Q3 US Bancorp Earnings Call

Okay.

Welcome to the U S Bancorp third quarter 2023 earnings Conference call. Following a review of the results there will be a formal question and answer session. If you'd like to ask a question. Please press. One then zero on your phone if you'd like to withdraw. Please press. One then zero again this call will be recorded and available for replay beginning today.

At approximately nine o'clock a M central time, I will now turn the conference call over to George Anderson, Senior Vice President and director of Investor Relations for U S Bancorp.

Thank you Brad and good morning, everyone with me today are Andy <unk>, Our chairman President and Chief Executive Officer, Terry Dolan, Vice Chair, and Chief Administration Officer, and Jon Stern, Senior Executive Vice President and Chief Financial Officer.

During their initial prepared remarks, Andy and John will be referencing a slide presentation, a copy of the presentation. Our earnings release and supplemental analyst schedules are available on our website at U S Bank Dot com.

Please note that any forward looking statements made during today's call are subject to risk and uncertainty factors that could materially change. Our current forward looking assumptions are described on page two of today's presentation. Our press release, our Form 10-K and its subsequent reports on file with the SEC.

Following our prepared remarks, Andy Terry and John will take any questions that you have I will now turn the call over to Andy. Thanks, George Good morning, everyone and thank you for joining our call I'll begin on slide three.

The third quarter, we reported earnings per share of <unk> 91 cents, which included 14 cents per share of notable items related to merger and integration charges. Excluding those notable items, we delivered earnings per share of $1 five for the quarter.

Third quarter results were highlighted by linked quarter and year over year fee revenue growth that benefited from our acquisition of Union bank deepening client relationships and strong underlying business activity.

We are achieving the cost synergies, we anticipated from Union Bank and continue to prudently manage core expense as we identify operational efficiencies across the business.

As of September 30th our common equity tier one capital ratio was nine 7% an increase of 60 basis points. This quarter. This is the same level. It was prior to our acquisition of Union Bank.

Total average deposits increased 3% or $15 billion on a linked quarter basis.

Credit quality continues to normalize this quarter in line with expectations and we further strengthened the balance sheet by adding $95 million to our loan loss reserve reflective of an evolving credit environment.

On October 16th to Federal Reserve granted as full really from certain category two commitments made in connection with the Union Bank acquisition, given our balance sheet reduction and capital actions.

As a result, we are now subject to existing capital rules or if adopted the same transition rules as all other category three banks related to enhanced capital requirements under the Basel III and game proposal.

As proposed this would include a three year transition period for the expanded risk based approach and a OCI regulatory Terry capital adjustment starting in the third quarter of 2025.

We will discuss the impacts of this decisions further in my closing remarks.

Slide four provides income staying results as reported and on an adjusted basis, ending and average balances and other key metrics.

Slide five provides key performance metrics, excluding notable items our return on average assets was 1.0% to 4% and a return on tangible common equity was 21%.

While net interest margin declined nine basis points to 281 this quarter in line with our expectations. We continue to expect the NIM to bottom in the fourth quarter as we reached the end of the current rate hiking cycle.

Turning to slide six a great benefit of our business model include who's a balance between our spread and fee income businesses that helps us reduce earnings volatility through a business cycle.

On a year over year basis noninterest income grew approximately 12% within payment services, we continue to invest in our digital capabilities, expanding our payments ecosystem and optimizing our distribution and emphasis on expanded partnerships and integrated capabilities will continue to support tech led growth across merchant processing and increase.

<unk> across other areas of our payment services businesses. Additionally, we are continuing to make investments that leverage our scale and strategic market positioning across our corporate trust mortgage banking and capital markets businesses, which should enhance our already strong annualized growth trajectories.

Slide seven highlights a few of our many post conversion revenue opportunities and expected cost synergies with Union Bank.

Early indications of the potential to deepen relationships with language legacy Union bank loyal affluent and diversified client base are promising and we continue to be on track to realize approximately $900 million in cost synergies, which we expect to be fully reflected in our run rate as we head into the year 2024.

Let me now turn the call over to John who will provide more details on the balance sheet and our results for the quarter. Thanks Andy.

Turning to slide eight we ended the quarter with total average assets of $664 billion in total average loans of $377 billion down nine and $12 billion, respectively on a linked quarter basis, as we prudently manage and optimize their balance sheet, given the current macroeconomic and regulatory environment.

Average total deposits were $512 billion, representing a 3% increase linked quarter, driven by expected seasonality and growth in money market and time deposits time deposit accounts.

Specifically average noninterest bearing deposits decreased $16 $2 billion. This quarter, primarily driven by our Union bank retail customer upgrade at conversion from noninterest bearing checking accounts to our interest bearing bank smartly product excluding.

Excluding this reclassification the decrease would have been $6 $2 billion.

Our mix of noninterest bearing to interest bearing deposits was approximately 19% consistent with where we expect the mix shift to stabilize based on historical performance and the operational nature of our court about deposit base.

Slide nine provides an update on the investment securities portfolio as of September 30th are available for sale Securities were 97% of our total securities.

We continued to reduce the effective duration of the F. S portfolio, which is now less than three and a half years.

On slide 10, we provide a detailed earnings summary for the quarter. This quarter, we reported diluting diluted earnings per share of <unk> 91 cents or a $1 five per share after adjusting for merger and integration charges of $213 million net of tax or <unk> 14 cents per diluted common share.

Turning to slide 11, net interest income on a fully taxable equivalent basis totaled approximately $4 3 billion, which represented a 4.1% decrease on a linked quarter basis, and a 10, 7% increase from a year ago due to the impact of rising rates and the acquisition of Union Bank.

Our net interest margin declined nine basis points to eight 1% in the third quarter.

The linked quarter decline was primarily due to the impact of lower earning assets deposit pricing and mix shift offset somewhat by better loan spreads and funding mix.

Slide 12 highlights trends in non interest income.

Fee income increased 11.9% or $295 million on a year over year basis, driven by higher payment service revenue Trust and investment management fees commercial products and mortgage banking revenues.

On a linked quarter basis fee income increased one 4% or $38 million driven by other revenues, which included servicing revenue from previously executed balance sheet optimization actions.

Turning to slide 13 reported noninterest expense for the quarter totaled $4 $5 billion, which included $284 million of merger and integration related charges.

Noninterest expense as adjusted decreased $13 million or 0.3% on a linked quarter basis, driven by lower compensation expense that was somewhat offset by our investments in marketing and business development.

Slide 14 shows our credit quality performance this quarter.

While asset quality metrics, reflecting changing conditions in the commercial real estate office segment results. This quarter continue to trend in the in line with our expectations and key metrics remained below pre pandemic levels.

Importantly, given the higher interest rate environment as well as other portfolio considerations, we increased our reserve ratio for our commercial real estate office loans to 10%.

Our ratio of nonperforming assets to loans and other real estate was 0.35% at September 30th compared with 0.29% at June 30th and 0.20% a year ago.

Our third quarter net charge off ratio of 0.44% increased nine basis points from a second quarter level of 0.35% as adjusted and was higher when compared to a third quarter 2022 level of 0.19% or.

Our allowance for credit losses as of September 30th totaled $7.8 billion or 2.08% of period end loans.

Turning to slide 15, we continue to take action to improve our capital ratios this quarter, increasing our CET one ratio to nine 7% as of September 30th.

The combination of our debt to equity conversion with Mufe Chi.

Earnings accretion net of distributions and balance sheet optimization actions resulted in a 60 basis point increase from last quarter Importantly, our CET one capital ratio is now 270 basis points above our regulatory capital minimum.

I will now provide fourth quarter forward looking guidance on slide 16 in.

In the fourth quarter, we expect net interest income of between four one and $4 $2 billion.

Total revenue as adjusted is estimated to be in the range of $6 eight to $6 $9 billion, including approximately $65 million of purchase accounting accretion.

Total noninterest expense as adjusted is expected to be approximately $4 $2 billion inclusive of approximately $115 million of core deposit intangible amortization related to Union Bank acquisition on a core basis, we expect full year 2020 for expenses to be flat.

With 2023.

Our income tax rate is expected to be approximately 23% on a taxable equivalent basis, we expect merger and integration charges of between $250 million to $300 million in the fourth quarter I'll now hand, it back to Andy for closing remarks, Thanks, John turning to slide 17 to Federal reserve notified us on October 16th that they.

Granted us full relief from category two commitments made in conjunction with the Union Bank acquisition after considering several factors, including actions to reduce our risk profile strengthen our capital position and provisions related to category three roles made after each we received approval on Union Bank acquisition.

This important decision now subjects us to the same enhanced capital requirements as all other category three banks, including a three year phase in of LCI into regulatory capital starting in the third quarter of 2025.

As expected, we will continue to carefully balance the need to accrete capital with any potential impact to earnings from further balance sheet optimization activities.

Measures to manage the interest rate sensitivity and duration of our available for sale Securities will continue.

Since before our acquisition of Union Bank, our priority has been and will continue to be that strategic execution of capital efficient growth opportunities across each of our business lines.

As a result of the Fed's decision, we are now well positioned with our enhanced earnings profile and diversified business mix to increase our capital levels continue our disciplined lending activities and further strengthen our balance sheet.

Let me close by thanking our more than 75000 employees for their dedication to supporting the needs of our clients communities and shareholders. We'll now open up the call to Q&A.

Thank you we will now begin the question and answer session. If you have a question. Please press. One then zero on your phone if you wish to be removed from the queue. Please press one zero again once again kept a question. Please press <unk>, one and then zero on your phone.

Good day Abraham <unk> with Bank of America. Please go ahead.

Hey, good morning.

Good morning, good morning.

Guess, maybe the first question just around the fed decision.

In its letter the fed said I guess the bank anticipates, taking further actions to reduce our risk profile and reduce assets and increase capital.

If you don't mind talking about just what additional actions. We should expect I think you mentioned that the EPS in fact could be neutral from here, but just how should we think about what else. The fed expects from you on the risk mitigation side as we move forward into next year. Thank you.

Sure. Thanks, Abraham good morning Joseph.

This is John as way of background, you know the fed granted us as we as you mentioned full relief from our category to our commitments and that's because of the actions and Andy mentioned this of our actions to reduce risk as well as our ability to strengthen our capital position. So importantly, this is going to provide us additional time and flexibility to meet those new rail.

Tori requirements and do so in the same timeframe as our category three peers and Additionally, we think it's going to reduce the downside risk given that given the challenging rate environment.

Nothing really changes in terms of how we're fundamentally managing the balance sheet going forward, we're still committed to building regulatory capital, we're still expecting to increase and accrete capital at a $20 to 25 basis points on average per quarter.

And our our expectation is to accelerate that as we get through the merger related costs or be in the high end of that range I should say as we as we get through the merger related costs and start to realize the full union bank synergies and we're still going to be executing risk weighted asset optimization transactions, but now we have the time and flexibility to do that over.

In a way that is low to neutral in terms of our earnings impact.

And so all of those for all those reasons, we feel like we have the flexibility in our balance sheet to do those sorts of things I think that's exactly right John the only thing I'd add as part of this decision is reflective of what we've already done for the last 12 months in terms of reducing the risk profile building capital optimizing the balance sheet and I want to be clear a abraham.

Not under the asset cap at all we are maintaining flexibility in managing the balance sheet and and capital and will continue to remain focused on capital efficient growth and that includes focusing in the high Mark high margin high return businesses that exceed our cost of capital while deepening relationships from our most profitable clients.

Operator: Welcome to the US Bancorp third quarter, 2023 earnings conference call. Following a review of the results, there will be a formal question and answer session. If you would like to ask a question, please press one then zero on your phone. If you'd like to withdraw, please press one then zero again. This call will be recorded and available for replay beginning today at approximately nine o'clock a.m. Central time.

It has been and will continue to be our focus.

That's good color. Thank you and just a separate question Jordan I think I heard you correctly. If I heard you correctly. You mentioned you expect the NIM to show off and Im assuming NIM.

I'd like to trough in the fourth quarter.

Is that as Dr. Lin culture, there's a steeper yield curve or widening.

George Andersen: I will now turn the conference call over to George Andersen, Senior Vice President and Director of Vestor Relations for US Bancorp.

The call it was a risk that assumption that all traffic off of NII or NIM.

George Andersen: Thank you Brad and good morning everyone with me today are Andy Cecere, our chairman, president and chief executive officer, Terry Dolan, Vice Chair and Chief Administration Officer, and John Stern, Senior Executive Vice President and Chief Financial Officer. During their initial prepare remarks, Andy and John will be referencing a slide presentation, a copy of the presentation, our earnings release and supplemental analyst schedules are available on our website at usbanc.com. Please note that in the early forward looking statements made during today's call are subject to risk and uncertainty factors that can materially change our current forward looking assumptions are described on page two of today's presentation, our press release, our form 10k and its subsequent reports on file with the SEC following our prepared remarks, Andy, Terry and John will take any questions that you have.

<unk>.

What gives you confidence that our mixed shift consumer behavior too.

To feel good about that.

Yes, so I think in terms of the guidance we provided.

We have embedded in there in our rate forecast, which includes a rate increase in December .

Whether or not that happens or not is relatively materials. Since we are fairly neutral from an interest rate risk positioning standpoint.

I guess, what I would say is as.

As the fed is continue whether they're done or not in terms of the rate hiking.

We start to see a lot of the things on the deposit side slowdowns are noninterest bearing.

Balances will be relatively stable here at this level.

You know the deposit betas will in the rate paid will start to slow down and then on the other side your assets will start to reprice, whether that's the securities book the loan book and all those sorts of things. So that's what gives us the confidence really that that we will bottom out here in the fourth quarter from a NIM and net interest income perspective.

Andrew Cecere: I will now turn the call over to Andy. Thanks George.

Andrew Cecere: Good morning everyone. Thank you for joining our call. I'll begin on slide three. In the third quarter, we reported earnings for Sheridan, 91 cents, which included 14 cents per share of notable items related to merger and integration charges. Excluding those notable items, we delivered earnings per share of $1.5 for the quarter. Third quarter results were highlighted by link quarter and year over year fee revenue growth that benefited from our acquisition of union bank, deepening client relationships and strong underlying business activity.

Thanks for taking my questions.

Thank you.

Yes.

Next we'll go to John Mcdonald with Autonomous Research. Please go ahead.

John Hi, Good morning, John can I just follow up on what you were just talking about what are you looking at in terms of the NIM for the fourth quarter roughly and.

Andrew Cecere: We are achieving the cost energies we anticipated from union bank and continue to prudently manage core expense as we identify operation with businesses across the business. As of September 30th, our common equity tier one capital ratio was 9.7%, an increase of 60 basis points this quarter. This is the same level it was prior to our acquisition of union bank. Total average deposits increased 3% or $15 billion on a link quarter basis.

Did I hear correctly, you think the deposit mix kind of settles out in around 1920, where you are here in beta kind of in the mid forties, you still have those expectations.

Yes, maybe just to go off the last couple of questions you mentioned so.

From a from a noninterest bearing we yes, we do expect that.

That mix, we're at about 19% that's about where we will be we expect that to be in that in that range.

From a beta perspective, we are in the mid <unk> right now.

Andrew Cecere: Credit quality continues to normalize as quarter in line with expectations and we further strengthen the balance sheet by adding $95 million to our loan loss reserve reflective of an evolving credit environment. On October 16th, the Federal Reserve granted its full relief from certain category to commitments made in connection with the union bank acquisition given our balance sheet reduction and capital actions. As a result, we are now subject to existing capital rules or, if adopted, the same transition rules as all other category three banks related to enhanced capital requirements under the Basel 3 and Game Proposal.

It's possible it could creep up higher depending on where the fed goes from here, but we feel feel good about that.

In terms of your.

The net interest margin and things like that we do anticipate a little bit more pressure here in the fourth quarter, but then that that really is the point, where we feel that oh bottom out based on my comments I just made a previous question and that is reflected in our revenue and net interest income guidance Jim.

Okay, and then recognizing with the fed decision, you've obviously got a lot more time to phase in the Aoc I know Jonathan.

Andrew Cecere: As proposed, this would include a three-year transition period for the expanded risk-based approach and AOCI regulatory capital adjustments starting in the third quarter of 2025. I will discuss the impacts of this decisions further in my closing remarks. Slide four provides income state results as reported and on an adjusted basis, ending in average balances and other key metrics. Tricks, Slide 5 provides key performance metrics. Excluding notable volumes, our return on average assets was 1.04% and our return on tangible common equity was 21%.

John could you just give us a little more color.

What happened in terms of the trend in <unk> this quarter what are the pieces there.

And how does the swaps affect your burn down timeline and just also if you could add on what do you how do you calculate the capital with RCI today, it looks like maybe around 7% something like that.

Yes, so I think all in.

It's about the OCI is about 250 basis point of impact So I would say seven to <unk>.

Probably roughly kind of where I would think about it in terms of the change in the F. S. Obviously rates.

Andrew Cecere: While that interest margin declined, nine basis points to 281 this quarter, in line with our expectations, we continue to expect the nymph to bottom in the fourth quarter as we reach the end of the current rate hiking cycle. Turning to slide 6, a great benefit of our business model includes a balance between our spread and fee income businesses that helps us reduce earnings volatility through a business cycle. On a year over your basis, non-interest income grew approximately 12%.

Backed up on the on the long end of the curve.

75% to 90 basis points, depending on treasuries or mortgages that you are looking at and that had an impact of about $1 $4 billion and are on an after tax basis on our <unk> Securities book.

Which we would've expected and is consistent with the duration of our book, which we have continued to.

To wind down as I mentioned in our comments about three less than three and a half years is our is our current duration. So.

Andrew Cecere: Within payment services, we continue to invest in our digital capabilities, expanding our payments ecosystem, and optimizing our distribution. Emphasis on expanded partnerships and integrated capabilities will continue to support tech-led growth across merchant processing and increase opportunities across other areas of our payment services businesses. Additionally, we are continuing to make investments that leverage our scale and strategic market positioning across our corporate trust, mortgage banking, and capital markets businesses, which should enhance our already strong annualized growth trajectories.

So that's that's the effect of that we are continuing to see.

We will continue to see pay downs in that book, whether it's the HTM Maria first we have about approximately $3 billion or so per quarter that rolls off that book and we will reinvest in the <unk> side of things over time.

Okay. Thank you.

Thanks, John .

And next we'll go to Mike Mayo with Wells Fargo Securities. Please go ahead.

Hi, Andy.

Mike.

Andrew Cecere: Fights 7 highlights a few of our many post-conversion revenue opportunities and expected cost energies with Union Bank. Early indications of the potential, the deep in relationships with legacy Union Bank loyal, affluent, and diversified client base are promising, and we continue to be on track to realize approximately $900 million in cost energies, which we expect to be fully reflected in our run rate as we head into the year 2024.

Just to be clear how much of the $900 million merger savings were recognized in the third quarter results.

Well in terms of we will get to a full run rate of $900 million.

It's probably.

$100 million or so is kind of in that range is probably what we were seeing.

It's been.

Growing in terms of the amount and we will see that full benefit flow through in the fourth quarter.

John Stern: Let me now turn the call over to John who will provide more details on the balance sheet and results for the quarter. Thanks, Andy. Turning to slide 8, we ended the quarter with total average assets of $664 billion and total average loans of $377 billion, down 9 and $12 billion respectively on a link quarter basis, as we prudently manage and optimize their balance sheet given the current macroeconomic and regulatory environment. Average total deposits were $512 billion, representing a 3% increased link quarter, driven by expected seasonality and growth in money market and time deposits.

So relative to the third quarter, the first quarter of 2025 could see $800 million of additional expense savings.

No because we've been we've been these savings have been I've been generated all throughout the course of the year and they have they accelerate third quarter into fourth quarter, and all of that second quarter third quarter and the fourth quarter.

So what's the cumulative merger savings I guess, how much more expense savings should there be when they are fully realized in the first quarter relative to the third quarter.

John Stern: Time deposit accounts. Specifically, average non-intersparing deposits decrease $16.2 billion as quarter, primarily driven by our Union Bank retail customer upgrade and conversion, from non-intersparing checking accounts to our interest-bearing bank smartly product. Excluding this reclassification, the decrease would have been $6.2 billion. Our mix of non-intersparing to interest-bearing deposits was approximately 19%. Consistent with where we expect the mixed shift to stabilize based on historical performance and the operational nature of our quarterback deposit base.

When we have the the savings we will have.

Approximately.

400, or so million dollars of that has gone through this full year and then we will expect to see that in the next coming year, but thats embedded into our our full our full year.

Guidance of flat expenses between 2023 and 2024, so Mike the way I think about it. This is andy by them by the end of the fourth quarter, we will be on a run rate recognizing $900 million of savings.

John Stern: Slide 9 provides an update on the investment securities portfolio. As of September 30th, our available for sale securities were 97% of our total securities. We continue to reduce the affected duration of the AFS portfolio, which is now less than 3.5 years.

Which will be fully reflected in 2024 in our in our expense base and that is consistent with how we think about a relatively flat.

23% to 24 expense base, including those savings plus investments will continue to make in the business.

John Stern: On slide 10, we provide a detailed earning summary for the quarter. This quarter, we reported diluted earnings per share of 91 cents, or $1.5 per share after adjusting for merger and integration charges of $213 million net attacks, or 14 cents per diluted common share. Turning to slide 11, net interest income on a fully taxable equivalent basis told approximately $4.3 billion, which represented a 4.1% decrease on a link quarter basis and a 10.7% increase from a year ago due to the impact of rising rates and the acquisition of union bank.

And then.

The Big question that is tariff yet flat 2020 core expenses do you think you can get to positive operating leverage.

Too early or too many moving parts because this is the sweet spot of the merger savings coming up right at by the next it is it is a sweet spot might Mike Youre, absolutely right and the savings are great.

Opportunities to deepen relationships on the Union Bank customer base I mentioned that in my comments I think that is terrific. Our fee businesses are doing extremely well on a year over year basis. It was up 12% across almost every category.

And frankly very little of that was related to Union bank that was this quarter improvement across a number of categories capital markets are corporate and trust of our fee businesses our payments businesses.

John Stern: Our net interest margin declined 9 basis points to 2.81% in the third quarter. The link quarter decline was primarily due to the impact of lower earning assets, deposit pricing and mixed shift, offset somewhat by better loan spreads and funding mix.

The challenge for us and for the entire industry is net interest income and margin.

In this environment, that's the one that I.

John Stern: Slide 12 highlights trends in non interest income, fee income increased 11.9% or $295 million on a year-over-year basis driven by higher payment service revenue, trust in investment management fees, commercial products, and mortgage banking revenues. On a link quarter basis, fee income increased 1.4% or $38 million, driven by other revenues, which included servicing revenue from previously executed balance sheet optimization actions.

Theres a lot of moving pieces as you say loan growth is relatively tepid as we as we speak for us and for the industry. Overall, so it'll be dependent upon that in terms of positive operating leverage and I would say, it's too early to call.

Okay and last follow up.

Increase in CET, one ratio due to a lot of balance sheet optimization did come at a cost of less assets less loan growth.

Less earnings right there Theres a tradeoff in that they are now that you're under.

Less pressure and have so much more flexibility do you think you can be.

John Stern: Turning to slide 13, reported non interest expense for the quarter, totaled $4.5 billion, which included $284 million of merger and integration related charges. Non interest expense as adjusted decreased $13 million or 0.3% on a link quarter basis driven by lower compensation expense that was somewhat offset by our investments in marketing and business development.

Be a little bit more lack in terms of your growth and in turn that may help NII or is that too much of a stretch.

Yeah, we have we have flexibility now.

In terms of the transactions that we do to optimize and we still have plans to do those sorts of things. We've identified some some things that are going to be relatively neutral.

John Stern: Slide 14 shows our credit quality performance this quarter. While asset quality metrics reflecting changing conditions in the commercial real estate office segment, results this quarter continue to trend in the in line with our expectations. And key metrics remain below pre-pandemic levels. Importantly, given the higher interest rate environment as well as other portfolio considerations, we increased our reserve ratio for commercial real estate office loans to 10%. Our ratio of non performing assets to loans and other real estate was 0.35% at September 30th, compared with 0.29% at June 30th and 0.20% a year ago.

And a little bit on the low end of earnings impact and of course, you saw some of those transactions in the second quarter.

Flow through in terms of provision and things like that and that did lower earning assets as you mentioned about $8 billion or thereabouts this quarter.

Great. Thank you. Thanks.

Thanks, Mike Thanks, Mike.

And next we'll go to John can carry with Evercore. Please go ahead.

Good morning, John Good morning.

I know despite the regulatory change around the cat two requirement.

Maintaining the 20 to 25 bps generation.

John Stern: Our third quarter net charge ratio of 0.44% increased nine basis points from a second quarter level of 0.35% as adjusted and was higher when compared to a third quarter of 2022 level of 0.19%. Our allowance for credit losses as of September 30th totaled $7.8 billion or 2.08% of period and loans.

CET one quarterly.

Why no change there can you just talk to us maybe about the.

Given <unk> and that expectation is the need.

Need to meet the category to shifted to category three why no change there.

Well I think.

There's no change because we feel like given the new rule set and things like that over time, we will have to transition into the new regime, which will include <unk> and so all the other rules and so we're going to be in a mode to continue to accrete that capital in that 20 to 25 basis points is our our earnings stream that we will we will accrete and right.

John Stern: Turning to slide 15, we continue to take action to improve our capital ratios this quarter, increasing our CET1 ratio to 9.7% as of September 30th. The combination of our debt to equity conversion with MUFG, earnings accretion, net distributions and balance sheet optimization actions resulted in a 60 basis point increase from last quarter. Importantly, our CET1 capital ratio is now 270 basis points above our regulatory capital minimum.

Like this quarter for example is 20 basis points, but we anticipate go into 25 are on the higher end of that range.

As we get through the merger related costs, and we have the union synergies.

Okay.

Yes, BSO activities.

Materially benefit.

Jason.

John Stern: I will now provide fourth quarter forward looking guidance on slide 16. In the fourth quarter, we expect net interest income of between 4.1 and 4.2 billion dollars. Total revenue, as adjusted, is estimated to be in the range of 6.8 to 6.9 billion dollars, including approximately 65 million dollars of purchase accounting accretion. Total non-interest expense, as adjusted, is expected to be approximately 4.2 billion dollars, inclusive of approximately 115 million dollars of core deposit and intangible amortization related to union bank acquisition.

I'm, sorry can you say that I couldn't hear you.

The less risk weighted asset.

Optimization efforts.

Would be needed now under <unk>.

The meat category III did not materially impact 2025 basis points of earnings generation X that no that did not know that did not and.

Like for example, this quarter we had.

20 basis points of our Wi actions, which included some of the asset reduction you saw our earning assets lower for example, as well as some other transactions embedded so.

John Stern: On a core basis, we expect full year 2024 expenses to be flat with 2023. Our income tax rate is expected to be approximately 23% on a taxable equivalent basis. We expect merger and integration charges of between 250 to 300 million dollars in the fourth quarter.

We separate out the core earnings when we were talking about 20 to 25 basis points core earnings from other <unk> optimization transactions that we that we have the ability to do.

Okay, and then separately is there any opex impact of the <unk>.

Now needing to conform to.

Andrew Cecere: I'll now hand it back to Andy for closing remarks. Thanks, John. Turning to slide 17, the Federal Reserve notified us on October 16th that they have granted us full relief from category 2 commitments made in conjunction with the union bank acquisition after considering several factors, including actions to reduce our risk profile, strengthen our capital position, and provisions related to category 3 roles made after we received approval on the union bank acquisition.

The category III versus the more immediate requirements of category to anything on the expense side and then separately on the on your margin bottoming comment anything on in terms of the trajectory and the margin that you would expect after an achievable bottoming as we head into.

2024.

Okay.

Yes, so in terms of Opex.

No. There is there is there is no further investment you may recall before tailoring, we had many of the same.

Andrew Cecere: This important decision now subjects us to the same enhanced capital requirements as all other category 3 banks, including a three year phase in of AOCI into regulatory capital starting in the third quarter of 2025. As expected, we will continue to carefully balance the need to accrete capital with any potential impact to earnings from further balance sheet optimization activities. Measures to manage the interest rate sensitivity and duration of our available for sale securities will continue since before acquisition of union bank our priority has been and will continue to be the strategic execution of capital efficient growth opportunities across each of our business lines. As a result of the Fed's decision, we are now well positioned with our enhanced earnings profile and diversified business mix to increase our capital levels, continue our disciplined lending activities, and further strengthen our balance sheet.

Rules and.

And then standards that we had in terms of liquidity rules and reporting and all those sorts of things. So we have all the capabilities built up or we can quickly.

Get to that level from an operational standpoint, so theres no worries there.

In terms of the net interest margin.

We mentioned just a little bit of pressure in the fourth quarter, and then bottoming out likely stable, but still depend on interest rates quite frankly at that particular point in time.

Okay. Thank you.

Thanks, John .

And next we'll go to John Mcdonald with Autonomous Research. Please go ahead.

One moment here.

Okay.

Okay.

Yeah.

We'll move past pardon me, we'll go to Scott Seafarers with Piper Sandler. Please go ahead.

Operator: Let me close by thanking our more than 75,000 employees for their dedication to supporting the needs of our clients, communities, and shareholders. We'll now open up the call to Q&A. Thank you. We will now begin the question and answer session. If you have a question, please press one then zero on your phone. If you wish to be removed from the Q, please press one then zero again. Once again, if you have a question, please press one and then zero on your phone.

Good morning, Scott.

Hey, Thanks for taking the question just as it relates to sort of.

Balance sheet growth dynamic so great great to see you out of the fed restriction do you see any risk that you would exceed $700 billion in assets organically.

Our.

Come into contact with them together.

Two restrictions organically in a timeframe that would suggest you to caf II rules before your peers would have to get their under.

Ebrahim Poonawala: And then go to Abraham Punewala with Bank of America. Please go ahead.

John Stern: Good morning. I guess maybe the first question just around the Fed decision. In its level, the Fed said, I guess the bank can't participate. It's taking further actions to reduce risk profile and reduce assets and increase capital. So if you don't mind talking about just what additional actions we should expect, I think you mentioned that the EPS impact could be neutral from here, but just how should we think about what else the Fed expects from you on the risk mitigation side as we move forward into next year. Thank you. Sure. Thanks, Ebrahim.

New levels in other words Im just trying to.

Kind of make sure that this is indeed, just a full free and clear.

So just curious curious your thoughts there.

It is as Andy mentioned, there is no asset cap. So that we have complete flexibility here on our balance sheet going forward. So if we.

I would like to grow or want to grow and we do want to grow on a capital efficient manner, we will do so.

What I would say, though is that we're going to be emphasizing higher return.

Loans and deemphasizing lower return type of assets and I think that will manifest itself in is the balance sheet churns and and in addition to that I would just highlight that in this environment right now the loan outlook is pretty is pretty low the demand for loans is quite low given a number of different reasons out there.

Andrew Cecere: Good morning. You know, so this way, this is John, his way of background. You know, the Fed granted us, as we, as you mentioned, full relief from our category two commitments. And that's because of the actions and Andy mentioned this of our actions to reduce risk as well as our ability to strengthen our capital position. So importantly, this is going to provide us additional time and flexibility to meet those new regulatory requirements and do so on the same time frame as our category three peers.

But.

That gives us the confidence that we have a lot have more time and flexibility here.

Yes.

Okay. Thank you and then I think you might have touched on this in.

Earlier question, but maybe if you can sort of re walked us through the sort of LCI burned down and cash flow expectations coming off the both DFS in HTM books, and then I think you might have given the duration of the RFS booked but do you have that for the HTM book as well.

Andrew Cecere: And additionally, we think it's going to reduce the downside risk, given that, given the challenging rate environment. But you know, nothing really changes in terms of how we're fundamentally managing the balance sheet going forward. We're still committed to building regulatory capital. We're still expecting to increase and create capital at a 20 to 25 basis points on average for quarter. And our expectation is to accelerate that as we get through the merger related costs or be on the high end of that range, I should say, as we get through the merger related costs and start to realize the full union bank synergies.

Sure so in terms of the RFS.

In HTM.

We're at about.

In terms of balances about $162 billion or so and it's about a 50 50 mix as we mentioned on the call in terms of MFS in HTM. So we have about as I mentioned $3 billion of runoff per quarter on average just given the current interest rate environment and things of that variety.

Andrew Cecere: And we're still going to be executing risk weighted asset optimization transactions. But now we have the time and flexibility to do that over in a way that is low to neutral in terms of our earnings impact. And so, you know, all the problems reasons we feel like we have the flexibility in our balance sheet to do those sorts of things. I think that's exactly right, John. And the only thing I'd add is you know, part of this decision is reflective of what we've already done for the last 12 months in terms of reducing the risk profile building capital optimizing the balance sheet.

In terms of.

Our profile, we've been able to hedge.

About 30% of the fixed rate portion of the <unk> book and.

And so that's what has driven the duration of that particular book and the three and a half less than three and a half years as we have the HTM book is principally all agency mortgage backed securities and which have longer lives and so it's more more in the six or so six five range in terms of the duration of that book.

Andrew Cecere: And I want to be clear Abraham, we are not under an asset cap at all. We are maintaining flexibility and managing the balance sheet and capital and will continue to remain focused on capital efficient growth. And that includes focusing in a high margin, high return businesses that exceed our cost of capital while deepening relationships, more or most profitable clients. And that has been and will continue to be our focus. That's good color.

Unknown Attendee: Thank you.

Perfect.

Alright wonderful. Thank you guys for taking the question.

Thanks Scott.

And next we'll go to Erika Najarian with UBS. Please go ahead hi.

Good morning, Good morning, Eric Good morning.

Andy My first question is for you.

Yesterday's announcements.

It is a big win for the company and as we think about.

John Stern: And this is a separate question, John. I think I heard you correctly. If I heard you correctly, you mentioned you expect the name to drop and I'm assuming name equals and I like to drop in the fourth quarter, maybe that assumption in terms of those steeper yield curve or widening in just the curve. It was just that assumption around dropping off an eye or name.

Sure.

Combining that.

Relief with a generally tighter regulatory environment.

What what CET one are you looking at and what level are you looking at in terms of Okay. Now I'm at the right level. This is now my my my target in the new World and now in an environment, where balance sheet growth is you know.

John Stern: And how what gives you confidence around mixture consumer behavior to feel good about that. Yeah, so I think in terms of the guidance we provided, we have embedded in there our rate forecast, which includes a rate increase in December. Whether or not that happens or not is relatively immaterial since we're fairly neutral from an interest rate risk positioning standpoint. I guess what I would say is, as the Fed is continuing, whether they're done or not in terms of the rate hiking, we start to see a lot of the things on the depositized slowdowns or non-interesting balances will be relatively stable here at this level.

Minimal at best right I can now return capital back to shareholders through buybacks I guess I'm just wondering.

Printed CEB your GAAP CET one there's the adjusted the John gave right. But then you only have to take into account 25% of that 250 by July one 2025, if we get to a final date by then so theres a lot of moving pieces. So as your investors think about all of this progress that you've made.

John Stern: The deposit betas and the rate paid will start to slow down and then on the other side your assets will start to reprise, whether that's the securities book, the loan book and all those sorts of things. So that's what gives us the confidence really that we will bottom out here in the fourth quarter from a NIM and an interest income perspective.

This relief.

Is your what is your new target is that transitional or fully phased in and what's the bogey that investors can look forward to.

That you would hit before returning them.

Unknown Attendee: Thanks for taking my questions. Thank you.

Capital through buybacks.

Yes, Eric I understand the question and first of all I just want to highlight we're back to 97, which is where we started before the deal and we're able to build when we went from 97% or eight four and build 130 basis points basically less than a year, which I thought was a great effort across the company in terms of what our new target is I think our short term target is to continue to be.

Billed as we talked about remember there is two sets of rules that are yet to be finalized and coming down number one are the Basel III endgame finalization of rules, which will in one shape, one way shape or form increased capital levels. In the second is clarity on CCAR will set those targets once we have clarity on those two items.

John Gao: Next we'll go to John Gao with Economist Research. Please go ahead.

John Stern: Morning, John. Hi, good morning. John, can I just follow up on what you're just talking about? What are you looking at in terms of the NIMM for the fourth quarter roughly? Did I hear correctly? You think the deposit mix kind of settles out, you know, around 1920 where you are here and beta, kind of in the mid-40s. You still have those expectations. Yeah, maybe just to go out the last couple questions you mentioned.

So just just to follow up here.

At least until June 2020 for CCAR results, regardless of how quickly you build the capital either on an adjusted or on a GAAP basis.

John Stern: So from a from a non-interest bearing, yes, we do expect that mix we're at about 19%. That's about where we will be. We expect that to be in that in that range. And from a beta perspective, we are in the mid-40s right now. It's possible to creep up higher depending on where the Fed goes from here, but we, you know, we feel good about that. And then in terms of your, you know, your the net interest margin and things like that, we do anticipate a little bit more pressure here in the fourth quarter, but then that, that really is the point where we, we feel that oh, bottom out, based on my comments, I just made a previous question. And that's reflected in our revenue and industry's income guidance. Yeah. Okay.

You're going to continue to be a pause on the buyback until at least until we see that the CCAR and the SCB.

That's my expectation Erika we want clarity on the Finalization of the Basel III and then CCAR importantly, so we'll be continuing to build capital and determine our capital targets and buffers and all of that activity. Once we have more clear clarity on the finalization of the rules.

Got it.

That's very clear and then just one more for John if I may.

The net interest income trajectory.

Thank you.

The fourth quarter bottom is good news, especially relative to what we thought two days ago, which would be more arguably in litigation.

John Stern: And then, you know, recognizing with the Fed decision, you've obviously got a lot more time to face in the AOC eye now. John, just give us a little more color on what happened in terms of the trend in AOC eye this quarter, what are the pieces there? You know, and how did that swaps effect your burn down timeline? And just also, if you could add on, what do you, how do you calculate the capital with AOC eye today?

We think about the arguably a mitigation habits.

John Stern: Looks like maybe around 7% something like that. Yeah. So I think all in, you know, it's about AOC eyes, about 250 basis point of impact. So I would say 72 is probably, you know, roughly kind of where I would think about it. You know, in terms of the change. And the AFS obviously rates backed up on the, on the long end of the curve, you know, 75 to 90 basis points, depending on treasuries or mortgages that you're looking at.

Impactful to EPS should we think about it similar to what we saw early in the year in terms of securitization.

Are you more actively.

Going to continue to use credit linked notes, which I assume is.

Costs were 12, 5% or so of the pool, so far in a spread and as we think about those dynamics do you feel like you have to you know warehouse more liquidity as we can.

Anticipate LCR rules for regional banks, because we're also hearing that there could be pretty significant haircuts on.

About HTM of HLA.

Sure Erika somebody else I will start with your last point on LCR. We will in addition to what Andy said on the capital side, we're going to have to wait and see what it is on liquidity side.

John Stern: And that had an impact of about $1.4 billion in our, on an aftertax basis on our AFS securities book, which we would have expected. And it's consistent with the duration of our, our book, which we have continued to, to wind down as I mentioned in our comments about a three, less than three and a half years is our, is our current duration. So, so that's, that's the, the effect of that, you know, we are continuing to see, you know, we will continue to see paydowns in that book, whether it's the HTML or FS. We have about approximately $3 billion or so per quarter that rolls off that book. And, you know, we'll reinvest in the AFS side of things over time.

In terms of any potential changes that come out of LCR, we feel very comfortable that we will be able to achieve whatever that changes and feel.

Unknown Attendee: Okay, thank you. Thanks, John.

That will be able to to achieve that whatever that scenario is we'll work into it.

In terms of.

You talked about the noninterest income we feel like again just to kind of reiterate we're looking for that to bottom at this particular point in time in the fourth quarter and where it kind of goes from there post it will depend in part by interest rates.

Got it thanks congratulations.

The release of commitment.

Erika Thank you.

Mike Mayo: Next, we'll go to Mike Mayo with Wells Fargo Security. Please go ahead. Hi.

And next we'll go to Gerard Cassidy with RBC. Please go ahead.

Gerard I handed him.

John Stern: Just to be clear, how much of a 900 million murder savings were recognized in the third quarter results? Well, in terms of, we will get to a full run rate of, of 900 million dollars. You know, it's probably, you know, 100 million or so is kind of the, in that range is probably what we were seeing. But, you know, it's been a growing in terms of the amount and we'll see that full benefit, full through in the fourth quarter.

Yes.

Good morning.

Andy Obviously U S. Bancorp has developed a reputation of being a strong underwriter and we've talked about this in the past with you folks and I was wondering if you could frame out the environment. Because every bank is talking about credit normalization as you guys did.

Because we have such great numbers coming out of the pandemic on credit.

And if you just exclude for a moment the economy, because obviously none of us can control that but I would really be interested in what you guys are seeing from a competitive standpoint in terms of underwriting and if you could compare it to past cycles. Obviously, we've been around for a few cycles and can compare but I'm curious for.

John Stern: So relative to the third quarter, the first quarter of 2025, could see 800 million of additional expense savings? No, because we've been the savings have been generated all throughout the course of the year. And they accelerate, you know, third quarter into fourth quarter and all that, you know, second quarter, third quarter into fourth quarter.

Your Guy's vantage point is it as.

Risky today as it may have been in over five or six or 99, 2000, and any color. There that you can share with us.

Andrew Cecere: So what's the cumulative merger savings? I guess how much more expense saving should there be when they're fully realized in the first quarter relative to the third quarter? When we have the the savings, you know, we'll have, you know, approximately, you know, 400 or so million dollars that has gone through this full year. And then we'll expect to see that in the next coming year. But that's embedded into our, our full, our full year.

Let me give you the big picture and I'm going to ask Terry to highlight some specifics I would say the consumers entering this cycle in very strong shape from a balance standpoint from a.

The perspective of savings accounts that they have to spend activity I think are all starting to normalize but normalized to a pre pandemic, what I would say normal level.

Companies and small businesses are also in very good shape. The one area that we're all very focused on is commercial real estate office, which is one of the areas that we increased our reserve to as you know it's at 10% in this quarter. So maybe Terry you can go into some specifics.

Andrew Cecere: We're, our guidance of flat expenses between 2023 and 2024. So Mike, the way I think about it, this is Andy by the, by the end of the fourth quarter, we will be on a run rate, recognizing 900 million dollars as savings, which will, which will be fully reflected in 2024 in our, in our expense base, and that is consistent with how we think about a relatively flat. 23 to 24 expense base, including those savings plus investments will continue to make in the business.

Andrew Cecere: And then the big question that is so if you have flat 2024 expenses, you think you can get to positive offering leverage towards it. Too early or too many moving parts because this is the sweet spot of the merger savings coming up right by the next quarter. It is a sweet spot. Mike, you're absolutely right. And the savings are great. The opportunities to deepen relationships on the union bank customer base. I mentioned that in my comments.

What I would add to that Gerard as you know when we think about underwriting we really underwrite through a cycle, we try to take into consideration in the stress.

From an underwriting perspective, you know what could happen in terms of rising interest rates are.

Other economic factors that come into play so we haven't adjusted our underwriting standards a lot as we have been thinking about this particular cycle.

Do think that when you end up looking at the industry I think there is some some tightening is going on out there.

Certainly from a competitive standpoint.

<unk>.

We are seeing that to some extent, but no we feel like we're in pretty good shape.

If you end up looking at our situation as.

As Andy said, you know probably the area that we're monitoring the most is commercial real estate office space, specifically, we have a reserve that's about 10% of the overall balance there we have been increasing that and we're likely to continue to increase that.

Andrew Cecere: I think that is terrific. Our fee businesses are doing extremely well. You know, our year over year basis, it was up 12% across almost every category. And frankly, very little of that was related to union bank. That was this core improvement across a number of categories. Capital markets are corporate entrusted, our fee businesses, our payments businesses. You know, the challenge for us and for the entire industry is net interest income and margin.

Because that's going to be a pressure point, but but we're starting from if you think about the overall portfolio, we're starting at a.

Fairly low points, our nonaccrual loans is only 35 basis points of total loans, our allowance is strong at.

Andrew Cecere: And you know, in this environment, that's the one that I, you know, there's a lot of moving pieces. As you say, wrong growth is relatively tepid as we, as we speak for us and for the industry overall. So it will be dependent upon that in terms of positive offering leverage. And I would say it's too early to come. Okay.

208.

Delinquencies are.

You know still at relatively low levels, although increasing and our expectation as we go into 2024.

John Stern: And last follow up, your increase in CET one ratio due to a lot of balance, the optimization did come at a cost of less assets, less loan growth, less earnings, right. There's a trade off in that. But now that you're under kind of less pressure and have so much more flexibility, do you think you can be a little bit more lack in terms of your growth and in turn, that may help.

At that normalization will continue delinquencies will continue to kind of move up.

And <unk>.

Nonperforming assets will continue to move up.

But I think we're in a really good position in terms of the allowance coverage that we have.

And we feel pretty good about that.

Very good good to hear your voice Terry.

To follow up on what you were saying from a competitive standpoint do you sense. The extreme of course was over five or six when all of the crazy lending was being done by some banks, but also the non banks when you guys.

John Stern: And I or is that too much of a stretch? Yeah, we have, we have flexibility now in terms of the transactions that we, we do to optimize and you know, we still have plans to do those sorts of things. We, we've identified some, some things that are going to be relatively neutral and a little bit on the low end of earnings impact. And of course, you saw some of those transactions in the second quarter, you know, pull through in terms of provision and things like that. And that did lower earning assets, as you mentioned, about $8 billion or, or thereabouts this quarter. Great. Thank you. Thanks Mike.

Look at the non bank competitors are there in road players out there that are just doing crazy things. So that the second derivative impacts the banks not because any of the banks yourself included made a poor underwriting decision, but it was the competitors that really do something foolish and now the banks are suffering a bit.

Again, it's not like those things I'm, not suggesting we're there but.

From a comparison standpoint, I think both in the bank and the nonbank space I think that people are being fairly rational a part of the issue is that it's maybe more so on the demand side of the equation as much as anything I think.

John Pancari: And next we'll go to John Pancari with Evercourt. Please go ahead. Morning John.

John Stern: Morning. I know despite the regulatory change around the cat to requirement, you maintain the 20 to 25 dips generation in Team T1 quarterly. You know, why no change there? Can you just talk to us maybe about the given takes in that expectation as the need to meet the category 2 shifted to a category 3. Why don't you change there? Well, I think, you know, there's no change because we feel like given the new rule set and things like that over time, we'll have to transition into the new regime, which will include ALCI and so all the other rules.

Corporate America is being relatively cautious out there other still waiting to see where interest rates are.

It will settle in at and.

Until they see more certainty with respect to what the interest rate inflationary environment looks like I think.

Corporate America has been relatively rare.

Relatively cautious.

And therefore demand is relatively soft, but we're not seeing what I would say crazy things either on the bank or on the nonbank side at this particular point in time in fact, we're probably see and if you end up looking at commercial commercial real estate, probably a pullback across the board.

Great and then as my second follow up question Andy.

John Stern: And so we're going to be in a mode to continue to accrete that capital and that 20 to 25 basis points is our earning stream that we will accrete. And right, you know, like this quarter, for example, is 20 basis points, but we anticipate going to 25 are on the higher end of that range, you know, as we get through the merger related costs and we have the union synergies. Okay, so the less BSO activity can materially benefit that expectation.

It was obviously great news that you guys had yesterday about the release.

Is there any read through obviously, you sat down with the regulators to get that release and they seem to be fairly rational in their decision to make that change there's been a lot of hope and criticism that the Basel III end game.

Proposals are pretty darn strict do you think is there any read through where we may actually see some rationality with the regulators and they may kind of pare back some of those requirements or is that too far of a stretch.

John Stern: I'm sorry. Can you say that more? I can hear you. The less risk-weighted, you know, optimization efforts that would be needed now under the need to meet category 3 did not materially impact the 20 to 25 basis points of earnings generation. No, that did not. And, you know, like, for example, this quarter, we had 20 basis points of RWA actions, which included some of the asset reduction, you saw our earning assets lower, for example, as well as some other transactions embedded.

Alright.

I think.

The regulators have asked for feedback the banks will provide feedback both collectively and individually I think a lot of the feedback is good feedback because of the consequences.

Our customers and I think that's an area of focus that we're going to be very pointed on in terms of our feedback and we want to make sure that from a banking standpoint, we're able to serve our customers and in the rule set.

Create some friction around that in certain categories and that's what we're going to focus in my anticipation is that that the fed will listen to our perspectives and.

John Stern: So, you know, we separate out the core earnings when we're talking about 20 to 25 basis points core earnings from other RWA optimization transactions that we have the ability to do. Okay, and then separately, is there any op-ex impact of the of now needing to conform to the category 3 versus the more immediate requirements of category 2?

That's my hope.

Great Yeah, and I think Youll go ahead, I'm, sorry, I was just going to say.

Particularly can be punitive with respect to low and moderate income customer base.

You see some capital rules related to renewable energy.

Tax credits that don't make.

It seem punitive it does trigger point in time, so I do think theres, a number of different areas, where there is opportunity for adjustment.

John Stern: You can go on the expense side and then separately on the on your margin bottoming comment anything in terms of the trajectory in the margin that you would expect after you see this bottoming as we head into 2024. Yeah, so in terms of op-ex, no, there's no further investment. You may recall before tailoring we had many of the same rules and standards that we had in terms of liquidity rules and reporting and all those sorts of things.

Great. Thank you guys.

Thanks, Greg.

Next we'll go to Vivek <unk> with Jpmorgan. Please go ahead.

Good morning.

Morning.

Shifting gears from capital given that EMEA, a lot of progress to just.

Our normal business.

Payments, you've talked Andy about wanting to grow merchant processing high.

Mid to high single digits really more in the high single digits.

John Stern: So, we we have all the capabilities built up or can quickly get to that level from an operational standpoint. So, there's no worries there. In terms of the net interest margin, you know, we're we mentioned just a little bit of pressure in the fourth quarter and then bottoming out likely stable, but it will depend on interest rates quite frankly at that particular point in time.

And some of the others in the low double digits.

Like corporate payments any color.

Unknown Attendee: Okay, thank you. Thanks, John.

Any thoughts on how you get back up there because that hasnt been the case last couple of quarters, what do you need to do a change of what would help you get that.

Unknown Attendee: Thank you.

I'm going to ask John to start then I'll add in sure. So in terms of merchant processing.

<unk> been making a number of investments over the years and continue to expect.

That high single digit in terms of the merchant sort of thing the numbers are.

Scott Seifers: Okay, next we'll go to John McDonald with the count of his research. Please go ahead. Oh, one moment here. We'll move past that part of me.

We have been.

Have been strong this quarter, but there is normalization that has been happening and so in the quarters.

The quarter to quarter here in the last several quarters theres been a lot of.

Scott Seifers: We'll go to Scott Seifers with Piper Sandler. Please go ahead.

The nuances coming out of the Covid and all those sorts of things. So if you think about airline tickets and hotels and corporate <unk> those have been very strong, but they're normalizing that said.

John Stern: Morning Scott. Hey, thanks for taking the question. Just as it relates to sort of the balance you growth dynamic. So great, great to see you out of that fed restriction. Do you see any risk that you'd exceed $700 billion in assets organically or you know come into contact with any of the other cat recruit cat to restrictions organically in a timeframe that would inject you to cat to rules before your peers would have to get there under new levels.

Services and retail have been strong and so and the retail print that we saw yesterday.

It was very constructive so we feel like there's good underpinnings. There. In addition to the investments that we make to continue to believe in and give us confidence in that in that.

In our projections, there and I think two of those most important investments Vivek are tech led initiative, which is about a third of our revenue base right. Now is tech led from a perspective of new activity and secondly is that while we've talked a lot about which is this business payments ecosystem, which continues to be a top priority for the company because I think it's a huge opportunity for our <unk>.

John Stern: In other words, I'm just starting to kind of make sure that this is a indeed just a full, free and clear, just serious, serious thoughts there. It is as Andy mentioned. There's no asset cap so that we have complete flexibility here on our balance sheet going forward. So if we elect to grow or want to grow and we do want to grow in a capital efficient manner, we will do so. What I would say though is that we're going to be emphasizing higher return loans and de-emphasizing lower return type of assets.

Banking customer base as well as our commercial customer base and then you add in what we're getting from Union Bank I think that's why we're confident in that higher single digit increase.

Okay, and then another fee business that you mentioned, you're expanding capital market.

John Stern: And I think that will manifest itself as the balance sheet turns. And in addition to that, I would just highlight that in this environment right now, the loan outlook is pretty low. The demand for loans is quite low given a number of different reasons out there. But that gives us kind of the confidence that we have a lot of have more time and flexibility here. Yeah. Perfect. Okay. Thank you.

Since you're not doing your <unk>.

Investor Day is anymore any color on what youre doing there to expand that they've always had the loan syndications and <unk>.

Debt capital markets, what else are you doing to step that up in terms of fee.

Level of revenues from that.

Sure. This is John so the.

This is another area, where we are continuing to make investments in back end systems in the frontline and acquiring talent and all these sorts of things and it's been a great story for us and we continue to.

John Stern: And then I think you might have touched on this in an earlier question. But maybe if you can sort of re-walk us through the, so that AOC I'd burn down and cash flow expectations coming off the both the AFS and HTM books. And then I think you might have given the duration of the AFS book, but do you have that for the HTM book as well? Sure. So in terms of the AFS and HTM, you know, we're at about, you know, in terms of balances, about 162 billion or so.

Invest in this going forward and along with.

Hi, great and underwriting there is.

High yield as well as what other areas that have been very strong as in the derivative market providing interest rate.

Our hedging products for our clients, especially in this time, where.

Interest rates are moving around quite a bit that's a service that has been highly needed.

John Stern: And it's about a 50-50 mix as we mentioned on the call in terms of AFS and HTM. So we have about, as I mentioned, $3 billion of runoff per quarter on average just given the current interest rate environment and things of that variety. You know, in terms of our profile, we've been able to hedge about 30% of the fixed rate portion of the AFS book. And, you know, and so that's what has driven the duration of that particular book in the three and a half, less than three and a half years as we have.

Foreign exchange has been a growing component here as well.

Particularly now with Union Bank, we have more of a west coast customer base and more of a foreign exchange need.

In addition to some of the businesses that we work within the corporate Trust side, we have as you know we have businesses.

In Europe as well so there is always some form of foreign exchange and so we've seen a lot of growth. There. In addition to that we've been gaining market share.

The investment grade business and high yield over the.

Days I think we've had an investment grade in the top 10 now in terms of market share. So that has been a business that has continued to advance a slow and steady and it's been it's been a good a good item for us business for us.

John Stern: You know, the HTM book is principally all, you know, agency mortgage-backed securities, which have longer lives. And so it's more in the six or so, six and a half range in terms of the duration of that book. Perfect. All right. Wonderful. Thank you, guys, for taking the question. Thanks, Scott.

Thanks.

Before we take our next question I'd like to remind everybody. It is one zero to ask a question.

Erika Najarian: And next, we'll go to Erica, Nigerian with UBS. Please go ahead. Hi. Good morning. Good morning, Erica. Good morning. And my first question is for you. Yesterday's announcement, you know, is a big one for the company. And as we think about, You know, you know, combining that relief with a generally tighter regulatory environment, you know, what, what CT one are you looking at and what level are you looking at in terms of, okay, now I'm at the right level, this is now my, my target in the new world and now in an environment where balance sheet growth is, you know, minimal at best, right?

And next we'll go to Matt O'connor with Deutsche Bank.

Good morning, Matt.

I was wondering slide seven it shows some of the revenue opportunities I was wondering if you could size that.

Let's start with <unk>.

The revenue synergies related to <unk> deal that you outlined on slide seven is there any way to frame, how big that might be and over what timeframe.

It is a high priority for each of our businesses.

Probably the greatest priorities that first one you highlight which is our credit card opportunity.

Payments business is a strength of U S bank or our card offering us is terrific and we have already had a penetration increase from where we started and that continues to be a focus and then you think about that with the business clients as well.

Erika Najarian: I can now return capital back to shareholders. I guess I'm just wondering because, you know, there's your printed seat, your gap CT one, there's the adjusted that John gave, right? But then you only have to, you know, take into account 25% of that 250 by, you know, July 1st, 2025, if we get to a final date by then. So there's a lot of moving pieces. So as your investors think about all this progress that you've made plus this relief, what is your new, what is your new target? Is that transitional or fully phased in? And what's the bogey that investors could look forward to, you know, that you would hit before returning capital through buybacks?

It is.

A material impact, but we were still working through exactly the sizing and timing and we will continue to update on that but it is a priority and a focus area for each of our businesses.

Okay, and then separately.

A technical question I forget somebody CFA.

Materials, but when we look at the Securities book.

The duration of less than three and a half years, but you're only burning down 25% through 25.

Find me, how that math works and does it cause the burn down kind of step up as we think about 'twenty six right because the duration is pretty short and the breakdown is not all that much in the first couple of years.

Andrew Cecere: Yes, Erica, understand the question. And, you know, first of all, I just want to highlight we're back to 97, which is where we started before the deal and we're able to build and we went from 97 to 84 and build 130 basis points in a basically less than a year, which I thought was a great effort across the company. In terms of what our new target is, I think our short-term target is to continue to build as we talked about.

Okay.

The function of the curve really changed.

We saw the curve flattened out quite a bit this quarter, what I would say on that as we have.

A number of securities that obviously are fixed rate that have longer durations to them or longer average lives and so.

Andrew Cecere: Remember, there's two sets of rules that are yet to be finalized and coming down. Number one are the Basel 3N game finalization of rules, which will in one way shape reform increase capital levels. And the second is clarity on C car. We'll set those targets once we have clarity on those two items. And so just to follow up here, you know, at least until June 2020 for C car results, regardless of how quickly you build the capital, either on an adjusted or on a gap basis, you know, you're going to continue to be at pause on the buyback until at least then until we see the C car and the SUV.

And then we have a number of with our.

The security portion, where we have swaps that is very very low duration.

It's three months or so because of how it swapped to floating rate index.

So in addition to that we've as we've added on some of the security book, we have about $8 billion or so of when.

When we did some of the auto repack transactions.

In the fourth quarter of last year as well as the second quarter of this year.

That is very short as well in addition to some of the floating rate securities within that book, So that it's kind of more of a barbell approach, which gives you the duration of it which is.

Andrew Cecere: That's my expectation, Erica, we want clarity on the finalization of the Basel 3 and then C car importantly, so we'll be continuing to build capital and determine our capital targets and buffers and all that activity once we have more clarity on the finalization of the rules. Got it.

<unk>.

It gives us a value change for a move in interest rates, but in terms of.

The burn down they'll dependent part Bob how does the shape and the type of securities that are.

In the book.

Okay. That's helpful. Obviously less relevant now given the fed's decision, but that's something we're all tracking so thank you.

John Stern: That's very clear.

John Stern: And just one more for John, if I may. In terms of the net interest income trajectory, I think, you know, the fourth quarter bottom is good news, especially relative to, you know, what we thought two days ago, which would be more RWA mitigation. You know, as we think about the RWA mitigation ahead, that's less impactful to EPS. Should we think about it similar to what we saw early in the year in terms of, you know, securitizations.

Thanks, Matt Thanks, Matt.

Okay.

And next we can go to Ken Houston with Jefferies. Please go ahead.

Hey, guys. Thanks, just one more follow up on the category two news I just wanted to make sure we're super clear so the.

700 billion stopped being a buying forever or obviously, you don't have to cross on the prior potential timeframe, but to the prior question. Just wondering you said there is you don't have an asset cap. So does that mean that category. Two is now a non thing for U S bank going forward in any time period or when you Cross <unk>.

John Stern: Are you more actively, are you going to continue to use credit link notes, which I assume is, you know, cost you 12 and a half percent or so of the pool, plus so far in the spread. And as we think about those dynamics, do you feel like you have to, you know, warehouse more liquidity as we anticipate LCR rules for regional banks, because we're also hearing that. That there could be pretty significant haircuts on how they're thinking about HTM of H2LA.

Naturally do you still get on the natural clock clock of having two events to comply just wondering how that fits in with the <unk>.

With their news you've got yesterday, so so we're bound Ken by the by the current rule set which is after four quarters of an average of $700 billion. Then you would go to category two.

Erika Najarian: Sure, Erika, maybe I'll start with your last point. You know, on LCR, we will, in addition to what Andy said on the capital side, we're going to have to wait and see what it is on the liquidity side in terms of any potential changes that come out of LCR. We feel very comfortable that we'll be able to achieve whatever that scenario is. We'll work into it. You know, in terms of, you know, you talked about the net interest income, you know, we feel like it's, again, just to kind of reiterate, we're looking for that to bottom at this particular point in time in the fourth quarter, and where it kind of goes from there post, it will depend in part by interest rates.

Or.

The new Basel III rule set which is yet to be finalized and as you said, but the current rule set is what we're bound on so 700 still is important but what were saying is given where we think asset growth will be given our continued optimization in certain categories. Given our focus on high return businesses, we do not see that as a hurdle to growth.

Understood. Okay, that's what I wanted to clarify thank you and goodbye.

Right.

And with no further questions I'll hand, the call back over to George Anderson.

Thanks, Brad. Thank you everyone for listening to our earnings call. Please contact the Investor Relations Department. If you have any follow up questions.

Erika Najarian: Congratulations on the release of commitment. Thanks, Erika.

This does conclude the conference for today. Thank you for participating you may now disconnect.

Gerard Cassidy: Thank you. And next we'll go to Gerard Cassidy with RBC. Please go ahead. Morning, Gerard. Hi, Andy. Good. Andy, obviously, US Bancorp has developed a reputation of being a strong underwriter, and we've talked about this in the past with you, folks. And I was wondering if you could frame out the environment, because every bank is talking about credit normalization, as you guys did, because we had such great numbers coming out of the pandemic on credit.

Gerard Cassidy: And if you just exclude for a moment the economy, because obviously none of us can control that, but I'm really interested in what you guys are seeing from a competitive standpoint in terms of underwriting. And if you could compare it to path cycles, obviously, we've been around for a few cycles and can compare it, but I'm curious from your guys' vantage point, is it as risky today as it may have been in 0506 or 992000? Any color there that you can share with us?

Andrew Cecere: Let me give you the big picture, and I'm going to ask Terry to highlight some specifics. I would say the consumers entering this cycle in very strong shape from a balanced standpoint, from the perspective of saving to counts that they have, the spend activity. I think are all starting to normalize, but normalize to a pre-pandemic, what I would say, normal level. The companies in small businesses are also in very good shape. You know, the one area that we're all very focused on is commercial real estate office, which is one of the areas that we increase the reserve to, as you know, it's at 10% in this quarter.

Terrance Dolan: So maybe Terry, you can go on some specifics. Yeah, and what I would add to that, Gerard, is as you know, when we think about underwriting, we really underwrite through a cycle. You know, we try to take into consideration and stress from an underwriting perspective, you know, what could happen in terms of rising interest rates or other economic factors that come into play. So, you know, we haven't adjusted our underwriting standards a lot as we have been thinking about this particular cycle.

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Terrance Dolan: I do think that, you know, when you end up looking at the industry, I think there is some tightening that's going on out there. You know, certainly from a competitive standpoint, you know, we are seeing that to some extent. But, you know, we feel like we're in pretty good shape. You know, if you end up looking at, you know, our situation, as Andy said, you know, probably the area that we're monitoring the most is commercial real estate office space specifically.

Terrance Dolan: You know, we have a reserve that's about 10% of the overall balance there. We have been increasing that and we're likely to continue to increase that, because that's going to be a pressure point. But we're starting from, you know, if you think about the overall portfolio, we're starting at fairly low points, you know, our non accrual loans is only 35 basis points of total loans are allowances strong at 208, you know, still at relatively low levels, although increasing.

Terrance Dolan: And, you know, our expectation, as we go into 2024, is that, you know, that normalization will continue. The Lincoln Seas will continue to kind of move up. And non performing assets will continue to move up, you know, but I think we're in a really good position in terms of the allowance coverage that we have, and we feel pretty good about that.

Terrance Dolan: [inaudible] very good to hear your voice Terry, just to follow up on what you were saying from a competitive standpoint do you sense you know the extreme of course was 0 506 when all of the crazy lending was being done by you know some banks but also the non banks when you can look at the non bank competitors are there road players out there that are just doing crazy things so that the second derivative impacts the banks not because any of the banks yourself included made a poor underwriting decision but it was the competitors that really did something foolish and now you the banks are suffering a bit or yeah I think again not not like those things I'm not suggesting where they are but yeah from a comparison standpoint I think both in the bank and in the non bank space I think that you know people are being fairly rational a part of the issue is that it's maybe more so on the demand side of the equation as much as anything I think corporate America is being relatively cautious out there there's still waiting to see where interest rates you know settled in at and you know tell they see more certainty with respect to what the interest rate inflationary environment looks like you know I think corporate America is being relatively relatively cautious and therefore demand is relatively soft but we're not seeing what I would say crazy things either on the bank or on the non bank side at this particular point time back we're probably seeing if you end up looking at commercial real estate probably a pullback across the board great and then as my second follow-up question Andy it was obviously great news that you guys had yesterday about the release is there any read through obviously use that down with the regulators to get that release and they seem to be fairly rational in their decision to make that change there's been a lot of hope and criticism that the Basel 3N game proposals are pretty darn strict do you think is there any read through where we may actually see some rationality with the regulates and they may kind of pair back some of those requirements or is that too far of a stretch[inaudible] have some friction around that in certain categories and that's where we're going to focus and in my anticipation is that that the Fed will will listen to our perspectives and and and that's my hope yeah I think you go ahead I'm sorry you know I was just going to say you know and in particularly it can be punitive with respect to low and moderate income customer base. You see some capital rules related to renewable energy tax credits that don't make the same punitive at this particular point time so I do think there's a number of different areas where you know there's opportunity for adjustment.

Gerard Cassidy: Great thank you guys. Thanks Greg.

Vivek Juneja: And next we'll go to back to Juneja with JP Morgan please go ahead. We're either that good morning. Sifting years from capital given that you made a lot of progress to just your normal business. Payments, you've talked Andy about wanting to grow much in processing mid to high single digits, really more in the high single digits and some of the others in the low double digits like corporate payments. Any color on any thoughts on how you get back up there because that hasn't been the case last couple of quarters, what you need to do or change or what would help you get there.

Vivek Juneja: I'm going to ask John to start the now add in. Sure. So, you know, in terms of immersion processing, we, you know, have been making a number of investments over the years and continue to expect, you know, that that high single digit in terms of the merchant sort of thing, you know, the numbers are have been, you know, have been strong this quarter, but there's normalization that has been happening. And so in the quarters, the quarter to quarter here, the last several quarters, there's been a lot of the nuances coming out of the COVID and all those sorts of things.

Vivek Juneja: So, if you think about airline tickets and hotel hotels and corporate teeny, those have been very strong, but they're normalizing that said services and retail have been strong. And so and the retail print that we saw yesterday, you know, was very constructive. So we feel like there's good underpinnings there in addition to the investments that we make to continue to believe and give us confidence in that in that in our projections there.

Vivek Juneja: And I think two of those most important investments for that are our tech led initiative, which is about a third of our revenue base right now is tech led from a perspective of new activity. And secondly is that what we've talked a lot about, which is this business payments ecosystem, which continues to be a top priority for the company, because I think it's a huge opportunity for our business banking customer base as well as our commercial customer base. And then you add in what we're getting from union bank.

John Stern: I think that's why we're confident in that higher single digit increase.

John Stern: Okay, and then another fee business that you mentioned, you're expanding capital markets since you're not doing your, your investor days anymore, any color on what you're doing there to expand that you've always had the loans, indications and debt capital markets, what else are you doing to step that up in terms of the level of revenues from that? Sure, this is John, so this is another area where we have continued to make investments in backend systems and the front line and acquiring talent and all these sorts of things.

John Stern: And it's been a great story for us and we continue to invest in this going forward. And along with high grade and underwriting there's high yield as well as what other areas that have been very strong is in the derivative market providing interest rate. Hedging products for our clients, especially in this time where interest rates are moving around quite a bit to service that has been highly needed. Foreign exchange has been a growing component here as well.

John Stern: And particularly now with union bank, we have more of a west coast customer base and more of a foreign exchange need in addition to some of the businesses that we work with in the corporate trust side. We have, as you know, we have businesses in Europe as well. So there's always some form of foreign exchange. And so we've seen a lot of growth there. In addition to that, we've been graining market share in the investment grade business and high yield over the coming days.

John Stern: I think we've had an investment grade in the top 10 now in terms of market share. So that has been a business that has continued to advance, slow and steady, and it's been a good item for us, business for us. Thanks.

Matt O'connor: Before we take our next question, I'd like to remind everybody it is one zero to ask a question, and next we'll go to Matt O'Connor with Deutsche Bank. I was wondering a slide seven that shows some of the revenue opportunities, I was wondering if you could slide that. If you could start with the UB deal, the revenue strategy is way to the UB deal that you outlined in slide seven, is there any way to frame how big that might be or what time frame.

Andrew Cecere: It is a high priority for each of our businesses, probably the greatest priorities that first one you talk we highlight, which is our credit card opportunity. The payment business is a strength of US bank, our card offering is terrific and we've already had a penetration increase from where we started, and that continues to be a focus. And then you think about that with the business clients as well, I think it is a material impact, but we're still working through exactly the sizing and timing and we'll continue to update on that, but it is a priority and a focus area for each of our businesses.

John Stern: Okay, and then separately, a little bit of a technical question, I forget some of my CFA materials, but when we look at the securities book of a duration of less than three and a half years, but you're only burning down 25% through 25, remind me how that math works, and does the burn down kind of step up as we think about 26. Because the duration is pretty short and the burn down is not all that much in the first couple of years.

John Stern: Yeah, the function of the curve really changed. We saw the curve flatten out quite a bit this quarter. What I would say on that is we have a number of securities that obviously are fixed rate that have longer durations to them or longer average lives. And so, and then we have a number of with the security portion where we have swaps, that has very, very low duration. It's three months or so because of how it swapped the floating rate index.

John Stern: So in addition to that, as we've added on some of the security book, we have about 8 billion or so of when we did some of the auto repack transactions in the fourth quarter of last year as well as the second quarter of this year. That is very short as well in addition to some of the floating rate securities within that book. So, it's kind of more of a barbell approach which gives you the duration of it which gives us a value change for a move and interest rates. But in terms of the burn down that will depend on how the shape and the type of securities that are within the book.

Matt O'connor: Okay, well, obviously less relevant now given the credit decision but still something we're all tracking. So, thank you. Thanks, man.

Ken Yusin: And next we can go to Ken Yusin with Jeffries.

John Stern: Please go ahead. Hey guys, thanks. I just want to follow up on the category two news. I just want to make sure we're super clear. So, does 700 billion stop being a bind forever or obviously you don't have to cross on the prior potential time frame. But to the prior question, just wondering you said there's you don't have an asset cap. So does that mean that category two is now a non-thing for US bank going forward in any time period or when you cross naturally, do you still get on the natural clock of having to events, you know, to comply?

John Stern: Just wondering how that fits in with the news you got yesterday. So we're bound, Ken, by the current rule set, which is after four quarters of an average of 700 billion dollars, then you would go to category two. Or the new Basel 3 rule set, which is yet to be finalized as you said, but the current rule set is what we're bound on. So 700 still is important, but what we're saying is given where we think asset growth will be given our continued optimization and certain categories given our focus on I return businesses. We do not see that as they hurt all the growth.

Ken Yusin: Understood. Okay. That's what I want to clarify. Thank you. You bet.

George Andersen: And with no further questions, I'll hand the call back over to George Andersen. Thanks, Brad. Thank you, everyone, for listening to our earnings call. Please contact the investor relations department. If you have any follow up questions.

Operator: This does conclude the conference for today. Thank you for participating.

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