well. Deposits are performing well. We continue to see nice growth in our consumer franchise as well as small business, and we see new trends there. And then in terms of the net interest margin, we've made the comment that margins should increase by a similar amount this next quarter, and that's going to be just aided by the funding and asset mix that we have. that is improving as we've been talking about. So there's a lot of momentum that we have, and that's going to be -- that's reflected in our guide and what we discussed.

And just to follow up on that, in terms of the net interest margin drivers, could you give us a little feel for how rates -- rising rates impact it, maybe an update on fixed asset reprice and your deposit beta assumptions.

Sure. So we aim to be as neutral as we can be from an interest rate risk perspective. However, given this environment, we have been shifting more into asset sensitivity. And you're starting to see that come through. In terms of loans, we've been shifting more into C&I, commercial real estate and card, all predominantly floating rate assets, as you know. And then in the investment portfolio, that has been coming down and we've been doing more in cash. So we have been shifting there a bit. In terms of -- I think you asked about fixed asset repricing, I would say there that we continue to see about $10 billion or so of per quarter of fixed rate assets that reprice whether that's in the securities book or in the loan book, and that's coming on probably at about 125 basis point improvement or so that's improved a little bit just because of the backup in rates as we've seen. And then finally, you asked about deposit betas. We think that betas pick up right where they left off from the last rate hike. So we're assuming about a 50% or so deposit beta to start out with and likely to continue as we see a couple of hikes kind of coming up in our forecast. So those are kind of the main points.

Your next question comes from the line of Scott Siefers from TD Cowen.

As first one, just sort of a top level it's ended up being a much better year. I think we knew it was going to be a good year from the standpoint of positive operating leverage. It looks like it's coming in even better than expected. I guess as you think about things looking ahead, maybe just sort of top-level thoughts on balance between profitability improvement, investment, just sort of top level how you're thinking about those things?

Yes. Sure, Scott. Yes, I mean, from our seat, obviously, we had strong growth in revenue, and that has been increasing and gaining momentum as the years come on. And so that's going to be the fundamental driver for why the increase in operating leverage this year from that 200 basis points now up to 300 basis points. We obviously have been onboarding a lot of revenue with the Amazon card book. and BTIG coming online. That's north of $1 billion of revenue we've onboarded. And we signaled this at the beginning of the year, we said that operating leverage, we wanted to be more of a driver from revenue growth because we know we can manage the expense side. We have a lot of levers to do that. So as we look forward, and we're early in the budget process, so we're not giving any guidance, but we anticipate operating leverage next year just kind of given similar drivers that we're seeing this year.

And Scott, I would just add that we have runway on productivity initiatives. As you know, we have materially invested in our digital capabilities over 5 years. And that just delivers ongoing productivity, and we continue to be very intentional about how much we spend on technology investments. So all in all, I would say it's not a trade-off. We don't think about operating leverage for shareholders or investing into the business. The business model is capable of generating both of them in balance.

Perfect. Okay. And then, John, just maybe on the repurchase comment, there's been a lot of focus following just sort of the pause that you disclosed a month or so ago. It sounds like you'll restart either this quarter or next quarter. Maybe just thoughts on kind of the main factors you're thinking of -- thinking of as you anticipate returning to repurchase and maybe just sort of the balance between common equity Tier 1 build, TCE considerations, et cetera?

Sure. Yes. So maybe just to recap, the third quarter had a lot of unique events in it for us. We had strong loan growth. We obviously had the Amazon book that added some capital demands and then obviously, the large rate move, which we all saw, of course. But given our unique position and just our prudent nature, we decided to pause, but we have a high degree of confidence in our ability to generate capital. I mean this quarter, after dividend distribution, we generated 33 basis points of capital. So we know we can build that back very quickly. I would just say what we're looking for this quarter is we're looking at loan demand? Where does that actually end up shaking out? Obviously, we believe that there will be growth, as I have mentioned in a previous comment, but interest rates, we're watching that very closely. And then obviously, you have the added component of regulation. We anticipate some new rules coming down. So the combination of all that, we are watching that will be the driver of whether it's this quarter or next. But in the meantime, we obviously are very much committed to the 70% to 75% payout from a capital distribution standpoint.

Your next question comes from the line of Manan Gosalia from Morgan Stanley.

I wanted to ask on commercial loan balances. The average loan balances were essentially flat sequentially. And I think utilization rates declined slightly. Can you talk about what you're seeing in terms of underlying corporate borrowing demand given that rates are expected to go up, most of your clients are on the short end of the curve? Is there some reduction in demand overall or in terms of the slowed down this quarter, was any of that related to, I guess, capital levels and the ability to deploy capital given the shift in the long end of the curve?

Sure. Thanks, Manan. What I would say is that the underlying core C&I growth was very healthy and strong. We did have some runoff in some balances related to more in that NDFI space. And some of this is just new deals coming to market didn't hurdle areas, and we've been more thoughtful on that of late. And so that's really the reason that you see the C&I component being pretty flat on a linked quarter basis. We do anticipate that to increase as we look into the fourth quarter. So the pipelines remain robust. And it's in all the areas that we've talked about in terms of food and beverage and energy and technology. Those are obviously very strong demand for loans at this point. So those are kind of the core things I'd say on the C&I line.

I would add that the only place we've seen a little slowdown is commercial real estate and residential mortgage continues to be very muted. But otherwise, C&I loan demand is quite robust and broad based.

Got it. And can you unpack those comments you just made on the capital side a little bit more. So you mentioned the potential for regulators to change the tethering rules and how that might give you some flexibility. So I guess, are you saying that if the 10-year kind of stays where it is, plus you get some more color from the regulators on which way they're taking it that you can stock buybacks as soon as the fourth quarter?

Yes. I mean that's a component. Obviously, we're going to -- we're all anxious for Basel III endgame. We've signaled that, that's about a 5% or so improvement to the RWA, but that's from the proposal. Things can change. So we need to see that. The [indiscernible] comments have been in the news. And so we're watching for that to see if anything comes online in that regard. So those are incremental pieces of information, but also it's going to be rates and RWA/loan growth. I mean those are the 3 main components. And we'll clearly update you. But it's clear. We're going to be -- we'll be starting that back up and we'll glide back up into that 70% to 75% as we just mentioned, we have a high degree of confidence in our capital build.

Your next question comes from the line of Ebrahim Poonawala from Bank of America.

I guess maybe is the first question, the Slide 6 where you have the national footprint. Just talk to us in terms of what the strategy around the client centers is, obviously, you've seen many of your peers announced significant branch expansion in new markets. Is this a precursor to adding a ton of branches? Or is this an indication that you don't see a ton of value adding hundreds of branches and the client centers allows you to achieve and reach the same outcomes? I would love just your strategic sort of thought process behind that?

So I'll just start by saying we do see value in branches, and we do see them as anchoring very high-quality customer relationships. Just to back up a little bit, we had been on a journey for really a decade to transform our branch network from what used to be a lot of small Tier 3 service outlets to more advice hubs with most of our products being represented there. That was the renovation strategy that is finishing up now, and we are beginning to lean into new branches. We have shared that our branch investment has increased from $200 million or thereabouts on average to $300 million, which is what we expect to do going forward. And those will be more new branches. Our first phase of that work is to densify within our own footprint. As you see from the blue dots, we are in a vast territory, and we have real meaningful opportunity to get to 8% to 10% branch share in those markets within our footprint that have high household formats.

There, our brand, is already known. We are our operations already established and the return is very high. It is fully our expectation that over time, we will inch out from that footprint to other branches. The client centers on the other hand, are an interim answer that is faster for us to establish national presence. This is not a new strategy. Our commercial teams, our wealth teams, our mortgage teams and our commercial real estate teams have been operating out of our footprint. The Northeast is a big site for capital markets type of businesses as well. And what we have done more recently is to say, small business can also operate out of client centers. So the strategy is both and it's a matter of sequencing.

Got it. So I guess, safe to say over time, those red dots, which feel quite lonely will get accompanied by more blue dots. .

We hope to make them less loan, Ebrahim, yes.

Understood. And just one separate question on the broad-based C&I growth. Obviously, even in the last week, your -- markets are once again questioning the AI CapEx build-out. To the extent you have visibility, just talk to us when you think about broad-based C&I growth, how much of that are you able to see is the second, third derivative of the data center build-out versus just other industries we are seeing growth, which may be less connected to the AI CapEx cycle?

Thanks, Ebrahim. Yes, it's a topic that comes up frequently for us. We are looking to see if there's loose as to how much of growth and credit impact there is related to AI. I mean, obviously, you have adjacent sectors like energy and telecom and things like that, areas that are seeing benefit in loan growth. But then there's other other areas that are more broad-based that are beyond that in terms of retail and food and beverage and insurance and all these other sorts of things. So it is broad-based. And I would actually add on top of that small business with SBA loans and things like that. Just a lot of -- there's a lot of momentum in the business community to want to grow. And so, that is on our mindset right now. And so we're watching for that, but it is a topic we certainly look at.

Your next question comes from the line of John Pancari from Evercore ISI.

If you can maybe unpack a little bit of the trends you're seeing within the fee income space, particularly around treasury management and processing and corporate payments. Just some of the business color that you're seeing in terms of demand as well as kind of as you look going into 2027, what's a good reasonable pace of growth as you continue to emphasize those businesses? And then maybe a similar color around the underlying pipeline that you're seeing in the capital markets side.

Sure. So yes, a couple of things there. So I'll start on the treasury management and corporate payments side. Obviously, you saw some very strong growth on that side of the equation. The -- there's -- obviously, on the corporate payment side, we saw about 19% year-on-year growth. Most of that is new business as well as the spending from corporates and government is up quite a bit from last year at this time. I recall this time last year, there was the impacts of tariffs and all that sort of things. So that -- we've lapped all that, and so there's good growth there. There's a little bit of fuel spend as well in there, but that's -- that's pretty nominal in terms of the growth rate. So we do expect continued growth in the or corporate payments side of the equation.

And then the treasury management side is continuing to see nice growth in that mid-single-digit area. It's an important business. We've been making a lot of investments of late. And so we are doing a lot in terms of the payable and digital channels and capabilities. And so going forward, we have high hopes in these 2 areas for sure.

On the capital markets side, we continue to see strong growth there into the next quarter. Obviously, we had a very strong growth of 69% or so this quarter. And on the -- and we -- BTIG will continue to be a strong component of that at about $200 million or so. But our core FICC or legacy capital markets led by commodities, foreign exchange and impact finance are really showing some nice growth, and that's going to help us get some more in the double-digit type of growth on a year-over-year basis. So we feel very good about those areas.

Okay. That's helpful. And then on the margin side, just looking for a little bit more color just what you're seeing in terms of competition. Like I heard you on the deposit beta commentary. What do you see there on deposit pricing in terms of market trends and how that's influencing your actions on the deposit side? And then similarly, on the loan side, I know you mentioned little earlier that within the C&I book, a couple of deals didn't hurdle, but you expect to pick up. What are you seeing, I guess, in terms of pressures on spreads and loan pricing on the lending side?

Sure. The answer is going to be pretty boring. We're not seeing a whole lot of change in both deposit and the loan side of the equation from a pricing standpoint. The post hike, the pricing that we are seeing is very consistent with what you would expect. There's nothing out of the ordinary. And I would say, similar on the loan side, there are loan spreads by and large, tend to be pretty stable, and it's competitive, of course, but it's completely -- it's manageable.

On the C&I side of the equation, as I just mentioned, some of those things just didn't hurdle. And that -- some of that is a little bit more. We've been more prescriptive with the businesses in terms of making sure that things hurdle. And so it's a little bit of a dial turn for us that, that occurred. But we see broad-based growth in the C&I portfolio.

Your next question comes from the line of Ken Usdin from Autonomous Research.

John, can I just ask you to just walk through a couple of more things on fees. So obviously, the guide implies sequentially lower fees for the fourth quarter, and I know a lot of that is seasonal. Can you just kind of remind us what usually happens in the payment lines does capital markets hold up at the third quarter level? I know you're saying $200 million of BTIG versus $226 million and then can you size the amount of equity gain that were in the other line and what that line should usually look like?

Sure. Yes. So we are -- the fourth quarter from a year-over-year growth standpoint, is going to look a lot like the third quarter with a couple of exceptions, which explains the slightly down growth rate, although it's still very, very strong. Mortgage is going to be impacted by higher rates. And so we anticipate there to be more of a limited or low year-on-year growth, if any. And then other revenue, we did have some gains that were more unique to that this quarter. And so our other revenue tends to be in that $125 million to $150 million range. So we anticipate that to kind of normalize into that. .

Other than that, I think things like Corporate Trust continues to be very strong. I talked about capital markets and many of the payments lines. We see strong growth in corporate as well as retail cards. Merchant will probably be still in that 0% area for the next couple of quarters, as we've talked about. And then all the other areas are about as expected. So it's shaping up to be a lot of momentum for us in the fee side of the equation.

Perfect. And then secondly, with the NIM up 5% this quarter and you're saying about the same amount, it's a [ 290-ish ] exit. Can you just talk about, I know balance sheet size and mix will be an important part of this answer. But your comments previously about getting to a 3% NIM in '27. Can you talk about just how that looks and what needs to happen in terms of the mix and size of the balance sheet vis-a-vis prior questions on rates and such?

Yes. Ken, we see -- continue to see a path on the 3% NIM at some point in 2027. You're starting to see that thesis play out as we've talked about. It's a constant formula of just consistent asset repricing as we've -- as I just mentioned, obviously, the asset and funding mix is continuing to improve. And then we're just being thoughtful in terms of deposit acquisition versus cost. So those are the formula -- that's the formula and the ingredients that we need to continue to do what we're doing on the NIM side. Obviously, the curve and deposit competition may have something to say about that in the end. But we're we have a lot to like about in terms of the trajectory we are making on that path. So we feel good about it.

I'll add one thing that we are very disciplined about improving both the deposit mix and the loan mix, which is helping the NIM situation. And for the fourth quarter, we have the full year impact of the Amazon deal, which is a nice tailwind. But we are continuing to focus on credit card receivables, which are growing very well, the C&I loan and CRE. And as that becomes a bigger part of our loan book and deposits become more relationship-oriented, it gives us it gives us strengthening NIM and NII growth for some time.

Your next question comes from the line of Chris McGratty from KBW.

Maybe a question on credit, maybe the higher rate environment. Any comments from the team on the impact you've seen so far in consumer and also health of the commercial customer. I know you talked about moving some of the DFI lending out in the quarter.

Sure. Chris, so on the credit side, we haven't really seen a whole lot of change in that. It's obviously a watch item when we think about the impacts of higher rates. Right now, we're not seeing anything on the consumer side. Spend levels are high, employment is strong. So there just continues to be strong patterns there despite sentiment and things of that variety. So -- and then on the commercial side, and commercial clients are well managed. They have strong balance sheets. They've been going through a lot over the last several years, and they've been very nimble. I think the area we are watching, obviously, is going to be in the commercial real estate side. You always want to watch when rates go up. And obviously, when we underwrite, we build in cushion for a rate move. So it's well understood and managed. But we -- but it's going to be an area that we watch, but nothing at this point to call out.

Okay. I think I may have asked this in prior quarters. But just in the broader balance sheet optimization discussion today with where rates have moved and the growth that's occurred, anything additionally, that might be ripe for optimization, whether it be the funding base, perhaps syndicating more production into the capital markets for a quarter or 2? Anything we should be aware of there?

Yes. I think we're doing the actions, and we -- I would just anticipate continued action from us. We -- in this environment, you want to be very active in your management of the balance sheet. And I've already mentioned several of those things that we've done. Maybe some other things you probably noticed, you've seen that our long-term debt fell a few -- a couple of billion dollars as well as the investment portfolio. We did repay some home loan bank advances that were long-term debt, but really, there wasn't much maturity left in them. So we're just being -- and as I mentioned, the investment portfolio, we've been lowering that amount and put going more into cash. So we're just doing a lot of things to kind of optimize the balance sheet for the rate environment that we're entering, and we feel good about taking action as needed.

Your next question comes from the line of Gerard Cassidy from RBC.

Back in your Investor Day, Gunjan, I guess it was the fall of '24, you talked a lot about interconnectedness. And when you look at your Slide 5 on the BTIG, you talked about deepening the client base. Can you share with us how that opportunity for the cross-sell into your existing client base for BTIG products and vice versa? How is that proceeding? And what are the opportunities that you folks see for growing that business through that interconnectedness?

Thank you, Gerard. It's actually gone very well. As you know, when we did the BTIG deal, the biggest questions were around cultural fit and the chemistry is very good and the substantive ability to deepen relationships is very good. As you know, we deploy a very significant balance sheet to our corporate relationships and having more product to get your fair share of fee revenue is an important part of the interconnected thesis, and it's coming through very nicely. It's also been very encouraging to see it on the other side. We have developed a very sizable relation -- book in leveraged ETS. And a lot of the trading opportunity that comes from that helps BTIG too. So we expect that this will be a very good deal for us, and we are very confident in getting the combined capital markets business to about 10% of total net revenue or more over time. And that completes the product set. .

I'll ask -- I'll also answer a broader question on interconnectivity, which is really playing out with deposits. right now. There's a lot of discussion around deposit cost, deposit betas and the smartly product that we launched about 2 years back now just around the Investor Day, connects our banking products to our credit card products. and allows a person to optimize their card rewards based on their deposit relationships. That product has been very successful for us using the funding mix improvements based on that. And that's exactly the thesis we are taking now to small business. So this theme of interconnectedness is very present in the company. It takes incentive changes, some changes to oak structures, some development of skill sets. But we've had a lot of momentum there and will continue to be a very big part of our strategy even into next year.

Very good. And then as a follow-up, obviously, maybe you can update us since you've been very active in doing some bolt-on acquisitions, just at BTIG, for example, as well as the portfolio acquisition, where are you guys standing out in terms of either more bolt-on acquisitions as you look out into the future or possibly even in depository acquisition.

Sure. Our point of view remains consistent. We like bolt-on acquisitions. We are good at it and they give us local scale and products. And we don't think of them as fundamentally different from investing organically into our business. On deposit reacquisition, we find our organic strategies to have compelling strategic financial and execution characteristics. And we are very, very focused on that part of the strategy and have a lot of momentum there.

Your next question comes from the line of Mike Mayo from Wells Fargo.

So you increased your guide for operating leverage this year by 100 basis points. And I think you said one reason related to AI and that's a little surprising because it's hard for banks to actually quantify benefits and banks usually talk about AI benefits more general terms and productivity and stuff like that. Were you talking in a more general sense? Or do you actually have numbers around it? And how are you using AI? And why do you think it's helping to improve your efficiency?

So I think AI is one, not the only reason to drive good productivity, but it is an important lever and as growing momentum and growing use cases for productivity within our world, and we do continue to expect it to be a contributor to productivity. Some of the discussions around whether the token costs are overtaking returns. Is the relevant discussion we have invested in developing the capabilities to swap out expensive models for cheaper models? And we have some confidence over time we'll continue to get positive returns from our AI program on productivity. More broadly, though, the place where we are being more measured is on client-facing applications just as we fully understand the concerns around privacy and some of the customer confidence issues around it. These things will get resolved in due course we remain quite focused on the AI program and do have confidence around its contribution to our productivity.

And as it relates to the cash sorting concerns that personal AI agents will drain deposits from the banking industry, how do you think about that potential threat and the value that U.S. Bancorp provides to depositors, say, for privacy and trust?

So Mike, just first, we haven't seen any AI cash sorting third-party agents try to interact with the bank. The logistics of doing something like this are very complicated. So we do not expect it to be a near-term impact to us. Our customer base is very digitally savvy. The adoption rates are very high. Our digital tools allow a fairly high amount of deposit price discovery and the ability to optimize automatically should a depositor choose to do that. All of these capabilities will strengthen with AI over time. We are not counting on it not to be that. But again, our strategy is not to attract depositors only through deposit price have invested a lot in creating meaningful value propositions that help people manage their lives and manage the transactions. And we are quite comfortable with transparency around deposit pricing. So I would say a lot of discussion around that topic. We do not see it yet in day-to-day life.

Your next question comes from the line of Erika Najarian from UBS.

Just wondering, I had a few follow-up questions. Going back to the exit rate on the net interest margin, and I just wanted to drill down on this Gunjan's remarks about focusing on strengthening NII. John, in the past, you mentioned that you're liability sensitive to the short end. So as we think about the path from the fourth quarter to that is the optimization on the funding side and the asset remix enough to offset that sort of initial liability sensitivity assuming the curve flattens from the rate hikes. In other words, does that balance sheet optimization overwhelm that static positioning on the short end?

Sure. So on the mix and all this sort of thing, we have continued to and want to improve our asset mix to be more floating rate. That has been an area that what we've talked about here and even put a slide in to show how much we've moved over the last couple of years and been methodical about that. So the answer is yes. We think that the funding and the asset mix and the fixed asset repricing are enough to offset any competition on the beta side. That is our -- that is what we're developing on the balance sheet side of the equation. And that's what gives us confidence, as I mentioned, just in terms of NIM path and all that sort of thing. Obviously, we'll watch the curve shipping what that looks like and how deposit competition pans out, but that's what our assumptions are at this particular juncture.

Got it. And just a follow-up question. You're certainly in a unique position in terms of category 2, and there's a big difference between sort of a cliff vest of your AOCI and a 5-year phase in. And we're hearing that Basel III endgame will be finalized by year-end. And it just feels like tailor has to come with it, right, just given the phase-in component. And I guess do you have a sense on whether or not if we do get finalization of Basel III endgame, if that would be sort of the superseding rule for you versus the "cliff vest on AOCI." In other words, you get to enjoy a 5-year phase-in versus the cliff vest. And if so, does that change anything in terms of how you're thinking about buybacks from either a timing or magnitude perspective?

Yes. I'll go back to my comments that we're looking certainly at the regulation as a component of deciding on buybacks. But it's going to be probably more dependent on RWA demands as well as interest rates, particularly in the short run. We are very much interested in rural changes that we expect to see here in the fourth quarter that can shift what our ultimate RWA and capital demands are or what that looks like. We're also interested, obviously, if there's tailoring and how that gets applied it's speculation at this point, right? We know just as much as you do and what we see in the press. And -- but we're not planning on it. We're planning on growing our capital base. We're planning on all the things that we talked about in terms of balance sheet, stewardship and optimization and all these things that are going to help us on our path.

And Erika, I just want to double underline that. We are fully ready to transition into Cat II regardless of the timing of the Basel III endgame. We've been preparing for it for a long time. And when John talks about starting buybacks in the next 1 or 2 quarters, we are not counting on any benefit from Basel III endgame. This is just capital accretion we get based on normal course business.

Your next question comes from the line of Ben Gerlinger from Citi.

I just want to call it's helpful to hear the thoughts on overall growth and then kind of bolt-on opportunities if they do arise. If you do go that route. Just kind of thinking about the loan portfolio itself, you kind of had some organic growth and you've had some remixing with the card. Just kind of not necessarily a fourth quarter comment or even '27 comment, but just down the road, how should we think about the relative mix and weighting between some of the loan categories in the areas that you would see more appealing today?

Sure. Ben, I can start on that. I think what you've been seeing on the loan side of the equation, you'll -- over the past several quarters, you'll continue to see for the next several quarters in terms of leaning in on card, lean in on C&I and commercial real estate. Now there may be some bumps like commercial real estate may not be as robust in the next quarter or 2, just given the backup in rates all in, we're focusing in that way. When we started the year, I believe our mortgage -- residential mortgage area of loans -- was in the 30% area in terms of loan mix. We do see that coming down and more because of the growth in the other categories. So we're growing into it. So we anticipate the mortgage area will probably be in the mid-20s at some point over time. But again, it's going to be because of the growth in the other areas, not because we're diminishing our focus on the residential mortgage book, we continue to think that's a strong business over the fullness of time.

Ben, our thought process very much is that it's a relationship loan, where you get fee revenue, you get deep relationships, you get sticky deposits. That's where we want to extend our balance sheet. And the categories that lend themselves to this are credit cards. It's a big fee-based business. The C&I loans with our corporate payments, our treasury management and our investment services products makes that a very attractive loan. And then as we build out the capital markets, becomes a good use of balance sheet as well. So the categories that we would be more measured on would then become auto, mortgage and some of these more stand-alone, which over time will still be very important products for us. But as John said just become more measured.

Your next question comes from the line of David Chiaverini from Jefferies.

I wanted to ask about the efficiency ratio outlook. Your guide mid- to high 50s what could take U.S. Bancorp to the high end versus the low end? And to what extent does the interest rate environment influence that?

Sure. So right now, obviously, we're around 56, just under that, which we're very proud of in terms of making good progress there. And it's been obviously the operating leverage has helped with the revenue growth that we've seen. We continue to anticipate strong growth and continuing that operating leverage. And so our desire is to get into closer to that mid part of the -- versus the mid- to high 50s, that's an area that we're focused on. Obviously, the rate environment and the macro will drive things here and there, but that's been our focus and what we've been talking about.

I would say the high end will be if capital markets growth turns out to be very robust, and it will be a good reason to be on a high end, that's a high efficiency ratio business. And the low end will be our AI program. There's a lot to be discovered there. There's a lot of potential there, and it's quite -- you can see a path where that accelerates and really begins to impact the productivity of the phone.

And then I wanted to ask about USB DC, you mentioned about how it launched in September. Did you launch this due to strong client demand? Or is this more of getting the capability up and running in anticipation of increased client demand down the road?

It's certainly the latter. I very clearly have to say there is not much client demand at all. What there is now is client curiosity even from 2 quarters back, we have quite a few clients wanting to experiment with us on what this might do. The launch, as you know, is a pilot. We are -- the actual launch of the product will take some regulatory approvals here. We do think that as companies think about combining the benefits of the banking system, which they do really appreciate. With some of the shortcomings, mostly what we've heard is 24/7 real-time availability, especially over the weekends, cross-border. Most central banks don't have that kind of capability. So we are building out products in anticipation of being able to do something that creates value to customers, but we would not say that there is very robust demand just yet that has developed. And most of the conversations are around the corporate payment space.

There are no further questions at this time. Mr. Mauney, I turn the call back over to you.

Yes. Thank you to everyone who joined our call this morning. Please contact the Investor Relations department if you have any follow-up questions. Rob, you may now disconnect.

This concludes today's conference call. You may now disconnect.

Next up, if everyone could take their seats, very pleased to have U.S. Bancorp. From the company, Gunjan Kedia, Chief Executive Officer; and John Stern, Chief Financial Officer. Welcome back, guys.

Thank you.

Glad to be here.

Great. Gunjan, maybe to start with you. You're a little bit more than a year into your job as CEO at this point. Over that span, we've definitely seen a pickup in revenue growth, I think a pickup in sentiment around the name. Maybe just talk about how the pace of improvement at USB has -- is better than you expected or worse than you expected? And maybe what have been some of the biggest drivers of the success the market is beginning to realize?

Well, thank you, Jason. Very nice to be here, and thank you for recognizing the progress in our results. It feels really rewarding to see the bank start to deliver financials that are consistent with our potential. When I stepped into my role April last year, I did inherit a very attractive franchise. Largely, the mix of businesses is the fee-heavy businesses, is very differentiating, it's very distinctive. The products were good.

We had invested a lot in digital, and the customer base was very strong, especially with the Union Bank acquisition in California. There was just a very attractive customer base to work on. So the fundamentals were all in place. Our opportunity was just good consistent execution. So first year, we credit a lot of the inflection in the results to just urgency and pace. The first thing we did was to focus our efforts on 3 sharp strategic priorities that was expense management, organic growth and payments transformation and did some meaningful shifts in resource allocation to support those priorities.

And a lot of organizational changes, we elevated some revenue-facing roles in the structure of the company. There's been a very meaningful refresh of the talent, almost 1/4 of the top 200 roles are new to bank or new to roles, higher aspirations, flatter corporate center processes, a more leveraged compensation plan.

And all of that collectively picked up more consistent financial results. And that was the first year. We are now 4 quarters operating within our medium-term financial guidance. And the first year has closed the valuation gap with our peers. But of course, a lot more upside, but a good start in the first year.

I guess on the flip side, is there anything that has not gone quite as well as you have planned so far? And also as you kind of look to year 2 or so under your leadership, just how are your priorities shifting? And are there areas you're more focused on to get them up to speed?

What's not gone to plan or disappointing, I would -- the biggest would be the mortgage and auto businesses. They are almost 10% of our company, so very large businesses for us. And our base case was to see some moderation in rates and some pickup in that activity and the demand there is very muted. So those have probably underperformed the base case in the last year. But for the rest, what has gone exceptionally well is expense management.

We have taken almost 5-plus points out of our efficiency ratio in the last 2 years and fee growth inflection, we are at double digits over the last quarters. And those 2 pillars have surprised on the positive and quite a lot of runway going forward. So going forward, they continue to be very strong parts of the agenda. What gets added on in year 2 and beyond, Jason, are 2 other areas.

The first is NII growth. We are very focused on our consumer and small business franchise. That improves our funding mix, our deposit mix, and we've seen some good results there. It will be another quarter of record consumer deposits. And on the loan side, we have focused very much on C&I and credit card growth. So that improves the loan mix. And collectively, they create both NII growth and NIM improvement. So that's an important part of the priority this year and beyond.

And then the second broadly is making sure we get full leverage out of the twin technology shocks of AI and stablecoins. Those are transformative levers for the industry, and we want to be very front-footed and ahead in terms of creating enduring success. Then I think all of the organizational health things that we started in the first year, as you know, these things take time and they build a real high-performance culture. So as I think about my second year and beyond, keep the momentum with expenses and fees, really inflect NII, just get very front-footed with AI and stablecoin and just create a really high-performing bank.

You mentioned fees in that last remark is one of the areas, I think almost 45% of revenue is in U.S. bank, so kind of certainly differentiates you from some of the other super regionals. Just as you kind of think about the fee complex, maybe which areas you're most excited about over the next year or 2 and maybe which one is a little less so?

Well, first, I'm most excited that it is a fee complex, and it's a very marquee fee complex. We have 4 fee categories, payments that we are known for, the trust and investments, which is very good for us, capital markets and then the consumer fees, which is very traditionally seen in most banks. These are attractive. These are differentiated and very difficult to replicate either through organic growth or through acquisitions. So we think it will be a differentiating feature for a long time.

And the beauty of these, the fee complex, is that they do stabilize your earnings because there's a diversification benefit to them. The underlying growth trends are faster than GDP or population growth, which is really what the banking side gets anchored around. They also create very sticky relationships. So really, that is a strategic focus for us is to keep the diversification of the complex and inch up even beyond the 44% that we see.

The big 2 areas, though, is capital markets and payments. Capital markets, just because we are about 7%, 8% of revenue, we should be 10%, 11%. BTIG was a very strong start, and we expect to grow into the balance sheet we are already deploying. So this is not more use of balance sheet that could inflect it even more. But right now, we're just trying to get fair share of the balance sheet that's being deployed.

And the second is payments. That was one of my first priorities even in my President's role. And we are beginning to see the results inflect up every quarter. The growth rates are inching up. It is a long game, though. You have to wait for contracts to come due. Even on the credit card side, you have to wait for your marketing offers to sort of deplete out of the upfront cost. So we are very pleased with those, and those 2 will create sort of the fee engines going forward. Other categories, too, but they tend to be more ballast-like and steady.

Got it. Maybe we'll come back to maybe strategy and longer-term topics in a bit, but maybe kind of pull up for a second. And could you just talk to what you're seeing and hearing from your clients in terms of sentiment, spending trends, et cetera?

It's all favorable, and our outlook is that as we end the year. The commercial clients are particularly vibrant. Loan pipelines continue to be very strong and quite diversified. So it's not just the AI trade. And the consumer is stable. We see some moderation of spend in August relative to the FIFA bump of June, but still very healthy delinquency credit, all looks good. So it's a favorable outlook for the rest of the year.

I guess, John, I wanted to bring you in against that backdrop. You had your slide deck, your slide in July with the outlook for 3Q and the full year. Anything you want to call out or update us on?

Yes. Jason, it's going to be another strong quarter for us. We talked about net interest income being in that 4% to 6%. We anticipate being on the high end of that range on a year-over-year basis. Fee revenues, we mentioned to be 12% to 14%. We again expect to be on the high end of the range and maybe even above that, depending on some of the capital markets transactions that may or may not occur, but not in the third quarter, will happen certainly in the fourth.

So we feel really good about the momentum there on the revenue side. Expenses are going to come in as expected. We have 8%, was what we had anticipated. So we feel like that's a good place for that to be and charge-offs are very stable. And as Gunjan mentioned, there's a lot of momentum on the client side. So overall, we feel very good about where we're at. And we feel looking at it from a full year perspective, our outlook was 7% to 9%. We -- as the third quarter is coming into shape, that just gives us confidence that we'll be on the higher end of the range. So it's just looking to be a very strong year for us.

Great. Maybe we can kind of maybe double-click into some of those components, starting with NII. But one of the things we're hearing about is just the competitive environment. Maybe just talk to how it's evolving for loans to deposit this quarter and anything you just call out in terms of demand and pricing?

Yes. I mean loans, just looking at that, the market, as always, is competitive, but the spreads and everything like that have been pretty stable over the last several quarters. I haven't really -- haven't really seen anything that's unique or different there. Demand is still very strong. So we see just a lot of growth in that particular area. Gunjan mentioned some of the areas that we're paying more attention to from a growth standpoint.

The deposit side, I'd say it is -- there is a lot of competition there. We're seeing more of our peers do specials, whether it's CD specials at higher rates or they're asking for $500 -- or they're providing $750 to $500 for a new operating account on the consumer side. That money goes through marketing expense generally, but it's still all the same from a competition standpoint, right? And so we compete against that.

The good news for us is we're competing very well on that space. Gunjan mentioned record consumer deposits. We feel like we're going to get that again. We've gotten some of the seasonality back on our commercial side. So we're going to have a very strong growth amount in the deposit side this quarter. Actually probably will outpace our loan side of the loan growth this quarter, which is a little bit of a reversal of the second quarter. So all in all, we feel that the markets are -- we're right there in line with where we need to be.

Got it. And maybe one thing that's something you talked to and you kind of see in the H.8 data is just a slowing of C&I growth so far this quarter. Maybe kind of just elaborate what you're seeing there.

Loan growth is -- I'd say the demand is still very strong. I mean, there's a lot of companies that are looking for CapEx. They're looking for additional capital and things like that. I think what we have seen is still very strong growth, but there is some timing. I think there is some time for things to get booked.

I also think we are being a little bit more -- we're looking at our levels in terms of return hurdles and things like that, and we're being a little bit more prescriptive on that. The first half, we saw some tremendous growth on the loan side of the equation. I'd say now we're being a little bit more strict about return hurdles and less fewer exceptions, things of that variety. So -- but still beyond that, I mean, demand is still quite strong.

I guess all that said on the July call, you mentioned that you expect it to be a little bit better than mid-single-digit growth for loans for the full year. And is that still the case?

Yes, that is the case. Yes, we -- I expect 6% to 7% loan growth this year on a full year basis, yes.

Got it. And then maybe a little bit more on deposits. Gunjan, you mentioned before, record consumer deposits, I think, for this quarter. That's certainly, I think, outpacing the industry there. So maybe talk to kind of what have been the primary drivers of the success? And just how do you think about sustaining that growth over time?

Well, we are very intensely focused on strengthening the consumer and small business franchise. Not only does it anchor high-quality deposits, it also provides the base that then we deepen in a quite disciplined manner with credit cards and then wealth. So our fee complexes really benefit from a vibrant consumer and small business franchise. So we have 3 very integrated strategies that we have deployed and are maturing.

The first is just the products need to be attractive and differentiated so that you don't just pay up for deposits. We have done just some really good work interconnecting our banking and payments product. This is the Smartly Suite. It is now $84 billion. So it's like a mini bank in itself and has just been a very attractive value proposition to the customers. Our branch and digital marketing people tell us it's easy to convey the value proposition and get people excited about something different. So we'll continue to lean in on creative value propositions that play to our strengths in terms of breadth.

The second is deposit pricing, Jason. We have invested a fair amount in making it highly granular, highly surgical, and it allows us to optimize growth and cost of funds in a way that we were not doing a few years back. And so the micro pricing disciplines have been helpful to us here. And now we are just scaling up the branch side. You might recall that over the last 5-ish years, we've been at about $200 million a year in investment into the branch.

And a big portion of that has gone into reformatting service branches in Tier 3 locations into these broad multiproduct hubs. That work is largely concluding at this point. And what we're looking at is a $300 million like investment per year and going far more into new branch formats. Our earlier focus is on densifying into within our footprint, those areas that have much higher household formation growth rates.

And all of that, along with good branch execution and elevation and refreshing of the incentives structure, the tools that we are supporting them with some AI-enabled tools. And all of that is just coming together to create a sustainably better performing consumer and small business franchise. A lot of that movement coming into the small business side, too, but the consumer is a few years ahead there.

Right. And I guess you put a press release out a couple of weeks ago talking about Florida, Georgia, Texas, new markets that I guess we traditionally didn't think of you maybe in from a branch standpoint. Just why now? And just will you need branches over time to kind of serve that segment?

Yes. So maybe I'll step back and just explain the context of the press release. We got a lot of interest in our business banking expansion markets press release. So the 3/4 of our businesses, so this is all our institutional businesses, our payments businesses, our wealth businesses do operate fully nationally and have been for some time. Approximately 5 years back, we started to be intentional about creating client centers that co-locate our wealth, our commercial real estate, our commercial and our mortgage teams.

And these client centers sometimes have branch licenses, but they are cashless branches. They're mostly sort of not branches and like office spaces. We have found that the upper end of the small business can also serve clients in that model. So this recent expansion is to co-locate the higher end of the small businesses with these client centers. These are in all the vanguard markets that is seeing a lot of population and business growth. The smaller end of the small business, which is also very attractive from a deposit side, does need branch presence.

So it is our expectation that in due course, our retail network will follow these expansion markets or at least some of them, although right now, our retail focus, as I said, is really on densifying markets. So it's a very long-range strategy that sees ourselves inching out of our traditional places. We are just choosing to do it with vanguard businesses. For example, Atlanta, we have -- is a hub for our payments business. That's where Elavon, a merchant is. And Dallas, we have a very large technology presence in Dallas and Houston. And Houston is very big for our Corporate Trust business.

So we are also leveraging some of our national presence. It gives you connectivity. It gives you a reason to extend the brand presence. And we're investing a lot in national brands with the NFL, with the sense, but these are all ingredients you need on top of just a pure branch expansion to truly sort of create a better national presence.

So you probably guessed the next question. Would a bank acquisition help accelerate that process?

I get asked that question a lot, and I do feel like I have to say I don't have anything ideological or philosophical against a bank acquisition. Our organic opportunities are very high. So when we look at any of our inorganic or organic options, we are saying, what's the bar for strategic fit, for execution risk, for financial and cultural fit. And right now, our organic opportunities are very clear and present, and that's been our focus.

I guess, John, maybe back to you. There's ongoing debate with investors between the trade-off between NII dollar growth and NIM. Banks that can grow both seems to be ideal. There's not all of them to do that. But you've talked before about a path to like a 3% NIM at some point next year, which I think is up like 20 basis points from where we are. At the same time, a couple of banks have kind of talked about some pressure there. So just how do you think about that 3% number? And can you get there? Will you get there? And just any updated thoughts around that?

Yes. Your first comment there is the debate, which is an interesting way to put it. I mean, we have that conversation quite a bit internally, just is it in net interest income? Is it net interest margin? And I think the answer is yes. You have to look at both. I mean I would lean toward net interest income because at the end of the day, that's going to drive EPS and all that sort of thing. But you can't do that and just completely ignore the metric of net interest margin.

I think there's a deal of efficiency there. There is a balance sheet stewardship mindset that you have that goes along with net interest margin. Fortunately, for us, we expect to grow both net interest income and net interest margin here in the third and the fourth quarter. We think that's powered very much by the asset mix. Gunjan has talked about that a little bit. Fixed asset repricing is favorable.

So yes, we do see and continue to see a path on 3% net interest margin. And you asked, is it getting any harder? I guess, 18 months ago, I didn't -- we didn't know if the Fed was going to be in a hike cycle, and that's new and different. And so, not that the hikes themselves are consequential to net interest income for us, but it's the curve after that, right? What does the curve look like? So that's something that we'll focus on very much in 2027 as we kind of think about our budgeting and all that sort of thing.

But we definitely see a path. But at the end of the day, I do lean noninterest income. That's where our clients -- where our clients seem to be is going to be of utmost importance. We're not going to manage to a metric just for the sake of managing to it, but it's really all about the client growth and where is that coming from.

Got it. And then on fee income, you guided to the upper end of 12% to 14% for the quarter. I think for the year, you're talking about low teens growth. I'm not sure if there's an update there. But maybe just kind of drill down and just give us some flavor in terms of what's performing better than expected this quarter than expected?

Yes. Fee revenue is -- has a lot of momentum in a lot of areas. We talked about the fee complex, the 4-legged stool, however you want to kind of call it, all these areas are doing quite well. So maybe just to start, capital market is very strong. This is going to be the first quarter, as you know, where we have BTIG fully loaded. So from a fee growth perspective, that will be not quite, but about half of our fee growth will come from just BTIG being in the -- now in the run rate.

But the broader or the legacy capital markets businesses are doing very well. I expect low double digits from a capital markets standpoint in the core kind of legacy businesses, whether that's foreign exchange or commodities, loan syndications, they're all doing very well. There's just a lot of activity and market gains that I believe we're making. On the payments side, I expect continued strong growth there, very similar to what we had in the second quarter.

Bright spots there include -- the consumer card is doing very well. Gunjan highlighted a couple of points there as well as our corporate payments. A lot of new business being won, a lot of just market tailwinds that are supporting that business. So we feel really good about that. On the merchant processing side, we're likely looking at a flat year-on-year growth for merchant processing, and that probably will persist for the next 2 or 3 quarters as we're kind of working through our go-to-market strategy and kind of shedding some distribution partners and things like that.

And then finally, the investment products and investment services businesses like Corporate Trust, fund services and things like that, doing very well, just like clockwork, taking advantage of the marketplace, taking advantage of their market share. There's a lot of market activity there, and that bodes very well for those businesses. So strong growth there as well.

If we could maybe double-click on BTIG. Gunjan, you mentioned you want to take it from 7% of revenues to 10%. I imagine that's the context of the rest of the company continuing to grow. So I guess, how do you envision kind of building it to a bigger component?

So we have started off beautifully with BTIG. There's a lot of conversation around culture fits and these executives have been great colleagues of ours, have really embraced the bank. We measure referrals, and they're going both ways very strongly. So we have great hopes of this marriage going forward. The bar from 7% to 11% requires capital markets to grow twice the rest of the franchise. And I hope the rest of the franchise makes it harder and harder for them.

But that's the -- and we are very comfortable with that path going forward. So the levers are twofold. On the fixed income side, which is our legacy business, it's really new product introductions organically. Commodities was a big build-out over the last couple of years that the timing was very right that has performed very well. We've introduced some macro capabilities, and we'll keep doing that.

And on BTIG, it's a very nascent investment bank. It's the equity and that is leveraging our existing relationships and our existing balance sheet and their product capabilities. I do not expect it to be a meaningful M&A-driven growth rate, although we might -- if we see something unique that's a small bolt-on, we'll certainly be open to it, but it's a largely organic play, really bringing together the balance sheet that's in play with the new capabilities that we haven't had our fair share there.

Got it. I guess one area I haven't asked you about in a while, Global Fund Services and Corporate Trust. But just maybe talk to those are businesses that others -- some of your peers actually don't have? And just how they give you a competitive advantage when you're talking to new or current clients?

Well, first, thank you for asking me about Investment Services. It is, like John said, not a business we talk about very much. But collectively, these 2 businesses are now almost 10% of our revenue. So they matter. They are very fee intensive. The fees are recurring fees. If we lose the business today, it will be 18, 24 months before we lose the revenue. And so very sticky relationships, large, large relationships.

These are also producers of very good operating deposits, $70 billion, $80 billion in operating deposits. They give us a lending capacity that you wouldn't otherwise have, and they create the most sticky relationships. What has created success for this, and you see these businesses in the trust banks a fair amount.

So you do sort of explore that area, just not with the traditional banks is that our deposits do more just because of our lending capacity. If you're only deploying your deposits into an investment portfolio, your natural NIM is much less than a bank owns these. But the market share gains outside of just the market momentum have come from 2 areas that are very vibrant for us. One is ETF formations.

We early on got very good with brand-new ETF start-ups because some of the large families were pretty anchored with the large trust banks. That has turned out to be a very meaningful growth engine for us because so many '40 Act funds are converting to ETF structures and all of the mania around cryptocurrency, AI has come to the investment market through an ETF structure, which is a low cost . And we have just a very disproportionate share of brand-new ETFs, and many of them have become very sizable. So that's been a sort of market share gain strategy.

And the second is private credit. Corporate trust, which is largely a fixed income type of a business. It's a large business for us. And so we have very good waterfall capabilities, private credit capabilities. And as that market has taken off in the last 5 or 7 years, our business has grown a lot. So we think very intentionally about connecting that as a way of getting paid for balance sheet usage with people who really do need a lot more balance sheet.

And now with even the BTIG acquisition, there's just so much of the trading volumes from these businesses that was going to third party is now hopefully going to be reverse referrals back to the equity trading businesses. So these businesses are very interconnected with the bank franchise, and that's the biggest point I want to make, not just attractive as a stand-alone thing that we own, but products that really deepen our client relationships on the institutional side.

Got it. And maybe, John, for you on expenses, a 2-part question. First one, you talked to the high end of the 7% to 9% revenue growth for the full year. I guess, any update to your operating leverage target for the full year? And then just secondly, as you kind of head into the planning season for next year, just how you're balancing investments versus operating leverage and just how you're thinking about sort of target or just how that plays through?

Yes. I mean, first of all, on operating leverage, we feel very comfortable with at least 200 basis points of operating leverage for the full year, at least 300 if you exclude BTIG. So we're on a really good path there. If I think about the budgeting process that we have right now, and we -- we're very committed to positive operating leverage. That's kind of the starting point that we have. I think it would take us to be in that 55% to 58% range for a long, consistent period of time before we would ever really consider start to move away from that sort of commitment. We are not there yet.

As I think about '27, I would think more about we have revenue growth that's -- and a lot of tailwinds that are coming our way. Our mindset is around revenue focus, as Gunjan has laid out in her priorities as well as there's -- we have this commitment to operating leverage. That should give us a very nice high-quality earnings per share growth, and that's what we're focused on for '27.

So as I think about kind of the future and the journey that we're going on, though, there will come a time assuming we can -- and we expect our ranges to be up into the right, so to speak, in our medium-term targets, and we get closer to that mid-55 area that we start to focus less on operating leverage and more on EPS growth being a high-return bank, more so than we even are now as well as just investing in our products and capabilities and making sure we have that sort of investment in doing that. So that's really the focus that we have. We're not there yet, but that's just kind of where we're -- what our aspirations are at this point.

I'll add one thing. This -- we keep getting asked the expenses versus investing in the franchise. It's not a trade-off. The expense management is coming from what I call good productivity. We have invested an enormous amount of money over the last 5 years, like $5 billion, $6 billion into just updating every platform, custody platform, loan underwriting platform, the core modernization, the cloud program, and that yields productivity over time.

The investments are coming outside in, if you will, in technology and marketing because we are really expanding the sort of revenue side of the equation with both of those. So I just wanted to double -- just amplify the point that we are not thinking of productivity as a trade-off with investing into growth.

Got it. Maybe shifting to credit quality, benign for you and many of your peers so far. Any areas in your portfolio you're watching more closely? Any areas you're seeing cracks, what should we be paying attention to? And is the Fed starting to hike change anything?

Well, I mean, our answer is very boring. There's just nothing that is -- that we see that's really an area of issue right now. As I mentioned, credit metrics are likely going to be stable linked quarter. We are watching for higher -- what is the impact of higher interest rates, what's the higher -- the impact of potential inflation?

The AI cycle as we're going through that, if there's anything that derails off of that, is there any exposure? So those are kind of the conversations that we're having on credit and just kind of watching in different pockets. So we have our eyes set on areas that we are watching, but I don't see anything right now that gives us any concern.

Got it. And just maybe on capital deployment. You've kind of been buying back stock $200 million a quarter. You talked about this payout ratio of 70%, 75% at some point. You're obviously below that now. I don't know, is there a timeline? Or how should we be thinking about when you're returning to that level?

Yes. So a couple of things. Maybe just our framework on capital. We prioritize organic growth, client growth as well as dividend. Those are priorities 1A, 1B, however you want to say it. And then share repurchases, right? And so as I think about the third quarter, we've had a lot of demand on our capital. We've had a lot of strong growth as we've talked about the high demand that we have on capital. We've talked about the Amazon portfolio, and that's coming online. We've also had interest rates move up pretty significantly this quarter.

So given our -- just our prudent nature, we actually elected to pause on buybacks for the third quarter. But we'll -- we're shortly thereafter, we expect to go back right into share repurchases and to increase those and very much committed to that 70%, 75% area. And so that's what we're really focused on.

We are still building our capital from a Cat II perspective. We still think 10% on a Cat II basis is the right level for us. And we generate 25, 30 basis points of capital a quarter, and that has been increasing as we've been earning more and more over this time frame. So still feel good about the long-term projections of our share buyback program.

Do you care to guess on what time frame to get back to it?

We think right away. I think it's shortly. So it's just -- this is a quarter where we had a lot of demand. There was a lot of unique things going on. Amazon was a big amount for RWA. We had the interest rate movement, which affects the AFS portfolio. So those are kind of the big factors that swayed us here. That's just a temporary thing.

All right. So 70%, 75% is still the right way to think about it?

That is absolutely the right way to think about it.

Got it. And then you mentioned Cat II. Is there anything around that we need to know in terms of that impacts liquidity, NIM, expenses that will change things when they...

No. Our Cat II or just -- we continue to grow, as you know. From our seat, what we anticipate getting to that Cat II effective date would be either the second or the third quarter is likely when that would occur. There's like a 2-quarter lag between when you go over the $700 billion to when you actually become that. So second, third quarter is probably the right way to think about it. And we have the appropriate amount of liquidity. We have all the expense and the reporting kind of built in. We've already been kind of ramping up our discussions with regulators on it. So we feel like it's kind of as expected.

Got it. And then, Gunjan, earlier, you kind of touched on stablecoins and digital currencies. And maybe talk to new use cases, tangible benefits that you see?

On the AI programs, both of those.

Yes, both AI and digital currencies.

So there's a lot of focus on it internally. On the AI side, we are seeing very real measurable benefits on the productivity use cases. The revenue use cases are gearing up more. And so we expect them to be the biggest contributor going forward. A lot of conversation in the industry around the slowdown. We don't -- our use cases don't require the most complex frontier model. So we don't think the slowdown of model upgrades impacts our program. If anything, it helps us. It's a little difficult to keep up with all those model upgrades when you don't need most of the capacity.

So maybe just a little breathing room to use the stuff that we already have. So it's a very powerful technology. And we think it has the potential to really elevate and differentiate and personalize the customer experience and shred the productivity. We are implementing it in a very methodical straightforward way, and it's a big contributor to our expense management program. And we don't see that changing with all of the debates that we're hearing.

The stablecoins was new. We introduced U.S. Bank Digital Coin and did the first transaction with our own Dublin Bank. The thesis there is the numbers are very large on stablecoin transactions. The majority of them are cryptocurrency trading with each other. The real payments use cases are still nascent, but what has shifted in the last few quarters is many of our clients are engaging with us to really see if there's something there.

So the use case that is most real for us is the 24/7 gap with the banking system. And is there some way to tokenize deposits on a Friday and we bring it back to the balance sheet on Monday, but have some transaction capabilities with stablecoins. So that's the use case that we announced. We are not going to compete on the actual stablecoin infrastructure. This one was Stellar. We are part of many consortiums. What we are building, which we think could be differentiating is what we call Digital Assets Platform, DAP.

So clearly, our marketing people didn't have anything to do with the naming. It's called Digital Assets Platform. But we are building into that the compliance and controls of our bank. So the clawback capability with stablecoins, the ability to block airdropping. These are things that are quite important to our commercial clients, and we think that could be a differentiator. But I will say that the supply side is far more active than real demand. So excited to take this step. We'll have tokenized deposits early in the year and still exploring the revenue models.

Makes sense. We have about 2 minutes left. Maybe, Gunjan, as you kind of look to build on your success after your first plus year as CEO, just how would you define what the next leg of success looks like as you look out over the next couple of years?

Well, thank you. We talked about many of the ingredients. So just to put it together, the first year was helpful in bringing back the confidence externally and internally creating momentum. As we look forward, our focus is on EPS growth within tight guardrails of return and prudent risk management. Strategically, we are very committed to being a very attractive fee-heavy complex and then increasingly delivering scale and national presence. And that, along with just re-bringing back the high-performance consistency that many of you expect out of U.S. Bank's name, we think is a franchise that brings back the premium valuation and more. So that, in a nutshell, is the plan looking forward.

Great place to end it. Gunjan and John, thank you for your time today.

Thank you.

Welcome to the U.S. Bancorp Second Quarter 2026 Earnings Conference Call. [Operator Instructions] This call will be recorded and available for replay beginning today at approximately 10 a.m. Central Time.

I will now turn the conference over to Brian Mauney, Director of Investor Relations for U.S. Bancorp.

Thank you, Krista, and good morning, everyone. Today, I'm joined by our Chairman and Chief Executive Officer, Gunjan Kedia, and Vice Chair; and Chief Financial Officer, 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 2 of today's earnings presentation, our press release and reports on file with the SEC. Following our prepared remarks, Gunjan and John will be happy to take questions that you have.

I will now turn the call over to Gunjan.

Thank you, Brian, and welcome to our team. Good morning, everyone. Beginning on Slide 3. This quarter, we delivered earnings per share of $1.35, an increase of approximately 22% year-over-year. Record net revenue of $7.7 billion highlights the strength of our diversified business mix and improved execution.

Results in the quarter reflect strong progress against our 3 strategic priorities. Revenue growth accelerated to 10.1% year-over-year. Expense discipline remains a hallmark for us with 400 basis points of positive operating leverage this quarter. Our payments transformation is differentiating us and driving innovative client value propositions, especially for the Gen Z and younger generations. Importantly, we delivered these results while maintaining strong returns, credit performance and capital levels. John will provide more details on our financial performance in his opening remarks.

Turning to Slide 4. Fees rose to 44% of total revenue this quarter with both scale and quality of our fee mix, driving high returns, stable earnings and enduring relationships. Fee growth has steadily accelerated, and this is an important priority for us. While fee growth drives higher expenses, productivity initiatives helped improve our efficiency ratio and increase return on average assets.

Moving to Slide 5. The successful completion of the BTIG acquisition marks a significant milestone in our strategic build-out of capital markets. In its first month as part of U.S. Bancorp, BTIG generated approximately $98 million of revenue, marking the strongest monthly revenue performance in BTIG's history and outpacing our earlier expectations from the deal. As integration progresses, we expect to capture more long-term strategic benefits of the combination. Our aim is to grow capital markets to more than 10% of total company revenue over time.

On Slide 6, our payments franchise remains an important source of diversification and client engagement across the company. Total Payment Services revenue increased 5.7% year-over-year compared with 4.7% growth in the prior year quarter. While merchant processing growth slowed during the quarter, card issuing continued to perform well and corporate payments saw a strong rebound driven by core demand and new business installations. We are increasingly managing these products holistically at the client segment level and investing to be competitive as this space evolves.

Turning to Slide 7. Our consumer franchise is a source of strength for the company and an important driver of long-term relationships and lower cost deposits. Given the increased interest we have seen in this space recently, we are spotlighting the strategy for the consumer franchise. We serve nearly 13 million consumers through a combination of digital and physical distribution with approximately 18% residing outside of our traditional branch footprint today. In addition, we serve approximately 7 million customers through our card, co-brand, Elan and partner platforms. Our core products benefit greatly from this expanded scale. 42% of our consumer clients are now multiservice, up approximately 2 percentage points over the past 2 years. These relationships are more durable, generate higher return and strengthen engagement over our franchise.

Slide 8 highlights the core strategies of our consumer franchise. We are seeing strong momentum from differentiated offerings like Banks Smartly, which we introduced in 2024. The balances across smartly checking and savings now exceeding $84 billion. We have more recently introduced a similar interconnected product suite for small business called Business Essentials. Our branch expansion is focused on densifying our presence in approximately 10 markets within our footprint that have high rates of household formation. We expect our annual investment in branches to increase from approximately $200 million historically to $300 million annually. Importantly, these strategies are delivering strong results and have now driven a third consecutive quarter of record consumer deposits.

Let me now turn the call over to John.

Thanks, Gunjan, and good morning, everyone. This was another strong quarter for us as we continue to execute against our strategic priorities. We delivered meaningful revenue and fee growth, significant positive operating leverage and improved profitability metrics that are well within our medium-term target ranges.

If you turn to Slide 9, I'll start with some highlights, followed by a discussion of trends for the second quarter. We reported earnings per common share of $1.35 and generated record net revenue of $7.7 billion, representing 10.1% growth year-over-year. This quarter, we continue to see strong loan growth in areas like C&I, commercial real estate and card, reflecting steady client activity across the franchise. Meanwhile, fee income growth accelerated across most line items. Notably, this includes 1 month of BTIG. Our fee growth was still approximately 10% excluding BTIG. Average total assets increased 0.9% linked quarter to $695 billion. Key credit quality metrics improved both sequentially and year-over-year, reflecting a stable economic backdrop and the continued fortitude of our clients. As of June 30, our tangible book value per common share eclipsed $30 and increased more than 13% on a year-over-year basis.

Slide 10 provides our key performance metrics. ROA, ROTCE, efficiency ratio and NIM all improved both sequentially and year-over-year as a result of a disciplined execution. We delivered strong returns, which includes a return on tangible common equity of 18.7% and a return on average assets of 1.26%. The efficiency ratio improved to 57.1%.

Slide 11 provides a balance sheet summary. Total average deposits grew 2.4% year-over-year and were flat linked quarter. Consumer deposits reached another record this quarter driven by our Smart lead flagship product. The offset was typical seasonality in our wholesale and investment services businesses. Average loans totaled $405 billion up 7.1% from the prior year quarter and 3.0% from the prior quarter. Growth was broad-based in strategic categories, such as C&I, credit card and commercial real estate which brings ancillary fees with them.

Turning to Slide 12. Net interest income on a fully taxable equivalent basis totaled $4.4 billion, an increase of 7.5% on a year-over-year basis, above the range we had previously guided to, driven by stronger loan dynamics during the quarter. On a sequential basis, net interest income increased by $96 million or 2.2%, driven by loan growth recent investment portfolio repositioning and ongoing benefits from fixed asset repricing. Net interest margin improved 2 basis points sequentially to 2.79%.

Slide 13 highlights fee revenue trends within noninterest income. Total fee revenue accelerated during the quarter, reflecting broad-based strength across our businesses. Total fee income increased 13.2% year-over-year driven by strong performance in capital markets, trust and investment management, payments and other institutional fee businesses. In June, BTIG contributed approximately $98 million of capital markets fee revenue. Excluding BTIG, fee revenue grew 9.9% year-over-year. Capital Markets revenue, excluding BTIG, increased approximately 31% year-over-year, reflecting strong client activity across foreign exchange, syndications and corporate bond underwriting.

Moving to Slide 14. Noninterest expense totaled approximately $4.4 billion and included approximately $84 million related to BTIG. Excluding BTIG, expenses grew roughly 1.9% sequentially and 3.9% versus the prior year. The increase in core expense primarily reflected continued investments in technology and marketing, as well as higher incentive compensations associated with this quarter's strong revenue performance. These increases were partially offset by ongoing expense discipline across the franchise.

Turning to Slide 15. This quarter highlights our ability to improve profitability while continuing to grow the franchise. Over the past several quarters, we have meaningfully improved profitability, significantly reducing our efficiency ratio from its recent peak. We remain committed to meaningful positive operating leverage as we fully integrate and normalize BTIG. While disciplined expense management remains an important contributor, we are increasingly seeing revenue growth become a larger driver of earnings growth. That combination of improving top line momentum and ongoing expense discipline resulted in a year-over-year EPS growth of more than 20% this quarter. We remain confident in our ability to sustain strong profitability while continuing to invest for future growth.

Slide 16 highlights our credit quality performance, which continues to improve. Our ratio of nonperforming assets to loans and other real estate of 0.33% improved 5 basis points from the previous quarter and 11 basis points from a year ago. The second quarter net charge-off ratio was 0.53%, decreasing 3 basis points sequentially. Meanwhile, our allowance for credit losses remained steady at $8 billion or 1.94% of period-end loans.

Turning to Slide 17. As of June 30, our common equity Tier 1 capital ratio was 10.8% or 9.4%, including AOCI. Strong earnings generation this quarter supported capital distributions, strong loan growth and 12 basis points of impact from the BTIG acquisition this quarter. On Slide 18, we provide a comparison of our second quarter results to our previous guidance, provide third quarter guidance and update our full year 2026 outlook. Excluding BTIG, second quarter net interest income and fee revenue exceeded previous guidance while noninterest expense came in as expected.

Turning to forward-looking guidance for the third quarter and full year 2026, both of which are inclusive of BTIG and recently announced partnerships. For the third quarter, we expect net interest income growth of 4% to 6% on a fully taxable equivalent basis compared to the third quarter of 2025. Total fee revenue growth in the range of 12% to 14% compared to the third quarter of 2025 with contribution from BTIG of roughly $200 million per quarter in the back half of the year, noninterest expense growth of approximately 8% compared to the third quarter of 2025. Excluding BTIG, we would expect our core expense growth to be approximately 3.5%. Additionally, we expect to recognize approximately $160 million of reserve build related to the Amazon Small Business portfolio purchase, which we anticipate will close in mid-August.

For the full year 2026, we now expect total net revenue growth of 7% to 9% compared to the prior year or in the range of 5% to 7%, excluding BTIG, up from our prior range of 4% to 6%. We expect to deliver approximately 200 basis points of positive operating leverage this year and more than 300 basis points, excluding the impact from BTIG.

Moving to Slide 19. Second quarter results represented another consecutive quarter operating within all of our medium-term target ranges. We are encouraged by the momentum across the franchise and remain confident in our ability to continue to build on these results to deliver consistent, sustainable returns over time.

Let me now hand it back to Gunjan for closing remarks.

Thank you, John. As we look ahead, our focus remains on sustaining the strong return profile of the company while accelerating growth with resilient fundamentals strong execution momentum and an increasingly interconnected franchise, we believe we are well positioned for the next phase of profitable growth and long-term value creation.

With that, we will now open the call for your questions.

[Operator Instructions] Your first question comes from Erika Najarian with UBS Financial.

Gunjan and John, fully appreciate the revenue upgrade. I'm wondering if you could unpack maybe the path from 4% to 6% to 5% to 7% and perhaps separate the discussion with regards to the net interest income trajectory, particularly how you're viewing net interest margin from here with deposit costs coming up a little bit in the quarter. So I'm going to pause there because that's already a lot.

Sure. Erika, thanks for the question. Let me just start, we do expect, as I mentioned, the full year revenue guide to go up to 7% to 9% or 5% to 7% excluding BTIG, which is better than where we started the year when we mentioned 4% to 6%. And that just reflects a lot of broad-based growth that we just commented on in our opening comments there.

You mentioned net interest income. And maybe just to talk through that a bit. We've started the year expecting mid-single digits I would continue to expect mid-single digits on net interest income. Just given the momentum that we've had in the first half of the year, I would just say that we expect to be north of 5% for the full year. But obviously, a lot can happen. I think in terms of net interest income and net interest margin, in particular, we do expect that to grow over the course of the year, and that's reflected in the guide. And the deposits, we think that, that's -- that nothing's really changed on that front from a competitive nature standpoint. So we still feel really good about where we're moving here.

And just as a follow-up, I've already fielded investor questions on positive operating leverage. It feel socially to even ask this, but I've been guiding asked about this quickly 200 versus the 200 plus. And -- but anyway, I guess, like just to frame it for us, from your prepared remarks, it sounds like the fee generation ex BTIG is better, right? And clearly, that comes with it higher expenses. And also, it seems like consensus has to frame BTIG with that higher efficiency ratio.

So I guess like is that a fair read of how positive operating leverage is tracking because fees are driving the upside and thereby, that comes with it with expenses. And further, just sorry to sort of slip another one in, the $98 million in a month is clearly better than the $200 million, given the ECM sort of large assets happening in the industry, do you expect the pacing of BTIG contribution to be closer to $300 million this year.

Sure. Sure, a lot to unpack there, but I think maybe I'll start on the you talked about positive operating leverage just to start. And I would say that we're firmly committed to positive operating leverage. That is something we have been said repeatedly since the Investor Day back in 2024. We've obviously have been focusing more and more on fees, and you see that in the guide. We do expect our fees overall to be low teens from a full year perspective. and just likely over 4 points of that is going to be on the BTIG side of the equation.

I think in terms of this quickly line, as you call it, versus the 300 basis points or more signal. With BTG, within that $200 million that we anticipate per quarter, we assume a 15% contribution margin. There's also about $60 million of integration costs that will likely come in that's embedded in that we'll call out, obviously, as we move forward. But we're firmly positioned for positive operating leverage. And I think from a BTIG perspective, we're really excited about that acquisition and the new team that we have there. And -- but we do expect the contribution margin to improve over time.

I'd just add, Erika, that we are very comfortable with our expense and productivity runway on our programs. And like John said, very committed to a healthy positive operating leverage on the core. Just a reminder here that between BTIG and the Amazon deal, we're installing more than $1 billion of run rate revenue over a very short period of time, and there's a fair amount of onetime cost that we are absorbing within the 300-plus DOL as well. So just a reassurance that we are both committed to it and very confident in our plans there.

Your next question comes from the line of John Pancari with Evercore ISI.

You've put up some good numbers on the fee side, and you've acknowledged that the growth has steadily accelerated and we certainly saw upside this quarter in card and corporate payments. And I know in Corporate Payments, you acknowledged the rebound that you're seeing. Can you maybe just give us a little bit more color, given this, what is that growth rate that you believe is likely for the overall fee component, but for the year, but also maybe can you talk through what are you seeing as the greatest drivers of this accelerating growth in the fee trend that has materialized and that you expect to continue to play out? What are the biggest contributors?

Yes, sure. So I think, John, thanks. The biggest drivers, and we've seen a nice turn on the corporate payment side, you called that out. I think we've alluded to this at the beginning of the year, we mentioned that there has -- we see a lot of one but not yet installed business, and that is certainly the case here. We're experiencing that. And so we have a lot of what used to be headwinds in this business last -- this year at this time are now tailwinds. And so I think that along with the new business is helping.

And I would say then on the card side, we're also saying the same thing. We've been seeing a lot of great account growth. The fee revenue has been steadily increasing. We're going to get the Amazon book loaded here in mid-August, we anticipate. And so we think there's just a lot of momentum on the fee side of the equation there.

John, I'll add. This is a very important part of our strategy. It's a defining feature of our banking franchise. We closed -- this quarter, we were at 44% fee revenue. That gives us enormous stability, both of earnings and depth in our relationship. And we are building this 4-legged stool of fees, which are very well diversified. So it's the capital markets that's become very significant now.

The payments franchise, which was always great trust and investment franchise has grown very nicely for us and has lots of tailwinds right now with the capital markets and then the traditional consumer fees. So we expect that the fee complex overall will outpace our NII, at least in the long-term, very, very healthy growth across the board on all 3 categories. And by design and strategy, we're very focused on that part of the business.

So based on that, Gunjan, how would you characterize the year-over-year growth expectation on the fee side? Yes, I know you said it should outpace but any way you can help us with that.

Sure. Yes. I mean we expect full year low teens on the fee side of the equation. And that's going to include about 4 points -- a little over 4 points will be BTIG driven. And again, that's we assume $200 million per quarter in the back half of the year. and then inclusive, obviously, of the $100 million that they did in June. So that's going to be -- that's kind of how we think about it. And as Gunjan said, it's strengthened the capital markets, investment services and payments that are really going to drive it.

Yes. I know you gave that line detail before, but -- and then lastly, just around loan to be in, I wanted to see if you can give us a bit more detail on what you're seeing there as trends came in pretty sold for the quarter.

On loans, Sure. Yes. So on loan growth, a very strong quarter for us. The pipelines continue to look very good, particularly on the commercial and commercial real estate side. Commercial real estate saw some nice uptick. This quarter, we continue to see that improve. And it's in virtually all the categories that we talked about last quarter. It's -- there's a -- pretty much every category in the commercial side is green from a growth standpoint. Everything from large corporates down to small business and SBA loans and things of that variety.

So I know we talked about mid-single-digit growth last time at this time, but we anticipate to be through that. And then, of course, we have the Amazon the $1.6 billion that we -- as I mentioned, that will come online in the April time frame -- August time frame, excuse me.

Your next question comes from the line of John McDonald with Truist Securities.

Could you give us some color, John, on what you saw in terms of deposit trends this quarter and how you're thinking about the back half of the year in terms of deposit growth, costs and mix?

Sure. So maybe just to start with the quarter. This is a pretty typical second quarter for us, I would say, over long periods of time. On the commercial side, we always see seasonal outflow, and that's a reflection of just the tax seasonality. And so we anticipated that we would be have lower balances on the commercial side. We did see nice growth on the consumer side, and that's by design. We've been very much focused on growing our consumer deposits.

As I look ahead, clearly, we've already -- as we look at the trends here, starting in the third quarter, we've already made good progress on deposit growth. A lot of that just comes back over the course of late second quarter and into third for us. So I would expect, as loan growth continues to go, deposit growth will grow with some sort of parity there. And so -- and then I think from a deposit rate standpoint, I think you mentioned that as well, were up a couple of basis points this quarter. In terms of how we're looking at it going forward, that rate is going to be dependent on just how strong loan growth is. I think the stronger the loan growth is potential rates might go up on that deposit side, we just anticipate some of that in our guidance as well. So those are kind of the puts and takes right now as I think about deposits.

Okay. And then just following up on that, could you remind us of the broader drivers of the NIM expansion story and your thoughts on getting into that 3% range next year that you've talked about on the NIM?

Yes. Sure, absolutely. We continue to see a path on the 3% journey here at some point in 2027. Not much has changed really since I think the last time we talked here some time ago, it was good to see the NIM go up this quarter. We expect that to continue to progress. the positives, of course, are going to be on the asset mix side as well as just the continual fixed repricing.

I think, John, what it's going to come down to in terms of the speed in which we go that way is going to be on the deposit side of the equation, as I just mentioned, some points there. but also the slope of the curve. Obviously, there's some talk of rate hikes and things like that. And the hikes in of themselves are not consequential. It's more what's the shape of the curve after that, and that's what we're going to be focused on as we move forward.

Your next question comes from the line of Ebrahim Poonawala with Bank of America.

I guess maybe one just big picture question on Slide 19. When you look at your returns for the second quarter and for the first half, like ROE, ROTCE, or in the midpoint of the guidance. Maybe just talk to us, I mean, obviously, all banks want to use a strong revenue backdrop to invest in the business. When you think about just -- we can pick on the return on assets at 1.26, in the higher end of the guidance, 1.35. Like how do you think about it? Do you think this should move towards that 1.35? Or are you happy operating at this midpoint?

Ebrahim, thank you. We're -- first of all, we're pleased with where we're at this part of the journey. It's good to see that we're well established in our medium-term targets that we had talked to you about back in 2024. Yes, of course, our hope and expectation is to continue to improve. I mean that's where we want to go as to the -- we started at the beginning of the year or late last year, actually at the lower end of the range, not just ROA, but some of these other metrics as well. And we want to -- our continual push is to continue to improve these metrics as we progress.

Ebrahim, we think about it in waves. We published these medium-term targets at Investor Day in 2024. So the first goal was to get into the ranges across the board. The metrics have been very thoughtfully selected to balance growth, productivity and returns, which is how we think about the metrics. The first think we made progress on this capital. You'll remember, we were very low on capital coming out of the Union Bank acquisition. We are feeling very good about that, very ready for a Category 2 transition that's upcoming. Expenses is the next thing that we were able to very quickly make a difference on the fee revenue growth. And right now, we are very focused on NII expansion which will help the ROA. So broadly speaking, move towards the right on the ranges is the way we are managing the bank.

Got it. And maybe just on the capital front. Maybe if we can revisit in terms of timing. I mean, you've talked about wanting to get to a 10% adjusted CET1 before we see a ramp-up in buybacks. Is that still the case? And beyond that, are there additional BTIG out there in terms of small tuck-in deals that would make sense?

I'll start with the capital question. I mean, yes, we've made tremendous progress over the last couple of years. We've grown capital over 30% just in those last 2 years, and we think we're on the last lap, certainly of capital build right now. Our first priority is going to be supporting loan growth. That's something that we clearly did this time along with BTIG, and so we're pleased to see our capital levels actually flat NIM making -- at the same time, making progress in our category, too.

And Ebrahim, I would say that we would anticipate to increase the buybacks and glide into that 70% to 75% range, which we're very committed to as we approach that 10% -- approximately that 10% level. So this quarter, we had $200 million of repurchases that was flat versus the prior quarter, but we had a lot of loan growth in the BTIG acquisition. So if we continue to see those sorts of opportunities, we'll pause for share repurchase or keep it at these particular levels, but we intend to glide up into that level.

And Ebrahim, on your second question, are there other BTIG. We do [indiscernible] look at a lot of smaller bolt-on deals, it would not be our expectation that we would need to do a bolt-on capital markets. BTIG brought equity trading and advisory businesses to complement our [ FIC ] business so we have a complete offering now. It's about 7% of our total revenue. That puts us roughly in line with our regional peers but there's a lot of headroom relative to GCIB.

So we think we have a nice platform to grow organically and get to the 10% revenue, which would really give us sort of the right portfolio mix. But the broader question on the bolt-on, our thought process always is to create a very accretive, financially attractive way of creating localized scale in 1 or 2 of our products. And we do look at those. And again, I think of them very much as organic growth because these are sort of tuck-in deals. I hope that answers your question.

Your next question comes from the line of Mike Mayo with Wells Fargo.

I think you -- I think the key phrase here is fee complex. You keep mentioning fees in many different ways. And what's the output of all your plans here? Like fees over 50% or up to 50%. And then as a component of that, how do you plan to get that capital markets number higher investing in legacy U.S. Bancorp or BTIG relates to cards, in terms of -- by the way, is Amazon in the guide for the year and then corporate payments. So what's really the plan for fee, the complex as a whole? And how does that overlay with your existing business relationships?

Thank you, Mike. I do call it the fee complex don't tie because the quality and the mix is an important part of our. We don't want to be a single business name. And the 4 categories are very diversified with each other, and they are underpinned by some faster-growing markets. We would aspire to be in the higher 40s as a total percentage. We were at 45% at one point. And if we can keep our efficiency ratio to the mid. So the 55%, 57% range and growth fees at that level, I think it makes for a very enduring franchise. And that's not just financially. We think about fees as the hooks that create enduring relationships that also bring high-quality deposits, both on the consumer side and the corporate side.

So the intent here is not just the business portfolio, but the consumer relationship being very deep and multiproduct. So the strategies are all anchored around each of those 4 big pillars, having enough nourishment and enough investments to grow alongside the bank. And I'll let John answer the questions on the outlook for CPS.

Yes. I would just maybe add to that, Gunjan, we talk a lot about here, leveraging the balance sheet, the growth that we have either in the loan book, et cetera, to help with the fee categories, whether that is capital markets or investment services, that's why the fee complex is so important. We have a lot of different products that we can apply to clients that have balance sheet usage for us. And so we're really leveraging that component. And yes, the Amazon component is in the guide.

We talked about $75 million to $85 million of revenue that is -- a majority of that is in net interest income. So there will be some split between NII and fees on that. And then, of course, just as a reminder, we anticipate a $160 million reserve build that will occur with the closing that we anticipate to be mid-August.

And then as far as how you intend to go through 7% to 10% capital markets as a percentage of revenues. Is that -- would you be hiring more people through DTI? Or is it through legacy U.S. Bancorp or other means? Or do you have to back your mind, maybe we'll find a small bolt-on?

Well, thank you for that. Yes, you did ask that. We don't -- we are not anticipating small bolt-on needed to get to the 10-ish percent. This is organic growth from just leveraging the relationship and the product capabilities on both sides. What we are seeing, Mike, even in the first month, and we're just getting started here is balance sheet that is already being deployed has room to earn some fee revenue just from the relationships we have.

BTIG is being invited in to the relationships we already have. So the organic growth does not really anticipate a massive expansion of head count or a massive it is cross-selling and getting a fair share of the fee revenue from the book from a balance sheet that has been deployed against the commercial side. So that's the plan. And we have some confidence that gets us to about 10% of the total revenue.

Your next question comes from the line of Ken Usdin with Autonomous Research.

I was just wondering if I could just clean up a couple of the -- like these acquisition-related math thing. So first of all, I guess, on BTIG, you mentioned you've got the $60 million of restructuring, that's all in the second half. And will that be the end of it? So you see kind of like an improvement in the incremental margin post the end of the year as we go forward?

Yes, Ken, that's right. So $60 million is -- would be the -- just the merger-related items that we would anticipate this year. There will be a tail or so probably early '27. We'll update you as we progress. But yes, the contribution margin, we anticipate being the remainder of this year kind of 50% for this business, but we anticipate that to build out. I have 20% in my head or how we're thinking about it right now and with hopeful room for improvement, but that's how we're progressing.

And on BTIG, so they just did a 300 run rate in June, as you mentioned, almost 100, but you're only building in 200 into the forward guide from here? Is there some -- was there something extraordinary? Obviously, second quarter wasn't ordinary for capital markets. I was just wondering, maybe you can just help us understand like what's the right run rate for that capital markets line once we kind of get to the right place and fully run rate type of thing?

Yes. Well, a couple of things yet. Just to be clear, 200 per quarter is what we anticipate. I think there's some seasonality in the third and fourth -- they had a record month in June, a lot of transactions. Could it go higher than 200, it could. But capital markets fees can swing and things of that nature. So we'll see how that goes.

Going back, I would just point back to Gunjan's comments you just made on -- or 7% of revenue right now anticipating to get to 10%. I think that's the right trajectory. We expect strong growth. I mean this -- organically, the capital markets grew 30%, both first and second quarter. I don't know -- I don't anticipate being that strong in the back half of the year, but it's still going to be strong. And based on everything we see and based on the new business and all the different pieces that we've been building on our legacy products, not to mention the BTIG synergies that we anticipate. So that's what gives us all that positivity and momentum that we think for this business.

Okay. And then the third one, thanks for mentioning the 75, 85 on Amazon. Just want to make clear again, that's an annualized number? And would you expect that to be fully run rated in the fourth quarter?

Yes, that's a per quarter number, and that would be then -- so we would anticipate getting approximately half of that for the third quarter, and then that would be fully in for the fourth quarter.

Okay. So that's a quarterly enough. So more like 300-ish on an annual perspective.

Yes, that's right. So back to link all these things together, Gunjan mentioned adding $1 billion. So if we think about $200 million per quarter and 75, 85 for Amazon, that's going to be north of $1 billion for revenues that we're installing based on these acquisitions, which we're excited about.

Your next question comes from the line of Gerard Cassidy with RBC Capital Markets.

Can you guys share with us the build-out of the consumer branches that you mentioned, Gunjan, I think you said you're going to spend $300 million up from $200 million. How much of that is for new branches and versus just rehabbing existing branches? And then second, how long does it take when you do build a new branch in your markets, does it take to reach breakeven and then to a profitability level that you're satisfied with?

Yes. Thank you, Gerard. And we spotlighted that business because having really worked on our expenses and fees last year. We are very focused now on the consumer deposit franchise, in particular. These consumer relationships are increasingly driving card in our wealth business as well because we've gotten quite good at it. So it's a very important part of our strategy as we look forward. And hence, higher investment into the branches. It's not a onetime step-up. It's just something we have been gradually leaning into.

For context, the last 10-ish years now, we have been reshaping our branch network to go from what it was, which was a lot of Tier 3 markets smaller service branches, many of them in-store locations to modern technology-enabled multi-product hubs in attractive Tier 2 like markets. So that's been the journey all along. We are at a point when the refurbishment part of our branch network is largely done. So we are now leaning into new builds and a new growth focus. Our first set of on densifying within our region. The returns on that investments are very quick because the brand is known. The customers are going back and forth from those geographies. So we tend to arrive at our sort of attractive target numbers very quickly.

When you inch out to brand new locations, it's a slightly longer runway. That's why we look for a strategy where we've already planted a flag to our client centers. And those are important aspects for us as well. The client center houses our wealth teams, our commercial teams, our mortgage teams, increasingly small business, and they are also anchored around some of our partnership relationships. So we would expect that for the next few years, the focus will be on the densification. The returns are very good there on the investments and then the inches are more strategic in nature.

I see. And Gunjan, have you identified the number of branches per year over the next 2 or 3 years that you might be building?

Yes. I mean, Gerard, we anticipate accelerating that. Part of this as well as we've been spending some time in how to drive the cost down of branch build out, how we do it faster. So that's all going to be incorporated. We don't have a specific number in mind that's going to -- it's going to ramp, though as we continue here. The densification, as Gunjan mentioned, that's kind of our first priority as the refurbishments have largely taken hold. And obviously, we'll have refurbishments ongoing. That's just kind of the care and feeding of the network that we want to make sure that we do.

But also, it's important that we have the product set with the Smartlead suite and in the products we have now and our are the pricing models that we have associated with that we have in an area where we can equip the frontline branch folks with the tools to help us grow and drive down that breakeven time which is what we're really focused on.

Very good. And then as a follow-up question, and this is maybe tough to answer. We see in this country, the benefits of the build-out of AI, both in data centers and all the capital expenditures that are being done, have you guys been able to look at your second derivative exposures what the benefits are that you might be seeing, John, I think you touched on your commercial loan growth was quite good across the different size companies, but we've been asking on these calls, what kind of impact this having on the numbers, not just in lending, but BTIG is probably volumes we saw with the big investment banks. The trading volumes were phenomenal in this quarter and a lot of it had to do with the hyperscalers and the semiconductor stocks.

So have you guys been able to -- or have you started to look at what kind of presence is this new industry having on your business and should it ever slow down what it might do to the impact on some of the growth you're experiencing?

Yes. It's a good question, Gerard. I think from a -- I think there's more direct impact with the capital market space. But I'll tell you, we're not the very biggest headlines we may not be as involved in, but there's a number of just activities that are going on with our clients across. I think I understand the AI, the build of all that and how that can -- that certainly is helping the U.S. GDP.

But I think the way we view our -- the way we talk to our clients, they are growing their businesses and it's in all areas. It's in food and beverage. It's in media and technology. It's in power. It's in -- so I mean -- so some of that clearly has more tangential to the build, but others are not. So I just think there's just people are feeling very optimistic. They want to grow their business, and we're here to support them. And I think that's -- those are the broad themes we think about right now.

I would just add, Gerard, for us, the data center loans, in particular, are not very large in terms of on our balance sheet. The sentiment rebound from the pause the tariffs last year has been the story. We've heard it certainly in the Middle American footprint that we've had. A lot of people who had paused last year to say where is all of this going are seeing a very resilient consumer and a lot of demand and beginning to lean into that in a fair way. So it's very -- it's more broad-based and healthier loan growth and loan demand than just a concentrated AI trade. And you're right, we do try to look through the motivations behind the loan demand, and it's quite healthy right now.

Your next question comes from the line of Manan Gosalia with Morgan Stanley.

So you mentioned that deposit rates might go up a little bit as loan growth is stronger. I guess, question is, is there a difference in how proactive you want to be here? We're hearing from several banks that loan growth has been a little stronger than expected. Your loan growth outlook from here is pretty good. Rates have been fairly volatile. We're going to get less forward-looking color from the Fed I guess, is there anything different that you're doing here that you weren't doing at the start of the year, maybe in terms of promo balances, marketing incentives to just get ahead of what could be a little bit more volatility on the deposit side.

Yes. Thanks for the question, Manan. I think largely speaking, our strategy on deposits has been on hold, remains on track. The consumer deposits, we continue to focus on. We've had 3 quarters there in a row of record deposit growth from -- on the consumer franchise. The commercial side was a little light seasonally this quarter, but we anticipate that to continue to go up. And I would say from our seat, the commercial deposits will help fill any gap that we need from a loan growth perspective. So -- and the pricing on the commercial side is well understood by us, whereas the consumer side added tools and added models to help, again, our frontline folks in the network really help -- can help us price that appropriately.

And so we always see different pockets of pricing in different geographies and things like that, but that's sort of episode happen all the time. And so I don't think there's anything here any different than any other environment. So I would say largely, our strategy is intact.

Got it. Okay. Perfect. And then maybe just a follow-up to Gerard's question. Can you remind us which geographies you are focused on in terms of branch expansion? And I guess, what level of densification you expect to reach in these new markets? Is there a specific brand share number or rank or something you're targeting in the new markets you're expanding it?

Yes. And we are looking to be more than 80% of the branch count, which gets you into a sweet spot to be the top 4 depositor in the region, which is what our goal is, obviously, to be up higher than that as well. But at that number, it's pretty good. Right now, our focus very much has been in the Southwest. We've been growing out our Arizona footprint Nashville and surrounding Tennessee markets have been very good for us. And then everything else not a book state-focused necessarily, but for example, parts of [ Utah ] are very high growth, even in and around Boise. So we are very surgical about how we think about permits that are being filed many years into advancement where the shopping is growing.

And so we have a very good sense of where sort of household formation is higher. And I must say that since cover, we have seen many, many areas within our footprint really revive in terms of affluence and in terms of younger generations moving in. And all of those, the quality of the household formation is very important to us, too. So those are the [ 10-ish ] markets just focus right now to get it above a certain branch density.

Your next question comes from the line of Chris McGratty with KBW.

John, on the fixed rate asset repricing. Any update, given the curves moved from what you said last quarter and maybe remind us the pickup on both the loan and security side?

Sure. Yes. So I think what's been going on is -- as we've been getting bigger, the ballot volumes have picked up in terms of the amount. I think that we have more like $10 billion to $11 billion per quarter that really come through in terms of repricing. You can think of about $3 million to $4 million of that is on the investment portfolio versus the balance being on the loan side.

I would say we're kind of in that 100 to 125 basis points. And it depends on what's rolling off and what the rate is at the time of coming on, and that's obviously very fluid. But it's been helpful. The Fed funds versus 5-year treasuries around 60 bps or so, and that's been hanging in there. We obviously watch the forwards, and we know that, that forward curve is flattening as you look out. But to the extent that it stays around here, we feel really good that hopefully that we can keep at that level or expand as we move forward.

Okay. Great. And given the positive commentary on loan growth, and the focus on the deposit -- the branches that we've been talking about. Is there any scenario where you might consider a depository acquisition over the medium term? [indiscernible] no recently?

Yes, nothing has changed really about our -- we are very targeted with our organic build on the deposit quality and the customer franchise quality. So yes, nothing has changed about us stance really focused on the organic growth aspects here.

Your next question comes from the line of Saul Martinez with HSBC.

So I apologize in advance, I'm going to get into the weeds on some of the numbers with some of these questions again. But on your NII guidance, that does include Amazon $80 million, $75 million, $85 million a quarter, that's half a quarter. That's about 1 percentage point of benefit in terms of the year-on-year growth. So 4% to 6% is organically, maybe 3% to 5%. And if I look at it on a sequential basis, it kind of implies flattish to about up 2%, which isn't really suggestive of much NIM expansion. So I'm just curious, given everything else you guys are talking about and good underlying trends, loan growth, controlled deposit costs, as pricing whether there's an element of conservatism in this guide. And I'm just curious how you think about all that.

Sure. Just want to reiterate that $75 million to $85 million is a total revenue number, a majority of that is going to be NII. So it's probably -- I know I said majority, but it's probably, I would say, 2/3 is going to be NII to 1/3 fee is going to be roughly what it is, but that can move. So that maybe helps there a little bit.

Of course, in the third quarter, we gave you a guide for 4% to 6%, and that includes half a quarter assumed for the Amazon. So there's pieces of it before it kind of ramps up fully in the fourth quarter. That's why we anticipate, as I mentioned earlier, our trajectory of NIM and net interest income kind of kind of growing throughout the course of the year, in part due to the Amazon. But of course, we have momentum in other places. The loan growth, as we've talked about, is positive. I just answered a question on the fixed as repricing. Those are the positive items, obviously, that we'll continue to manifest. The things that we're watching and is the deposit side as well as the shape of the curve, those are kind of the things that can move, and we'll watch that obviously very closely.

Okay. That's helpful. Then more -- just to go back to the BTIG numbers and follow up on some of the questions there, make sure I have them straight here. So $200 million a quarter and then $100 million in June, so that's about $500 million. You have $60 million of integration costs built into that and the 15% margin. That margin is net -- my understanding net of those integration costs, which would imply $60 million or $500 million, that's a big number that the sort of a cleaner margin on this is much higher mid-20 kind of percent margin.

Am I thinking about that right? Because you also said 20% was what you had in your head, but it does imply a 15% margin with $60 million of integration costs, we would imply that the margin is much higher than that.

Yes. I think, Saul, for the -- just to clarify, so that the $60 million is kind of outside of the 15% contribution. So the $200 million, I'd multiply that by 85% to get the expense rate, and that's kind of our core operating model at this particular juncture. I would anticipate $60 million or so, 30 or so per quarter here in the third and fourth quarter, there might be some trailing components of that in the first quarter. We'll see as we kind of progress.

But in terms of the contribution margin, that 15% is a good core base run rate. That's why we gave it to you in that sense. And then we'll, obviously, over time, we look to improve that, as I mentioned.

Your next question comes from the line of David Chiaverini with Jefferies.

I wanted to ask on Slide 6 to highlight the payments businesses. And good trends overall, but you do show the merchant processing, the middle chart showing a slowdown. You cited the softness in Europe, anything else that's driving that? And what's the outlook for the merchant processing business going forward?

Yes. As I -- on the merchant side, yes, certainly, Europe had an impact on the business. We just saw slowness post war impacts that gave us that sort of thing. However, we also had loss of some nonstrategic distribution partners that over there and that we've -- that we will feel that impact for the next 3 quarters or so. So I think our growth rate will be -- so while the European macro component will come back, the distribution component or the partner aspect will hang for a few quarters.

And this is just part of the transformation as we Gunjan has talked about, is a very big priority for us. And so while we anticipate perhaps lower growth rates in the near term here for merchant, we do expect the other parts of the payment complex to really -- to improve. All the cards are doing very well, as we've talked about, corporate, retail and small business are doing quite well.

And I would just add for the total payment business, which is quite sizable for us, about 23% of our total revenue this quarter. The revenue grew very healthily. It's 5.7%, so well within our mid-single-digit expectations from a medium-term target standpoint and quite strengthened from last year. Last year, we were really looking at the corporate side dragging because of slowness in corporate and government spend, and they have come back very much. So the diversification benefits are real, but we absolutely feel confident in the mid-single-digit number for the overall payments complex and on the better side of that range as we go forward.

Great. And then shifting to a housekeeping question on Amazon. How much in onetime costs, if any, related to Amazon are embedded in the expense guide?

Yes. We've embedded some of that already in our run rate. And so there has been some cost some of the other expense and so on and so forth that you're seeing, but that's already been largely embedded. There might be some other ongoing, but that's all embedded into our guide that we've been talking about.

And are you able to quantify the -- that impact or no?

It's -- there's probably $20 million to $30 million or so this quarter. And there's been a little bit prior to that, but it's been -- it hasn't been worth mentioning is it's been pretty immaterial.

Your next question comes from the line of Vivek Juneja with JPMorgan.

Question on BTIG. What are your plans for expanding that in terms of growing its panoply of products or capabilities is research, sales, et cetera? And also, what are your plans? And what have you factored in, in terms of adding to risk and controls and regulatory given that it's now part of a bank umbrella, and it's a very widespread franchise all the way from Norway to Australia and Hong Kong.

Yes. Thank you, Greg. Broadly speaking, our sense is their product capabilities are helpful to the franchise. And the focus is on leveraging those within our existing client base rather than building the franchise out over time. So product build is not a big part of our immediate plans. And the risk and control overlays are very important, and they're already in place we've anticipated this deal for some time. So we were building those out here earlier in the year and from day 1, all of that is -- all of that infrastructure is fully in place at this point.

Your next question comes from the line of Matt O'Connor with Deutsche Bank.

I know period-end balance sheets can be a little quirky, but you had a big increase in cash lower securities maybe from the restructuring and then a big increase in short-term borrowings. And is that the BTIG deal, something else going on or just kind of quarter end ads?

Yes. It's more of the latter, Matt, thanks for the question. It's going to -- June 30 and December 30 are very intense high activities for our clients, especially given our investment services businesses and things of that variety. So while obviously, ending balance sheets are important. I always stress to investors that the averages are the best place to look. So you do have some elevation there.

However, I would say on the investment portfolio, because of the sale, we had $1.6 billion of sales this quarter as we did there. I do anticipate that the investment portfolio will kind of keep at this level or so. as we kind of have been trading the securities book balances for more loan balances, which we think is a healthy thing to do from a balance sheet perspective.

Okay. That's helpful. And then just separately, kind of a more big picture question on the AMEX or the Amazon deal that came from AMEX. I guess, what's the kind of opportunity over time here. It's $1.6 billion. It seems like a pretty meaningful refresh switching over to Mastercard. I assume Amazon picked you over where they've been [indiscernible] for a reason, and I would assume, optimism to grow it. So just talk about is this a book to grow 5%, 10%? Or we're going to walk in a couple of years and it's just significantly bigger for kind of obvious reasons?

Yes. Thank you. It's a very strategic deal for us, certainly economically very, very attractive, but it introduces us to the small business segment around a partner that has a long-standing reputation of growing quite robustly. Their vision for this product set and this partnership is to do anything they can to support a very large ecosystem of small businesses around their platform. They think expansively about how to provide financial services to them, very keen on exploring our business essentials, smartly like product platform to figure out how card and banking and some amount of ancillary services even around the payments can be fully provided to the base. So we expect that this will be a visionary set of product development.

And of course, we hope the book will grow, but we don't have experience with this yet. We'll convert it and then we'll get a sense of how it grows. It joins pretty robust co-brand platform for us, which is providing a lot of scale to our existing products, reviewed almost all parts of the business. So we are anticipating it will create a strategic platform that will be leveraged with our own small businesses and perhaps with our other deals. But more to come once we experience the book, we experienced the nature of the relationship, we'll know more next earnings quarter.

Okay. So more than just kind of targeting the credit card balances. I mean, have you now got also going after like the pharma small business checking accounts or accounts is that part of the thought process when you say traditional banking as well?

It is because you know this is -- we've had a partnership platform with State Farm that we -- and then we improve with Edward Jones that brings banking and credit card together in a branded name for the partner. And that's the platform we are now enhancing for the small business because it was built for consumer. So we know how to do it, all the operational processes around how do you bank a credit card and a banking customer out of our footprint through digital means are all now in place. We've had 2 or 3 years of experience running that. So the expansion of the partner platform to small business could be sort of a strategy we grow out over time. Very exciting.

There are no further questions at this time. Mr. Mauney, I'll turn the call back over to you.

All right. Thank you to everyone who joined our call this morning. Please contact the Investor Relations department if you have any follow-up questions. Krista, you may now disconnect.

Ladies and gentlemen, this does conclude today's call, and you may now disconnect.

Okay. Up next, we have U.S. Bancorp, and I'm delighted to have with us today Gunjan Kedia, Chairman and CEO of U.S. Bancorp; and John Stern, Vice Chair and CFO. Thanks so much for joining us.

It's a pleasure.

So Gunjan, let's start with you've completed your first full year as CEO. And as you reflect on the first year of leading the company, what have some of the biggest lessons been that you've taken away? And I guess what are you most focused on for the next phase of execution for U.S. Bancorp?

Well, thank you for hosting us, and congratulations, Manan. And it's been a very real honor and a pleasure to be leading a wonderful bank. Just over 12 months back when I stepped into the role, our focus was very much on delivering the medium-term targets that we had committed to during our Investor Day. So that's what sort of we got very focused on.

So what did we do? The first was positive operating leverage. There was a lot of question marks around the efficiency ratio. And over the last 2 years, we brought our efficiency ratio down by 4% or so and delivered very strong positive operating leverage. The second was fee growth. As you know, our franchise is unique in being very fee heavy and not just the size of the fee base, but also the mix and the quality of the fee base. So we had committed to mid-single-digit growth, and we are certainly there. And on the upper end of that, we built capital by 30%. We are on the verge of entering a Category II designation, and that was important. And what we were very proud of is we maintained our ROTCE. So by the third quarter of last year, we had started operating in our medium-term targets. We are very confident in that range.

So looking forward, our focus is on maintaining the profitability and the return profile of the bank, but accelerating EPS growth. And we're getting ready to publish our next set of medium-term targets next year at Investor Day. So the focus really is the next era of very profitable growth.

I'm sure that will be an exciting Investor Day, and we will look forward to it.

We look forward to it.

So maybe, Gunjan, stepping back, U.S. Bank has a unique lens into consumers, small businesses, corporates. We're hearing from different banks at this conference that, well, things -- survey data might suggest people are being cautious, but you're not really seeing it in the numbers. I guess what are you seeing from your seat?

Our perspective would be very consistent with that framing. We -- earlier in the year, we entered the year with very strong tailwinds in the industry. And much of the substance of that is very intact. Starting with consumer, the spend levels stay quite robust. And the things that we watch for is the lowest end of the customer tier. As you know, we have a very affluent high-FICO business. And we are also looking at discretionary spend where you see the stress more, and it's all good. You are seeing some extra rotation into gas-related spend, but the consumer is healthy. More importantly, employment is solidifying and strengthening and real wage growth is strengthening. So we feel good about the customer.

What's been the real pleasure this year is core loan demand from not just the AI trade or the data centers trade or NDFI, but broad-based mid-American core growth for all the right reasons. But you are right, the sentiment is getting bleaker even as the facts are quite strong. That's what we are looking at.

So it is something you're focused on, but nothing is coming through in the numbers, nothing?

Nothing is coming through in the numbers. It's the sentiment and the forward gauge is what we are focused on.

Okay. Perfect. And John, maybe I'll come to you. With 2/3 of the quarter now behind us, I guess, how does that translate into what you're seeing so far in the numbers this quarter?

Sure. Yes. And thanks for hosting a great conference. So we are up for another strong quarter. We -- maybe just to give a little color on some of the components. Net interest income, we talked about 6% to 7% year-on-year growth. We'll be toward the upper end of the range on that for the quarter. Fee revenue, we also talked about 6% to 7% year-on-year growth, and we'll be above that range this quarter on the strength of capital markets. And expenses will come in as we expected, so 3% to 4% year-on-year growth. So when you put all that together, it's a very -- we have a lot of positive operating leverage, and we're very excited about the end of the quarter here.

I'd also say just from a full year perspective, no change, really, to our guidance. We have -- we still have mid-single digits from a revenue standpoint. And then we have -- we expect at least 200 basis points or more positive operating leverage for the full year.

Great.

And just to add, we closed on our BTIG deal, and we'll update the guidance at earnings with that included.

Okay. So this excludes the BTIG?

Excludes, yes. And so in July, we'll comment on BTIG. How we incorporate that in the guidance, we'll be more clear about that at that time.

All right. Perfect. So just to recap, full year guide, no change there. For the quarter, you're seeing even more operating leverage because you're coming in at the high end of the NII guide, above the range of the fee guide and in line with the expenses?

That's right. Good summary.

That's a great update. Thank you for that. And I think let's start on deposits because that's been an area of debate amongst the investor community. I think at earnings, you said the deposit costs should remain relatively stable even if the Fed doesn't cut rates this year. We're starting to see a hike getting priced in towards the end of the year. Can you provide us with an update on how you're thinking about deposit costs here?

Yes, sure. Really no change to our outlook on deposits. I think how you summarized is how we still think about it. There really isn't too much change in terms of how our deposit base is presented. We feel like what we've -- where we've gone is really more focused on consumer deposits, and we've been doing that for the last couple of years in terms of moving the -- shifting the mix to more consumer-based. Over the last several quarters, we've moved that mix up 2 points. We expect another -- in terms of total amounts, another record amount of consumer deposits so that the consumer part of the deposit engine is working very well.

What has changed, as you pointed out, the rates have changed. But for us, we're pretty agnostic to that, that move and shift in sentiment, just because we're neutral from an interest rate risk positioning. And so if rates go up or down, that's not going to impact us too much. What I would say, though, is where we're focused is really on how we go to market and how we accumulate deposits. And so there's 3 areas I always focus on with the team. First, it's going to be about our distribution. We've made a lot of investments in branches over the last several years. We've improved our -- the way we go to market with our bankers and either in the call center or in the branches, updated incentive plans, things of that variety. The second thing would be on the modeling capabilities. So really getting really surgical on the pricing, whether it's on an individual basis or it's within MSA-type level, so we can get very granular with respect to that sort of pricing.

And then thirdly is just the products. We've been enhancing our product set over the last couple of years. As an example, Bank Smartly is a flagship product that we use, and the savings product of that has actually gone from nothing a couple of years ago to nearly $50 billion right now. So we've seen a lot of good momentum in that space, and we feel really good about the deposit base right now.

So one area of, I guess, deposit competition that might not be near term that people are talking about is the impact of having stablecoin and AI agent -- well, agentic AI and that driving deposit costs. What are you thinking about that debate in terms of the longer-term impact on deposit costs across the industry?

We are not seeing the impact, and the noise is far outpacing any observed behavior in the franchise. The bear case around bank deposits with AI and stablecoin that we hear about is AI tools will create transparency to deposit pricing, and rewards on stablecoin will provide one way to risk deposits out of the system. So that's sort of what the bear thesis is and a lot of barriers to that coming through really around consumer behavior. So on the institutional side, Manan, there's a lot of price transparency, and that part of the business can get the rate they want. It's a very efficient market. There may be some exposure on the small cross-border flows to inflationary economies where stablecoin seems to have been -- but we don't have almost no exposure to that business.

On the consumer side, it's even more robust. If this narrative that people are just sleepy and sit on deposits without earning -- is not the world we experience. We add value by access to physical branches, by advice from people, by ability to call into a call center if your identity gets stolen, assurance that a bank will be around for 100 years, and you can rely on that, assurance that if you have a fraud event, somebody will be there to help you. And all of this collectively is the value proposition of a bank, and we spend a lot of time trying to strengthen that.

And the AI tools will be a real positive benefit from our point of view. The positivity is the ability to provide a personalized set of advice to people, which is not affordable today. But if that AI tools do what we are beginning to see them do, we could have the same client adviser in a branch handle twice the customer base. Like, our AI tool at the branch, we call it Pearl, what it is meant to do is to read the notes that have been written about every customer's interaction across all channels and give to the adviser a very precise view of what's the best product for the customer, not for the bank. And that increases your leverage.

So I would just say to you with quite sort of real conviction that this narrative is overblown on sort of the impact of AI and stablecoins, on sort of core deposits of the bank in the near term.

I definitely want to dig in on the AI side, but maybe to round out the conversation on deposits and NII. Gunjan, you've emphasized that you're winning deposits through deeper relationships and differentiated capabilities. And you're also densifying in certain markets, right, as you expand in some and you're densifying in others. How are those strategies working together to drive deposit growth? And which products or capabilities are resonating most amongst clients?

Well, thank you for asking. It's a big conversation and a big focus for us to improve the quality of the deposit base, and we define that by anchor around a real relationship value proposition. We do not subscribe to the thesis that sort of lazy customers are the way to prosperity going forward. Also, very focused on the Gen Z customer base and not just sort of create a model that is attractive to only one generation. So our strategies are how do you be really exciting to the person like my dad and how do you be very exciting to my son? And that's sort of the range.

But John talked about 2 of the big strategies to deepen the client relationships, which is precision pricing by micro MSA so that you are really balancing growth with the cost of deposits. But the big push has been acute product. The Bank Smartly, which is now up to $50 billion, allows you to earn attractive returns and rewards on your credit card based on your checking and saving relationship. So there is something in it for the customer to consolidate their relationship. And our deepening statistics have steadily improved, and that's what's driving the consumer deposit.

Then the densify is a matter of expanding our reach, not just deepening our share of wallet with the client. Just a quick sort of history lesson on how we grew up. U.S. Bank really grew up over -- since the '90s with a lot of bank M&A roll-ups. So the markets were put together with a deep emphasis on what I would call Tier 3 and 4 markets within our 26-state footprint. What we have been working on for the last 10 years now is changing the format of in-store service-oriented branches to large advice hubs that deliver maybe 2 to 3x the deposit per branch. They are nice branches. This is where you really get into the advice part. And we are moving to Tier 1 and 2 markets within our franchise. So that's the densify strategy.

There are about a dozen or so markets where the household growth is about twice national average within our 26, and we are really wanting to get the branch density above 8% there. That's when you get disproportionate deposit growth, and the acquisition costs are low. And our goal is to be top 4 depositor in these high-growth densify markets. In addition, we are now inching out to 1 or 2 contiguous states, which is what we would expect to do, so go up from 26 to a few more.

Before we did the Union Bank deal, the CapEx investment into branches used to be roughly $200 million on average, and we think that will inch up to $300 million or so. And that's really part of our POL commitment. It's designed. It's just the evolution of having, what I call, renovated the existing franchise enough that we are now taking the model out. And these branches are very tech-enabled. They are very different from a servicing mindset. So that's sort of the branch densify strategy.

And you mentioned 8%. Is 8% the right number to get more deposit share in the market and have enough scale?

It seems to be the sweet spot where you're not overbranched and where your acquisition costs are low and the brand is very present. Certainly, within the densify region, the cost of branding and marketing is very efficient. So the ROI and the breakevens are just really very attractive there. So there's a formula here. Of course, we tweak it based on competitive actions, but that's the focus of the strategy right now.

Got it. So maybe pivoting to loans, and we spoke about deposit competition. Maybe let's talk about loan competition. We're hearing the loan spreads are coming in. Are you seeing any of that? Any specific trends to call out across any loan categories there?

Sure. Yes. So Gunjan, you touched on it just a little bit ago. Loan demand is broad-based across. There is virtually all categories that we care to be active in. So maybe just to double-click on a couple of those, commercial and industrial loans, wide-ranging demand in all different geographies, all different industries, very much focused on CapEx for their own -- or M&A for their own business and their growth needs. And so that has been a very big focus. So we see a tremendous amount of growth there. Commercial real estate also is doing well from a growth standpoint. That's being led more or less by multifamily. But what I'd also say there is there's just fewer paydowns than we had. So we've been having growth in that, but it's just been masked by the paydowns over the last couple of quarters. Now that's starting to abate, and you're starting to see growth in the commercial real estate side of the equation.

And then credit cards, Gunjan also mentioned, spend levels are still robust. It's almost a carbon copy from prior quarter, maybe with a plus to the gasoline purchases that people are making. And so that is also driving more spend and more balance sheet in terms of balances that we have from a credit card standpoint. All those areas are areas where we're focused on, multi-servicing client, multiple products in a variety of different areas. And not just growing for growth's sake, it's got to make sure we make hurdles and things of that variety, but we feel really good about it.

You mentioned loan spreads, I might just touch on that. We do see that has grinded in a little bit over the course of the year, in line with where credit spreads, just from a macro standpoint, have been. And I think a little bit is the mix, too. You see more large corporates and things that command a little bit tighter spread, still good returning loans. So that's kind of the lay of the land of the loan market.

I'll add one thing, Manan. The loan mix, we are intentionally also evolving. We talked about deposits. And here, our focus is on C&I and credit card. We are oversized in mortgage. After our Union Bank acquisition, they brought a lot of California mortgages to it. So the C&I and the credit card bring really significant fees associated with it. Credit card is -- obviously, you know the fee business there. And on the C&I side, because we have such a big investment services business, it's a very positive. So there's a little bit of extra sort of execution effort around those 2 categories of the loans, and the market is very favorable to do that.

So let's talk about fees. You've talked about fees becoming a bigger driver of growth and returns over time. Where are the biggest opportunities here?

So we have 42% of our revenues is fees. It's organized in 4 different chunks, very attractive chunks of fees. The biggest is payments. The second is our trust and investment fees, that's wealth and our investment services. And the third is capital markets and of course, the traditional consumer fees. So there's opportunity in the first 3 categories that we are very excited about. And mortgage, we are maintaining. The market is not favorable for mortgage right now. And as I said, we are overweighted that business.

Capital markets has been the big focus. We were -- we had product gaps there that we filled with the BTIG. And honestly, Manan, we were just underweight the balance sheet that we are deploying. So it's about just getting a fair share of rotations into it. We had great products on the fixed income. As John said, that's been a big driver even this quarter fee growth. And we expect that to grow to about 11% of our revenue, is our target. We think -- and we are -- with BTIG, about 7%. So that will be a big driver of growth.

The second is payments, where we have had sort of sluggish growth for some time, a lot of momentum there being -- and trust and investment has been performing very well for us over a very bellwether business. So all 3 of them will drive growth. And we do expect to grow fees higher than our NII and over time, have that 42% inch up. It gives us a stable earnings profile, and it gives us a structurally high return profile, and it creates sticky client relationships. So there's a strategic issue here, not just sort of fees for the sake of a financial portfolio.

So I want to double-click on cards and payments. Let's start with card. You've talked about how the maturation cycle of that works, right? Like, you have a customer acquisition strategy, there's upfront costs associated with that, and then you get some more of the loans and profitability there. So can you talk about that trajectory and how you see that evolving?

Yes. So our credit card business is about 3/4 of our total payments business. I know we get a lot of questions on merchant, but it's the card business that is sort of the dominant business. After COVID, there was just a period when our marketing spend had settled at an inappropriate level to drive the growth that we aspire to. About 2 years back, we really started to enhance very meaningfully both the marketing spend, but also the product set that would be focused on transactors. Traditionally, we had done very well with loan balances on the credit card side because the products leaned into that. And now we are beginning to see the revenue growth start to inch. It's a 12- to 18-month cycle before the upfront rewards, which are negative revenue phase out. So just last quarter, we showed the trajectory of how the growth is strengthening. And of course, with the Amazon deal coming online in the third quarter, we expect that to strengthen.

The products are doing really well in the market. The Smartly is bringing a lot of card fees as well. So we are very confident. And the new thing this quarter is the corporate card is actually beginning to revive a little bit after a tough year last year. So a lot of good strategies and a lot of good momentum on the card side.

Got it. And then payments, that's been a high priority as well. It feels like it has a little bit more of a longer tail to it. But I guess, how are you thinking about the near-term aspects of it relative to the longer-term aspects of it?

So the merchant business, and I'll just repeat a few things because so many investors ask me this question, and I think there's a little bit of a misunderstanding. First, it's a very high-margin business. So often people think it's a threadbare business, and it's not for us. It's also a business that's very interconnected with our core small business franchise. Of course, the enterprise side, too, but the core small business franchise. And it's been operated for a very high profit margin for the needs of the business. So what we have done with our transformation over the last 2 years is to refocus the efforts around 5 vertical segment strategies, which is a shift from the way we operated for the last 20 years, which is broad generic clearing and across the entire industry set.

That model has sort of gone away. So that transformation is a little bit slower. You have to wait for contracts to come due. You have to change the distribution. And we track about 1% to 2% to 3% improvement in what we think are the vertical business models, and we are about 1/3 of the way there. And each quarter, it sort of inches up. There's some natural variation based on sort of spend levels. But we like the business. We are committed to it. We think we will prevail. Our value proposition is very different from the fintechs. It appeals to industries like healthcare that are regulated, that have HIPAA requirements that have data privacy requirements. They expect a level of resiliency and fraud protection that -- so we're very -- we've become very focused on where our value proposition works. But as you say, it is a slow transformation.

Got it. Very clear. Maybe we'll pivot over to expenses. You're currently tracking ahead of your guide of 200 basis points in operating leverage, but you've also said that you're keeping the guide because you might want to make some investments as well. Where are those investments being directed today? And well, let's stop there. Maybe we can pivot over to the longer-term efficiency ratio?

Sure. Yes. So I think the -- from an expense standpoint, we made a lot of progress as we talked about over the last couple of years, we've moved about 420 basis points on our efficiency ratio, positively. We've made a lot of efficiencies. We've had some areas where we've been able to just take costs out that weren't aligned with the strategic priorities that we set out with. And so we've been able to do that. We think there's still room and improvement that we can do, particularly on things like AI and efficiencies and simplification and things of that variety.

Where the expenses, as you mentioned, how is that going to relay? We're very committed to positive operating leverage. And so as revenues are stronger, we want to lean in more. And where you'll see that spend is going to be more on the technology side for products, some of the branch items that Gunjan just talked about as well as the marketing, brand awareness, things of that variety. So that's really where we're going to spend most of our emphasis as we move forward.

And then how do you think about the longer-term efficiency ratio and operating leverage of the bank?

Sure. So as I said, we've made significant progress. We're now kind of in that upper 50s right now. We want to be in that mid-50s to upper 50s over long periods of time. And the reason for that is as we gain more into the fee categories, as we gain more into capital markets, and we have high expectations for growth there, as well as payments and other areas, those are going to naturally have more of an efficiency ratio that is going to put upward pressure. And that's okay. And so that's why we think the mid- to high 50s over a long period of time is the right area for us to be at, to make sure we're balanced between investments as well as making sure we have good ratios for us to produce.

Sure. And I would just add, though, that we have flexibility, and I want to reiterate our commitment to bringing the efficiency ratio in line with our targets and positive operating leverage. So to that extent, to the extent that something happens in the economy, we've been very clear that we'll take care of the shareholder interest and commitments. And some of these investments are not -- they're variable investments. We can flex a little bit up and down as needed.

That's right.

Another thing you've spoken about is the $2.5 billion or so in tech spend, it goes a lot further today because of the advancements in AI and automation. Given that the pace of AI continues to accelerate, how are you thinking about the right level of investment there? You spoke about Pearl, you spoke about the various tools that you have for FAs and for the rest of the organization. Talk about like the right level of investment for AI and where you see that whole process going?

Sure. Yes. And maybe I'll back up just a little bit to level set on the number of $2.5 billion. We actually did some work internally to just look at what -- comparing that number to how peers represent it and what's included or not in that. We actually -- there are some expenses that have already embedded in our cost structure that actually should be applied to that. So we think of it more as like a $3.2 billion, is really the amount of tech spend that we have collectively. And the way I would think about that number is that's somewhere in that 10% to 11% of revenues. And so that will give you kind of a gauge of where we'll migrate depending on kind of the revenue spend. So that's just kind of as a big picture, how we think about where we need to spend.

Now from an AI perspective, as you mentioned, we're getting efficiencies on some of the coding. And as that happens, we can allocate more and more cost into things like AI and the several dozens and dozens, if not hundreds, of projects that we have around the bank right now in terms of utilizing that. One of the things that we did, Manan, is that we've gained so much efficiency from just sort of the simplifications that we've been doing and the focus on our strategic priorities, that we've been able to open up some costs to the business lines that we've established a growth fund. And so if there are good, ready shovel-made projects, if you will, that are ready to go that have AI use cases or other sorts of automation type of use case, we will fund that. That's something that we can do very quickly. And to Gunjan's point, if things don't go quite as planned on the revenue side, we can also pull back. So we feel like we have a lot of flexibility on this front to move forward.

And that -- the $3.2 billion number is not an additional number?

Not an additional number.

it is what you've already been...

We weren't including some of the information systems, some of the security, some of these other things that should have been embedded in that number. So we just wanted to update investors on how much our actual -- how we think about internally our tech and digital spend is collectively. And all that number is just embedded in our run rate that we have right now.

Got it. All right. Perfect. That's very clear. So maybe in the last 5 minutes or so that we have, pivoting over to regulatory capital. Gunjan, one of the bigger strategic debates right now -- well, actually, before we get into capital, let's talk about the Clarity Act and the broader evolution of stablecoins and tokenized deposits. Given the scale that U.S. Bancorp has, how are you thinking about the risk versus the opportunities there?

We are thinking but not doing as much. It's very experimental still. If you look at the world of digital assets, it comes in the form of the capital markets trading side and the commerce payment side. Much of the numbers are on the capital markets side. We do see revenue momentum from that. It comes in the form of very rapid increase in ETFs that are chasing some form of digital assets. And we have some unique products for start-up ETFs. So we are quite attentive to that, and that's in production and operational, cryptocurrency, custody, et cetera. The real debate though in the industry, as you know, is around core commerce and payments and where it is very experimental. Even large e-commerce platforms are not reporting client demand for stablecoin related, but we are ready with the product set.

What is very interesting just in the last 6 months is the amount of work we are doing to get -- capture the tokenized technology benefits in the fiat system of banking. And much good will come out of that, real-time payments, better, cheaper payments, just in the -- with the safety and soundness of banking. So I'm actually more excited about that part of the work we are doing. So lots of experimentation, not much real client demand on the payment side.

Got it. All right. Perfect. So then to talk about capital, John, you're already operating close to that 10% CET1 target. And I think you mentioned the Basel endgame proposal is about 5% to 7% RWAs. Is there a potential to step up capital returns over the 70% to 75% long-term payout ratio that you've highlighted?

Sure. A couple of points I'd make here is that we're very much focused on our -- we're very close to Category II. And so that's kind of where we're aiming for right now. We know there are pending rules that could be on indexing on the Basel III endgame, and all that sort of thing. And that may come to be, but we want to make sure we're ready, and we are, from a Category II standpoint, getting that capital to be at that level.

We're also, at the same time, very much committed to our long-term payout ratios, in that 70% to 75%. We're just under that today, but we are gliding that up. And over time, you'll see that happening. And as the rules come and go in terms of how that -- the timing of all these things occur, that's something that we'll just -- we'll deal with at that particular juncture. But for now, it's steady as it goes, and we're preparing for that Category II level.

Got it. And are there any changes to how you might allocate capital as you -- as the new rules come through?

I don't think so, not materially. I think we're interested in the endgames getting finalized. We will -- whatever is earliest practical to adhere to it, we would love to get into that rule set as soon as we can. We think that's a smarter way from a capital perspective. And I think those risk weights that apply to those will help us just refine where we are from a pricing standpoint. But I don't expect wholesale changes there.

Got it. All right. Perfect. So Gunjan, maybe to conclude one final question. You're generating the 17% to 18% ROTCE, which is in line with the high teens medium-term target. As you think about returns from here, which areas of the franchise do you think have the biggest opportunity from here? And where do you see the biggest opportunity to improve profitability?

Well, thank you for letting me close it out. Our first year -- my first year was really about getting the foundations in place, getting the leadership transition. We have a fantastic team, wonderful chemistry in the team. We wanted to execute very sharply, put some points on the board and arrive at our medium-term targets. That has created a lot of confidence. It has restored investor confidence.

So looking forward, our goal is to stay a very high-return bank but accelerate EPS growth and lean into the stature of our franchise. We are the largest non-G-SIB. We will be Category II, which means a high quality of data. We have a great fee mix and just execution momentum. So I would expect that the opportunity here is to sustain the efficiency and the return, but just really drive EPS growth, which we think will be very valuation enhancing.

All right. Perfect. With that, we're right out of time. So Gunjan and John, thanks so much for joining us.

Thank you.

Thank you. Pleasure.

Welcome to U.S. Bancorp's First Quarter 2026 Earnings Conference Call. [Operator Instructions] This call will be recorded and available for replay beginning today at approximately 10:00 a.m. Central Time.

I will now turn the conference call over to Jen Thompson.

Thank you, Regina, and good morning, everyone. In our boardroom today, I'm joined by 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 2 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 questions that you have. I will now turn the call over to Gunjan.

Thank you, Jen, and good morning, everyone. I will begin on Slide 3.

This quarter, we delivered earnings per share of $1.18, a year-over-year increase of approximately 15%. Total net revenue of $7.3 billion increased 4.7% year-over-year, with broad-based growth across each of our 3 major business lines.

Net interest income on a taxable equivalent basis increased 4.1% year-over-year, supported by robust core loan growth in Commercial and Credit Card and a second consecutive quarter of record consumer deposits. Fee income grew 6.9% year-over-year, reflecting improved payments performance and momentum across Capital Markets and Investment Services businesses. Capital Markets' performance was particularly strong as new product penetration with long-standing clients and favorable market volatility combined to drive strong revenue growth.

We delivered positive operating leverage of 440 basis points in the quarter. Strong revenue growth and continued expense discipline improved our efficiency ratio by 260 basis points year-over-year. John will provide more details on our financial performance in his opening remarks.

On Slide 4, we are spotlighting our Business Banking franchise. This segment contributes approximately 9% of our revenues and represents a compelling long-term opportunity for us. We have been building out new products and operational capabilities for this segment. We have also expanded our client teams to build deep, multi-serve relationships that are served in branches with direct bankers and exceptional digital experiences. That approach has driven high single-digit compound annual growth in both clients and fees over the past 2 years.

Looking ahead, we are investing in integrated solutions, collectively branded Business Essentials. These solutions offer banking, card, spend management and merchant solutions that support small businesses at every stage of their life cycle.

Our recently announced partnership with Amazon is significant in size and will meaningfully expand our small business reach. This partnership is unique from traditional co-brand card arrangements in anticipating a clear pathway to broader banking relationships over time.

On Slide 5, we highlight strong momentum in California, where we increased our scale and density with our Union Bank acquisition at the end of 2022. As previously reported, we realized merger-related expense savings of approximately $1 billion and are now focused on capturing the considerable revenue synergies offered by this acquisition.

The map on the left illustrates our strong positioning in markets with a high concentration of small businesses. California is a powerful growth engine for us and is outperforming the broader franchise across multiple key dimensions.

Moving to Slide 6. Within Payments, we continue to see fee revenue growth consistently strengthening across all segments. In our Credit Card business, new products aimed at affluent transactors, along with significant increases in marketing, have resulted in double-digit growth in account acquisitions over the past 4 quarters and a strong start to the year.

Merchant processing fee growth remained steady in the mid-single digits, reflecting disciplined execution across 3 core strategies: software-led products focused on 5 verticals and expanding direct distribution. And in corporate payments and prepaid, we are beginning to see growth rebound as spend levels normalize and installations of last year's strong business wins start to show through in results.

I'll close on Slide 7. In Capital Markets, our organic product expansion as well as our pending BTIG acquisition are expected to drive sustained revenue growth. In Payments, the Amazon partnership will meaningfully accelerate Credit Card revenue growth by the end of the year and expand our banking opportunity with the small business segments in the future. And in our Consumer franchise, we look forward to building Financial Edge, a program to better serve the needs of NFL athletes and their families and to build our brand nationally, both in partnership with the NFL.

Let me now turn the call over to John.

Thank you, Gunjan, and good morning, everyone. First quarter results showcased another quarter of strong business momentum and ongoing execution against our medium-term financial targets. If you turn to Slide 8, I'll start with some highlights, followed by a discussion of trends for the first quarter.

We reported earnings per common share of $1.18 and generated $7.3 billion of net revenue, representing 4.7% growth year-over-year. Improved revenue trends reflect strong loan growth in areas like C&I and Credit Cards, along continued momentum in fee-generating businesses like Capital Markets, Investment Services and Payments.

Average total assets increased 0.7% linked quarter to $688 billion, reflecting steady client activity across the franchise. For the first quarter, ending assets were $701 billion. As a reminder, the Category 2 transition requires 4 quarters of average assets to be $700 billion or more. As expected, credit quality metrics remain stable, underscoring the resilience of our clients in an uncertain operating environment. As of March 31, our tangible book value per common share increased more than 15% on a year-over-year basis.

Slide 9 provides our key performance metrics. We continue to operate comfortably within our medium-term targets for profitability and efficiency. Disciplined balance sheet management and strong returns drove a return on tangible common equity of 17%, while return on average assets was 1.15% this quarter. Net interest margin was flat linked quarter at 2.77% as core loan growth and stable deposit pricing were offset by elevated mortgage prepayments and somewhat tighter credit spreads.

Turning to Slide 10. Over the last 2 years, we have increased our tangible common equity 31%, while continuing to deliver high-teens returns on tangible common equity given steady and improving earnings growth. The sequential step down this quarter reflects normal seasonality, along with the impact of continued AOCI burn-down, rather than any change in the underlying earnings or profitability trajectory. As we look ahead, we remain confident in our ability to deliver high-teens returns on tangible common equity.

Slide 11 provides a balance sheet summary. Total average deposits were relatively flat on a linked-quarter basis, as record consumer deposits were offset by typical seasonality in our wholesale and investment services businesses, improving our deposit mix. Our percentage of noninterest-bearing to total average deposits remained stable at approximately 16%.

Average loans totaled $394 billion, up 3.8% from the prior year or 5.3% when adjusting for loan sales in the second quarter of 2025. The growth was broad based and centered around Credit Card, Commercial and Commercial Real Estate. The ending balance on our investment securities portfolio as of March 31 was $174 billion.

Turning to Slide 12. Net interest income on a fully taxable equivalent basis totaled $4.3 billion, an increase of 4.1% on a year-over-year basis, driven by a robust loan growth, funding optimization and ongoing benefits from fixed asset repricing.

Slide 13 highlights fee revenue trends within noninterest income. Total fee income increased 6.9% on a year-over-year basis, supported by nearly 30% growth in Capital Markets, nearly 10% for trust and institutional fees and ongoing momentum across our Payments business. As a reminder, our Capital Markets business is focused on fixed income, foreign exchange and derivatives, including our commodities business. Our pending BTIG acquisition adds equity and investment banking capabilities in the future.

During the quarter, we also made updates to a select number of fee categories to better align our disclosure with how we manage the businesses. Prior results were restated for these classification changes, with no effect on total fee revenue.

Turning to Slide 14. Noninterest expense totaled approximately $4.3 billion, up 0.8% linked quarter. On a year-over-year basis, ongoing productivity and continued expense discipline helped us fund strong investments in technology and marketing.

Slide 15 highlights our ability to effectively manage our expense base while driving top line growth. Disciplined expense management has become foundational to how we operate, showcased by our seventh consecutive quarter of positive operating leverage. Looking ahead, we see opportunities to build on our strong operating leverage story, supported in part by the ongoing deployment of AI and other automation tools to improve efficiency.

Slide 16 highlights our credit quality performance. Our ratio of nonperforming assets to loans and other real estate was 0.38% as of March 31, an improvement of 3 basis points from the previous quarter and 7 basis points from a year ago. The first quarter net charge-off ratio was 0.56%, increasing 2 basis points sequentially, driven by the seasonal nature of Credit Cards, while our allowance for credit losses of nearly $8 billion represented 2.0% of period-end loans.

On Slide 17, we're providing a closer look at our business credit exposure within the nondepositary financial institution loan portfolio given the increased attention on this segment. Business credit intermediaries represent approximately 3% of total ending loans, and these exposures are well structured. Our risk framework includes meaningful over-collateralization, clearly defined industry concentration limits and first-lien collateral. Importantly, this reflects U.S. Bank's long-standing approach to risk management and underpins our comfort with both business credit and the broader NDFI portfolio.

Turning to Slide 18. As of March 31, our common equity Tier 1 capital ratio was 10.8%, or 9.3% including AOCI.

On Slide 19, we wanted to provide some initial thoughts following the updated Basel III proposals. We're encouraged by the initial proposals and expect to see meaningful RWA relief under both methodologies, particularly in areas like mortgage and investment-grade corporate lending, providing additional flexibility to support clients through disciplined balance sheet usage. While we await final outcomes around key elements such as the AOCI phase-in and the effective date of the new rules, the framework as proposed supports our return to historical capital deployment ranges under both scenarios.

On Slide 20, we provide a comparison of our first quarter results to our previous guidance. For the first quarter, net interest income, fee revenue and noninterest expense all exceeded our previous guidance.

I'll now provide forward-looking guidance for the second quarter and the full year 2026. Starting with the second quarter 2026 guidance. Net interest income growth on a fully taxable equivalent basis is expected to be in the range of 6% to 7% compared to the second quarter of 2025. Total fee revenue growth is expected to be in the range of 6% to 7% compared to the second quarter of 2025. We expect total noninterest expense growth of 3% to 4% compared to the second quarter of 2025.

I'll now provide full year 2026 guidance, which is consistent with our previous guidance. 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. And our guidance excludes the impact of the pending BTIG acquisition, which is expected to contribute approximately $200 million of fee revenue per quarter, with an anticipated close date in the back half of the second quarter. The impact of the Amazon Small Business Card and the NFL partnership are fully contemplated in our guidance.

Turning to Slide 21. First quarter results represent another consecutive quarter of operating within all of our medium-term targets. While we are pleased with our continued momentum, our focus remains on delivering consistent, sustainable and industry-leading returns over time. And we have a high degree of confidence in our ability to strengthen our performance and build on these results.

Let me now hand it back to Gunjan for closing remarks.

Thank you, John. As we look ahead, the macroeconomic backdrop remains constructive despite some softening of sentiment recently. Consumer spend, core loan demand and credit delinquency trends all indicate relative stability. The regulatory backdrop is becoming more helpful, giving us greater capital flexibility over time. And our execution has strong momentum. All of that gives us confidence in our ability to continue building earnings power and creating long-term value as we move forward.

With that, we will now open the call for your questions.

[Operator Instructions] And our first question will come from the line of Scott Siefers with Piper Sandler.

John, I wanted to ask about positive operating leverage. You kept the 200-plus basis points target for the year. although you did -- you're doing significantly more than that now. It looks like it'll be about 300 basis points in the second quarter. Maybe -- I was hoping you could discuss how you're thinking about it. Would you sort of manage to that level or maybe let some incremental revenues drop to the bottom line if they came in better? And I guess the or more leaves a lot to the imagination. So I'm just curious on your thoughts.

Sure. Thanks, Scott. I appreciate that. Yes. No, we feel good about the outlook. As we mentioned in our guidance slide, we have a lot of growth opportunities, as we talked about. As we've mentioned in the past a couple of quarters now as we think about 2026, we're really thinking about our revenues growing faster and that being the driver of positive operating leverage. And we have a desire really to invest some of the savings that we have into things like technology and marketing, some of the things that we've talked about in the past.

And it also kind of depends on the nature of the revenues. If fee revenues grow faster, as an example, that's going to bring with it more expense just by the nature of the compensation and things like that. And then net interest income, of course, we welcome that as well. So from an operating leverage standpoint, we have a lot of flexibility, and we feel good about our outlook.

Terrific. Okay. And then maybe, Gunjan or John, really good commercial loan growth, maybe if you could touch on sort of what you're seeing in terms of utilization rates. And then you touched on customer sentiment a bit toward the end of the prepared remarks, so maybe just some thoughts on what you're seeing there. Maybe if you could expand upon that a bit. .

Yes. No, absolutely, Scott. I'll start. The commercial loan side, we just -- we saw a broad-based good core loan growth really across a number of different sectors. On the large corporate side, food and beverage, energy, health care are probably the top ones in our area. M&A for these customers as well as just general CapEx, really starting to kind of see its way through. Small business also continues to be a very strong performer for us, and that we expect that all to continue.

We've talked about loan growth to being in the kind of that 3% to 4%, but I certainly think it's going to be higher than that. It's probably more in the mid-single-digit range from a broader loan growth perspective for the full year. So I think there's just a lot of momentum.

In terms of utilization rate, we're at 25% or so, a little bit north of 25%. That's probably a good level for it. It's been creeping up a bit. I don't think there's a lot more upside from that standpoint. But just in general, core loan growth has been really strong.

Scott, what I'll add on sentiment is it's turning to more core demand, which we find to be very healthy. So if you compare this time last year when the tariff discussion was very present, the demand we saw last year was very focused on the AI trade data centers, some M&A-driven trades, but a real pause pending some resolution or clarity around tariffs. What we see with loan pipelines going forward, which are quite robust, is people beginning to invest in kind of core middle market expansion and CapEx. So the sentiment has stabilized quite nicely.

Our next question will come from the line of John Pancari with Evercore ISI.

And then just on the funding and the margin side, I appreciate your loan growth commentary in terms of what you're seeing, what does that imply in terms of how we should think about the pace of deposit growth? And what are you seeing on the deposit pricing side? We've got a number of even the larger banks that are flagging some pressure still on the deposit pricing side from a competitive dynamic. And then lastly, how should we think about the progression of your margin here as you look out through '26?

Yes. A couple of things there, John. On the funding side of things, the deposit equation, we're seeing -- it's a competitive market, right? It's always been that way on the deposit side. But we saw, relatively speaking, price stability really within -- across the portfolios that we that we have. Maybe just as a reminder, our focus is really going to be and has been on growing consumer deposits. Again, we saw another record level on the super deposit side. We've seen a $7 billion increase year-on-year, nearly 3% growth. We've seen a focus for us on operational deposits on the wholesale side. really utilizing deposits that can help us, along with the broader relationship and leverages into fees and things of that variety. So that has been where our focus has been on the deposit side. And we've been able to just navigate the deposit environment as we typically do.

On the margin side of the equation, I -- just as a reminder, I mentioned the margin was flat this quarter and we gave some color that the positive drivers were really good core loan growth, as we talked about. And then the pricing characteristics I just mentioned on the deposit side. On the other end of that though, there was some of the loans we brought on we're at tighter spreads. Still good returning, but these are larger institutions that trade at tighter spreads. And so that was a little bit of a way as well as the impact of some refinancings on the mortgage side as rates -- we had more refinance activity of nearly 15% to 20% more than we did prior year. So those are kind of the puts and takes.

Going forward, I expect that the mortgage stuff will abate and the other things to stick, meaning the good core loan growth, the deposit pricing stability, our earning asset mix all improving as we think about the future. So we see -- we continue to see progression in our net interest margin going forward.

Okay. Great, John. And then just separately on the capital front, if you could maybe just talk a little bit about capital allocation priorities, how you're thinking about the buyback expectation? And then as you look at inorganic opportunities, you've done the BTIG deal, should we expect that there'll be a more active effort to continue to build out the Capital Markets business potentially inorganic? And then, of course, Gunjan, I got to throw the whole bank M&A question at you as well. Sorry to ask it early in the call.

Maybe I'll start on the priorities of capital deployment. Really no change to our thinking here, John. I think from a capital deployment, we really focus our client and loan growth. And we certainly saw that this quarter, we're going to support our clients as needed. And then we're going to focus on the capital deployment to our shareholders. Certainly, the dividend is extremely important. And then the buybacks, as you know, we went from $100 million to $200 million this quarter. I would anticipate we're going to continue to guide up. I think we're going to start at $200 million, would be my base case, but -- because we see such strength in the pipelines. But it could increase from there or that would be our intention. We're certainly going to guide up as we, again, as we get to our capital levels that we need to get to.

Thank you, John. I do want to just reiterate that we are very committed to a long-term capital distribution targets of 70% to 75%, and we are keen to get back to those levels with share repurchases. And we are very close, John, to just stabilizing our capital ratios in a Category 2 framework and, of course, very encouraged by the capital rules that might accelerate that. So that's the backdrop.

On our bolt-on acquisition strategy, we are constantly looking at properties. They are usually not as big as the acquisition we did with BTIG. It would be unusual for us to think about another bolt-on in the capital markets world because we are focused on closing the BTIG deal and getting synergies out of that.

But we stay open to that. Those tend to be quite accretive immediately. There are small deals that give you local scale in a particular product to fill a gap.

On your broader M&A question, nothing has changed about our strategy. We are very excited about the organic growth opportunities we have in front of us and the momentum we have. So that is our focus.

Our next question will come from the line of John McDonald with Truist Securities.

John, maybe just to follow up on your net interest margin comment. Just to clarify, you do expect the margin to continue expanding, maybe expand in the second quarter and move steadily upward? And are you still on a path to that 3% sometime next year?

Yes, John. Yes, we certainly still see a path to that 3%. The margin is not always linear, and I gave kind of the reasons why this quarter, the pluses and minuses, of course. I mean if I think about just the underlying metrics, just to repeat, we feel like in terms of loan growth is a good indicator and good -- that will help in terms of the earning asset mix of how we think about the loan growth driving the balance sheet sizing. The deposits are stabilizing, as I mentioned. And then just our asset mix is improving.

If I think about just the small business, Amazon acquisition that will come on in the third quarter as an example. So it's things like that, that are going to be -- that we will continue to focus on that should help drive the net interest margin going forward.

And that 3% target, is that still a good target for next year time frame?

Yes, we certainly feel there's a path in 2027 to get to that level.

Okay. And then just maybe broader, your thoughts on the revenue growth guidance for this year. With the loan growth now looking a bit better and fees starting off strong in the first quarter, is it fair to say you're starting off the year feeling like the higher end of that 4% to 6% range is achievable? Maybe just some thoughts on what are the big swing factors for the low end versus the high end of that 4% to 6%.

Yes. No, good question. We have certainly had good momentum on a number of different areas in the fee categories. We've listed out Capital Markets has been extremely strong for us, you see that growth. Payments is -- we're starting to -- we've been making a clear inflection there. And things like the corporate payments after the second quarter are going to -- the drag of government spending from last year, that's going to fall away, and we have good pipelines in that area. And our institutional businesses are doing extremely well.

So I would expect, yes, we'll -- my bias certainly is to be on the higher end of that 4% to 6% range on the fee revenue side of the equation.

And I was thinking also on the total revenue guidance is also the 4% to 6%?

And the total -- yes, total revenue is 4% to 6%. We feel like that's the right level for us to be at this particular juncture.

And John, on NII, we are very -- we are feeling optimistic about the volume demand for loans, and the deposits have stabilized. It's just the Iran war has a level of uncertainty around monetary policy and rate path that does impact the resi mortgage book and credit spreads. So we are staying with the 4% to 6% on the NII just because it's quite a heightened level of uncertainty around the rate path.

Our next question will come from the line of Ebrahim Poonawala with Bank of America.

So 2 questions. One, I think on the regulatory stuff, or the regulatory changes, just talk to us, I think given you've obviously slightly crossed $700 billion this quarter. We have heard tailoring is front burner agenda for the Fed over the summer. If Category 2 moves to, I don't know, $900 billion, $1 trillion in assets, what does that mean for you strategically capital allocation-wise? Does it change anything? Does it not change anything? Would love your perspective there.

Yes. Sure, Ebrahim, thank you. I think from a Category 2, certainly, we're watching to see what the rules are and how those come up. Right now, we have to focus on just kind of what the rule set is. So we are focusing on our on our Category 2 level. Of course, with the regulatory changes, we put the slide in on the 2 different proposals in terms of standardized and expanded versions. Both of those are better than the Category 2 regime. So that's going to be a better -- more of a help for us. And in the end, it's just going to give us more flexibility. So those are going to be kind of the helpful nature of the capital areas.

Ebrahim, the big variable is timing of when the rules, either indexing and tailoring or even the proposed Basel III rules are effective. So to the extent that the indexing is forward-looking, it doesn't make a difference if the proposed rules get implemented sooner than we think, then we are in a good shape. But either which way, we're very prepared for Category 2 with full AOCI in our capital. That's what we are counting on. We are very proximate to that. So it's not a meaningful change to anything we would anticipate doing with capital distributions.

Got it. Clear. And then on your Slide 5 and 7, I'm just trying to right-size the idiosyncratic growth opportunity for USB. In Slide 5, California, super competitive. We have a Canadian bank that's also trying to gain share in California. And then on Slide 7 where you lay out Amazon, NFL, like I'm not sure if that's going to be a needle mover or it's a good logo to have. If it's possible to frame what the actual opportunity could be on both those as we think about the P&L over the next year or 2, I think that would be extremely helpful.

These are quite needle moving. So John, why don't you give some color on that and I'll add on?

Yes. So on the Amazon side of the equation, we expect that to be coming online in the third quarter. The loan amount is going to be about $1.6 billion area, is likely in that area, and it's going to be about 70,000 co-brand clients. It's probably going to add in the neighborhood of $75 million to $85 million per quarter. A majority of that is going to be on the net interest income side of the equation. Again, this is all taken into our guidance, of course, as I mentioned in our prepared remarks. But we're going to expect to see that in the third quarter and we'll take a reserve with that at the appropriate time. That's about this kind of the same level that our Card book represents.

And I'll add on California. Yes, it is competitive, as are any other regions that have a big opportunity. But it's a very, very big market too, and we are becoming very significant as a player there, and we are seeing the growth be higher than the rest of our franchise.

I'll say a word about what is the significance of the new co-brand relationships we are doing. We built our digital platform to nationally serve co-brand Card clients with banking services for the first time with State Farm. We improved that platform with Edward Jones, and it's unique in the market today. And it's very attractive to partners because you can provide a full range of service to your clients under sort of your user experience.

The Amazon deal allows us to take that platform and then expand it to the small business side, at which point it becomes a very big asset to attract big co-brand mandates. So that's a lot of revenue. We have 1.4 million small businesses today. These are banking clients. And the Amazon deal will bring 700,000 new small businesses to the co-brand side, with the opportunity to attract them to the business side. So it's a pathway to a very different type of growth that doesn't need to come with sort of deposit pricing erosion or any of the usual ways banks grow their business. So we are very excited about these possibilities.

And if I may follow up just, Gunjan, on the State Farm and the Edward Jones, because it is idiosyncratic what you're doing there. Is the view that you can actually grow Cards or grow fees in markets where you obviously don't have an on-the-ground presence? Or if the success is determined by converting that State Farm client into a core USB client? Like how do you -- what determines success?

We think of it as an attractive value proposition for co-brand relationships, first and foremost. That's the easiest value proposition to the partner, because they like to provide the banking services. We think it's a good front-edge brand build with the local client base on the ground. It does not compete in size with what the deposit gathering machine of a bank generally is. But the results show up here in a very unique way to go to market on our Card business on attracting new clients for a bank of our size, that's the fifth largest bank, and we're very, very well known within our own franchises, but trying very, in a very disciplined way, to build our brand out outside of our franchise. And that's what the NFL deal is about to.

So it is an idiosyncratic approach. It has been very economically lucrative for us. And because the platform is now built and now we're going to expand it to small business, it also supports our own product sets, like the Bank Smartly product set that is attracting very meaningful level of deposits along with the card loyalty programs.

Our next question will come from the line of Mike Mayo with Wells Fargo Securities.

You certainly have come a long way with your CET1 when you highlight over the last 3 years going from 6% to 9%. So the days of "Are you going to be issuing [indiscernible]?" are long behind you. But still, when you look back over time, the positive operating leverage is something relatively new. It's not U.S. Bancorp of old in terms of the efficiency ratio. And John, you mentioned this is the second quarter in a row of positive operating leverage. Is this something that you're going to kind of track quarter-to-quarter-to-quarter?

And then on the other side of that, I'll contradict myself a little bit here, I think everybody wants to make sure you're investing for that growth, and you've highlighted all sorts of growth initiatives from partners to California into small business, middle market to Payments. If you were simply to highlight your 3 priority areas for investing for growth, what would those be? But first, the operating leverage, if you would.

You bet. Thanks, Mike. Yes, we've had 7 quarters in a row of positive operating leverage, which is we are very proud of and we are very much committed to positive operating leverage. We are tracking that and we will continue to track that. We've -- we're going on with the mindset this year, while last year was more driven by expense management and finding savings within the company to become more efficient, we continue to do that, but what we're doing now is we're taking those savings and investing in some of these projects that we were talking about, and Gunjan will highlight some of the priorities here in a moment.

But the things like the small business area, more of the marketing, more of the technology builds and all that sort of thing are really what we are very much focused on. But we are very much committed to positive operating leverage and having it more driven by revenue growth here as we look into 2026.

Mike, what I'd add is last year we were very focused on expense management and fee growth. Both of those who were natural extensions of last 5 years of very heavy investments digitally into a really world-class product set. And the product set is very good, and it came with some sacrifice of efficiency ratio in the past. And going forward, our business mix is very, very helpful to delivering consistent positive operating leverage. And I want to just reiterate that we are very committed to sustaining that over time.

The priorities in terms of growth are very simply to continue to grow out of fee categories. We want to always be known as very heavy in fee mix driving heavy returns for us as a bank. Second real focus is to strengthen our consumer and small business franchise. And all of the examples that we are sharing here are towards that goal so that the consumer franchise and the core funding mix continues to strengthen over time.

And we do want to go back to our DNA of being a very simplified, streamlined cost structure, which we think we can do. In the past, it was very much around the automations. And going forward, we are very focused on what AI can do. So that's the priorities: fee growth, strengthen the consumer franchise and go down the journey of becoming an AI-native organization.

All right. That's clear. And then just one follow-up. You're saying you have Credit Card customer growth of 10%, but you've only had fee growth of 5%. So does that imply you expect much better fee growth ahead, or is it doesn't work that way?

No, it does work that way. There is a leading gap between acquisitions and when revenue shows up. And that's just the reward structure and the upfront rewards of transitioning the book. So if you see what we've done really over the last 6 quarters is elevated our marketing and acquisition spend, and we track that very closely, across the 2 big types of segments: the balance revolvers and the transactors.

We've always been quite strong on the balance side. If you look at our [ A&R ], it has consistently exceeded [ HA ] data. But it was the fee side, the transactor side that we really accelerated acquisitions.

Faster acquisitions are actually negative revenue on the core revenue pipeline. So you see this measured balance between acquiring new clients, and it's showing up in revenue. And so you see the acquisition numbers be much stronger, and they will lead to stronger strengthening revenue growth about 4 to 6 quarters out.

Our next question comes from the line of Erika Najarian with UBS.

Just a few follow-up questions for me, please. Just on the forward look for deposit costs. If the Fed doesn't cut, John, do you think U.S. Bank can hold the line on deposit costs? And to that end, some investors were asking for clarity on your response to John's question. I just wanted to make sure we're taking away the right thing in that, fee revenue, you're confident you could be at the high end of the guide, but you're keeping your ranges for both net interest income and total revenue, because while loan growth is strong, the rate curve has a little bit more volatility in terms of the forward look?

Yes. Erika, so on your first question on the deposit side of the equation, yes, I think -- the short answer is yes. I think we've seen stabilization in our deposit mix. We are ultra-focused on the priorities that I just mentioned in terms of consumer deposit growth as well as on the wholesale side of the equation.

What we've been doing, maybe just to add a little bit more color, is we have been doing a lot of work to reduce, and you'll see this in the numbers, CDs and higher cost, institutional-type deposits and things like that, that have less value, maybe our one more -- one-off type transaction as opposed to multi-serve. So that's really where our focus is on the deposit side. And so we do see that.

On the -- just to repeat what we've said, our bias is really on the high end of the range for fees just given the momentum we're seeing in all those categories. And we have that visibility because you can see the pipelines of the businesses that are coming online. You can see in all the different categories that I just talked about, including Payments, including Institutional Services. And then the Capital Markets just has been continuing to be robust.

On the net interest income side, just we continue to expect mid-single-digit growth in that area. And that's a reflection of just the uncertainty in the marketplace right now. There's a lot of puts and takes that are occurring. And so while we have deposit stabilization, while we have good core loan growth, those are all things. Some things are coming on tighter spreads and the interest rate environment is uncertain, and we just are taking that into consideration here.

Got it. And the second question is just a follow-up on the capital discussion. So under the current rules, obviously, in theory, you'll be crossing Cat 2 at some point next year. if you do elect to the ERBA or enhanced risk-based approach, is your understanding that is the 5-year phase-in going to be overarching sort of guide? Or does it -- does the AOCI cliff once you cross over? Or to Gunjan's earlier point, does it matter very little because of the timing issue and your AOCI would burn down by the time that's valid anyway?

Yes. It's a good question, Erika, and it's one we actually have for the regulators in terms of just clarification of it. We're unique in that we have proximity to Category 2. So there is a little bit of a timing collision between the Category 2 timing of when we come online which is we expect that would to be under current rules sometime in 2027, the effective date of ERBA, and when does that occur? And then of course, Ebrahim, I believe, had the comment about, is there some rules that will change on the index?

So a lot of things are moving. What I'll tell you is that we're preparing for a Cat 2 world. That is what we are -- have been ensuring that we have -- we'll be in compliance with. We have the capability to go to standardize or ERBA. That's, technologically, that's very simple for us to execute. And I think overall, we will just have -- we'll monitor and we'll update you as we go. But we feel prepared, and we have a lot of -- we feel like we have a lot of flexibility now with the capital rules and how that will go -- how ultimately it will play out.

And just a quick follow-up question in terms of what Gunjan is saying with regards to optimizing the payout. Does the timing of the clarification impact sort of the path to optimization? Or does that really have to do with sort of the RWA demands from stronger loan growth, in terms of timing of capital payout optimization?

Erika, I would say that we believe the regulators' intent is to allow all banks 5-year phase-in on AOCI to take the cliff effects away. But we are waiting for that clarification. A very good outcome from a capital distribution side for us will be, let's say, a very prompt date to have the current proposals of Basel III be effective and for us to get a 5-year phase-in period, in which case we'll be well ahead of our capital needs even as a Cat 2, and we would bring forward the capital distributions. We are thinking here 1 or 2-quarter changes. So that's why I say it's not that material to our strategy or our timing. But it can move by 1 or 2 quarters in terms of how quickly we step up.

Our next question comes from the line of Ken Usdin with Autonomous Research.

Just one question on the expense side. You did a great job holding the line as you had expected to on year-over-year growth in first. And we can see in the second quarter guide that, as expected, moving higher. Just wondering, first, the second quarter costs last year were actually down. So understanding the year-over-year growth goes up a little bit. But kind of tied to the prior points about operating leverage and magnitude, if we get back into this 3% to 4% growth, is that how we kind of think about it as we just move forward on a regular basis, that the investment that you're making kind of and revenue-related leads you to a decently higher expense growth rate than what we had seen in the first quarter, which I don't think people thought was going to be the baseline?

Yes. Ken, yes, I appreciate that because, right, we've been operating at pretty much a flat expense base for several quarters now, I think it's been, or something like that. And here, we are stepping that up. And it's -- I'll tie it back to some of the answers we have been giving on positive operating leverage. We're very much committed to positive operating leverage, but we want it to be driven by revenue. And so to the extent that revenue is at the levels that we are forecasting, for example, here in the second quarter, that 6% to 7% area, then that calls for expenses to be elevated and higher so that we can invest more into the business.

Certainly, if the revenues don't materialize, we have levers to move that down. I think you can tell from our actions over the past 2 to 3 years plus, maybe decades, that we have the ability to manage expenses and have the different levers to do so. So we have a lot of confidence in our ability to achieve positive operating leverage.

I'll add, Ken, you can be confident in our degrees of freedom around expenses. We have quite a lot of flexibility in delivering the positive operating leverage and [ flexibility on the ] revenue set up, the productivity that the franchise is observing is very real and not just squeezing expenses, which I know investors worry about whether that is sustainable. So we are, as John said, very committed to positive operating leverage and with some ability to flex on the expenses as needed.

And are you able to pull forward investments? Like if you are doing that well on the revenue side and you still want to keep closer to that 200, I mean, I think people are hoping for more than 200, but how much on the flex side, do you also kind of have the opportunity to just get some spending done and then set yourself up for even better results in the future?

It's a combination. So there are things like branch investments and things like big technology builds that you don't think you can flex and change in the short term. But a lot of our expense is contra revenue in the sense of marketing expense for acquisition of Card or marketing expense for brand building is very short-term flex. So that mix is flexible enough for us to think about it.

I do hear your point, I'm not ignoring it, that investors would prefer it to be more than 200 basis points. But as you know, the opportunity set in our portfolio is really very attractive. So we are leaning into it this year, while last year we realized that we really needed to put some points on board on positive operating leverage.

And you saw from John that we've reduced efficiency ratio by more than 400 basis points over the last 2 years. And we still have some aspirations to be a just a lean bank, but not at the expense of really investing to capture some of the growth opportunities we have.

Our next question will come from the line of Gerard Cassidy with RBC Capital Markets.

Gunjan, can you share with us -- obviously, you were very clear about focusing in on organic growth. And we all know in the banking industry that consumer transaction accounts or DDA deposit accounts are the gold that really drives profitability from the liability side of the balance sheet for all the banks. And our industry or your industry has obviously consolidated U.S. Bancorp, has been a big consolidator over the years. And that's one way to grow those core deposits, of course.

But with the organic growth, is there any plans for U.S. Bancorp maybe to follow some of the strategies your peers are pursuing now of building out nationwide or regional-wide branches to grow these core deposits? Even though I know online digital is a main driver of capturing new growth. But it seems like it's complemented by having physical branch presence. What are your thoughts on that?

Gerard, well, we very much agree that the physical branch presence is very critical both to the quality of the deposits and the deposits per account. So the economics of a branch-based deposit acquisition are very attractive to us. As you know, we spend $200 million a year on our branch network. We still have work to do in changing the formats of the branch, to go from focus on servicing, which our legacy branch network very much had focused on like these small branches, many times an in-store, what you see us building out even sometimes in the same location are these multiproduct branches where you can have a small business adviser, a wealth adviser, a mortgage adviser and, of course, our banking and loan and small business specialists. So we are very committed to branch expansion.

The slight nuance here is that our focus is on densifying those parts of our existing footprint where our brand is very powerful to become the top 3 depositor in that geography. And so that's been our focus. We're building our branches in places like Nashville, Phoenix is a big focus for us, Reno, and pockets of sort of really new, young growth, is that we are building out the branches.

What we want to do though is to leverage the uniqueness of our Payments franchise and our digital capabilities to augment that branch-based growth. But all of this to say we strategically understand the need to be very highly focused on building out a high-quality consumer and small business franchise and improving the deposit quality over time. That's why we track the consumer deposits as a mix of our total deposits like a hawk now. And we are very focused on growing that mix. What would you add, John?

Yes. I mean, I think that's well said. And from a deposit standpoint, as I mentioned, we've been growing deposits. And I think the opportunity for us to refurbish and to, where we have scale and lean in on those areas that you mentioned and then some, is really where we are focusing our investment and time. And that's where, ultimately, once you have scale in those markets, you can get the deposit features that you want that help us with the things like the deposit stabilization that we're getting in terms of not as much rotation in the consumer side of the equation and things like that. So that's very much a focus for us as we -- as Gunjan has articulated. .

Very good. And the follow-up question is, and I direct it to you, folks, because you're well respected on credit quality through a full cycle. You're one of the banks that has demonstrated consistent underwriting conservativeness. And I want to come back to the slides that you put out, John and Gunjan, 17 and 26, on the NDFI portfolios. And what's interesting is that many of the banks are giving us this information, which is very helpful, and it doesn't appear that these NDFI portfolios, even in the business credit intermediaries category, are that frightening, if you will, because of the structure of the portfolios.

And so this is more of an educational question, I'm asking for myself and probably others. What kind of scenario -- and again, I'm not saying it's going to happen to you, folks, but again, it's more -- you guys know credit very well. What kind of scenario would you actually have to see for losses to show up in these types of credits? Because it doesn't appear that it's going to happen even in a traditional credit cycle? Or am I way off?

Well, thanks, Gerard, for that thoughtful question. I think a couple of points I'd make. One, we put the slide out there. This really started, I think, a couple of quarters ago, and there was a couple of unique losses that were in the marketplace and there was a reaction to, hey, what's in the book from an investor standpoint. And so I think more information, more education is helpful.

I think getting more granular, like we did on Page 17 in terms of giving you some color on the structure and how it's set up to give, just how you -- what exactly you just said that we think there's very low loss likelihood in these sorts of structures. It would, in terms of like AAA CLOs, I mean, we've never really seen losses. And of course, as a banker, you want to never say they never say never because you -- that's why you have limits. That's why you have underwriting practices. That's where the risk management comes in.

Because it's hard to envision any -- there's lots and lots of scenarios out there, and there could be one that could trigger something. I don't know what that would be. I don't know what the trigger item would be. But that's why we have the limits. That's why we have the rigor that we do. And we'll stay true to that, and that's -- we wanted to illustrate that on Page 17 and the other page in the appendix.

Our next question will come from the line of Saul Martinez with HSBC.

I want to go back to Amazon. You guys seem very excited at the opportunity set here. And Gunjan, I think you said it meaningfully expands your Card growth. And John, you gave some numbers around it, $1.6 billion of loans and, I guess, $75 million, $80 million of revenue. But can you talk to the size of the opportunity? It seems like a relationship that could really grow. How big can this get either in terms of volumes, loans, revenues? And what can you do -- what are you doing to ensure that this partnership is enhancing value for yourselves and for Amazon?

Saul, we have a portfolio of co-brand partners, and the growth in that book is very reliant on the growth of the customer base of our partner. So to that extent, just because Amazon's ability to grow its small business base, and their aspirations around this segment, give us optimism around our path forward.

Just when we convert the book in the third quarter, what we are expecting is about a $75 million to $85 million per quarter type of impact, which is meaningful from a growth standpoint. Our intention would be to have some of that show up in the revenue projections of the business, but some of that we'll reinvest in driving new client acquisition. But our goal here is to take our Payments business to a more robust long-term growth trajectory. And that's what this platform helps us do, along with many others that we are building.

Okay. That's helpful. And maybe to stay on Payments, I wanted to ask about the merchant acquiring business. The merchant processing fees did grow nicely again, mid-single digits, 5%. The volumes have been a little soft though the last couple of quarters. I think it was 2% last year -- last quarter, 1% this quarter. It's actually a little bit lower than even the number of transactions, which grew slightly more than that, which would suggest lower ticket, average ticket. It's a little bit unusual in an inflationary backdrop.

But anything to read from this? Are you seeing higher take rates? Does it reflect the mix shift? Are you seeing changes in consumer behavior or consumer spend patterns? I'm just curious if there's anything to read from this because, obviously, the volume eventually, I think you would want to have volumes growing a little bit faster than what they've been growing the last couple of quarters.

Saul, it's a great insight and question. I'll give you with the quick fact on it, is it's just -- it's basically 1 or 2 clients that have exited that have really no revenue impact on the numbers. And so the big picture then, therefore, is that the underlying trends of our clients are more reflective of the growth rate that you see. So if you were to take that -- and what I mean by that is the growth rates we had in Card are kind of that 5% to 6% area. That's kind of more reflective of what we're seeing in our core for merchant, which is reflective of that growth rate of 5.1% that you see for the quarter.

And broadly speaking, Payment trends have been just very strong. Gunjan mentioned in her comments, despite the sentiment that is out there, the spend patterns that we've seen both in terms of high-FICO and in mid-FICO are about the same, discretionary versus nondiscretionary about the same. We're just -- it's broad-based strength in the spend despite the sentiment that you see out there.

And over time, we do want to decouple from the volume growth. This is a vast industry and a lot of volume comes with very little revenue and a lot of risks. So we are going to be quite disciplined about only focusing on the revenue growth.

And I do understand from your point of view, there's not that much visibility to revenue trends. A lot of the external reporting is only volume. And we'll try to bring as much transparency. But we are very committed to a profitable business that grows modestly, and not chase after sort of big volume that comes with very, very thin revenue, which you can do in this market quite a bit.

Our next question will come from the line of Vivek Juneja with JPMorgan.

I have a couple of questions. One, to sort of follow up on Payments. I think you have a new category now, it says corporate and treasury payments, pardon me, if I get that wrong, or is it treasury and corporate? I know you just changed, yes, corporate payment and treasury management revenues. You've reclassified it. The growth rate in that slowed to 2% year-on-year, and you have the fuel card, which benefited a lot from gas prices. So any color on what's going on there that you can help elaborate on that growth rate?

You bet, Vivek. Yes. So with the change, we combined treasury management as well as corporate payments, that's kind of the classification change based on how we manage the businesses here within the company, along with other changes that we put in the 8-K a week or 2 ago.

In terms of the growth rate, just on the corporate payment side is where we're seeing the drag in that number. And that's really a reflection of last year at this time, recall, there was the tariff announcements and things of that variety and a lot of focus on government spend from DOGE and other things like that, that really we're beginning to lap that. In the second quarter, you'll start to see that lapped and fully in the third quarter. So we see the pipelines being really strong there. And so by the time we get to the third quarter, that will be more representative of what we believe that will be the true growth rate in that business.

A different question. John, thanks for the disclosure on the NDFI stuff. I know you gave BDCs and CLOs. How about private credit? And what's your exposure there?

Yes. So I think if I'm reading you right, just on the capital call facilities and things like that.

No, not private equity, more I was talking private credit, because that's going to be different from BDCs? Or is that in your mind synonymous?

Yes. I mean, I think Page 17 is a lot of the private credit type of exposures. So I think that's the laundry list, is how I would lead to. Then the call facilities, which I know you mentioned private equity, that's going to be the other the equity component of NDFI. So I look at this page as really the private credit component and exposure, on Page 17.

Okay. You mean because you've got the 5 different categories, but not all of that should really be private credit?

Yes. No, true. True. Yes, CDF, BDCs and the CLOs, I would say, are really representative of the private credit components, yes, which is just under 3% of our total loans.

Our next question comes from the line of David Chiaverini with Jefferies.

The other bogeyman out there is AI disruption risk as opposed to just private credit. Can you frame to what extent any of your fee income businesses could be at risk from AI, particularly Payments, and the moats you have to defend your position?

Let me start. We don't see any particular business be truly exposed to an en masse disruption either in terms of price collapse or volume transition. What we are seeing is a very rapid shift in customer search behavior in how they find products and services. So to the extent that we need to keep up with the discovery, and it's very like basic things like search engine optimization tools for marketing are very rapidly migrating to the AI world. The reason we don't think that is going to be impacting our business is because we are building those capabilities and transitioning our approaches pretty rapidly too and there's a lot of tool kit.

So I will tell you we are watching these trends very carefully to see how it might be. But as of now, we are not seeing anything that would show a sudden discontinuity or shift here.

Maybe I'd just add. I mean, I think of -- we had a commentary from Stephen in the recent conference about the usage of AI. We have a lot of businesses that have complex operations that we do very well, if you think about fund services and corporate trust. So this is an opportunity for us to leverage AI and go on offense really and simplify our operations and the complexity that goes along with it.

We have the knowledge of how these things work and so we should be able to take advantage of that faster than any other outside competitor or fintech or whatever the case may be. So that's kind of how we think about it.

Our next question will come from the line of Chris McGratty with KBW.

I'm interested if any of the optimism on loan growth is perhaps nonbank lending turning back to the traditional banks such as yourself?

I don't think so. This is -- what we're seeing is if I think about private credit and where they've grown, they've grown in more of the leverage space, more in HLT and other places like that. And a lot of that we just -- because of our credit underwriting and the way we look at things, those are areas that we're not as focused on really. So we never really have truly competed head-to-head with the private credit wing, so to speak.

This growth that we're seeing is going to be more in the large corporate space. I mentioned food and beverage and energy. All these sorts of categories are really coming online. And that's unique. That has not that has not shown up in the last several quarters. So I think that is why we wanted to call that out and why we have such optimism in our pipelines go forward.

Okay. And then given the optimism on growth, is the expectation core deposit funded? Do you think you'll need to rely on perhaps more expensive sources to fund the stronger growth?

Yes. Maybe just to link a couple of comments we made here, I think deposits will generally grow in line with loans, although it may not be one for one. It will probably be a little bit less. The reason I say that is because our focus is really on consumer deposits and operational deposits and really limiting or eliminating things like CDs and higher-cost institutional or just kind of onetime clients that just that's all we have, is just the deposit. So we're going to be more nimble on the deposit side of growth versus the loan side, I would imagine.

Our next question is a follow-up from the line of John McDonald with Truist Securities.

Just a quick modeling question on the BTIG. John, understanding it's not part of the guidance. When you say accretive for the year, does that include any integration charges, so that's kind of all in accretive to your results for the year is the expectation?

Yes. That's our expectation, John, is slightly accretive to inclusive of those charges. We'll start to provide some of that information as we come online. We're expecting kind of back half of the year in terms of that. So obviously, there'll be a bigger expense base. There's less of a margin with this business than most of our businesses. So you'll see that flow through. And then it's merger cost that we'll identify as well.

Okay. So the financial impact, probably not much in the second quarter? This will all start hitting the numbers back half?

Yes, that's right. Yes. I wouldn't expect much of anything in the second quarter. Then the third and fourth quarter, we should be, pending regulatory approvals, yes.

There are no further questions at this time. I'll hand the call back over to Jen for closing comments.

Thank you, everyone, for joining our call this morning. Please contact the Investor Relations department if you have any follow-up questions.

Regina, you may now disconnect the call.

This concludes our call today. Thank you all for joining. You may now disconnect.

Good morning, everybody. Welcome to the second day of the RBC Financial Institutions Conference. And we're kicking off the fireside chats this morning with U.S. Bancorp. Immediately to my left is John Stern, the Chief Financial Officer. He joined the organization back in 2000, and he's assumed the leadership of the Financial division in 2023. He's Vice Chair and Chief Financial Officer, as I mentioned.

Also to his left is Stephen Philipson, who is Vice Chair and Head of the Wealth, Corporate and Commercial Institutional Banking Group. He's been with U.S. Bancorp since 2009 and has been on a number of the different departments and divisions within U.S. Bancorp, which, as we all know, is a bank that has almost $700 billion in assets, $81 billion market cap and is one of the premier regional banks with a price to tangible book value of about 1.8x. So gentlemen, thank you for joining us. I really appreciate it.

Yes. Thank you.

And maybe we could start off with both John and Stephen with just an overview in the sense that what are you seeing in your customers, the commercial banking area as well as on the consumer side? There are some crosscurrents; of course, we got the geopolitical issues now. But what are you guys seeing right now in your markets?

Sure. So first of all, good morning. Thank you for having us.

From an economy standpoint, the way we look at it, it's quite constructive. It's a resilient economy. I know a lot of people have said that, but it's so true. I mean there's a lot of headlines out there, a lot of things that we look at, particularly from a risk management standpoint, we're always looking, but there's just -- there's nothing at this point that makes us rises to the level of something that we think is going to derail things. So it's steady as she goes.

From a consumer standpoint, spend is strong across all different type of clients, whether the credit quality of the client base that we have remains quite robust in terms of their spending patterns. And then on the business side, it's robust across -- and broad-based in many of the industries. And Stephen, I don't know if you want to maybe provide a little more color on that?

Yes, I'd just add on the corporate and commercial side, sentiment is strong and it's strengthening. There are macro uncertainties out there. But when we talk to most companies, they've gotten used to dealing with some of these macro uncertainties over the last several years, and they're investing, whether it's M&A or CapEx. And similar on the commercial real estate side, we've seen a deceleration in paydowns that we saw throughout last year and seeing robust pipelines in both C&I and CRE.

Coming back to the resilience, Stephen, of the customers. We're hearing yesterday that because of the pandemic, a lot of companies had to really change the way they operate, which is now a silver lining to this type of period. Is that something that you guys have seen as well with your customer base?

Absolutely. We're actually just talking with a client yesterday about this that particularly on the corporate side, there is a lot more, I would say, nimble approach to managing the business. And it did start back with the pandemic and adjusting supply chains and whether it's tariffs or wars, our customers are much more adept and able to pivot to these curveballs.

Very good. Maybe there's only a few weeks left in the quarter, John. Is there any update to guidance that you guys would like to provide?

Sure. Yes. No change to our guidance for the first quarter, Gerard. We have -- but maybe I'll give a couple -- a little bit of color to how we see the quarter shaping up. From a net interest income standpoint, we had talked about a range of 3% to 4% year-on-year growth, and we expect to be at the high end of the range on that, just given loan growth has been quite strong and so that's powering the net interest income side of the equation.

On the fee side, we've talked about 5% to 6% year-on-year growth, and we'll be at the high end of that range as well, given the strength in the capital markets. It remains quite robust. And so that's going to be helpful. Expenses will maintain at that approximately 1% on year-on-year growth. So you put that all together and really meaningful positive operating leverage for the quarter. And so we're really pleased with the outcomes of where we're at right now.

And that's been the real strength over the last -- the third and fourth quarters, the positive operating leverage.

Yes. That's right.

It really stood out, and it looks like it's going to standout again.

Yes. It's going to continue. Yes.

Yes. Following up on the loan growth comment. Maybe you can share with us what areas are you seeing the loan growth? What does it look like, as we go out for the full year? Is it coming in C&I or commercial real estate, consumer? I mean if you both could comment?

Yes, I'll start and maybe Stephen can add on more into his businesses. But the areas that we see a lot of growth continue to be in the card side of the equation and C&I part of the equation. Those have been kind of the main areas where we focused on multi-client and multiservice type of clients. So we're getting multiple products with clients. We know that those are stickier that they generate more revenue for us over time. But the other group that's getting involved is in the commercial real estate side. That's -- we're starting to see fewer paydowns, more activity in that area.

We saw a little bit of growth in the fourth quarter. We'll continue to see that in the first. And so that's positive. Mortgage is probably the one area where it's going to probably offset just because with paydowns from rates coming down a little bit. But all in all, we feel really good about -- we've talked about a 3% to 4% year-on-year loan growth, that's probably the right area for us to be at this particular juncture. Stephen?

And just diving into my businesses a little bit. On the C&I side, we're seeing some meaningful growth in the pipelines and loan balances. And it's being driven again by the combination of M&A and just good old-fashioned CapEx. We're seeing some benefit from the reshoring of manufacturing. We're seeing good activity in terms of equipment purchases. So it's a nice contrast relative to the last few years. The last few years, a lot of our loan growth, we built out a structured credit business and a lot of the loan growth was coming from that NDFI segment. And this is the first time in the last few years where we're really seeing what we call the core C&I being the driver.

And on the commercial real estate side, just adding to John's comments, it's also pretty widespread in terms of the pipeline growth. It's across retail, industrial, parts of multifamily. So it's sort of, again, getting back to the good old-fashioned plain vanilla CRE growth. And there's a lot of demand for data center financing out there, which grabs a lot of headlines. It's something that we'll remain pretty cautious around and very selective.

And that would apply to most of the areas that are in the headlines these days. We never bend our credit box to chase growth. And so as a result, we'll stay pretty diversified. Areas like software, we're not big in. Technology is less than total technology. We stay focused on high-quality cash flow loans. And when you look at our book, we're less than 3% of our commercial loans are in technology. And it's -- so it's kind of a nice environment right now because the most attractive opportunities are just the basics of C&I and CRE.

Yes. Speaking of the data center build out that's going on in our country, are you guys seeing any of the ancillary companies that support, not necessarily the actual construction loan, but it's more of the C&I loans to support the ancillary companies to help with this build out?

Yes, we do see some opportunities, and that's where we are more active, like on the equipment side and certainly on the energy and power side. A lot of opportunities with our utility clients is as they build out capacity, and that's a sector that we've always been meaningful in and are very comfortable with that, that regulated utility risk and see continued growth there.

Got it. John, you gave us the NII outlook for the first quarter. And what are you thinking about for the remainder of the year? The puts and takes across the balance sheet and yields, how are you framing that out?

Yes. So net interest income, there's a lot of moving pieces that tend to kind of come together. But maybe some of the puts and takes I'll go through, and we've talked about this in the past, but it's worth going through that. We've talked about the mixing of our book, more C&I, more card, now a little bit more commercial real estate. So more into that. Those are higher-yielding loans than we've been booking at prior junctures. So I think that's all positive.

On the fixed asset repricing side of the equation, that's going to continue to be a tailwind for us. There, I would just say that spreads, though -- and rates have probably down a little bit. And so the spreads -- our reinvestment yields have probably compressed a bit. But we'll have a little bit more volume that will reprice. So that should help offset some of that, but still positive trajectory from a repricing standpoint.

Then it comes down to deposits. The deposits are always the story. It's always a competitive market, always has been, always will be. But the 2 areas we're really focused on deposits is going to be, one, the consumer side. We're very focused on how do we grow the consumer franchise. We've been doing a nice job of that over the last year or 2. We continue to expect to do that. Products like our Smartly product, where you combine a card with a checking or savings has proved to be a really good tool for us to grow deposits and bring in an affluent base that we haven't necessarily had in the past.

On the commercial side, we're very focused on operational deposits with -- that are tied to fees, again, multiproducts with these customers. And so that's -- those are the 2 areas we are really focused on. The rest we just kind of let run off or move on. So that's kind of how we're thinking about deposits at this point.

Maybe I should just add, since you asked about net interest income. Just interest rates, in general, that's another piece that always plays a part. We have 2 cuts still in their forecast. If that happens or doesn't happen, it's not going to be a material driver. And we're pretty well insulated from shocks and things like that. But we're positioned for an upward sloping curve. So the more upward sloping, the better it is for our business over the longer term.

And I know you've talked about this in the past that having the customers with the multiple products are just so much more profitable and stickier than a 1-product customer. And that seems like that's one of the successes that you guys are having.

Absolutely. Yes. And we have a lot of products to utilize. And I think that's a benefit of having a big diversified business that we do.

Okay. And speaking of products and moving to the fee side. Maybe you guys can share with us the acquisition of BTIG and how that fits into these -- your products? And can you tell us also where you see it impacting your business going forward, that acquisition?

Yes. Why don't you start, then I'll...

Yes. So this came about, we started talking to BTIG about this last year. We've been building our capital markets businesses now for over 15 years coming out of the financial crisis. And we're always focused on fixed income, and we've grown a really nice fixed income business with about $1.4 billion in revenues, and we've been expanding products over the years. The last couple of years, we added commodities, we added securitizations, brokered CD origination.

And we continue to have a pipeline of new products that we'll roll out on the fixed income side. But we always had this gap on the equity and advisory side since we started building that capital markets business. And we knew that was something the equity and advisory would be tough to build organically. So we know if we were going to get into that business eventually and a lot of our clients have asked us to add that capability over the years, we knew we'd have to acquire it.

But if we're going to acquire it, there were 2 big qualifications. One would be cultural fit; and two would be sort of risk management culture or approach. And BTIG checked both those boxes. From a cultural standpoint, we've worked with them for over 10 years. So for over 10 years, they've been our equity referral partner. And if a client wanted to put us on an equity deal, we referred it to BTIG, they executed it and then we shared in the fee, which wasn't always ideal.

Some clients didn't like that the fee getting diluted, but it worked and we worked well together. So we knew from a cultural standpoint, there was a good fit. Over 100 BTIG employees regularly interact with team members at U.S. Bank. And then from a risk management standpoint, we knew there was a good fit because these guys operated for over 20 years through the financial crisis, through the pandemic without a safety net. So risk management was existential for them.

So it checked both of those boxes and it allows us -- that was really the last major product gap for us in our toolkit. So we're excited to see that move forward, and we see a lot of opportunities after closing. Historically, we've only been able to advise clients on one part of their capital structure, on the debt side. Now we'll be able to go in and have a conversation around the whole capital structure. We'll be able to talk about their strategic aspirations and become that much more of a trusted adviser.

And then in areas like fund services, we'll now be able to introduce fund services capabilities to BTIG clients. And then with our existing fund services clients, add things like outsourced trading, prime brokerage, equity derivatives. So a much more fulsome offering there. Wealth management, as we advise companies on IPOs, on selling their companies, there's a wealth management opportunity to help them -- help owners invest those proceeds.

And then in our existing fixed income business, BTIG has outstanding distribution. They didn't have a balance sheet. So their distribution was their biggest strength, and they have global distribution that we can plug into our fixed income business. So just a ton of ways for us to work together and really enhance our capabilities for our clients.

And can you remind us, Stephen, it's going to close when about...

We're targeting the second quarter, subject to regulatory approvals.

Okay. Great.

And maybe I can just add a couple of more things just from a financial standpoint. The strategy is quite sound, and we've been -- we're really pleased with the strategic rationale why we're moving forward here. But financially, it's been doing quite well, better than what we would have expected. So we talked about $175 million to $200 million of revenue that will come on board once we close, which second quarter is what we are thinking.

It will probably be on the high end of that range given what we know right now. And with that revenue and reduced integration costs, we think it will be slightly accretive from an EPS standpoint this year. We thought it would be more of a neutral event as we kind of thought about the year. And the other thing I would just say, as a reminder, it's going to be 12 basis points of capital when we do close.

The final thing I would say is when we talked at Investor Day about our capital markets growth, we had talked about a 12% to 15% growth projection, and that's fantastic growth. And it's all thanks to the gentleman to my left here, who's built a big platform. As we get this bigger revenue base, we'll still be growing quite strongly and it will be probably in the low double digits area. So it's going to be a bigger base, strong growth and we're really excited about it.

That's great. And speaking of fees, as a regional bank, you've got one of the highest fee components of total revenues of your peers, close to 40% to 50%, depending on how you measure it. Aside from this capital markets area, can you share with us where you're seeing the momentum today in the fees and what's driving those other fee lines?

Yes. So I think of the fees in really 4 different kind of buckets from our -- from my seat anyway. And one, we just talked about the capital markets, and we're making great progress there. Second would be the institutional trust and custody and fund services and all those institutional businesses, really strong growth. Based on activity, it's reoccurring. So if prices go up, go down, it's not going to be consequent -- it's all about market activity. We have great market share. Those are a great set of businesses for us.

Payments, another great group of products that we have developed over time. You might recall, we were at a conference, I think, in Boston that we -- you might have been at, and we had our leaders there talk about our business strategies there. It's a great gateway business. We pull in a lot of clients organically through different product sets that we have there that other banks probably can't get attached to. And there, the strategies are strong, but they'll take some time for the revenues to show up. That's okay.

It's a mid-single-digit business right now, but we have aspirations to grow that. And we see a lot of business that we know we have won, but have not yet installed. So we're really excited about the momentum there. And then the fourth is really the consumer side.

Yes. Got it. Stephen, obviously, on the institutional business, you're differentiating yourselves, as you described, with the capital markets. Are there other areas that differentiates USB from the peers in the institutional world?

Yes, Gerard, I would say the investment services businesses, so fund services, corporate trust, custody, that's a big differentiator for us. We are unique in that we have these large-scale businesses that are very difficult to replicate. They produce annuity-like fee streams as well as attractive deposits. And it's a really meaningful differentiator for us. So Fund Services in the fourth quarter, we highlighted how in the ETF business, which is a fast-growing segment of the market, we've got dominant market share.

In Corporate Trust, we're #1 in every market that we serve. And these -- again, they've always been attractive annuity-like businesses. But as we grow the product set like capital markets around Investment Services, we're finding whole new ways to leverage that strong franchise. And I'll give you one example. Recently, we had a Fund Services client where we provided the fund administration for this fund, this asset manager from their early days. So we came in, we provide the plumbing, that's what you do in those Investment Services businesses.

And it was a great annuity-like revenue stream and partnership as this fund manager grew and added new funds. But then as we built out these other capabilities, we're able to serve them in other ways. We're able to provide them securitization financing, we're able to service trustee when they do a takeout of that securitization, we're able to provide the hedging that's contractually required in that securitization.

So you take a client where we were making a couple of million dollars a year and now you're making tens of million dollars a year. You're going from providing the plumbing to sort of building the whole house. So it's a great opportunity. We talk about interconnectivity, and that's how it works. And you take a franchise like that, that we're able to not just leverage that annuity-like revenue stream from these franchises, but they're now foundational in how we're building broader relationships.

Very good. Maybe just coming back to you, Stephen, again. What's been a competitive impact from private credit in the commercial lending area that you oversee?

Yes. So private credit hasn't impacted us in the same way as others in terms of being this competitive threat from a credit standpoint just because we've never been big in highly leveraged lending. So we didn't have those -- we weren't serving those customers from a credit standpoint and at risk of losing them. Where we've benefited with private credit is in those investment services businesses, whether it's our CLO business or our alternatives business and Fund Services, where we partner with them and provide that plumbing for their funds.

And the nice thing in terms of how we interact with private credit, and I don't think there's going to be a massive correction in private credit. But if there were a big downturn, from a credit standpoint, where we interact with them is we provide highly structured lending to some private credit funds, things like subscription finance facilities or AAA tranches of CLOs and AAA consumer ABS. So we're sort of top of the waterfall, highly structured credit exposure in terms of how we face-off with private credit from a credit standpoint. So in a downturn, we've got great protections, lots of credit enhancement underneath.

And then from an Investment Services standpoint, our Investment Services business, as John alluded to, it's more about the outstandings in the marketplace. So we're not dependent on the success of a new fund raise or the performance of a fund. It's more about the outstanding. So like in the instance of CLOs, it would take a massive deleveraging in the market for it to start to dent that -- to see outstandings come down and start to dent that Investment Services revenue.

Moving over to expenses and investments. On the fourth quarter earnings call, Gunjan talked about positive operating leverage. It's a focus point for obviously U.S. Bancorp for 2026. Can you remind us the levers that you have to maneuver that positive operating leverage as we go forward?

Sure. So first of all, we're very committed to positive operating leverage. We talked about a little bit of that for the first quarter, what we're seeing; and our targets for the full year, we've talked about in the past. But I would say, if I step back, if I look at 2025, the way we got there was really -- we had strong revenue growth, but it was only about 4%. We had stronger expense discipline. And so as I look forward into 2026, we want more of that to be coming from the revenue side in terms of that. So that's our goal in terms of growing those revenues through all the strategies we just are starting to articulate here.

And I think from that seat, if something does go bump in the night, Stephen talked about a scenario where things happen and the revenues don't come in, we have a lot of levers. We spent a lot of time in Gunjan's early tenure and at the end of Andy's tenure as CEO of looking for big expense blocks like real estate, like organizational design and efficiency, some automation and things like that. We've been taking those savings and plowing into growth of late, more marketing, more technology. We know the levers we can pull at any time to meet that moment if needed. So we're committed to operating leverage in that sense.

Very good. Speaking of technology, maybe both of you, if you could, how is U.S. Bancorp using AI in today? And what are some of the opportunities that AI brings to the table for you folks over the next couple of years?

Yes. I'll start and maybe Stephen can give a couple of examples. But from an AI perspective, probably like a lot of companies, we started our program probably a couple of years ago-or-so. We brought in some good expertise. We stood up a center of excellence. We did a lot of the things that you would expect, and we attack big rocks. So we went after developer productivity, call center resources, fraud management and things like that. So that's really where we spent our time.

The last couple of months have been different. We've been deploying the tools to the business lines, and it's just been an uptick from the lines organically. It's like unlike anything -- usually, these things are top down. We need to drive efficiencies. But there's a genuine effort within the company to see how does these tools, within the right risk management framework, put it into place and to help make their lives easier, to make their process more efficient, make their product more effective, and we're starting to see the benefits of that.

Gerard, we've had flat expenses now for 10 quarters. And the first couple of quarters were very intentional. We're going to use these programs to cut costs. The last few quarters have really been more, I won't say surprises to us, but we've been pleasantly surprised with some efficiencies we've gotten out of the business. I think it's because of some of these tools that are really helping us along the way. So a lot of runway to go, and we're really excited about it, but maybe...

I'll give you a real-time example in my businesses. So getting back to those investment services businesses, they are large businesses moving tons of money every day, very operationally complex. Historically, as we see the revenues grow in that business, as those market outstandings grow, we see revenues grow, we have to scale expenses almost in lockstep to support that growth. But what we're looking at now are opportunities utilizing AI for things like wire matching, reconnaissance, deal document searches, NAV reporting. As we implement AI agents to support some of that, we'll be able to scale the growth without having -- scale the revenue growth without having that same lockstep growth in expense. And so there's a real opportunity to expand margin in the business as we deploy AI.

Very good. I'd be remiss not to ask U.S. Bancorp about credit. You guys have developed a very strong reputation on managing credit well. Aside from downtown office commercial real estate that we're all aware of, what are you guys keeping your eyes on in terms of credit trends?

And second, when you think of your ROTCE targets of high-teens, what does that assume for a net charge-off ratio when you go in there?

Yes. So first of all, from a credit standpoint, it's quite stable. We look at a lot of different things. We're constantly -- we have our processes, as you're well aware, in terms of how we manage and risk manage the credit book. Office is obviously starting to fade into the sunset in terms of that story. But other than that, it's been very stable. We expect stable charge-offs. We expect that sort of thing for the foreseeable future. And I would just say any reserve build we have here on out is really going to be tied to loan growth. And as we book more loans, we'll need to cover the provision expense on that side, which is very normal.

I would say to your second question really on what environment do we need to have for our high teens ROTCE, which is where we're at right now? It's probably this environment. It's pretty steady unemployment rate, charge-offs in the ZIP code of where we're at today. So those would be probably the key areas that we look at.

Yes. And Stephen, following up what we talked about a moment ago with the pandemic, could it be that we could come through a credit cycle where the commercial loan losses tend to be less than prior periods because the companies themselves are better, again, due to what that tough period we went through?

Yes. And I think companies, in general, are just more nimble, not just in how they manage the business, but how they manage the balance sheet as well. So we certainly see that where there's much more -- they're much faster reactions to changes in the marketplace and adjusting the balance sheet and the capital stack as a result.

Yes. One of the other topics that we've discussed over the last day-or-so is the regulatory outlook. It's really changed. There's the expectation that the Basel III endgame proposal will come out hopefully later this month. What's your guys' view of what's going on and how it affects U.S. Bancorp?

And then second, we've also seen a very active M&A market. And what's your view on the bank depository acquisitions that are going on as well?

Sure. So on your -- on the regulatory question, we're -- first of all, we're just pleased with the direction that the regulators are going. They are more focused on large financial risks. And I think that's to be applauded. We're -- we have great relations with regulators. We are always talking to them about our products and where we are at. We're very interested in how this rule set comes out later this -- as a category 2 pending bank that we're approaching $700 billion, we're interested in how they're approaching tailoring, how they're approaching indexing. Some of the comments on MSR is really good to hear since that's somewhat of a constraint for us. So these sorts of things are really positive that we expect to see.

The other thing I might add is there's other things -- other topics that have been brought up, credit card caps, CCCA. These are risks out there for us, but they're -- they have to be congressionally approved. So that's kind of the -- so we think low likelihood, but we are always preparing for those sorts of things.

And then finally, you asked about M&A. I would just say there's no change in our stance. We are very focused on our organic growth strategies that are in front of us.

Got it. We're running out of time here. So maybe for the final question for both of you. If investors take away 1 core message from our discussion today about the future for U.S. Bancorp, what would you want it to be?

So for the wholesale businesses, I'd say we have a unique and exceptional set of products that generate consistent and differentiated fee growth. Our products are distinct. We operate at scale. And a lot of those products are very difficult to replicate. So the one thing I want them to take away is, as our WCIB lending book continues to grow and we expand our products through organic product expansion and the addition of BTIG, there is a huge opportunity for us to continue to expand on that differentiated fee growth going forward.

And I'd just add, our franchise is -- got a great -- it's hard to replicate, and we've got a differentiated set of products, as we've talked about. We've made tremendous progress in our financial targets that we've laid out in our Investor Day. Now we're not satisfied with that. We want to be more consistent, we want to grow and extend our lead in some of those areas where our ranges are, and we feel the strategies we're super focused on and really excited about our opportunity set in front of us.

Great. And with that perfect time, we've run out. So please join me in a round the applause thanking John and Stephen.

Yes. Thank you.

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. [Operator Instructions].

This call will be recorded and available for replay beginning today at approximately 11:00 a.m. Central Time.

I will now turn the conference over to George Anderson, Director of Investor Relations for U.S. Bancorp.

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 risks and uncertainty.

Factors that could materially change our current forward-looking assumptions are described on Page 2 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.

Thank you, George, and good morning, everyone. I will begin on Slide 3. 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 4. Our 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 3 key priorities resulted in us operating within all of our medium-term target ranges.

On Slide 5, we highlight steady progress against our expense management priority. Fourth, signature productivity programs have helped us deliver 9 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 6 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 businesses 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 that are 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 7, we recap the strategic rationale for this bolt-on acquisition. We've had a 10-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 2 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 the future analyst conference.

Let me turn to Slide 8. We briefly spotlight our Global Fund Services business, we 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 ETF 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 9. Our payments transformation is a strategic and long-term priority for the company. Today, a payments product is often times 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 us tried on execution. In '26, we expect to sustain momentum on our transformation and add additional focus on the small business segment for both card and merchant.

Turning to Slide 10. I net interest income and margin are both improving. We delivered record consumer deposits this quarter. The effectiveness of products like bank smartly, 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 11 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 industry-leading EPS growth as adjusted in 2025. A 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.

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, a 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 an accelerating year-over-year growth in our focus areas of commercial and credit card loans, which grew 10.1% and 5.7%, 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 was 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 2 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 2 basis points linked quarter and 7 basis points year-over-year.

The net charge-off ratio improved to 0.54%, a 2 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 1 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. We have provided some additional details on Page 30 of the appendix.

Let me now provide first quarter 2026 guidance. Net interest income growth on a fully taxable equivalent basis is expected to be in the range of 3% to 4%, compared to the first quarter of 2025. Total fee revenue growth is expected to be in the range of 5% to 6% compared to the first quarter of 2025 and we expect total noninterest expense growth of approximately 1% compared to the first quarter of 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.

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 Instructions] Our first question comes from Scott Siefers from Piper Sampler.

John was to start with you. Could you please speak to how you might think about the pace of share repurchase as this year plays out, just given you're increasing the capital ratio for the 10% CAT II target. You, of course, dipped your toe back in at the end of last year, but just would love to hear your thoughts on the go forward.

Sure, Scott. In terms of share repurchases, we've made a tremendous amount of progress on 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.

Knowing all that, our intention is to grow our share repurchase amount starting this quarter in a gradual way. will 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.

Terrific. Okay. Good. And then just sort of a broader question, given all the noise regarding whether it's credit card rate caps and then newer chatter regarding the Credit Card Competition Act, can you speak to how you all are thinking about how -- I guess how USB is thinking about these possible responses -- how are these -- granted, they're all sort of in flight, but what are you all thinking about at this point?

Scott. 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 crushing 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 24 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. They 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 observe it, but it is not a meaningful planning thing that we are focused on.

Our next question comes from John Pancari from Evercore ISI.

Just wonder 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. Can you possibly help us and kind of how that -- I think about how that could play out for the full year in terms of some of the balance sheet dynamics in terms of the growth expectations and your margin outlook?

And then the same thing on the fee side. How should we think about the breakout of that total revenue when you look at '26?

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 going to be led by many of our key businesses like trust, capital markets, impact finance and payment.

So overall, we see a lot of momentum in the businesses. We've had several good quarters here in a row and our job is now to continue to execute on the strategy.

Got it. All right. And then Gunjan, you mentioned that revenue rather than expenses maybe a bigger driver of the expected positive operating leverage in 2020. And if revenue doesn't cooperate, can you discuss the flexibility that you still may have to achieve the 200 basis points plus in positive operating leverage? Like what are your levers? And do you have flexibility around the strategic investments that you emphasized.

John, the short answer is yes. Our productivity and expense management is being created in a very fundamental way. You'll remember that for 6 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 pool. 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 and 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 if something happens in the macroeconomic environment, we have levers on expenses.

Our next question comes from John McDonald from Truist.

I was wondering, John, if you could expand a little bit about your outlook balance sheet growth in 2026? And any mix shifts or trade-offs that you want to highlight between loans -- within loans and also loans to earning assets. You had given a forecast last year -- early last year about balance sheet growth by the end of the year and had some mix shifts. So I just wanted to get an update on that.

Sure. Yes. So largely, the -- 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 range is the appropriate range for our balance sheet. Maybe just to go into some of the pieces -- 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 we also see that commercial real estate is starting to grow, and we expect that to be help in terms of growth there. We do expect that deposits will continue to grow content with loans. That should be kind of 1 for 1 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 than perhaps we kind of keep the balances the same. So if those are going to be kind of we manage through the quarter, we'll kind of 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.

Great. And maybe just on that note, you could give us your updated thoughts on the time line for the NIM expansion to get to 3% over the next year or 2, and in addition to that loan mix shift, what are -- just an update on some of the fixed asset reprice drivers.

Sure. Yes. So I think, first of all, there's no change. We -- to our outlook, we still feel there's definitely a path to 3% in 2027. And 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 accessory pricing is that we'll have slightly -- or we'll have more balances that should reprice this year than last year, but it will 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 going to continue to improve with a 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.

Our next question comes from Ebrahim Poonawala from Bank of America.

I guess maybe, John, just following up on the Slide 10 on the deposit growth. I 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 the mix shifting to the consumer side? And how accretive is that when we think about either deposit margin or the overall margin?

Sure. So on the deposit, a couple of things are going on in terms of the deposit growth. This -- over the course of the year, we saw steady growth in the consumer deposits. And as that Slide 10 illustrates where we continue to believe that, that is going to be -- that is accretive, and it is helpful to bring in new and new accounts and clients to the bank typically that are younger, more affluent base that we have.

And this is particularly in our bank smartly 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 over long periods of time, it's going to be very helpful from a 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 basically -- or we are at the lowest point in CD usage in the last 10 quarters.

So that has been that will be helpful going forward to our mix. And our wholesale and institutional balances are going to 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's going to give us. So the mix is going to be very important for us as we move forward.

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 $1 billion like business for us, not huge in our portfolio. It's a very important source of operational deposits.

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, there's 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?

Yes. 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 2 very distinct areas. The first is on capital markets, where the investment side around cryptocurrency stable coins 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 stable coin custody offer.

Ebrahim, I'll tell you, last year has been a very brisk pace 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 and the revenue model is still to be figured out.

But 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.

Next question comes from Mike Mayo from Wells Fargo.

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, those who covered U.S. Bancorp for a while, and this is over 2 decades after you spun off Piper and now you're going back into the capital markets business, a little bit more than you're already there. So if you can also just talk about the investments that you'll be making with BTIG 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 the underside of this, what do you expect in terms of capital markets fees other opportunities for balance sheet growth?

Sure, Mike. I'll start on your -- the 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 will 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 CET1 ratio. No more, no less. That's -- that will be the impact, no matter what the earn out 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 margins. So as we look to the following year, that will shift.

I'll just step back and maybe recap the strategic rationale. Our clients use both 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 14 years or so, and it's now grown to about $1.4 billion in revenues for us. So 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 10 years. And it is true 20 years back, Piper Jaffray was acquired. And just as a reminder, we retained all of the wealth and asset management sides 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 we're already deploying a very sizable balance sheet today against our commercial and corporate clients and a broader lineup of fees leverages the 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 IS business across our family office business. And we'll report on that more to you once the deal closes and the we give better guidance on what the economics of that deal will be like.

Our next question comes from Erika Najarian from UBS.

Yes. First question, period-end assets ended at $692 billion for the year. And I guess this is a 2-part question. First is, as you understand it, how do the tailoring proposals or the removal of tailoring proposals and Washington, how would that positively impact sort of that $700 billion crossing. And additionally, as we think about, John, that path is 3%, does that consider the currently more stringent liquidity requirements that you would need to adhere to, if nothing changed on tailoring.

Sure, Erika. Thanks for the question. So on the asset side, yes, we're continuing to grow. Obviously, as you know, it's a 4-quarter average of assets that is the deciding factor and how when you trip into Category 2. We're running our business with without any regard to that level, we are growing our loans in constant with the industry.

We want to 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 focus on -- and the regulatory spheres have talked about those perhaps being reindexed but we don't know that for sure.

So we're -- but in the meantime, we're going to 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, and I'm just -- I'm trying to remember your second question, it was on...

On the LCR, the....

CR. I'm sorry, yes. 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 to a full LCR that there's no impact, and that's now incorporated into our guidance.

That was very helpful. And just as a follow-up question. Gunjan, during prepared remarks, you talked about faster evolution of the banking industry and also in your responses to the other analyst questions, it seems like you have a very nimble organization in terms of how you're responding to these changes.

And as we think about the investments that you have to make in terms of moving -- continuing to move the company forward is there just enough productivity savings that you can identify where you can continue to invest for the future, whether it's near term like capital markets or medium term, like the digital asset transformation and still deliver on that positive operating leverage of 200 plus that has been a clear message to your investor base?

It's a very thoughtful question. And let me start really by the new investments in AI and stable coin. They are actually very capital-light. 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, we are unusual in having sizable capabilities on both of those. And we've organized our data. As you know, we are on the cusp or category 2 transition, and that has given us a lot of imperative over the last 2 or 3 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 stable coins. They are 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 product 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 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 12 to 18 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 billion or $6 billion, upgrading your digital investments, which we did over the last 6 years, you have a long runway to drive productivity out of them, which we will.

Our next question comes from Ken Usdin from Autonomous Research.

Just a follow-up on that last point. So as you've made all these investments, it's nice to see a little bit of improvement year-over-year in the 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 3 business areas there.

Sure. Thanks. Appreciate the question. Absolutely, payments as a role in our mid-single-digit call for fees overall. If I take it piece by piece, card, we have a lot of progress with the Smart lead 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. expect mid-single-digit growth in this business for the year of 2026.

On the merchant side, as we talked about in our strategy of recent investor conference, we talked about 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, 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&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 will -- by the time we exit that, that will also be more in the mid-single-digit range.

So overall, mid-single digit for this business is what we should expect, and we're looking forward to executing our strategy.

Okay. Great. And just one follow-up on the credit card side and charge-offs. That loss line has really settled down a little bit. Are we at kind of a new -- and I know there's some seasonality, but what's your expectations for card losses versus where we kind of ended the year and average for '25?

Yes. Thank you. So 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.

Our next question comes from Gerard Cassidy from RBC.

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 11 quarters, it may have seen a little bit of growth. Can you expand upon that for 2020 along with the commercial loan growth are the 10% year-over-year is quite nice. Where are you seeing that growth in the C&I portfolio? And can that continue do you think in 2026?

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 commercial real estate line, as you said, are the first growth that we've had in 11 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 3 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 $1 billion of data centers in our portfolio. And we do select high quality in that sense. So that's kind of the story on commercial 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. But 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 even going into business banking and SBA seeing very strong growth as well as our expansion markets and middle market. So a combination of all these things, we think, persists into 2026. And so we're looking forward to that growth.

Very good. And Gunjan, one of your peers in asking this question [indiscernible] 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 risk you guys keep your eye on? Just in case of a surprise comes up that we're not expecting right now?

Well, thank you, Gerard. I will not call your [indiscernible] worry about what's coming around the corner as much as you do.

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 or nondiscretionary spending. As you -- 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 Tipson overtime, et cetera, will come into the consumers' 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. So I would say the economic backdrop feels like tailwinds rather than headwinds going into the year.

So our attention really is on an unexpected policy changes, in front of us is a very big capital bill in front of us are some real discussions around stable coin 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.

Next question comes from Betsy Graseck from Morgan Stanley.

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 the 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.

Sure, Betsy. So maybe just as a starting point for BTIG, they have a very low balance sheet. There's not a lot loans and balance sheet with that. I think as we -- that potentially could be one of the synergies that's not built into our current forecast. We think the synergies are really going to 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 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 market space, methodically over the last 15 years. This is another component of that journey. And so we'll grow as the market allows, and we'll be taking into consideration with our risk management framework.

Okay. And is it a self-funded capital call? Or does it pull from other parts of the organization?

Yes. It's -- I mean, it's self-funded. I mean we are -- there's no other parts of the organization. It's all contained here at the bank.

Next question comes from Saul Martinez from HSBC.

I'll ask also on BTIG. This is more of a clarification. John, is expected to close in the second quarter. You mentioned there are some merger costs embedded in the guidance for 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 some of the synergies that you just mentioned on -- in your response to Betsy's question.

Yes. Thanks,. The answer is yes. We expect the merger-related costs to happen in the next quarter or or 2. And so as that occurs, that will keep the EPS will be neutral. And so after that, then we expect to have some -- obviously, we'll have to -- we'll see margin expansion in this business once we get through those costs.

Okay. That's helpful. And then 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 one of your competitors said that this really isn't a business that makes a lot of sense for a large regional bank is that you've given that, at least in their view, it really does require massive scale and there's more suitable for a larger bank I 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?

Yes. Thanks for the question. I think I'll start and Gunjan, can add on here. But our view is that this -- these businesses, we added because we had an opportunity here with a partner that we know, a known quantity 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 financing, 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 going to -- it's something that our clients have asked for. It fits well within our risk management profile that has been built up internally here over the last several years. And so it is a great fit for us.

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 on the client conversations. -- but also 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 a balance sheet here.

Our next question comes from Steven Chubak from Wolfe Research.

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 have transpired and just how that informs what you believe is a sustainable growth rate or outlook over the medium term relative to the mid-single-digit guidance that you offer at the firm level?

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 that don't get airtime. Just to keep [ teach ] you last quarter, we just gave you some visibility to our Impact Finance business. 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, you do slightly better in other times, you do slightly worse, but the core organic growth and market share gains here are very real.

That's great. And for my follow-up, just on deposit mix. Looking at noninterest-bearing deposits, you saw solid growth, 4% sequential increase on average recognizing some of that is going to 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?

Sure. Thanks. I appreciate that. In terms of noninterest bearing, 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 kind of how we think about it.

In terms of deposit mix and rates and things like that, I'm just going to kind of go back to we're focused very much on growing our consumer business as well as these these key areas that are going to help us grow in our fee revenues, the treasury management areas, the institutional businesses and several and select corporate clients. So that's going to be our focus as we think about deposits this upcoming year.

Our next question comes from Matt O'Connor from Deutsche Bank.

I was hoping you could give a quick update on your branch strategy. Your branch count, I think, is down about 4%, 5% versus a year ago. I think you talked about kind of not being that interested in bank deals. So kind of bringing that all together in lieu of some other banks may be announcing branch expansion strategies. -- just talk about the brand strategy. And again, if there's any change on the M&A dating.

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 a vast majority of our branch closures is really the small servicing units. What we're 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 5 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 just finished the renovation of all our branches into the new format. So 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 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.

Okay. That's all helpful. And then so if we strip out the in-store branches, any numbers on kind of the remaining French network? And then from your perspective, like how much more refurbishing or retrofitting is there still to do for the traditional branches?

Sure. So on how much to do, 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 will be just a continuation of our strategy that Gunjan just laid out.

Matt, it's very much always on because you refresh these formats over and over again. So it's not sort of 1 and done. But the message here really is we are investing very much in our branch. It's an important channel for us.

Our last question will come from Chris McGratty from KBW. Chris McGratty from KBW.

John, when you look at your top 5 goal for market share and across your footprint, the metro markets, 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?

In terms of -- are you speaking more on the consumer side or on the commercial side? On the consumer side?

Yes.

Sure. So 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 where we've combined where locations were very close to each other and obviously took the premier spot or refurbish those areas.

So we are -- 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 kind of market by market. but that's been the course of our strategy over the last couple of years.

Great. And my follow-up would be on just consumer checking account growth, I've 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 year or 2 that would give you optimism this could continue?

Yes. 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 2.5% or $7 billion or so this past year. Not many peers grew consumer deposits. This year, it's a very 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 the consumer growth will continue.

I just add that the branch performance has inflected very nicely to with all of the investments that we have made or the tools that we've put in the hands all the AI-powered next best solutions. 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.

There are no further questions at this time. Mr. Andersen, I turn the call back over to you.

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.

This concludes today's conference call. You may now disconnect.

Okay. So good morning, everybody. We're going to get started with the next presentation. Delighted to have U.S. Bancorp with us this morning. We have both President and CEO, Gunjan Kedia. You're, I guess, approaching your first year or close to the first year as CEO.

8 months.

8 months. I guess April, yes. And John Stern, CFO, who's known -- well known to everyone. And I guess you're close to 3 years of CFO.

Getting there.

And being very regular attendee at the conference. This is Gunjan's first time. Delighted to have you here for what I hope will be the first of many presentations.

So I thought I'll start off with your strategic priorities. And I think it's fair to say you've been very consistent and very clear around your strategic priorities over the course of the last 8 months, which are focusing on expenses, organic growth and payments transformation. Can you perhaps give us a scorecard on the progress you feel you have made on those priorities? And as you think about 2026, are those still the priorities that you're focused on?

Thank you, Richard, and it's a pleasure to be here to talk to you. So you remember last year at Investor Day, we articulated some firm commitments on our medium-term targets, financial targets. So these 3 priorities were our strategies to get there. The first was expenses where we have exceeded our expectations. We are now 8 quarters of flattish expenses. They have contributed very well to our positive operating leverage and our efficiency ratio is in a stronger place. So good marks there.

The second was organic growth. We had set for ourselves a mid-single-digit fee targets and high return metrics and the fees have done very, very well this year. So good marks there. On NII, we are really focusing on deposits for consumers and operational deposits and wholesale. It's a mix story. And on loans, we are focusing on C&I and credit cards, which is also high returns and better relationship products. So good progress, but more work to do.

And I would say our biggest longest priority is the payments transformation, most upside, but just a little bit more of a runway. So good early progress, but again, more work to do.

Okay. So we're going to get into all of that. So I think it's a great place to start. But before we do that, maybe you can talk a little bit about the state of the economy. Your payment business, I think, gives you some pretty unique and interesting insights into spend trends. So what have you been seeing over the fourth quarter? Is there anything that stands out to you? And maybe you can talk through what you're seeing from a balance sheet perspective across both Consumers and Corporates? And then just more broadly, how you're thinking about the trajectory of the economy heading into next year?

I'll think the messages have not shifted in the last few months. The facts are stronger than the sentiment for both Consumer and Corporates. On Consumer, delinquencies are good, credit is good. Spend is healthy, holiday season is shaping up nicely. The sentiment though is bleaker than it's been in a long time, although just recently, we've seen slight upticks in both jobs and sentiment. So maybe that's a future improvement, but the numbers are good.

On Corporates, it's a much better sentiment than April time frame for Corporates. If I unpack the AI trade and the M&A-driven loan appetite, it's still, I would say, cautiously optimistic, but the trends haven't shifted materially over the last few months.

And then just briefly, I guess it's, what is it, 8 months as well since Liberation Day. Any updated thoughts around the impact of tariffs at all in terms of Corporates and impact that's had?

Across the board, the narrative we hear from our clients is it's not a positive, but they have strategies and initiatives to mitigate the impact. It's not consequential to most companies.

Okay. Okay. So John, maybe turning to you. Can you just give us some high-level thoughts on the quarter? Has anything changed from the guidance that you provided Q3? That would be helpful just to get that out of the way.

Well, thanks, Richard. Good morning, and good morning, everyone. As far as it looks for the fourth quarter, I'll start with the net interest income. It's coming in as expected. We had talked about relative stability between the third and the fourth quarter on a linked-quarter basis with a bias for upside. I would continue to say that we have a bias for the upside on the net interest income side of the equation.

As it relates to fees, we're at -- we said that $3 billion -- approximately $3 billion would be our fee level for the fourth quarter. Here, I would also say we have a bias for upside as well. We've seen a nice strength in our capital markets area in Impact Finance, which as you know, is in our other revenue categories. We highlighted that last quarter. So it has been very strong for us.

And then really no change in terms of expenses. We continue to expect 1% to 1.5% linked quarter growth on expenses and positive operating leverage of at least 200 basis points. So no change there.

Okay. And then the bias to the upside on NII, is there anything specific that's driving that? Is that better loan growth, better deposit pricing, asset repricing? Is there anything specific?

It's a little bit of everything. I mean, loan growth has been good. Deposit pricing well behaved. So it's just a little bit of everything that's kind of calling for that sort of bias.

Okay. Okay. So maybe we can talk about fee income. Obviously, very, very important revenue line for you. You're obviously more skewed to fees than many of your peers. And I think the good news is you really are on track for solid growth in the fee line this year. Maybe we can talk about the 3 fee pillars, so payments, trust and capital markets and consumer fees and how you're thinking about the trajectory of those line items going into next year?

Well, we are very proud of our fee mix, and we are very committed to being a very high fee mix business model. It creates very enduring return characteristics for the bank and just earnings stability. The first is we're very committed to that. What's been exceptionally positive for us is the mix within the fee categories. So trust and investment fees have become a very large part of our fee growth, and that's wealth, asset management, where we are more than $0.5 trillion in AUM and our Investment Services business where we have some very unique properties like Corporate Trust. So they will continue in 2026 to be a very steady, reliable source of recurring fee revenue.

The second is capital markets, Richard. This is where we are most leaning in for growth. We are introducing product capabilities at a very fast clip. And the rationale there is simply we have a very large balance sheet that's already deployed and the capital markets fee revenue comes with it. So we are building out the product capabilities, and there, we expect double-digit growth to drive that line item.

The third is payments. Now payments is deeply strategic to us. It is very differentiating, and we are committed to bringing a healthier growth rate, and it's still a very large category for us, and I suspect will be larger over time.

The final category is consumer fees. This is mortgage and overdraft type of fees. These are volatile fees. There's regulatory pressure on these fees. So we are committed to these businesses, but I would expect them to be a smaller part. So what we are crafting here from a business model standpoint are 4 significant pillars of fees that work beautifully together from a diversification standpoint.

Okay. So let's talk about the Payment business because it's obviously a very, I think, important part of the investment thesis, very important business for you. You talked about maintaining margins in the business as well as accelerating growth. Three priorities, and I think it would be really helpful just to spend a little bit of time on each. So embedded payments, differentiated distribution and industry prioritization, I think, are the priorities you've talked about.

So maybe you can talk a little bit about those initiatives, but also talk about whether or not we should expect to see an inflection point in the revenue growth momentum in the Payment business for next year?

Thank you, Richard. It's a very important strategy for us. So if I could just back up for a second and give you a sense of what we're seeing in consumer behavior, which is what is anchoring our deep commitment to double down on payments.

When you see your own children and you see the Gen Z and the younger audience, we observe them interacting with the financial system first through a payment product. They are doing a P2P payment when they go out for dinner or a credit card well before they engage in a traditional checking account. So we believe our Payments business is a future client acquisition model where the engagement from a wedge product standpoint is with payments. So that -- so it's a very strategic commitment to the business that's well beyond the fact that it's a large business that drives earnings.

So on the merchant, which is about 6% to 7% of our revenue, very important for our small business franchise. And as you know, where goes small business goes to American economy. So here, their priorities are for us to have refocused quite sharply on 5 verticals, and we are building out the product set with what we call tech-led or embedded payments because that's where the value creation is, and that's how you maintain the high returns. This pure acquiring business, which is how we started has become very thin margin with the electronic platforms. So 5 verticals, very deep value proposition, software-led transformation.

The second part of that transformation is owning our own distribution. We are very partner heavy. And the partners' M&A and their changes in strategy have a disproportionate impact on our business. So we have materially started enhancing our own salespeople, our own marketing. We've re-shift the branding of Elavon. So we'll see the shift of direct versus partner distribution shift. We are about 1/3 of our way there. And we've already started to see the slight uptick in the growth rates, and we expect that to continue over time. We have said mid-single digits for the merchant business in the medium-term targets, although we understand this industry offers us headroom, but we are building out a very attractive, very enduring business model there.

The second part, which is the bigger part of our Payments business is the card business, card issuing business, very, very attractive business. It has long been a source of loan growth for us. And if you look at the HA data over a very long period, you will realize that our product set is actually maintaining or gaining market share on the loan side. What's new about our strategies there is an introduction of a whole new set of products that are attractive to the transactor segment. So they tend to be a more affluent segment, so that drives fee growth. So the strategy is that it's leveraging Union Bank. We inherited a very attractive affluent Consumer and Small business footprint in California. So it really lends a headroom to our card business.

And then the third is partnerships. We have a very unique property called Elan. About 1,300 financial institutions and smaller banks run their card programs on our. And I think we have not fully leveraged that yet. And last year, we introduced some extraordinarily good technology on Elan, and it has gotten sort of the customer experience to a highly, highly attractive level. So we will see growth there. So very intuitive, very differentiated strategies there. But as you know, in the card, we are seeing leading indicators of growth today in acquired clients sold but uninstalled business. And it just takes 12 to 18 months for the upfront rewards to dissipate and for it to show up in revenue.

So to your question, I don't think it will be an inflection in 2026. If we do our job right, you will see a steady uptick in growth rates as we see these vintages start to show up in revenue.

And then the inflection would be in out years, so '27 and beyond...

Towards the end of '26 and '27, we'll see the growth rates to our aspiration.

Okay. All right. That's great. So let's talk about net interest income and the balance sheet. Loan growth has been very, very healthy. I think you mentioned upfront that there's a strategic shift towards high-yielding loan categories. Maybe you can talk through what you're seeing in terms of loan demand in the fourth quarter, talk about pipelines heading into 2026. And are there any areas that you are expecting an inflection in terms of loan growth for next year?

Yes. If I think about loan growth for us, as I mentioned, I think the -- our growth will be very much in line with where the industry is at this particular juncture. Where we've seen strength is really in the commercial side of the equation and in card, that's really where our focus has been, rightly so because a little bit higher in terms of yield and also we can leverage the balance sheet from a relationship standpoint. So we feel very good about that.

As I look into 2026, I think we'll continue to see the strength in those particular areas of card and commercial loans. I also would say, though, that commercial real estate, the paydowns are starting to dissipate a bit. We've had 10 straight quarters of decline in commercial real estate. I think we'll have slight growth actually in the fourth quarter, and we'll probably see some positive tailwinds coming to us, which is all favorable. The commercial real estate clients are all very similar on the commercial side. It's a lot of relationships. There's a lot of products that we sell to them in terms of utilizing our balance sheet and some of the fee categories that Gunjan just highlighted.

Just as a quick follow-on on loan growth. I mean, obviously, a lot of debate around what's going to happen with interest rates in 2026. I mean how much is how much of a driver could lower rates be to incremental demand in some of those categories like commercial real estate next year?

Yes. I was going to add certainly for commercial real estate, the interest rate inflection will matter quite a lot. But I was going to add a point to the C&I growth. What we have observed is our treasury management capabilities have become really strong with some of the digital investments. So one of the reasons we have seen such strong C&I growth, above market C&I growth is because we are just able to have a return characteristics for each client that's driving operational deposits, that's driving treasury management fees. And that gives you sort of the ability to do more with C&I loans. It's a very important part of our interconnected bank strategy.

But John, I don't think we would see the C&I loan inflecting that much with interest rates.

Yes, I would agree. I think the bigger drivers are economic certainty, business outcomes and opportunities that they have, that sort of thing. I would -- rates are kind of more of a marginal type of decision.

And just one other question on loan growth, which is that the OCC has rescinded the rules around levered lending. Does that in any way create additional opportunities for USB that you wouldn't have thought about previously? Does that...

That change really isn't material to our business model. The -- our lending standards are actually inside of that -- where the OCC and FDIC have been traditionally. The one benefit is that operationally, it will be easier for us to process because every time you onboard a loan, you have to look at OCC and FDIC and Fed and then our own internal. So it will be much more streamlined and consistent for us to just look at our model, which is going to be the binding constraint.

Okay. Okay. So let's talk about balance sheet repositioning. You talked about repositioning the balance sheet so that you're better positioned for NII growth. So maybe you can talk through some of the measures that you've taken around that and maybe what's left to do. But then as a follow-on, I think it would be just helpful to get an update on how you're thinking about the 3% net interest margin target by 2027. Is that still the right target just given all the different moving pieces? And then what sort of progress should we expect to see towards the 3% in 2026?

Sure. So maybe just starting on the balance sheet changes that we've been making. It's really been a multiyear journey. And in some cases, you're never done like remodeling a home. You're just always working on it and working on the deposit side, we've been very intentional about growing the consumer base. We've been very intentional about reducing higher cost deposits that are nonoperational and being more front-footed with operational type deposits on the institutional and commercial side of the equation.

On the loan side, I talked about the mix a little bit already. But what I would add is that we've also been strategic in selling some portfolios, particularly mortgage over the last couple of years. And then investment portfolio, we found some opportunities where there's some -- perhaps some low liquidity or things that we haven't cared to have in our portfolio to sell that to gain a better yield. And as long as there's a good payback, that's an opportunity that we tend to look at as well.

All that is to say, we do these things, and that will be all beneficial to us from a spread and margin perspective as we think about that over time. And the -- your question about net interest margin, yes, we definitely see a path to that 3% in 2027. And it's the combination of the things I just mentioned plus fixed asset repricing.

And the final point I would just make is the curve is starting to be more beneficial. For the longest time, we've been talking about the SOFR to 5-year being inverted, and it's actually pretty flat right now. And so that has moved and that will be a benefit to us over time if it continues to steepen.

Okay. So maybe let's stick with the balance sheet. Let's talk about the funding. So I'm really interested to get your updated thoughts on the competitive environment for deposits, especially in the context of the fact that it does feel like there are a number of banks that are leaning into balance sheet growth heading into next year. So have you seen a change in the competitive environment for either consumer or commercial deposits?

And look, what are your updated thoughts around deposit betas over the course of the rate cycle and around the upcoming rate cuts that the market is expecting for next year?

Sure. So on the deposit side, I'd say it's always competitive and different markets have different dynamics, certainly. But what we're focused on is the mix shift that I talked about, making sure we're looking at consumer deposits and operational deposits on the institutional and commercial side.

I think what's important for us is we've been really focused on building out our tool set to price appropriately. That's something that's modeling in different type of capabilities that we've just continually enhanced. And we've done a lot, but we still have more to do. And that's going to help us over the long period of time.

In terms of where we are in terms of the current market, I think as rate cuts occur, today is obviously a big day for the market, a rate cut is very likely to occur. We're not seeing anything that's unique about this cut versus the one last one or the one prior to that, I would also say rotation is slowing down. And if there is rotation, it's actually less of an impact because now rates have come down. So any rotation that occurs is actually less harmful in that sense. And I would just say that we're just very much focused on pricing and outperforming our peers from a beta standpoint.

Richard, I'll add one thing around deposit behavior. We have been observing the performance of this must be product suite for us, where you have both credit card and deposits together and your deposit volumes give you loyalty points on credit cards. I can't tell you whether you're affluent or not, well, people love their loyalty program and they love to maximize that. The attachment rates when you have something unique, are much higher on consumer deposits. So if we showed some data last time even on how our consumer deposit as a percentage of total is increasing. So we would say it is as competitive as always, but the name of the game is not just pricing. You have to bring some unique value propositions, and we are very focused on unique value propositions.

Okay. Okay. So you mentioned operating leverage as one of the initiatives and expenses. And I think, look, you've had -- I think it's 8 quarters now of flattish expenses, even though the business has grown, that's obviously driven quite considerable operating leverage. So a couple of questions.

The first is, how are you thinking about the trade-off between driving operating leverage from here versus investment spend? Maybe you can talk a little bit about the efficiency agenda from here, what that looks like, where you see the greatest opportunity. And then the third thing is you talked about the $2.5 billion level of investment spend. Is that still the right number as you think about next year, just given some of the shifts in the competitive landscape?

I'll start and then you add on investments. So Richard, the way you're asking the question implies the trade-off, and I do not think of it as a trade-off between expenses and investments. And I'm just going to say that very bluntly.

Remember, our history has had 5 years of increasing investments to a level that is appropriate for our aspirations and our business unit. That is what created sort of an expense drag in the last 5 years. We are now stabilizing that. And we have these 4 signature productivity programs that are really harvesting the benefit of spending that $5-ish billion on all kind of platforms. So I would say that we are very comfortable with the level of investment we are at now. It will sustain the growth aspirations we have.

And going into 2026, I would expect that our expense programs will become more, what I call foundational discipline type of efforts and will -- and growth and revenue growth will contribute more to the positive operating leverage.

What I would add, you mentioned our $2.5 billion budget that we utilize for technology, whether it's capital expenditures or how we want to make sure we keep the systems going and things like that. We've been pretty steady at that $2.5 billion. But what I would say is that $2.5 billion goes a lot further today than it did 2 or 3 years ago simply because the efficiency of programming with different tools that you have in terms of AI or how we can write code more simpler, we can come to market, so to speak, much faster from a technology standpoint. So we really think that the $2.5 billion right now is the appropriate level for us.

Okay. So maybe we can segue and talk a little bit about cryptocurrency, very popular theme at this conference. And I know it's early days, but I do think you've been ahead of the curve in investing in this and actually talking about it. So I'm very curious to get some of your updated thoughts around client interest and adoption. How you're thinking about the longer-term opportunity set?

And then the other thing I'll just kind of weave in there is, look, tokenization seems to be coming up more and more. So the extent to which you think that is something that you're focused on, I'd be interested in hearing any thoughts you have on that as well.

Well, thank you for asking. And let me just say we are also learning. So I do not want to sort of proclaim an answer here. But we see enough money, enough investment, enough energy, enough changes in the regulatory landscape that we have stood up an organizational unit called digital assets and money movement. It's being led by a very experienced and veteran payments executive. So clearly, we are taking it very seriously, both as an opportunity and as a disruptive force in the industry.

There are 2 big areas of use cases that are have momentum. The first is around capital markets. So this is custody of assets that are new like cryptocurrency, stablecoins. That is very clear to us from a business model standpoint. We have the product capabilities. We were the first very early to adopt cryptocurrency custody before regulatory changes shut that down, and it was very easy to refresh all of that.

Where we are seeing real revenue growth and real client demand is coming to us in the formation of new ETFs that are all using that structure to invest in this space. And we have probably been awarded an extremely large percentage of the new ETF formation. They bring operational deposits with it. So there's real revenue, real momentum on the capital market side of the stablecoin cryptocurrency.

On that as a new payments vehicle, it's very experimental. And I cannot point to a single client, either consumer or corporate that has actually shown some real demand, but 100% of them have shown curiosity. So we have lots of pilots going with some of our large corporate clients that are not public, where we're just sort of using our system to just see if we can do a transaction. We did our first blockchain trade finance contract. We just did a pilot issuance on the Stellar network.

So all of this to say, we are getting -- working with the trades to be ready to onboard and offboard stable currency through the traditional banking system, experiment with multiple forms of potentially issuing our own stablecoin and certainly being ready if the use cases take off.

I was just going to ask on the use cases on the Corporate side, is one of the biggest use cases cross-border payments? Is that where you're seeing most of the interest?

That's where I'm seeing most of the narrative. It is true that some of the large corporates that have cross-border payments to underdeveloped economies, they have been able to extract efficiencies in different forms. So this is small ticket cross-border type of payments. And as you know, that's not a business we are in very much. It's a very complex market structure type of question.

So Richard, I would say that all disruptive technologies feel sort of less relevant in the really near term. That could be very consequential in the fullness. It's worth developing the capabilities. And my simple rule of thumb in prioritizing investments is if you can see a unique value to a customer, you should lean into it because eventually, the friction gets sorted out if there's real customer value.

Okay. So let's talk about credit. Is there anything that you've seen of note in terms of early delinquencies? Are there any portfolios you're monitoring more closely today? And then it would also be helpful just to get an update on how you're thinking about NDFI. Obviously, it was a huge focus a few months ago. Have you seen anything since then? And do you think what happened back in October is indicative of growing stress upstream in C&I portfolios?

Yes. Broadly speaking, I would say credit is very much as expected. There are not a lot of things -- I mean, we look at the portfolios quite a bit, especially with some of the noise that you just mentioned, but we feel like those things are very isolated at this point. We've looked at a number of our different portfolios. I mean, delinquencies are coming in as expected. I would say that we also -- commercial real estate office is kind of running its course at this particular juncture. And we're seeing the typical seasonality in our consumer credit card type products that you would expect.

The NDFI page was really helpful, I think, for the market because for us, it expressed -- well, the point we wanted to get across was there's a lot of different portfolios in it. It's not just one bucket of loans, right? There's multiple different businesses that we support and we underwrite for many, many years, decades, in fact, in some of these areas. So we wanted to highlight that and show that this is an area where we have very strong credit underwriting and very strong discipline. There's not a lot of leverage lending, as I just mentioned with our -- the HLT feedback that you just mentioned. We don't underwrite subprime. I mean it's all these things. We don't -- we have very little exposure to BDCs directly. So these are the things that we think are very important when we think about the credit quality of that NDFI portfolio.

Okay. So let's talk about capital. Your CET1 is 10.9%. You said CAT II won't happen until 2027 at the earliest. Is 10% still the right target? And what would it take for you to step up buybacks from the current levels?

Yes. So right now, we're at 9.2% excluding -- or including AOCI into our capital. We've talked about approximately 10% being that level. Right now, that's the appropriate level, maybe Basel III or some of these other rules as they come out, that makes us examine that, and we'll update you as that comes to fruition. But at this particular juncture, we are very much focused on being on the last lap of capital build to getting to that level and very much as we get into '26, growing and picking up our pace in terms of buybacks to get to more of that 75% area of total payout. That's part of our capital policy that we've been very -- obviously very vocal about and transparent about.

And then M&A, another very popular theme at the conference. Maybe you can just talk through about the potential for nonbank acquisitions or bolt-on deals that make -- that could make sense for you and how you're thinking about really redeployment of capital into nonorganic growth, if that is something that you're spending a lot of time on.

Richard, the bolt-on acquisitions are attractive to us, and we look at them all the time. They -- we generally see them in the payments or the institutional part of the business, not so much consumer wealth. And they tend to be sort of small easy-to-consume deals that strengthen our product set. So we're always open for sort of bolt-on like acquisitions.

For the rest, we are very excited about the momentum we have on the organic side. It's very real. It has momentum. And as John said, we are very focused on getting to a very healthy level of CAT II capital and to support our clients' needs. That's where the focus is.

Okay. So we've got a few minutes left. So 2 questions. The first is maybe we can talk about your medium-term targets, high teens ROTCE efficiency ratio in the high 50s. You're operating within the ranges. What would it take for you to operate towards the higher end of those ranges?

Sure. So we're very much focused on the organic growth and the priorities that Gunjan has laid out. So you think about organic growth, expense management and payments transformation and underneath that, a number of different projects and initiatives. So if we focus on that and we execute on that, that's going to give us that consistency and the higher performance. And if we do that, we have high confidence that we get to the higher end of those ranges. So those are the -- that's really the drive of what we have and the focus we have right now internally inside the company.

So to be clear, you think you can get to the higher end without any real change in terms of economic activity or the growth rate or the rate environment based on the initiatives that you currently have?

Yes, that's right. I mean we feel we're going to do our thing. The economy is going to move and zig and zag and that's fine, but we have our strategies and we want to execute.

Okay. So a couple of minutes left, 8 months, as you said. I rounded it up to a year, it is 8 months. I know you've spent a lot of time with investors, which I think is greatly appreciated, by the way. I am very curious as to where you see the biggest disconnects. When you talk to investors about either the concerns they have or around the investment case for USB relative to what you now think 8 months into the job. What do you think is most misunderstood?

Richard, thank you for asking the question. It's, first of all, been just a privilege to lead a very classy organization. It's an exceptional franchise. When I talk to investors, and I have spoken to many of them at in depth, they do get the attractiveness of the business model, especially the fee intensity, the diversification within the fees and the risk management discipline and the long-term stewardship mindset that the organization has.

The lingering question marks are around our ability to execute consistently and deliver bottom line financial results consistently. So we are very proud of the progress we have made quickly towards the medium-term targets. And I expect that as we execute and deliver consistent, attractive, impressive EPS growth, we will restore investor confidence and bring back some of the luster and the valuation that this business model and this name rightfully deserves. So our focus is consistency and execution.

Okay. I think that's a great place to end it on. So thank you so much for joining us. I very much hope you come back and join us next year.

It's a pleasure.

Good morning, everyone. I'm Gerry Benson, analyst at Fidelity, covering U.S. banks. Up next, we have U.S. Bancorp, financial services holding company with international operations and is the parent company of U.S. Bank. It's headquartered in Minneapolis. It's the fifth largest bank in the United States with [ $695 billion ] of assets at September 30.

Presenting today for U.S. Bancorp is John Stern, Senior Executive Vice President and Chief Financial Officer. John has been with the organization since 2000 and prior to becoming Head of Finance in 2023, he held various leadership positions with the company, including President for the Global Corporate Trust in Custody business as well as Corporate Treasurer.

Joining John today is Courtney Kelso, Senior Executive Vice President and Head of Payments for Consumer and Small Business. Prior to joining USB in 2025, she spent more than 17 years in consumer and small business payments at American Express. And we also have Mark Runkel, Vice Chair and Head of Payments for Merchants and Institutional. Mark's been with USB since 2002. And prior to heading commercial payments, he served in various roles, including Chief Transformation Officer, Executive Credit Officer of Retail Banking and Payment Services as well as risk management of -- or excuse me, risk manager of Retail and Small Business banking. Please join me in welcoming John, Courtney and Mark.

Great. Thank you, Gerry. Appreciate the introduction. And good morning, everyone. Thank you for being with us here today. Really excited to be with you. I just want to point out, as you look at this page, we may make forward-looking statements that may have risk and uncertainty, make sure we please look at the safe harbor page that we have here. As Gerry mentioned, many of you know, obviously, U.S. Bank, we are a $680 billion bank as of the third quarter of this last year. We do have 42% of our revenues are with fee revenue characteristics. And then we have nearly $1 trillion of payments that go through in terms of purchase volume that we have on an annual basis.

We're just coming off the third quarter from an earnings perspective, and so we're very pleased with the results that we had there, were about a year ago, you will recall that we had talked to you about our medium-term targets from an Investor Day -- at our Investor Day. And obviously, you can see those medium-term targets on the right-hand side of this page. We are pleased to see that we're in the range of each of those targets at this point. However, we're not satisfied with that. We do expect of ourselves to be consistent in this range and steadily improve as we go through, and that's a big focus from a management perspective.

Today, we're going to be focusing on the payment side of our businesses. We're very pleased with these businesses. It's a unique and differentiator for us. We have a lot of different components to it. And today, we're very excited to share with you that over 90% of the revenue within the stream, which, of course, is 26% of total revenue for the bank, we'll be discussing that today. So Courtney will talk about the card issuing side of the equation. Mark will talk about the merchant processing component as well, and then we'll be happy to take questions, of course, when we're done with our prepared remarks.

A couple of notes I would just say before I hand it over to Courtney as it pertains to these businesses. The first being from a standpoint of if you think about our costs and where we have been top of house for the bank, we have been running at 8 quarters or so in terms of about $4.2 billion. And so that flat cost that we've had, while that has been going on, we've actually had an increase in our investments we've been making in the payment side of the things. And I would -- importantly, over the last several years, we've been making significant investments within the payment side of things in terms of structure, in terms of systems. And a lot of that cost is already embedded into our run rate. And so as we continue to make investment, what you'll hear from Courtney and Mark is really about the strategies we have in place in terms of increasing spend as it relates to marketing, in terms of distribution, in terms of sales resources and things of that variety.

The second point I would make is that as Gunjan and I have talked about, we believe these businesses are mid-single-digit businesses. And as we get our strategies up and running, that you'll hear about mid-single digit is the appropriate, but we have potential for the upside, and we'll talk about that as we go throughout the course of today.

So with that, I will pass it along to Courtney Kelso, who will talk about the card issuing side. Courtney?

Thanks, John. Good morning, everyone. Pleased to be here with you to talk about -- this is us -- to talk a little bit about the multifaceted ways that U.S. Bank participates in the payments value stream. As mentioned, I'm Courtney Kelso, Head of Payments, Consumer and Small Business, which is our credit and debit issuing business. I joined earlier this year, so I've been at the bank for about 9 months after a 17-year career with American Express, where I have led multiple efforts across consumer and small business, most recently leading their small business, Issuing Business.

As you can see, U.S. Bank operates across multidimensions of the payments journey. For example, on an illustrative $100 consumer transaction at a merchant with that swipe at a merchant, the merchant acquirer then settles that routes through the Visa or Mastercard networks and settles with the merchant, providing them with the economics that you see here. We, as issuers approve the transaction. We also issue the cards, issue the credit and run the account management.

As you can see here, in this illustrative example, an issuer may make around 200 basis points in fee income from that transaction. The vast majority of that is passed along to the consumer or the small business in the form of fee income -- I'm sorry, in the form of rewards. Now the remainder of that comes to issuers in the form of fee income. For U.S. Bank, that's about 1/3 of our revenue stream. The other 2/3 of that is comprised of net interest income we make on loans extended through that product.

Now the value stream here and the economics available aren't the only reasons that a bank would be interested in this space. Ever more, the card and payments issuing side of a bank is becoming a very powerful customer, new-to-bank customer acquisition engine, attracting young affluent and transactors. And so it's a big part of what we find valuable here at U.S. Bank.

The industry itself is large and growing 5% over the past 5 years. And it's really dominated by the top 10 players. We are proud to have consistently maintained the seventh position in this marketplace and therefore, operate very, very prudently and intentionally in a space where we can grow, but grow responsibly. What you see on the right-hand side, this prudent and intentional space as measured on the X-axis by risk management and net credit loss, and then on the Y-axis by yield through disciplined pricing.

What you see here, again, an attractive market growing at around 5%. Historically, #7 position that we've held consistently with a very prudent and intentional space that we've carved out. Now what differentiates this book from our peers is our diversified distribution model. Here on the left-hand side, you see we run a proprietary bank-branded business. It's about 50% of our revenue stream. And here, we serve consumers, small businesses with about 20 really interesting rewards lending, cash-back debit products. We leveraged the 2,200 -- 2,100 bank branches in our footprint as well as nationally market.

And so we have a really strong franchise here. In fact, one that probably doesn't look just like a super regional. We also have a robust co-brand business. And in that co-brand business, we are able to serve the loyal customers of national brands all across the United States. Now these 2 models together look more like a national credit card issuing business. But third, in our distribution model is our Elan business, which is our white-labeled credit card issuing business, which allows us to partner with 1,300 smaller financial institutions, community banks and credit unions across consumers and small business. We operate in 50 states, 16,000 locations. And so taken together, this distribution model is pretty differentiated compared to peers.

We attract and manage a high-quality and durable base. What you see here on the left-hand side is that more than 70% of our consumers are FICOs with 720 and above. This is about 11 percentage points higher than the industry. So a very high-quality base. In the middle here, though, what you see is that a very high percentage of nondiscretionary spend, almost 60%. So this is food, this is restaurants, this is retail. These are the areas where consumers and small businesses are running their lives and their businesses through these sorts of spend, perhaps creating more durability through the cycle. And we have a balanced mix of transactors and revolvers that help us drive diversified income. I mentioned about 1/3 of our revenue pools come from fee income and about 2/3 come from net interest income.

Now in the last 5 years, we've been investing in the capabilities needed for real growth in this space. I'll tell you about 3 of those things that we've done over the last 5 years that now position us for growth. What you see here on the right-hand side, you may be familiar with our Smartly product we launched last year. And what it allows us to do is really bring together the power of the enterprise and the franchise and created a product that enables enhanced rewards for the deposits and the accounts that you have with us.

Importantly here, it is one application flow that drives -- that has driven so far really impressive new-to-bank stats and day 0 deepening, multiservice clients. What you see on the left-hand side is that at 40%, we are penetrated into 40% of our consumer DDA households in the bank. And I think there's a lot of opportunity, therefore, to grow.

We have plans on the small business side to introduce a similar product and offering, bringing together the services across retail banking as well as card in order to do the same thing and to activate the opportunity you see here where you have about 25% penetration today. And then you see the progress we've made in Union Bank and deepening with that population, meaningfully shifting any of these populations to 40 or more percent penetration will be very valuable to our franchise in the medium term.

Secondly, we've also increased tech and digital investments heavily. We've made multiyear generational investments across digital, tech and capabilities. We've invested in online journeys, easier and more customer-friendly application onboarding, mobile banking. Certainly, we've invested in partner capabilities that allow us to embed more seamlessly into our partners' ecosystems. And then we have invested in the types of capabilities, product capabilities that our customers are really interested in ExtendPay is an example. We have also back in 2021 acquired Bento, which gave us the spend management capabilities that we can deliver to smaller -- sorry, large or small businesses.

Finally, we've revitalized our partnership platforms to drive growth. I mentioned Elan allows us to partner with 1,300 smaller FIs throughout the United States, 50-state footprint here and those investments, both in products that we've been able to take from our proprietary business and in API platforms and ecosystem development, allow this to be a really important distribution mechanism for us. You see here on the right-hand side, we've got co-brand examples where we are able to leverage the distribution available through co-brand partners to really drive growth.

And finally, I'll say, if we just add together the awarded, but not yet installed base coming through both of these distribution channels that is also meaningful in the medium term. So we have -- with all of that investment, we are very poised to deliver growth and transform this business. We have 3 strategies underway today. First, product and marketing innovation. I'll start on the product side. You may have seen on Wednesday, we launched split card Mastercard. And that is a BNPL like product that allows younger consumers who are our target in this product to split payments, split transactions over $100 into 3 separate installment-like payment plans.

We learned from our ExtendPay offering that this is a really valuable and in-demand service. We are really working to use smart marketing dollars, smart digital campaigns, and we have increased our marketing investment in ways that finally, now that we're ready to really be tooled for growth, you see we are investing at least this year, almost 20% more than in prior years, the 3 prior years.

Secondly, we're scaling through partnerships. With Elan, we are embedding into scaled banking platforms to allow ourselves to more efficiently get the long tail of those 4,500 smaller financial institutions and community banks, credit unions. You may have seen on Monday of this week, we launched our co-branded partner offerings through our Edward Jones alliance. And so those are now available for all 20,000 of the Edward Jones financial advisers. And an example here is after many of the investments we've made through partner integrations, just this year alone in one of our key co-brands, we've increased acquisition by 40%.

Finally, small business expansion. We have a foothold here today. You see 10% of our accounts, 20% of our revenue is in small business. But now with planned developments like business essentials, as I mentioned, a bundled integrated card product, along with merchant processing and deposit accounts coming in 2026 will allow us to provide more tooled capabilities for the large or small business. And so we see a lot of opportunity here and we're going after it.

I'd finally say that it's early days, but we are executing a strategy really focused on momentum. We're seeing green shoots of this, as you see increased account acquisition this year will be our largest new credit account acquisitions in our franchise history. You see sequential quarter-by-quarter growth in credit fee revenue and then increasing receivables grow through a high-returning book. Happy to answer questions in a moment when we get there.

I'll now turn it over to Mark Runkel.

Great. Thank you, Courtney, and good morning, everybody. I'm excited to be with all of you this morning to share a little bit more about our Payments, Merchant and Institutional group. As Gerry noted, I have been at the bank 23 years. I've served in a number of different roles. I served as the Chief Credit Officer for about 8 of those years. I've served as the Chief Transformation Officer driving the Union Bank integration for a few years. But this morning, I get to talk about our Payments business that I'm quite excited about, one that is unique and a differentiator that John noted.

Let me start on Page 16, you'll see the full value stream that Courtney had walked through earlier today. You see in our merchant acquiring business where we play, which is in the center of the page, which includes the core merchant acquiring business, which handles the processing and payments on behalf of the merchant. Over time, we've added additional gateway capabilities to be able to pass more data and information back to the merchants.

We've also added most recently in the last 3 to 5 years, software capabilities to really help businesses run their business on a day-to-day basis and embedding all of our payment capabilities into those. At the bottom of the page, you'll see kind of a good illustrative example. Now these are industry economics where on that $100 transaction that Courtney had referenced earlier, we would generate on a transaction basis of just under 50 basis points of revenue. In addition to that, we would also generate revenue from value-added services, which is a growing part of the business as well as our software capabilities.

Elavon is the fifth largest merchant acquirer in the United States. Over the last 12 months, we've generated $1.8 billion of fee income for the company, which represents about 15% of the total fee income for the company. We have scale and reach, as you see in the middle of the page, and we're very focused in on these 5 key industry verticals at the bottom of the slide where we bring both payments and banking together for our customers.

We compete in a very dynamic landscape that you see on Page 18. We compete against legacy acquirers as well as the emerging fintech providers. We operate with higher margins with moderately lower levels of growth, especially compared to the fintech providers. Oftentimes, we get asked, why do we get this advantage. On the operating margin, it's simply because we have one back-end processing platform that we've converted all of our merchants on to, number one, and our differentiated distribution that we'll walk through in a little bit.

Clients choose us for many reasons. You see those on the right-hand side of the slide. What I'll say is, since I've joined in this role since January, I've had a chance to meet with a lot of customers. And there's lots of reasons why they choose us. But if I pick on the airline carriers that I've talked to, they will consistently tell me our organizational stability, our resiliency in our platforms and our systems as well as our strong risk management capabilities are part of the reasons why they want to partner with a strong acquirer that's backed by a strong bank and balance sheet.

In the health care space, I often hear from our customers about data privacy, think HIPAA and things like that. We're integrating a lot of our payment processing capabilities through our Salucro assets as well as our other platforms into their systems and making sure that we have strong risk management as well as strong data privacy is extremely important to them.

On the small business side, as I've had a number of conversations with small business owners, they're very interested in not only our banking capability, but also the ability to have payments and software fully embedded together, and we were able to deliver that to them in a simplified manner at a pricing advantage relative to the marketplace. So we're executing on our strategy to accelerate the growth while maintaining those strong margins.

We have 3 key strategies that we're focused in on. The first one is the embedded payments. This was formerly known as tech-lead. Second is our differentiated distribution. The third is our industry vertical prioritization and that industry vertical prioritization is bringing both that banking and payments together.

Slide 20 gives you a view on our embedded payments. This is an area that we've seen very nice growth over the last 5-plus years. It's growing 4x our core acquiring capabilities from a growth rate perspective. In order to maintain and accelerate that momentum, we have 5 key initiatives that you see on the right-hand side of the page that we're focused in on to drive the growth moving forward. Say the couple that I would call out is the first one and the third one are probably the two in the short term that's driving a lot of productivity by the team.

One is our omnichannel payment gateway. We call it the Elavon Payment Gateway platform. It's built on a very new modern tech stack. It allows customers to be able to process transactions online as well as in brick-and-mortar or in store to be able to purchase something online, return it in a store seamless on the back end for the client. Like I said, it's built on a very common tech stack. That tech stack sets us up for new payment rails that may be coming in the future as well as any kind of agentic commerce that may be coming down the road.

The second would be the software led. This is an area over the last 3 to 5 years. We've continued to invest in new software called talech is one we bring to the market with small business, Salucro in the health care space. And so those software assets that we own will continue to invest in the product capabilities as we move forward. The final one on the page is agentic commerce. This is one that's gaining a lot of momentum and traction. What I would say is we're early stages. We're partnering with some of the card associations to run some pilots. There's still a lot of rules that need to be determined in terms of some of the fraud charge-back rights and the like as it relates to that, and we're early stages, but we want to continue to be a leader in the payment space, and so we're going to invest in that as we move forward.

Our second strategy is differentiated distribution. You'll see on the left-hand side of the page, our current distribution is 40% direct through a U.S. Bank branch or a banker that we have on staff, 60% of it is through an indirect channel or a partner that we go to market. We enjoy much stronger economics where we go to market on our own through the direct channel. And so what we're going to be focusing on is changing the overall mix of that business over the next few years, and we want to get it into a 50% to 60% kind of range.

We have 3 key initiatives that we plan to execute to drive the change in the overall mix. And I would start by the first one that is going to be to increase the sales and marketing capacity. This year alone, we're already increasing the number of bankers that we have selling this product on the team. We're up over 10%. We're seeing a lot of momentum with our other U.S. Bank distribution channels. And so we are optimistic that we can drive this interconnected growth strategy as we move forward. We'll also be focused in on brand harmonization as well as inorganic growth opportunities that really extend our distribution and reach.

The third strategy that we're focused in on is our industry vertical prioritization. These 5 key industries make up 85% of the total TAM in the marketplace. On the left-hand side, you see that we're focused on the small- to medium-sized businesses in the retail, restaurant and services sector. I would say we've invested in the talech capability, but most recently, we launched our Business Essentials products, which brings together kind of a best-in-class business checking account with our core merchant acquiring capability, all bundled in one. One seamless underwriting process, onboarding is very simple and easy.

So the customer comes into the branch, walks out with a deposit account, they walk out with the ability to accept payments, and they walk out with the software to help them run their business. So far, early innings is the take rate of new small businesses at about 2x what we've historically seen. So we're very excited and optimistic that we'll continue to see this -- continue to accelerate the momentum, and that will also help us shift the overall mix of our distribution moving forward.

On the right-hand side, you see some of the healthcare in the travel sector. We, like I said, bought a Salucro asset which is again a software solution that we embed our payments into that we're selling into large hospital systems right now. This year alone, we've already won 50-plus new deals. This is an area we put a lot of balance sheet to work in terms of loans. So we're going back and deepening those client relationships, and we're seeing great success, and we're in the middle of installing a lot of those, which gives us a lot of momentum from a revenue perspective as we close the year and going into next.

On the travel sector, this has been an area of strength for us for many years. You'll see we have 8 of the top 10 global airlines and that we have 7 of the top 10 hotel brands that we continue to support.

So with that, I'll close by just saying we're executing the strategy to accelerate our growth, maintain those strong attractive margins. We have 3 key priorities: embedded payments, differentiated distribution and the third is those industry vertical prioritization. You see our success to date, we've hit this inflection point. We've continued to see momentum building throughout the year, which gives us great confidence in the path ahead.

So with that, I want to play the brand campaign that we'll be launching in 2026. And with that, thank you for your time and look forward to the questions. Turn it over to you, Gerry.

All right. Thank you both for walking us through your respective strategies. Maybe we'll start off just high level. I'll take the first one, and then we'll open it up to the audience and just kind of walk through kind of key considerations or potential hurdles you have as you think about executing in the near to medium term.

I'd be happy to start. Thanks for the question. Clearly, as you've heard, we see there's really attractive growth potential in the credit issuing business. We need to continue to play to our strengths and operate in the spaces that we know well, certainly, leveraging our strong breadth of products in our interconnected approach to both acquiring and deepening with customers. Secondly, we want to continue to attract the kinds of customers that have brought us success thus far. Thirdly, in marketing, we need to continue to invest marketing to bring customers into the franchise. But we needed to do so in a way that is targeted that is data-driven and smartly applying that marketing spend nationwide to efficiently acquire customers.

So we think a lot about really playing where we can leverage our strengths. Last thing I'd say is we look very closely at the health of the consumer which, as we've described, at least in our book right now, we see a really resilient consumer who continues to spend and grow their spend. But of course, we are sensitive to macroeconomic and other sort of strains just generally. So we watch for that.

And I would add, just in my businesses, I would just say that we're very focused in leaning in on the execution component of it, number one. Number two is really accelerating the mix of our direct distribution is a great focus of ours as we move forward. And the third area that I would just kind of highlight is the fact that we're continuing to bring in additional sales capacity, making sure that we find the right talent to help us execute the strategy is critically important as we move forward.

I think the good news is the market in which we operate today, there's just been a tremendous amount of disruption. And that disruption has created an opportunity for us to find some really very talented folks that want to come on to our platform. So we're very excited about the future, but obviously, we're executing and results kind of speak for themselves.

Okay. Betsy. Do we have a mic?

Betsy Graseck, Morgan Stanley. So thanks so much for everything. The strategic question I have is on whether or not it would be useful to have a slice of the network. You come from AMEX with the integrated package, right? And we know you are unique at U.S. Bancorp as being an issuer and a merchant acquirer. And so if you did have a deal with either a Mastercard or Visa or AMEX or Rail, to own that slice of it, I feel like it would give you even more flexibility in pricing and creating solutions for our customers. Is that a fair strategic question? Or does it not bring anything useful to the table?

It's a fair strategic question, of course. We are really focused on the value we can provide consumers and small businesses on the issuing side, where we find good economics, certainly. And I know you can -- you would probably say the same thing on the acquiring side. This is not something we have that's sort of on our strategic dashboard, so to speak, at this time. Then, you would...

Yes. No, I would just add that our focus is on the Business Essentials product that I had mentioned that we're bringing both the payments as well as business checking. And I think next year, as Courtney alluded to, we're going to be putting together the card offering as part of that bundle as well. And I think that's the opportunity in the near term. I think longer term that you highlight bringing those two together on the back end is one that is more on the longer term that we'll continue to evaluate.

Okay. And then on the near term, you did have a bullet point on agentic commerce. So could you talk a little bit about how you're preparing for that? Any tech you need to do for that and the offerings that you will be delivering to your clients?

Do you want to start that one?

We certainly recognize that this is a nascent space, but fast moving. We are participating with Mastercard in a pilot and tokenization pilot enabling agentic commerce. We are trying to learn as much as we can and be present in the space where -- while this is very quickly developing on the issuing side.

Yes. And on the acquiring side, I would just add to that we're part of those pilots with the card associations, number one. And number two is we're -- we've built the tech stack in our EPG that I had talked about earlier, that allows us because it's on modern technology to be able to easily integrate the capabilities to be able to run that agentic commerce. I think the real question for me continues to be is, for example, if you order a pair of shoes online with a bot, like who ordered it and what are the charge-back rights and what are the -- those things all need to be better defined as we move forward. But we're early innings. We're investing in it. We're focused in on it as we move forward.

A few weeks back, the gentleman who runs the business today, our Elavon business, actually took on a new role that is going to be focused in on money movement as well as the digital assets, and that will be a focus area of ours moving forward. So we're positioning the organization to be set up to take advantage of the opportunity.

Scott?

In light of the Fiserv situation, a week or two ago, I think there's right or wrong, there's just some broader anxiety about like pricing and fees in the payment space generally. Can you just sort of speak to where those sorts of concerns may or may not be applicable to the businesses that you all oversee if customer pricing pressures are a factor, just sort of kind of clear the air on that issue, if possible?

Yes. I mean I can speak on the acquiring side, not commenting on what's happening from -- with the competitors. But I will say from our perspective, we price for value that we create in the transaction. It is a very competitive marketplace that we compete in. So I think on the front end, we typically see us being a price leader in the marketplace, and that's often how we win, especially in the small business side.

Occasionally, from time to time, we will look at the back book and we'll continue to reprice that. And I think that's an area that we have continued to do in our space, and we'll continue to do when we feel like the environment has changed where we have the right to be able to increase it. But I think right now, we feel good with how we price it on the front book and the back book.

Vivek?

A couple of questions for you. Thank you, by the way, for bringing John and the IR team for bringing the Payments folks. It's good to have some more color on the business. .

Mark, starting with you, when you think about the growth that you're talking about coming a lot from embedded finance, can you talk a little bit about what's the margins on those? What's the pricing on that? And when we see your fee rate go down over the years, where is -- what's driving that, especially given the mix shift that you're seeing in terms of where the revenue growth is coming from. That's my first question. I have a follow-up.

Yes. I think our embedded payments in our value-added services has really been kind of that core engine that we've seen continued acceleration in the growth. Some of the core transaction processing volume that continues to tighten up over time, Vivek. But I would say it's those value-added services being able to be embedded into the customers software or using some of our software capability is where we see the growth in the business, and frankly, where the margins are the strongest.

So then what is driving the trajectory of sort of the gradual decline we're seeing in the fee rates over the years. I'm not talking about 1 quarter or 1 year, but just to...

If you look over a 10-year period of time, we were just looking at this, right, it's about -- it's been very flat, right? And so the core processing revenue, I would say, has kind of been coming down, but we've been offsetting a lot of that with the value-added services with the embedded capability, the software capability that we're bringing to market. I don't know, John, if you'd add anything else.

Exactly right.

And if you step back and take away the net interest income from the card issuing side, but just look at the rest of payment side business, how has the operating margin or the profitability of the business done over the last few years given the immense amount of technology spend that one has to do. Can you give any color on that?

I think we would say that we are -- historically, we have largely -- our offerings have attracted revolvers. We are starting to really create offerings that are attracting more transactors. We strive for a balanced transactors than our high spending, lowest risk and very sticky customers. And so we're really leaning in on that side as well on the fee income side.

Help preserving the revolving needs of the business.

Absolutely.

So that bubble chart, I think, is very helpful. It shows you where we play. We know where we are from a credit standpoint, the revolving business, but we want to, as you say, lean more into the transactors to help boost the fee revenue side of the equation.

We have time for one more. [ Julien? ]

Tell us about market share guidance in branded cards over the last 5 years and maybe what you are expecting over the next 5 years? And what have been the drivers of market share?

Yes. I'd say the question about drivers of market share in branded cards. There's been increasing amount of marketing spend and some consolidation recently. That has driven a lot of, again, consolidation at the top end of the market. What we've been pleased to see and what I have been pleased to see is that while that market share has shifted really through the top 5 players or so, U.S. Bank's market share has stayed largely consistent over the course of the last 5 years. And so it's becoming -- it's a very, very competitive marketplace for sure and a lot of attention being paid at the super premium side of the market.

We see a lot of interest, value and well-served customers on what I would call the mid-premium mass affluent. And that's really where we're focused. We are not competing at the upper end of the market in the super premium crowded and expensive -- more expensive space.

Okay. Thank you very much. Thanks, Mark. Courtney and John. Appreciate it.

Welcome to the U.S. Bancorp Third Quarter 2025 Earnings Conference Call. [Operator Instructions] This call will be recorded and available for replay beginning today at approximately 11:00 a.m. Central Time.

I will now turn the conference over to George Andersen, Director of Investor Relations for U.S. Bancorp.

Thank you, John-Louis, and good morning, everyone. Joining me today in Minneapolis is our Chief Executive Officer, Gunjan Kedia, and Vice Chair and CFO, Jon Stern. In a moment, Gunjan and John will reference a slide presentation together with their prepared remarks. A copy of the presentation, our press release and all supplemental consolidated schedules are available on our website at ir.usbank.com.

Please note that any forward-looking statements made during today's call are subject to risks and uncertainties that can cause our actual results to differ materially from our current expectations. These factors are described on Page 2 of today's earnings presentation, in our press release and in reports filed with the SEC. Following our prepared remarks, Gunjan and John will be happy to answer your questions.

I will now turn the call over to Gunjan.

Thank you, George, and good morning, everyone. If I could please turn your attention to Slide 3. In the third quarter, we reported earnings per share of $1.22, an increase of 18.4% year-over-year. Our net revenue of $7.3 billion was a quarterly record, reflecting both strong momentum across our fee businesses and improved spread income. This quarter, we generated a very meaningful 530 basis points of positive operating leverage a return on average assets of 1.17% and a net interest margin of 2.75% and John will provide more details on our financial performance in his opening remarks.

Importantly, we are making strong progress against each of our 3 strategic priorities for our company. We are generating organic growth through distinctive interconnected solutions. We are maintaining our expense discipline through sustainable process automation and we are executing on our payments transformation with greater focus and strategic investments. And as we manage the bank for the long run, through both positive and uncertain times, our highly diversified balance sheet and foundational risk management capabilities delivered improved credit quality and stronger capital and liquidity levels this quarter.

Moving to Slide 4. Fee income diversification is a key source of strength for the company. On the left, you will see that fee revenue grew at 9.5% on a year-over-year basis, reflecting broad-based strength across our payments, institutional and consumer businesses. Notably, interest rate movements this quarter supported a meaningful acceleration in select capital markets and mortgage revenue. On the right, we highlight 5 key businesses that have demonstrated strong year-over-year growth and that we believe present a favorable growth outlook. Collectively, these businesses represented approximately 2/3 of our total fee revenue this quarter.

Turning to Slide 5. We spotlight one additional business, Impact Finance. With the Union Bank acquisition, we bolstered our platform, bringing improved tax credit syndication capabilities, new talent and increased access to the California market. Currently reported within the other revenue, Impact Finance has grown at a 17% CAGR from 2021 to 2024, and is an important mission-driven capability that is core to our fee income portfolio.

Over the next several years, we anticipate additional growth from a pull forward of activity tied to some recent executive orders and expect revenue trends across our environmental finance, affordable housing and community finance solutions to remain robust. In addition, the business also supports a net tax benefit to the company, which we believe will continue to be a meaningful driver of bottom line EPS growth.

Slide 6 showcases a growing consumer franchise and long-term deposit strategy. Our deposit base is highly diversified across clients, geographies and products providing strength and stability through the cycle. We are actively working to increase our share of consumer deposits with interconnected products like bank smartly, branch and client center expansions, partnerships, and enhanced marketing and analytical capabilities. Consumer deposits now represent over 52% of total average deposits, up nearly 2 points from the third quarter of 2023.

Moving to Slide 7. Our expense discipline over the last 2 years and execution on 4 signature productivity programs has resulted in improved organic growth and greater operational efficiencies. As you can see on the left, the outcomes of our efforts have been quite successful as we have seen steady improvement to both the efficiency ratio and positive operating leverage as adjusted.

Turning to Slide 8. Our payments transformation remains a key strategic priority for our company. As the charts on the left show, we have seen steady improvement and more consistent year-over-year fee growth over the last several quarters across both our traditional card issuing and merchant processing businesses. We are looking forward to providing a deeper dive into our payments transformation and strategy at an upcoming industry conference in the fall.

Let me now turn the call over to John.

Thank you, Gunjan, and good morning, everyone. This is a very strong quarter for us, highlighted by core underlying business momentum and accelerating growth as we made meaningful progress toward our medium-term financial targets.

If you turn to Slide 9, I'll start with highlights for the quarter, followed by a discussion of third quarter earnings trends. As Gunjan mentioned, we reported earnings per common share of $1.22 and achieved record net revenue of $7.3 billion this quarter. Revenue growth versus prior periods benefited from improved spread income driven by enhancements we've made to our portfolio mix as well as broad-based fee growth as we deepen client relationships across the franchise.

Elevated deposit flows at the end of the quarter in support of more robust client activity and seasonality in our Corporate Trust business, resulted in ending assets of $695 billion. As expected, nearly all key credit quality metrics, including nonperforming assets and net charge-offs improved both sequentially and on a year-over-year basis. As of September 30, our tangible book value per share increased 12.7% on a year-over-year basis.

Slide 10 provides key performance metrics. As the slide illustrates, each of our key profitability and efficiency ratios improved this quarter, highlighted by a return on average assets of 1.17% and a return on tangible common equity of 18.6%. Over the last 2 years, we have increased our tangible common equity approximately 30% while continuing to deliver a high-teens ROTCE on steadily improving earnings growth.

Notably, we also delivered an improved efficiency ratio of 57.2% and a net interest margin of 2.75% this quarter. Our sequential margin expansion of 9 basis points was driven by fixed asset repricing, strong card and commercial loan growth as well as strategic balance sheet actions we took in the second quarter. We continue to expect net interest margin expansion in the medium term.

Slide 11 provides a balance sheet summary. Total average deposits increased 1.8% linked quarter to $512 billion, as we continued to emphasize growth in relationship-based deposits. Our percentage of noninterest-bearing to total deposits remained stable at approximately 16%. Average loans totaled $379 billion, up 0.2% from the prior quarter. Adjusting for loan sales last quarter, our underlying growth rate was 1.0% linked quarter and 2.8% on a year-over-year basis. Loan yields increased to 5.97%, an 8 basis point improvement linked quarter. As we continue to strategically remix our balance sheet with a greater proportion of commercial and credit card loan balances, we increased both commercial and credit card loans 9.5% and 4.3%, respectively, on a year-over-year basis.

Given the current industry focus on nondepository financial institution lending, we included a slide in the appendix of our presentation to provide additional transparency on this loan category. As you will observe, this is a highly diversified portfolio with a balanced and broad composition of borrowers that is underpinned by our proven underwriting capabilities and strong collateral and structural protections.

Finally, as it relates to the balance sheet, the ending balance in our investment portfolio as of September 30 was $171 billion and had an average yield of 3.26%, an 8 basis point improvement sequentially driven by the strategic actions we took last quarter and fixed asset repricing.

Turning to Slide 12. Net interest income on a fully taxable equivalent basis totaled $4.25 billion, an increase of 4.2% on a linked-quarter basis. Slide 13 highlights trends in noninterest income. Total noninterest income was approximately $3.08 billion. Excluding security losses, total fee revenue increased 9.5% on a year-over-year basis. driven by new business momentum and broad-based growth across our fee businesses.

Turning to Slide 14. Noninterest expense totaled approximately $4.2 billion as we continue to prudently manage our expense base. Slide 15 highlights our improving credit quality performance despite ongoing macroeconomic uncertainty. Our ratio of nonperforming assets to loans and other real estate was 0.43% at September 30, an improvement of 1 basis point linked quarter and 6 basis points year-over-year. This quarter, our net charge-off ratio of 0.56% improved 3 basis points sequentially and 4 basis points year-over-year.

Turning to Slide 16. As of September 30, our common equity Tier 1 capital as a percentage of risk-weighted assets was 10.9%, a 20 basis point increase linked quarter including AOCI, our CET1 ratio improved to 9.2%. At the top of Slide 17, we provide a comparison of third quarter results to our previous guidance. This quarter, both net interest income and fee revenues exceeded our expectations, while noninterest expense was in line with previous guidance, which drove meaningful positive operating leverage for the quarter.

Let me now provide our forward-looking guidance. In the fourth quarter, we expect net interest income on a fully taxable equivalent basis to be relatively stable to our third quarter level of $4.25 billion. Total fee revenue is expected to be approximately $3 billion. Total noninterest expense is expected to increase between 1% and 1.5% sequentially. We expect to deliver positive operating leverage of 200 basis points or more on an adjusted basis.

Turning to Slide 18. We are now operating within all of our medium-term target ranges, 1 year removed from our 2024 Investor Day and remain confident in our ability to build on these results over time.

Let me now hand it back to Gunjan for closing remarks.

Thank you, John. Third quarter results show that we are beginning to hit our stride on execution. We remain focused on delivering growth, productivity, returns and strong risk management, both in favorable and uncertain economic environments.

Let me just close by extending my deep gratitude to our clients and shareholders. Our results reflect the power of our strategy the strength of our franchise and the dedication of our teams across this organization. We appreciate your trust and your partnership.

With that, we will now open the call for your questions.