Q3 2025 US Bancorp Earnings Call
Speaker #3: Welcome to the US BANCORP \DE Q2 2025 earnings conference call. Following a review of the results, there will be a formal question and answer session.
Operator: Welcome to the U.S. Bancorp third quarter 2025 earnings conference call. Following a review of the results, there will be a formal question and answer session. If you would like to ask a question during this time, please press star, then one on your phone. If you wish to withdraw your question, please press star, then one again. This call will be recorded and available for replay beginning today at approximately 11:00 A.M. Central Time. I'll now turn the conference over to George Andersen, Director of Investor Relations for U.S. Bancorp.
Speaker #3: If you would like to ask a question during this time, please press star, then one on your phone. If you wish to withdraw your question, please press star, then one again.
Speaker #3: This call will be recorded and available for replay beginning today at approximately 11 AM Central Time. I will now turn the conference over to George Anderson, Director of Investor Relations of US BANCORP.
Speaker #4: Thank you, John Levy, and good morning, everyone. Joining me today in Minneapolis are our Chief Executive Officer, Gunjan Kedia, and Vice Chair and CFO, John Stern.
George Andersen: Thank you, John, Luis, and good morning, everyone. Joining me today in Minneapolis is our Chief Executive Officer, Gunjan Kedia, and Vice Chair and CFO, John Stern. In a moment, Gunjan and John will reference a slide presentation together with their prepared remarks. A copy of the presentation, our press release, and all supplemental consolidated schedules are available on our website at ir.usbank.com. Please note that any forward-looking statements made during today's call are subject to risks and uncertainties that can cause our actual results to differ materially from our current expectations. These factors are described on page two of today's earnings presentation, in our press release, and in reports filed with the SEC. Following our prepared remarks, Gunjan and John will be happy to answer your questions. I will now turn the call over to Gunjan.
Speaker #4: In a moment, Gunjan and John will reference a slide presentation together with their prepared remarks. A copy of the presentation, our press release, and all supplemental consolidated schedules are available on our website at iar.usbank.com.
Speaker #4: Please note that any forward-looking statements made during today's call are subject to risks and uncertainties that can cause our actual results to differ materially from our current expectations.
Speaker #4: These factors are described on page two of today's earnings presentation, in our press release, and in reports filed with the SEC. Following our prepared remarks, Gunjan and John will be happy to answer your questions.
Speaker #4: I will now turn the call over to Gunjan.
Speaker #1: Thank you, George, and good morning, everyone. If I could please turn your attention to slide three. In the third quarter, we reported earnings per share of $1.22, an increase of 18.4% year over year.
Gunjan Kedia: Thank you, George, and good morning, everyone. If I could please turn your attention to slide three. In the third quarter, we reported earnings per share of $1.22, an increase of 18.4% year over year. Our net revenue of $7.3 billion was a quarterly record, reflecting both strong momentum across our fee businesses and improved spread income. This quarter, we generated a very meaningful 530 basis points of positive operating leverage, a return on average assets of 1.17%, and a net interest margin of 2.75%. John will provide more details on our financial performance in his opening remarks. Importantly, we are making strong progress against each of our three strategic priorities for our company. We are generating organic growth through distinctive interconnected solutions. We are maintaining our expense discipline through sustainable process automation, and we are executing on our payments transformation with greater focus and strategic investments.
Speaker #1: Our net revenue of $7.3 billion was a quarterly record, reflecting both strong momentum across our three businesses and improved spread income. This quarter, we generated a very meaningful 530 basis points of positive operating leverage, a return on average assets of 1.17%, and a net interest margin of 2.75%. John will provide more details on our financial performance in his opening remarks.
Speaker #1: Importantly, we are making strong progress against each of our three strategic priorities for our company. We are generating organic growth through distinctive interconnected solutions; we are maintaining our expense discipline through sustainable process automation; and we are executing on our payments transformation with greater focus and strategic investments.
Speaker #1: And as we manage the bank for the long run, through both positive and uncertain times, our highly diversified balance sheet and foundational risk management capabilities delivered improved credit quality and stronger capital and liquidity levels this quarter.
Gunjan Kedia: As we manage the bank for the long run through both positive and uncertain times, our highly diversified balance sheet and foundational risk management capabilities delivered improved credit quality and stronger capital and liquidity levels this quarter. Moving to slide four, fee income diversification is a key source of strength for the company. On the left, you will see that fee revenue grew at 9.5% on a year-over-year basis, reflecting broad-based strength across our payments, institutional, and consumer businesses. Notably, interest rate movements this quarter supported a meaningful acceleration in select capital markets and mortgage revenues. On the right, we highlight five key businesses that have demonstrated strong year-over-year growth and that we believe present a favorable growth outlook. Collectively, these businesses represented approximately two-thirds of our total fee revenue this quarter. Turning to slide five, we spotlight one additional business: Impact Finance.
Speaker #1: Moving to slide four, fee income diversification is a key source of strength for the company. On the left, you will see that fee revenue grew by 9.5% on a year-over-year basis, reflecting broad-based strength across our payments, institutional, and consumer businesses.
Speaker #1: Notably, interest rate movements this quarter supported a meaningful acceleration in select capital markets and mortgage revenues. On the right, we highlight five key businesses that have demonstrated strong year-over-year growth and that we believe present a favorable growth outlook.
Speaker #1: Collectively, these businesses represented approximately two-thirds of our total fee revenue this quarter. Turning to slide five, we spotlight one additional business, Impact Finance. With the union bank acquisition, we bolstered our platform, bringing improved tax credit syndication capabilities, new talent, and increased access to the California market.
Gunjan Kedia: With the Union Bank acquisition, we bolstered our platform, bringing improved tax credit syndication capabilities, new talent, and increased access to the California market. Currently reported within the other revenue, Impact Finance has grown at a 17% compound annual growth rate from 2021 to 2024 and is an important mission-driven capability that is core to our fee income portfolio. Over the next several years, we anticipate additional growth from a pull forward of activity tied to some recent executive orders and expect revenue trends across our environmental finance, affordable housing, and community finance solutions to remain robust. In addition, the business also supports a net tax benefit to the company, which we believe will continue to be a meaningful driver of bottom-line EPS growth. Slide six showcases our growing consumer franchise and long-term deposit strategy.
Speaker #1: Currently reported within the other revenue, Impact Finance has grown at a 17% CAGR from 2021 to 2024 and is an important mission-driven capability that is core to our fee income portfolio.
Speaker #1: Over the next several years, we anticipate additional growth from a pull forward of activity tied to some recent executive orders and expect revenue trends across our environmental finance, affordable housing, and community finance solutions to remain robust.
Speaker #1: In addition, the business also supports a net tax benefit to the company, which we believe will continue to be a meaningful driver of bottom line EPS growth.
Speaker #1: Slide six, showcases our growing consumer franchise and long-term deposit strategy. Our deposit base is highly diversified, across clients, geographies, and products, providing strength and stability through the cycle.
Gunjan Kedia: Our deposit base is highly diversified across clients, geographies, and products, providing strength and stability through the cycle. We are actively working to increase our share of consumer deposits with interconnected products like Banksmartly, branch and client center expansions, partnerships, and enhanced marketing and analytical capabilities. Consumer deposits now represent over 52% of total average deposits, up nearly two points from the third quarter of 2023. Moving to slide seven, our expense discipline over the last two years and execution on four signature productivity programs has resulted in improved organic growth and greater operational efficiencies. As you can see on the left, the outcomes of our efforts have been quite successful, as we have seen steady improvement to both the efficiency ratio and positive operating leverage as adjusted. Turning to slide eight, our payments transformation remains a key strategic priority for our company.
Speaker #1: We are actively working to increase our share of consumer deposits, with interconnected products like bank Smartly, branch and client-center center expansions, partnerships, and enhanced marketing and analytical capabilities.
Speaker #1: Consumer deposits now represent over 52% of total average deposits, up nearly two points from the third quarter of 2023. Moving to slide seven, our expense discipline over the last two years and execution on four signature productivity programs have resulted in improved organic growth and greater operational efficiencies.
Speaker #1: As you can see on the left, the outcomes of our efforts have been quite successful, as we have seen steady improvement in both the efficiency ratio and positive operating leverage, as adjusted.
Speaker #1: Turning to slide eight, our payments transformation remains a key strategic priority for our company. As the charts on the left show, we have seen steady improvement and more consistent year-over-year fee growth over the last several quarters, across both our traditional card issuing and merchant processing businesses.
Gunjan Kedia: As the charts on the left show, we have seen steady improvement and more consistent year-over-year fee growth over the last several quarters across both our traditional card issuing and merchant processing businesses. We are looking forward to providing a deeper dive into our payments transformation and strategy at an upcoming industry conference in the fall. Let me now turn the call over to John.
Speaker #1: We are looking forward to providing a deeper dive into our payments transformation and strategy at an upcoming industry conference in the fall. Let me now turn the call over to John.
Speaker #4: Thank you, Gunjan and good morning, everyone. This was a very strong quarter for us, highlighted by core underlying business momentum and accelerating growth. As we made meaningful progress toward our medium-term financial targets.
George Andersen: Thank you, Gunjan, and good morning, everyone. This was a very strong quarter for us, highlighted by core underlying business momentum and accelerating growth as we made meaningful progress toward our medium-term financial targets. If you turn to slide nine, I'll start with highlights for the quarter, followed by a discussion of third quarter earnings trends. As Gunjan mentioned, we reported earnings per common share of $1.22 and achieved record net revenue of $7.3 billion this quarter. Revenue growth versus prior periods benefited from improved spread income, driven by enhancements we've made to our portfolio mix, as well as broad-based fee growth as we deepen client relationships across the franchise. Elevated deposit flows at the end of the quarter in support of more robust client activity and seasonality in our corporate trust business resulted in ending assets of $695 billion.
Speaker #4: If you turn to slide nine, I'll start with highlights for the quarter, followed by a discussion of third quarter earnings trends. As Gunjan mentioned, we reported earnings per common share of $1.22, and achieved record net revenue of $7.3 billion this quarter.
Speaker #4: Revenue growth versus prior periods benefited from improved spread income, driven by enhancements we've made to our portfolio mix, as well as broad-based fee growth, as we deepened client relationships across the franchise.
Speaker #4: Elevated deposit flows at the end of the quarter in support of more robust client activity and seasonality in our corporate trust business, resulted in ending assets of $695 billion.
Speaker #4: As expected, nearly all key credit quality metrics, including non-performing assets and net charge-offs, improved both sequentially and on a year-over-year basis. As of September 30th, our tangible book value per share increased 12.7% on a year-over-year basis.
George Andersen: As expected, nearly all key credit quality metrics, including non-performing assets and net charge-offs, improved both sequentially and on a year-over-year basis. As of September 30, our tangible book value per share increased 12.7% on a year-over-year basis. Slide 10 provides key performance metrics. As the slide illustrates, each of our key profitability and efficiency ratios improved this quarter, highlighted by a return on average assets of 1.17% and a return on tangible common equity of 18.6%. Over the last two years, we have increased our tangible common equity approximately 30% while continuing to deliver a high-teens ROTCE on steadily improving earnings growth. Notably, we also delivered an improved efficiency ratio of 57.2% and a net interest margin of 2.75% this quarter.
Speaker #4: Slide 10 provides key performance metrics. As the slide illustrates, each of our key profitability and efficiency ratios improved this quarter, highlighted by a return on average assets of 1.17% and a return on tangible common equity of 18.6%.
Speaker #4: Over the last two years, we have increased our tangible common equity approximately 30%, while continuing to deliver a high teens ROTCE on steadily improving earnings growth.
Speaker #4: Notably, we also delivered an improved efficiency ratio of 57.2% and a net interest margin of 2.75% this quarter. Our sequential margin expansion of nine basis points was driven by fixed asset repricing, strong card and commercial loan growth, as well as strategic balance sheet actions we took in Q2.
George Andersen: Our sequential margin expansion of nine basis points was driven by fixed asset repricing, strong card and commercial loan growth, as well as strategic balance sheet actions we took in the second quarter. We continue to expect net interest margin expansion in the medium term. Slide 11 provides a balance sheet summary. Total average deposits increased 1.8% linked quarter to $512 billion as we continued to emphasize growth in relationship-based deposits. Our percentage of non-interest bearing to total deposits remains stable at approximately 16%. Average loans totaled $379 billion, up 0.2% from the prior quarter. Adjusting for loan sales last quarter, our underlying growth rate was 1.0% linked quarter and 2.8% on a year-over-year basis. Loan yields increased to 5.97%, an eight-basis point improvement linked quarter.
Speaker #4: We continue to expect net interest margin expansion in the medium term. Slide 11 provides a balance sheet summary. Total average deposits increased 1.8% linked quarter to $512 billion, as we continued to emphasize growth in relationship-based deposits.
Speaker #4: Our percentage of non-interest-bearing deposits to total deposits remained stable at approximately 16%. Average loans totaled $379 billion, up 0.2% from the prior quarter. Adjusting for loan sales last quarter, our underlying growth rate was 1.0% linked quarter and 2.8% on a year-over-year basis.
Speaker #4: Loan yields increased to 5.97%, reflecting an eight basis point improvement from the linked quarter. As we continue to strategically remix our balance sheet with a greater proportion of commercial and credit card loan balances, we increased both commercial and credit card loans by 9.5% and 4.3%, respectively, on a year-over-year basis.
George Andersen: As we continue to strategically remix our balance sheet with a greater proportion of commercial and credit card loan balances, we increased both commercial and credit card loans 9.5% and 4.3% respectively on a year-over-year basis. Given the current industry focus on non-depository financial institutional lending, we included a slide in the appendix of our presentation to provide additional transparency on this loan category. As you will observe, this is a highly diversified portfolio with a balanced and broad composition of borrowers that is underpinned by our proven underwriting capabilities and strong collateral and structural protections. Finally, as it relates to the balance sheet, the ending balance on our investment portfolio as of September 30th was $171 billion and had an average yield of 3.26%, an eight-basis point improvement sequentially driven by the strategic actions we took last quarter and fixed asset repricing.
Speaker #4: Given the current industry focus on non-depository financial institution lending, we included a slide in the appendix of our presentation to provide additional transparency on this loan category.
Speaker #4: As we will observe, this is a highly diversified portfolio with a balanced and broad composition of borrowers that is underpinned by our proven underwriting capabilities and strong collateral and structural protections.
Speaker #4: Finally, as it relates to the balance sheet, the ending balance in our investment portfolio, as of September 30th, was $171 billion and had an average yield of 3.26%.
Speaker #4: In eight basis point improvements sequentially, driven by the strategic actions we took last quarter and fixed asset repricing. Turning to slide 12, net interest income on a fully taxable equivalent basis totaled $4.25 billion, an increase of 4.2% on a linked quarter basis.
George Andersen: Turning to slide 12, net interest income on a fully taxable equivalent basis totaled $4.25 billion, an increase of 4.2% on a linked quarter basis. Slide 13 highlights trends in non-interest income. Total non-interest income was approximately $3.08 billion. Excluding security losses, total fee revenue increased 9.5% on a year-over-year basis, driven by new business momentum and broad-based growth across our fee businesses. Turning to slide 14, non-interest expense totaled approximately $4.2 billion as we continue to prudently manage our expense base. Slide 15 highlights our improving credit quality performance despite ongoing macroeconomic uncertainty. Our ratio of non-performing assets to loans and other real estate was 0.43% at September 30th, an improvement of one basis point linked quarter and six basis points year over year. This quarter, our net charge-off ratio of 0.56% improved three basis points sequentially and four basis points year over year.
Speaker #4: Slide 13 highlights trends in non-interest income. Total non-interest income was approximately 3.08 billion, excluding security losses, total fee revenue increased 9.5% on a year-over-year basis.
Speaker #4: Driven by new business momentum and broad-based growth across our fee businesses. Turning to slide 14, non-interest expense totaled approximately 4.2 billion, as we continued to prudently manage our expense base.
Speaker #4: Slide 15 highlights our improving credit quality performance despite ongoing macroeconomic uncertainty. Our ratio of non-performing assets to loans and other real estate was 0.43% at September 30th, an improvement of one basis point linked quarter and six basis points year over year.
Speaker #4: This quarter, our net charge-off ratio of 0.56% improved three basis points sequentially and four basis points year over year. Turning to slide 16, as of September 30th, our common equity tier one capital, as a percentage of risk-weighted assets, was 10.9%.
George Andersen: Turning to slide 16, as of September 30th, our common equity tier one capital as a percentage of risk-weighted assets was 10.9%, a 20 basis point increase linked quarter. Including AOCI, our CET1 ratio improved to 9.2%. At the top of slide 17, we provide a comparison of third quarter results to our previous guidance. This quarter, both net interest income and fee revenues exceeded our expectations, while non-interest expense was in line with previous guidance, which drove meaningful positive operating leverage for the quarter. Let me now provide our forward-looking guidance. In the fourth quarter, we expect net interest income on a fully taxable equivalent basis to be relatively stable to our third quarter level of $4.25 billion. Total fee revenue is expected to be approximately $3 billion. Total non-interest expense is expected to increase between 1% and 1.5% sequentially.
Speaker #4: A 20 basis point increase linked quarter, including AOCI, our CET1 ratio improved to 9.2%. At the top of slide 17, we provide a comparison of third quarter results to our previous guidance.
Speaker #4: This quarter, both net interest income and fee revenues exceeded our expectations, while non-interest expense was in line with previous guidance, which drove meaningful positive operating leverage for the quarter.
Speaker #4: Let me now provide our forward-looking guidance. In the fourth quarter, we expect net interest income on a fully taxable equivalent basis to be relatively stable to our third quarter level of $4.25 billion.
Speaker #4: Total fee revenue is expected to be approximately $3 billion, total non-interest expense is expected to increase between 1 and 1.5% sequentially. We expect to deliver positive operating leverage of 200 basis points or more on an adjusted basis.
George Andersen: We expect to deliver positive operating leverage of 200 basis points or more on an adjusted basis. Turning to slide 18, we are now operating within all of our medium-term target ranges, one year removed from our 2024 investor day, and remain confident in our ability to build on these results over time. Let me now hand it back to Gunjan for closing remarks.
Speaker #4: Turning to slide 18, we are now operating within all of our medium-term target ranges, one year removed from our 2024 Investor Day. We remain confident in our ability to build on these results over time.
Speaker #4: Let me now hand it back to Gunjan for closing remarks.
Speaker #1: Thank you, John. Third-quarter results show that we are beginning to hit our stride on execution. We remain focused on delivering growth, productivity, returns, and strong risk management, both in favorable and uncertain economic environments.
Gunjan Kedia: Thank you, John. Third quarter results show that we are beginning to hit our stride on execution. We remain focused on delivering growth, productivity, returns, and strong risk management, both in favorable and uncertain economic environments. Let me just close by extending my deep gratitude to our clients and shareholders. Our results reflect the power of our strategy, the strength of our franchise, and the dedication of our teams across this organization. We appreciate your trust and your partnership. With that, we will now open the call for your questions.
Speaker #1: Let me just close by extending my deep gratitude to our clients and shareholders. Our results reflect the power of our strategy, the strength of our franchise, and the dedication of our teams across this organization.
Speaker #1: We appreciate your trust and your partnership. With that, we will now open the call for your questions.
Speaker #3: Thank you. At this time, as a reminder, if you would like to ask a question, press star, then the number one on your telephone keypad.
Operator: Thank you. At this time, as a reminder, if you would like to ask a question, press star, then the number one on your telephone keypad. We'll pause for just a moment to compile the Q&A order. Your first question comes from the line of John McDonald of Truist Securities. Your line is open.
Speaker #3: We'll pause for just a moment to compile the Q&A order. Your first question comes from the line of John McDonald of Truist Securities. Your line is open.
Speaker #4: Hi, good morning. I start off with a question for John, just on the outlook. John, what are you seeing for net interest margin trend in the fourth quarter, and can you give us some puts and takes on your outlook for net interest income to be relatively flattish in the fourth quarter?
[Analyst 1]: Hi, good morning. I start off with a question for John, just on the outlook. John, what are you seeing for net interest margin trend in the fourth quarter? Can you give us some puts and takes on your outlook for net interest income to be relatively flattish in the fourth quarter?
Speaker #3: Sure, good morning, John. You know, maybe stepping back just to the third quarter, we had a lot of favorable items this quarter that will continue to be sustainable.
George Andersen: Sure. Good morning, John. Maybe stepping back just to the third quarter, we had a lot of favorable items this quarter that will continue to be sustainable. We had strong fixed asset repricing. We had a healthy mix of favorability, both on the loan side of the equation as well as on the liability side. Of course, we had the strategic actions that we talked about last quarter that ended up being favorable as well. Looking forward, if I think about the fourth quarter, we talked about relative stability, and we have the favorable items still being a tailwind in terms of repricing and mix. However, we have credit card favorability this quarter that is seasonal to a certain extent, and that will reverse in some capacity. When I think about the quarter, there's obviously some risks and there's some opportunities.
Speaker #3: We had strong fixed asset repricing; we had a healthy mix of favorability, both on the loan side of the equation, as well as on the liability side.
Speaker #3: And of course, we had the strategic actions that we talked about last quarter that that ended up being favorable as well. So looking forward, if I think about, you know, the fourth quarter, we talked about relative stability, and we, you know, we have the favorable items still at our being a tailwind in terms of repricing and mix.
Speaker #3: However, we have credit card favorability this quarter that is seasonal to a certain extent, and that will reverse in some capacity. So when I think about the quarter, there are obviously some risks and some opportunities.
Speaker #3: I would say that we're biased to the upside, both in terms of net interest income and net interest margin versus our flat guidance, because I just see more opportunity than I do risk.
George Andersen: I would say that we're biased to the upside, both in terms of net interest income and net interest margin versus our flat guidance, because I just see more opportunity than I do risk. We'll see how the quarter plays out, but that's where we're at right now.
Speaker #3: But we'll see how the quarter plays out. That's where we're at right now.
Speaker #4: Okay, and then just following up on that, looking a little further out, what are some of the drivers you have for net interest margin expansion next year?
[Analyst 1]: Okay. Just following up on that, looking a little further out, what are some of the drivers you have for net interest margin expansion next year in the context of maybe a few rate cuts? Do you still think that you could get towards 3% in 2027?
Speaker #4: In the context of maybe a few rate cuts, do you still think that you could get towards 3% in 2027?
Speaker #3: We definitely see a path of net interest margin expansion getting to that 3% level. In 2027, I'll, you know, the drivers are going to be the ones that we've talked about in the past.
George Andersen: We definitely see a path of net interest margin expansion getting to that 3% level in 2027. The drivers are going to be the ones that we've talked about in the past. We have fixed asset repricing that is quite mechanical. We've talked about the $3 billion investment portfolio and the $5 to $7 billion of loans that reprice. We still have mix that we have in our control in terms of leaning more into card and commercial type of loans that are helping. I think of those things as having somewhere in that two to three basis points of embedded lift from a net interest margin standpoint. The third component is really going to be on the deposit side and the mix and pricing of that. That will depend a little bit.
Speaker #3: We have fixed asset repricing that is quite mechanical. We've talked about the $3 billion investment portfolio and the $5 billion to $7 billion of loans that reprice.
Speaker #3: We still have mix that we have in our control in terms of leaning more into card and commercial type of loans that are helping.
Speaker #3: And so I think of those things, having, you know, somewhere in that 2 to 3 basis points of embedded lift from a net interest margin standpoint.
Speaker #3: The third component is really going to be on the deposit side and the mix and pricing of that. And that will depend a little bit on the speed in which we gain to that 3% margin. It's going to depend on the curve, on deposit competition, and on how we execute really on DDA, checking, and all those sorts of accounts that we need to grow.
George Andersen: The speed in which we gain to that 3% margin is going to depend on the curve, depends on deposit competition, and how we execute really on DDA and checking and all those sorts of accounts that we need to grow. We definitely see a path for 3% in 2027, but some of those macro environments might impact the speed in which we get there.
Speaker #3: So we definitely see a path for 3% in 2027. But some of those macro environments might impact the speed in which we get there.
Speaker #4: Okay, thanks, John.
[Analyst 1]: Okay, thanks, John.
Speaker #3: You bet.
George Andersen: You bet.
Speaker #4: Your next question comes from the line of John Pencari of Evercore. Your line is open.
Operator: Your next question comes from the line of John Pencari of Evercore. Your line is open.
Speaker #5: Morning.
[Analyst 2]: Morning.
Speaker #4: Morning.
George Andersen: Morning.
Speaker #5: The positive operating leverage came in particularly solid this quarter, and you're clearly confident in the 200 basis points plus expectation for 2025. Could you give us just a little more color in terms of your confidence on that front or in that pace as you look into 2026?
[Analyst 2]: On the positive operating leverage, came in particularly solid this quarter, and you're clearly confident in the 200 basis points plus expectation for 2025. Can you give us just a little more color in terms of your confidence in that front or in that pace as you look into 2026, just given some of the investments that you're looking at, but also conversely some of the momentum you're clearly seeing on the revenue side? Could we see positive operating leverage exceed that 200 plus range as we look out?
Speaker #5: Just given some of the investments you're looking at, but also conversely some of the momentum you're clearly seeing on the revenue side, could we see positive operating leverage exceed that 200 plus range as we look out?
Speaker #3: So thanks, John. You know, in terms of our guidance, of course, we've been signaling over 200 basis points of operating leverage this year, and we've been achieving that.
George Andersen: Thank you, John. In terms of our guidance, of course, we've been signaling over 200 basis points of operating leverage this year, and we've been achieving that. Obviously, we had a lot of strength this quarter, and we continue to expect that in the fourth quarter. As we think about 2026, we haven't provided formal guidance there. We're in the middle of our planning process, of course. I think you can kind of see the key drivers here. You can think about net interest income having a good growth trajectory as we think about all the different items I just talked about, the fees. We continue to expect that mid-single-digit type of growth, and our expenses, we've been able to manage quite prudently. We expect to achieve meaningful positive operating leverage next year.
Speaker #3: Obviously, we had a lot of strength this quarter, and we continue to expect that in the fourth quarter. You know, as we think about 2026, we haven't provided formal guidance there.
Speaker #3: We're going to, in the middle of our planning process, of course. But, you know, I think you can kind of see the key drivers here.
Speaker #3: You can think about net interest income having a good, you know, growth trajectory as we think about all the different items I just talked about, the fees, we continue to expect that mid-single-digit type of growth, and our expenses, you know, we've been able to manage quite prudently.
Speaker #3: So we expect to achieve meaningful positive operating leverage next year.
Speaker #1: And John, I'll just add, this is Gunjan. We are very confident in our expense management disciplines because our four signature programs have runway still to go.
Gunjan Kedia: John, I'll just add, this is Gunjan. We are very confident in our expense management disciplines because our four signature programs have runway still to go, and the revenue outlook is positive. It does depend on the fee mix. As you know, we are very focused on improving our fee mix, and that tends to attract more expense, which we are very glad to do. That's the range. The business model lends itself to meaningful positive operating leverage for next year. It's just a matter of level.
Speaker #1: And the revenue outlook is positive. It does depend on the fee mix; as you know, we are very focused on improving our fee mix, and that tends to attract more expense, which we are very glad to do.
Speaker #1: So that's the range, but the business model lends itself to meaningful positive operating leverage for next year. It's just a matter of level.
Speaker #5: Okay, got it. Got it. And then on the fee side, you know, also some clear momentum there. Pretty good upside this quarter. And as you mentioned in your prepared remarks, you're certainly seeing some of the momentum follow through in terms of your key drivers and then your payments.
[Analyst 2]: Okay. Got it. Got it. On the fee side, you know, also some clear momentum there, some pretty good upside this quarter. As you mentioned in your prepared remarks, you're certainly seeing some of the momentum follow through in terms of your key drivers and in your payments space as well. I mean, I guess on the payment side, can you give us a little more color in terms of the drivers of the growth that you're seeing there and your confidence in that mid-single-digit expectation? Is there anything from the standpoint of customer acquisition or the benefits of the investments that you've made that you'd call out here as being key drivers to what seems to be a more sustainable consistency around your fee performance as of late?
Speaker #5: Space as well. I mean, I guess on the payment side, can you give us a little more color in terms of the drivers of the growth that you're seeing there and your confidence in that mid-single-digit expectation?
Speaker #5: You know, is there anything from the standpoint of customer acquisition or the benefits of the investments that you've made that you'd call out here as being key drivers to what seems to be a more sustainable consistency around your fee performance as of late?
Speaker #1: Thank you. We are feeling very confident in the broad-based strength of the fees, and let me just share two things, and then I'll get to the specifics on payments.
Gunjan Kedia: Thank you. We are feeling very confident in the broad-based strength of the fees. Let me just share two things, then I'll get to the specifics on payments. We have made a lot of progress over the last 12 months on creating an operating model that creates interconnectivity between our product sets. The fees are lifting each other. Our relationship teams, our sales and marketing efforts are multi-product. Our product design is multi-product, and all of that is leading to a measurable lift in effectiveness of marketing dollars. That gives us some real shift in the trajectory here. What we track internally on payments, for example, is new card acquisitions that we can measure today that have grown nicely from past trends, and it takes 12 to 18 months for that revenue to catch up.
Speaker #1: We have made a lot of progress over the last 12 months on creating an operating model that creates interconnectivity between our product sets. So the fees are lifting each other.
Speaker #1: Our relationship teams, sales, and marketing efforts are multi-product. Our product design is also multi-product, and all of that is leading to a measurable lift in the effectiveness of marketing dollars.
Speaker #1: So that gives us some real shift in the trajectory here. What we track internally on payments, for example, is new card acquisitions that we can measure today that have grown nicely from past trends. It takes 12 to 18 months for that revenue to catch up.
Gunjan Kedia: We are also seeing material strength in sold but not installed business on businesses like CPS and merchants. All of that leads us to have confidence in our mid-single-digit fee guidance across the whole portfolio and payments overall, with upside over time as we gain momentum.
[Analyst 2]: That upside would bode well for 2026, I assume there, Gunjan, above that mid-single-digit level, possibly?
George Andersen: We've talked about mid-single-digit in the payment complex, and that's what our objective is with upside. I think that's where our starting point is. We'll have more detail, obviously, as we think about that in the next call, but that mid-single-digit is a good place to start to the plus.
Gunjan Kedia: I do also want to just reiterate that there is a lot of curiosity around payments, and in the fall, we are going to bring a deep dive on the merchant business and the card issuing businesses. I look forward to more dialogue there.
[Analyst 2]: Got it. Okay. Thank you. Appreciate it.
Operator: Your next question comes from the line of Ken Usdin of Autonomous Research. Your line is open.
[Analyst 2]: Hi, thanks. Good morning. I just wanted to follow up on the payments point and just ask you to dive in a little bit more. 3% year over year is not far from mid-single-digit, but that corporate piece is still comping negative, and credit and debit is still three-ish. I just want to, you know, if you can give us some of the moving parts of the drivers now and when, across the lines, where do you expect those to inflect?
George Andersen: Sure. Your question regarding the corporate payment side of the house, that has seen negative year-over-year prints the last couple of quarters. The drivers of that are really on the government side of the equation as well as corporate T&E. You could think of government spend as about 15% of this line item. Corporate T&E is about the same thing, and those have had some headwinds in those particular areas. Gunjan mentioned uninstalled revenue and strong pipelines. That is certainly the case, and we expect to see some online versions of that coming into the fourth quarter. We do expect improving trends in our year-on-year outlook on corporate payments. Merchants have had a strong quarter given success in our key verticals that we've been talking about, as well as some of the embedded finance and tech-led type of strategies.
George Andersen: Card, as Gunjan mentioned, the marketing and account growth we see is very encouraging. Those are the items that I talk about from a payment standpoint.
Gunjan Kedia: I can add just a line on the debit card, where the growth is really about growing your entire consumer franchise. We are very laser-focused on that and see a lot of upside over time with interconnected products between card and the consumer bank. As we see momentum in the, we showed you some data on consumer deposits. That was a very favorable set of trends over the last two years. That creates momentum in the total number of clients and usage of the bank accounts and the debit card revenue line. We should expect that to come. The real payment strategies are focused on the card issuing and the merchant businesses that are the vast majority of our payments businesses. Of course, CPS is a very attractive business, and we are expecting those trends to reverse in due course here.
Expect that to come, but the real payment strategies focused on the card issuing and the merchant businesses that are the vast majority of our, um, of our payments businesses. And of course, CPS is a very, um, is a very attractive business and we, we are expecting those Trends to reverse in due course, here.
[Analyst 2]: Great. One follow-up just related to consumer. It's great to see the card loss rate come back down now at 3.73% in the third quarter. Are we starting to see that maturation of the portfolio? Where do you expect to see that card loss rate going forward, assuming a reasonably stable economy from here? Thanks.
George Andersen: Yeah, our view on credit right now is favorable. We see strong spend trends and credit trends, particularly the vast majority of our book is 720 or greater. The spend levels have been very good. The loss rates, as you had mentioned, have come down meaningfully this quarter. There is some seasonality there, but for certain, our 2025 loss rate on card will be less than our loss rate in 2024. There is some good momentum there. As we get into 2026, we will likely update you there. We do not see anything that gives us any concern in this area, and it has been a strong result.
Great, uh, one follow-up. Just, uh, I'm related to Consumer. It's great to see the card loss rate come back down now at 3.7.
Yeah, I I our view on on credit right now is favorable, we see, uh, strong, uh, spend Trends and credit Trends particularly uh, vast majority of our book is 720 or greater. Um, the spin levels have been very good. Um, the loss rates, as you mentioned, have come down, meaningfully, this quarter. Um, you know, there's some seasonality there. Uh, but our for certain our 2025 loss rate on card will be less than um, our loss rate in 20, uh, 24. So, there's some good Mo momentum there, you know, as we get into 26, we'll, we'll likely update you there but it's it's we don't see any anything that gives us any concern in this area and and and so it's been a strong result.
[Analyst 2]: Thanks, John.
Operator: Your next question comes from the line of Ebrahim Punawala of Bank of America. Your line is open.
Thanks John.
Your next question comes from the line of Abraham Poonawalla of Bank of America. Your line is open.
[Analyst 2]: Hey, good morning.
George Andersen: Good morning.
Hey, good morning.
[Analyst 2]: I just wanted to do, as we think about NII margin, I think deposit growth and pricing matters. I think, Gunjan, in your opening remarks, you talked about the Banksmartly partnerships, branches, like all of those from an outside looking in. It's just very hard to figure out whether these are sticky deposits, lower-cost deposits. If you don't mind spending some time on just the client acquisition that's happening through these channels and how we should think about either the magnitude of growth they can drive as we look out the next couple of years and the cost structure of these deposits. Thanks.
Good morning.
I just want to.
Everything about knee margin, I think deposit growth and pricing matters. I think, gujan in your opening remarks you talked about
The bank smartly Partnerships branches like all of those.
From an outside looking in, it's just very hard to figure out whether these are sticky deposits, lower-cost deposits. If you don't mind spending some time on just the client acquisition that's happening through these channels, and how we should think about either the magnitude of growth.
They can drive as we look out the next couple of years, and the cost structure of these deposits. Thanks.
Gunjan Kedia: Let me start, and then John will add on. The consumer clients and the consumer deposits, as you pointed out, are both sticky and favorably priced according to the total portfolio. We think about our deposits in three big categories: the consumer deposits, which includes our wealth franchise, our wholesale deposits that you're very familiar with, and a large trust business that is quite a unique property. Our ability to drive fee business growth is very helped by the balance sheet presence we have on the wholesale and the trust side, and the pricing there is quite dynamic. The consumer and our focus on improving the mix of consumer deposits is all about creating stickiness and better funding costs. These clients also then feed enormous growth in other businesses.
Um, uh, we'll add on, so the consumer clients and the consumer deposits, as you pointed out, are both sticky and favorably priced according to the total portfolio. When we think about our deposits, we categorize them into three big categories: the consumer deposits, which include our wealth franchise; our wholesale deposits, that you're very familiar with; and then we have a large trust business that is quite a unique property.
Gunjan Kedia: We very steadily see a client that might start with us on a core checking account or a core savings account, then deepens with credit card, deepens with wealth, and deepens even on the small business side. Those are the strategies across all of the levers that you point out. I'll add to it digital acquisitions with marketing, which we have really stepped up in terms of our investments and our capabilities there as well. That's sort of the story on deposits and the consumer franchise. John, you'll add something.
Our ability to drive free business growth is very um um helped by the balance sheet presence. We have on the wholesale and the trust side, and the pricing. There is quite Dynamic. So the consumer, and our focus on improving, the mix of consumer deposits, is all about creating stickiness and and and better funding costs. Uh, these clients also then feed enormous um, growth in other businesses. So we very steadily. See, a client that might start with us on our code checking account or a code savings account. Then deepens with credit card deepens with wealth and deepens even on the small business side. So those are the strategies across all of the levers that you, uh, that you point out and I'll add to a digital Acquisitions with marketing, which we have really stepped up in terms of our investments and our capabilities there as well. So that's sort of the story on deposits and the
George Andersen: Yeah, a couple of things I would just mention is we feel very good about where the deposit portfolio shaped out this quarter. We saw very strong growth in both consumer as well as on the commercial side of the equation. Our desire, as Gunjan just reiterated what she said, our growth is really to on deposits is to grow where it matters and where it's conducive to supporting fee growth. When we think about Smartly, and you mentioned that product, Abraham, for us, we are highly encouraged because it is a product that has three times as much multi-products attached to that client when they open up this product. In and of itself, we know that it has more stickiness to it.
George Andersen: It brings in a new type of client into the bank, which is from a credit card standpoint, about half of the cards that open up are new relationships that we have to the bank, which is very encouraging. On the commercial side of the house, we saw a lot of growth on the deposit side across all sorts of different areas, including treasury management and the investments we've been making in that business over the last couple of years really starting to come to fruition. We saw a lot of growth in investment services this quarter. There's just a lot of business activity, and we gain a lot of deposits as there's just a lot of investments moving around. We house those deposits while that is occurring. All this activity that occurs is really beneficial to us.
Consumer franchise and John, you had some pricing? Yeah, a couple couple things I would just mention is we we feel very good about where the deposit portfolio. Uh, shaped out this quarter, we saw a very strong growth in both consumer as well as on the commercial side of the equation. Um our desire as gungeon, just just to reiterate what she said. Our growth is really to to on deposits, is to grow where it matters and and where it's conducive to supporting fear growth. And so, when we think about smartly, uh, you you mentioned that product Abraham for us. We uh, are highly encouraged because it, it is a product that has 3 times as much multi-product attached to that client, when they, when they, uh, open up this product, uh, it, it, it, that in and of itself, we know that has more stickiness to it, it brings in a new, uh, type of client into our into the bank, which is from a credit card standpoint about half of the, the cards that open up are new, uh, relationships that we have to the bank, which is very encouraging.
George Andersen: For that reason, we saw benefits to our fee categories, as you saw this quarter. It's really all interconnected, which is the point of what Gunjan was saying earlier in the call.
Um, and so uh and then on the commercial side of the house, we saw a lot of growth on the deposit side across, all sorts of different care areas, including treasury management and the Investments we've been making in that business over the last couple of years, really, starting to come to fruition. Uh, we saw a lot of growth in Investment Services. This quarter, there's just a lot of business activity and so we gain a lot of deposits as there's just a lot of Investments moving around. And so we house those deposits um while that is occurring. So all this activity that occurs is really beneficial
Special to us. And, and for that reason, we saw benefits to our fee categories. As you saw this quarter and it's really all interconnected, which is what, uh, the point of what gungeon was saying, earlier in the call.
[Analyst 2]: Got it. That's helpful. I guess maybe going back to the margin discussion, John, you've talked about it was a pretty good expansion this quarter. You've talked about the 3%. I'm just wondering, as we think through the journey from 2.75% to 3%, is there a point where there's a pretty material inflection outside of the backbook repricing, everything that you talked about? I'm just wondering, is there a chance you could hit 3% by this time next year, by the fourth quarter? Is it just a very steady state, or are there going to be big step-ups in the progress towards that 3%?
George Andersen: Sure. You know I won't repeat everything I said on the drivers. To your point on the speed in which you get there, I'll point out that the curve from a SOFR versus five-year Treasury is still quite inverted. A speed-up, if you will, of margin could be the Fed is programmatically cutting. The curve is more upward sloping on that part of the curve, and that could really help boost the speed in which net interest margin improves. The other sides on the asset side are going to be a little bit more mechanical and more embedded in how we move forward. It's really going to be the macro that's going to drive the speed in which we get there.
Got it, that's helpful and I guess maybe going back to the margin discussion John. So you've talked about is pretty good expansion. This quarter you've talked about the 3%. I'm just wondering if the thing to the, uh, uh, the journey from 275 to 3 are, is there a point where there's a pretty material inflection outside of like the back book repricing, everything that you talked about? I'm just wondering, is there a chance you could hit 3% by this time. Next year by the fourth quarter is, is it just very steady state or are they going to be big step UPS in the progress towards that c name?
Sure. Um, so, uh, you know, I I won't repeat everything I said on the, on the, the drivers, but the, but to your point on the speed in which you get there, you know, I'll point out that the curve from a sofa versus 5-year. Treasury is still quite inverted. Um, and so and, uh, a speed up, if you will, of of margin could be, the FED is, is programmatically cutting. The curve is, is more, uh, upward sloping on that part of the curve. And that could really, uh, help boost, uh, the speed in which net interest margin improves. Uh, the other size on the acid side are going to be more a little bit more mechanical and and more weed.
In how we move forward, but it's really going to be that, uh, the macro that's going to drive the speed in which we get there.
[Analyst 2]: Got it. Thank you.
Good. Thank you.
Operator: Your next question comes from the line of Michael Mayo of Wells Fargo. Your line is open.
Your next question comes from line of Michael Mayo of Wells, Fargo, your line is open
[Analyst 1]: Hi. I don't know if we put this in the category of the Loch Ness Monster, Bermuda Triangle, and the contents of NDFI, but I'm sure many appreciate your detailing of NDFI. That's not really the way you run the business by NDFI. I guess it's just connecting regulatory reporting with your business lines. Since you did disclose that, can you just give us a little bit more color? You say that credit quality is higher on NDFI than your core CNI portfolio, which is interesting. NDFI is 12% of the total loan book. Where would that have been, say, 5 or 10 years ago? Any loans that you're not pursuing? The key to good credit quality is choosing to say no a lot. Thank you.
Hi. Um,
George Andersen: Sure, Mike. Thanks. I think the slide is in there because there's just been a lot of interest in the industry. You're right. It is a very broad set of businesses within there. Obviously, as you know, mortgage warehouse lending and subscription lines and auto ABS are very different items. We just wanted to show the sort of categories that we have. I think the point that we're trying to make is that our risk disciplines and how we think about the diversification of this book is something that we spend a lot of time on. It's not just the category for the category's sake. It's just the way we operate in terms of our credit culture. We think about the multiple ways that there's repayment. We think about how fees are over-collateralized.
I'm sure many appreciate your detailing of NDF. Um, but that's not really the way you run the business by NDF. I guess it's just connecting regulatory reporting with, um, your business lines. But, uh, since you did disclose that, can you just give us a little bit more color? Um, you say that credit quality is higher on NDF than your CNI portfolio, which is interesting. Uh, NDF is 12% of the total loan book; like, where would that have been say, you know, 5 or 10 years ago? Uh, and any loans that you're not pursuing? I mean, the key to good credit quality is choosing to say no a lot. Thank you.
Sure. Mike thanks. I think we the slide is in there because there's just been a lot of interest in the industry. You're right. I mean, there's a, it is a very Broad and uh, just um, set of businesses within their uh obviously as you know, mortgage Warehouse lending uh, and subscription lines and, um, Auto abs are very different items. We just wanted to show that, uh, that, that sort of the sort of categories that we have, you know, I think the the point that what we're trying to make is that, you know, our our risk disciplines and how we think about the diversification of this book is is something that we spend a lot of time on and and it's not just the category for the category sake. It's just, uh, the way we operate in terms of our credit culture. So we think about the multiple ways.
George Andersen: We think about the data that is needed to look through on some of these structures and things like that and the risk limits embedded in there. Ultimately, we know these clients a lot over many years. Many of these clients we've been servicing in many different products over a vast number of years. In terms of the growth that we've seen, I don't have a number for you in terms of 5 or 10-year, but it obviously has grown pretty substantially over the last several years. We're very comfortable with it because, again, we know the clients.
Gunjan Kedia: These are broad relationships on the fee side in addition to the loan book. That's just client selection there.
Is that there's repayment, we think about how fees are over collateralized. We think about the data that is needed to look through on, on some of these structures and things like that. And the risk limits embedded in there and ultimately, we know these clients, uh, a lot. Um, over many years, many of these clients we've been servicing, uh, in many different products over a vast number of years. And in terms of the growth that we've seen, I I don't have a number for you in terms of 5 or 10 year, but it obviously has grown uh pretty substantially over the last uh, several years and uh but we're very comfortable with it because we again we know the clients
You could add that, these are broad, relationships on the fee side, in addition to the loan book, uh, and that's, uh, just client selection there.
[Analyst 1]: Where would you say you choose to say no a little bit more often than not? In other words, you could have faster loan growth. Any bank could. Are there any areas where you say, "Hey, let's pay more attention to this"?
And my, my other question is, where would you say you?
George Andersen: Sure. We have that conversation all the time on our credit committees and things of that variety. We're talking about line items and single counterparty limits and things of that variety, and a number of different things. We're careful about certain areas that, when we look through, have more leverage and things of that variety. We want to make sure we understand it. It's all on the credit profile, and the client selection is very important. We're servicing a number of the different large players here that are very well known to the market, and we feel very comfortable about the book.
Choose to say no a little bit more often than not. In other words, you could have faster longer or if any Bank could, um, is there are there any areas for you? Say, hey, um, let's pay more attention to this.
Sure. We have that conversation all the time, on the, on our credit committees and things of that variety. We're talking about line items that and and single counterparty limits and things of that Variety in a number of different things. Uh, we're we're careful about certain, um, about certain areas that are have that when we look through have more leverage and things of that variety, we want to make sure we understand it. It's all on the, on the credit, uh, profile. And the client selection is very important. We're servicing a number of the different large
Players here that are very well known to the market. Um, and we feel very comfortable about the book.
[Analyst 1]: All right. Thank you.
All right. Thank you.
Operator: Your next question comes from the line of Saul Martinez of HSBC. Your line is open.
Your next question comes from the line of Saul Martinez of HSBC. Your line is open.
[Analyst 2]: Hey, good morning. Just wanted to quickly follow up on the fourth quarter net interest income outlook being stable. I get that there is a bias to the upside. John, you did mention that there are some upside sources and there are some risks. I think you mentioned credit card favorability in Q3 and some other risks. I'm not sure I understand. Could you just elaborate a little bit on what the card favorability dynamics are and what the other downside risks are? What are you assuming there for rates in the fourth quarter? How are you thinking about the rate backdrop in 2026? Are you working with a forward curve, which I think has five cuts in it, which presumably would be good for you? Any color on how you're thinking about the rate backdrop next year would be helpful.
Hey, good morning. Um, just wanted to quickly follow up on the fourth quarter net interest income outlook being stable. I get that, um, there is a bias to the upside but, John, you did mention that there, you know, there are some.
Upside sources, and there are some risks and I think you mentioned credit card favorability in in 3 q and um, some other risks, but but I'm not sure. I understand because you just elaborate a little bit on what the card favorability Dynamics are. And what the other downside risks are and what, what are you assuming there for rates in the fourth quarter? And how are you thinking about the rate backdrop in in 26? Are you working with the forward curve, which I think has 5 Cuts in it? Which presumably would be good for you. But just any color on how you're thinking about, um,
[Analyst 2]: Also, what are you assuming for the fourth quarter and how is it influencing your guidance at all?
The rate backdrop, uh, next year and also...
George Andersen: Sure. Let me go with the assumptions first. I think that's a good place to start on your questions. You know, from a curve and from a rate perspective, we do include two cuts this year. We also have two more cuts in 2026. Maybe we're a little bit late relative to the market in terms of cuts, but you know that obviously always shifts. We do have longer-term yields. I'll just pick on the 10-year Treasury as an example, more in the 4.25% to 4.50% range for the 2026 year.
What are you assuming for the fourth quarter, and how is it influencing your guidance at all?
Operator: As I think about the fourth quarter, to get to the more specifics of what you were talking about, we have a lot of upside in terms of the things that have been working for us in the past in terms of fixed asset repricing. The mix is obviously going to be very favorable for us. When I think about the things that are going the other way for the fourth quarter, we did have meaningful pickup in credit card yield this quarter. There were fees that we picked up as well as just strength in that area. Some of that is seasonality. We expect that to reverse in the fourth quarter just given the trends that we are observing. All in all, as we put together these things, there's obviously a lot of moving parts, especially in the fourth quarter.
Operator: I'll reiterate that we see more opportunity than we do risk as it's embedded into our call.
[Company Representative]: I'll add that the fourth quarter credit card dynamics are very seasonal and expected. It's the holiday season dynamics. We expect that. There's nothing unique about what we are seeing in that book at this time. It's just the holiday season changes the dynamics there a little bit.
6, uh, year. And so I as I think about the fourth quarter to get to the more specifics of what you were talking about. We have a lot of upside in, in terms of, uh, the things that have been, uh, working for us in the past. In terms of fixed asset pricing, the mix is obviously going to be very, uh, favorable for us when I think about the, uh, the things that are going the other way, uh, for the fourth quarter, we did have meaningful pickup and credit card yield. This quarter there was uh, uh, fees that we picked up as well as just, uh, just strengthening that, uh, area. Some of that is seasonality. We expect that to reverse in the fourth quarter, um, just given the trends that we are, uh, observing. But yeah, um, all in all I, you know, as we put together these things, there's obviously a lot of moving Parts especially in the fourth quarter, but I I I'll reiterate that we see more opportunity than we do risk as it's embedded into our call. And so I'll add that the fourth quarter credit card Dynamics are very, um, uh, seasonal and expected. It's the holiday season Dynamics. So,
[Analyst]: Okay, that's helpful. Maybe surprised, positively surprised, I guess, by the size of the sustainable finance business and the growth you've seen there. It is a pretty big part of the other income line. I just wanted to make sure I understood. You are expecting continued growth as you see a pull forward of some of this activity from current levels. If that is the case, I guess what is it? What does it mean for the other income line? That has been moving higher, I guess. I know it can jump around quarter to quarter, but should we be thinking that line is going to move higher as well as this business continues to grow?
We expect that there's nothing unique about what we are seeing in that book. Just at this time, it's just the holiday season that changes the dynamics there a little bit.
Okay good. Okay.
That's helpful. And then maybe, um, um,
The surprised positively spread I guess by the size of the sustainable Finance.
Business in the growth, you've, you've seen there and it is a pretty big part of the other income line. I just wanted to make sure I understood you. You are expecting continued growth as you see a pull forward of some of this activity and, you know, from current levels. And if that is the case, I guess what is it? I guess, what is the name for for the other income line because it that has been moving higher, I guess? Um, you know, I know it could jump around quarter to quarter but um is that should we be thinking that line is is um,
Operator: Yeah. Our view is that the impact, this Impact Finance line item will improve and increase. We've had, as we saw on the slide, a 17% increase. We expect this to be a high single-digit type of business over the medium term. There may be some pull forward given some of the legislative moves and things of that variety, but we see the momentum in the business. They've been gaining market share. It's an area that the team has had a lot of focus on. You look at renewable energy tax credits and you look at low-income housing and things of that variety. These are areas that we, and new market tax credits, were number one in terms of that market share. We've been building out our capabilities here and the additional tailwinds have been some of the administrative or the legislative areas that have helped us here as well.
Going to move higher as well as this business continues to grow.
Yeah. Our our, our, our view is that the impact this impact Finance. Uh, the impact Finance line, I am will, uh, improve and increase. We've had, as we saw on the slide of 17% increase, we expect this to be a, um, a high single digit, um, uh, type of business over. Uh, the medium-term. There's not, um, I mean, there may be some pull forward given some of the legislative moves and things of that variety. But I, uh, we see the momentum, in the business. They've been gaining market share. Um, it's an, it's an area that, uh, the team has had a lot of focus on, uh, and you look about renewable energy tax credits and you look at low income housing and things of that variety. This these are areas that we and new New Market tax credits uh were
[Company Representative]: You're right. It's quite a large business today. It started out in the other category. We've had some questions from all of you on sort of what really is there. We wanted to highlight a part of the business that's actually very core to what we do. It's ingrained in day-to-day sort of running of the businesses, but it has become quite sizable also because of Union Bank. The Union Bank acquisition for us is about three years old now. We are just beginning to realize the revenue benefits of some of that client base and the presence in California. This business is a good example of what a good, strong presence in California can do to certain line items. It's a very attractive business for us, a long-standing business, which just has become quite large now.
We're number 1, in terms of that market share. And so we we've been building out our capabilities here, and we've been um um uh been uh the additional Tailwind have been the some of the administrative or the legislative areas that have helped this year as well. And so you're right. It's quite a large business today. It started out in the other category and we've had some questions from, um, um, from from from all of you on sort of what really is there. So, we wanted to highlight a part of the business that's actually very core to what we do. It's, uh, it's ingrained in, uh, day-to-day, um, sort of running of the businesses but uh, it has become quite sizable also because of Union Bank.
You know, Union Bank acquisition for us is about 3 years old now, and we are just beginning to realize the revenue benefits of some of that. Uh, some of that client base and the presence in California. And this business is a, is a good example of, um, sort of what, uh, uh, a good strong presence in California. Can can do to certain certain line items. So, um, very attractive business for us. A long long-standing business which just has become quite large. Now,
[Analyst]: Great. That's very helpful. Thank you.
Great. That's very helpful. Thank you.
George Andersen: Your next question comes from Gerard Cassidy of RBC Capital Markets. Your line is open.
Gunjan Kedia: Good morning, Gunjan. Good morning, John.
Your next question comes from Gerard Cassidy of RBC Capital Markets. Your line is open.
Operator: Morning.
Good morning, ganjing. Good morning John. Good morning.
Gunjan Kedia: Can you guys share with us, obviously, there's a lot of talk about stablecoin and the impact it may have on the payments business. Can you share with us how you're getting out in front of it and what you're doing to prepare yourselves for the stablecoin activity eventually coming into the payments business?
[Company Representative]: Yes. Good morning, Gerard. We are working on stablecoins in two very distinct areas. The first is around the capital markets and investments part of it, where the business model is very clear and it's very favorable to us. This is custody and safekeeping of the collateral underlying stablecoins or custody and safekeeping of cryptocurrency assets. These are products that have been produced some time back, have reintroduced with the shift in the supervisory environment, and are quite confident in our ability to just provide those products. The other side is stablecoins as a payment rail where the client demand is more muted, although there are a lot of discussions. There are efforts that are twofold. One is to just be ready to onboard and offboard a stablecoin into the banking system. We are working on that in conjunction with the industry consortiums.
Can you guys share with us? Um, obviously there's a lot of talk about stablecoins and the impact it may have on the payments business. Can you share with us how you're getting out in front of it and what you're doing to prepare yourselves for the stablecoin activity eventually coming into the payments business?
Yes, good morning. Gerard.
sometime back have reintroduced with the shift in the supervisory environment and um, are are quite confident in our ability to just provide those, um, those products
The other side is stable coins as a payment rail.
[Company Representative]: The second is just being ready to provide stablecoin services as a payment vehicle should that market take off within our client base. We expect to pilot some stablecoin transactions yet this year with some partnerships in the market. We are also very aware that we have a unique franchise in Elan where we provide credit card payment services to 1,200 banks, smaller banks, on a white-label service. This is also a question that we'll get from our smaller bank base. We are just studying that market and being ready for if it takes off. The real momentum from revenues and a clear business case and an economic model is on the custody and investment side. It's a multidimensional field. It's moving very fast. We've just announced some organizational changes to stay current with the industry as it evolves and more to come there.
Where the client demand is, um, more muted. Although there are a lot of discussions, the efforts are twofold. One is to just be ready to onboard and offboard a stablecoin into the banking system, and we are working on that in conjunction with the industry consortiums.
And then the second is just being ready to provide stablecoin services as a payment vehicle, should that market take off within our client base.
Uh, so we expect to Pilot some stable coin transactions, yet this year with the, uh, with some Partnerships in the market.
Um I'm also um we're also very um uh aware that we have a unique franchise in Elon where we provide credit card payment services to 1,200 Banks smaller banks on a white label service. So this is also a question that we'll get from our uh, smaller Bank base. So we are just, um, studying that market and being ready for if it takes off, but the real momentum from revenues and, um, uh, a clear business case and an economic model is on the custody and investment side. So it's a
Multi-dimensional field, that's moving very fast. We've just announced some organizational changes uh, to to stay stay current with the, uh, with with the industry as it evolves and more to come there.
Gunjan Kedia: Very good. Thank you. Can you remind us when you look out over the next 12 or 24 months as your CET1 ratio with the AOCI included continues to grow, your views of returning capital to shareholders? For years, U.S. Bancorp consistently returned 75% to 80% of earnings. Can you kind of refresh our memories on what you think the long-term return will be to shareholders?
Operator: Sure. Gerard, it's John here. We're obviously continuing to build our capital base. I would consider that we're in the final lap, if you will, of building out our capital. We were at 8.4 a couple of years ago. You'll recall we're at 10.9 now. We gave you the number included in AOCI and where we're attempting to get into. Obviously, we are looking to increase that amount. It may not be this quarter, but as we look into 2026, we certainly feel that the glide path will be there to increase our pace and get to that 75% area that we had mentioned on the slide that you'll see there. We're very much committed to that. That, along with the things we have to balance, like things like loan growth and things like that, will take it quarter by quarter.
Very good. Thank you. And then um, can you remind us, um, when you look out over the next 12 or 24 months, as your CET, win ratio with the aoci included continues to grow, your views of returning Capital to shareholders for years, US Bank, or consistently returned to 75 to 80% of earnings. Um, can you kind of refresh our memories on what you think, the long term return will be to shareholders?
Sure. Um,
Uh, Gerard's John here. So, you know, we're obviously continuing to build, um, our Capital base. I would consider that we're in the final lap if you will of of building out our Capital. We we are at 8.4 a couple of years ago. You'll recall, we're at 10.9 now. Uh, we're uh, we gave you the number with included an aoci and where we're uh attempting to get into. Um obviously uh we are looking to increase uh that amount. Uh it may not be this quarter but as we look into 2026 we we certainly have um uh feel that the Glide path will be there to increase our Pace uh and get to that uh that 75 uh, percent area that we, that had mentioned on the slide that you'll see there, and we're very much committed to that. And so, um,
Operator: That just gives you kind of high level how we're thinking about it.
Gunjan Kedia: Great. Thank you. Gunjan, thank you for bringing Mark to John for the details about payments. We appreciate it. Thank you.
That that, that along with the things we have to balance, like things like loan growth and things like that will take a quarter by quarter, but uh, that just gives you kind of high level, how we're thinking about it.
[Company Representative]: Thank you, George. Mark and Courtney, Courtney will present on the card issuing business, which is a big part of our business. Mark will join you for MPS. I look forward to that.
Operator: Thank you.
Great. Thank you. And thank you for bringing Mark to Babb for the details about payments. We appreciate it. Thank you. Uh, thank you Gerard, Mark, and Courtney. So Courtney will present on the card issuing business, which is sort of a big part of our business, and Mark will join you for MPS. So we look forward to that.
Thank you.
George Andersen: Your next question comes from Erica Najarian of UBS. Your line is open.
[Analyst 1]: Hi. Just a few clean-up questions, if I may. First, I wanted to clarify, John, you said fixed asset repricing is two to three basis points of embedded lift. I just wanted to clarify if that embedded lift is a per-quarter statement. Also, as we think about fixed asset repricing, is that more tethered to the belly of the curve or the 10-year range that you mentioned, 425-450?
Your next question comes from the line of Erika Najarian of UBS. Your line is open.
Operator: Sure. Yeah, just to be clear, let me, and thank you for allowing me to clarify. When I had said the 2 to 3 basis points, I was referring to mix as well as fixed asset repricing that we have on a quarterly basis. Think of that as an embedded quarterly type of improvement that should be happening. As we know, every quarter there can be movements in balance sheet that can alter net interest margin. We don't always manage the net interest margin as an output. Directionally, obviously, we want that to improve and things of that variety. In terms of the mix, or excuse me, the repricing and where we focus on, it's more the belly of the curve is probably more appropriate.
Hi. Um, just a few, um, cleanup questions. As I may just first, um, you know, I wanted to clarify. Um, John, you said the fixed asset repricing is 2 to 3 basis points of embedded lift. I just wanted to clarify if that embedded lift is a per quarter statement. And also, you know, as we think about fixed asset repricing, is that more tethered to the belly of the curve or the 10-year range that you mentioned, 425 to 450?
Operator: The five-year Treasury, I think, is always a good proxy to look at and obviously spreads where those are at, whether it's mortgage spreads or credit spreads just in general. Those are the items that I look at.
Look at and uh, and obviously spreads uh, uh, where those are at whether it's mortgage spreads, or or, uh, credit spreads just in general. So that's those, are the items that I look at.
[Analyst 1]: Thank you. My second question is for Gunjan. The stock is clearly reacting favorably today. You had a nice beat to consensus really on the revenue side. It is really the revenue side that's driving the positive operating leverage this quarter. As you think forward, how are you balancing some of the embedded momentum that you have been talking about on this call that you're going to continue to talk about in Boston in a few weeks versus what seems to be a lot of questions and pressure on larger management teams in terms of questions on scale and having a relatively short inorganic growth window under this current administration?
Second question is for genjin, you know, the stock is clearly reacting favorably today. You know, you had a nice beat to consensus really on the revenue side and it's really the revenue side, you know, that's driving. Um, the positive operating leverage this quarter, you know, as you think forward, how are you balancing? Some of the embedded momentum that you have been talking about on this call that you're going to continue to talk about in Boston? You know, in a few weeks, you know, versus what seems to be, you know, a lot of questions and you know, pressure on larger management teams in terms of questions on scale and having a, you know, relatively short inorganic growth um, window in this under this current Administration.
[Company Representative]: Erica, good morning. Thank you for the question. When I stepped into my role now six months back, we had very clearly articulated three priorities, and they were connected to each other. The first, most urgent from a sequencing and timing standpoint, was expenses. Our opportunity was very real there. We had finished embedding Union Bank. We had finished all of the work we were doing to restore our capital positions, and it was appropriate to bring the efficiency ratio back to what the business model requires it to be, which is mid to high 50%. Having done that, we exceeded what we wanted to do from the efficiency ratio and positive operating leverage standpoint and released a fair amount of investment to invest in organic growth. You're beginning to see that show up now.
Erica good morning and um, thank you for the question we um, when I um stepped into my role now, 6 months back, we had very clearly articulated 3 priorities and they were uh connected to each other. The first more uh most urgent from a sequencing and timing standpoint was expenses are. Uh, it was um, our opportunity was very real. There we had finished embedding Union Bank.
[Company Representative]: You'll see payments show up sequentially a little bit behind that just because the sales cycles and the revenue models take time. That's why we talk about leading indicators. It is less a matter of balancing between them, but one fueling the other, with the ultimate goal being EPS growth that is also accompanied by very high attractive returns. You'll know John pointed out that we have maintained and increased our return on tangible capital very specifically. Going forward, you'll see the growth side of the equation become more present in our strategies, first with all of the fee businesses, our evolution to a more attractive asset side with more leaning in on CNI and credit loans and on deposits, more attractive balance sheet leaning in on the consumer side. You see NII growth and you see fee growth, and then you're going to start seeing the strategies for payments.
Bank. We had finished all of the work we were doing to restore our capital positions and it was, um, it was appropriate to bring the efficiency ratio back to what the business model requires it to be, which is, uh, mid to high 50s. Having done that, we exceeded, um, what we, uh, we wanted to do from the efficiency ratio and positive operating leverage standpoint and released a fair amount of investment to invest in organic growth, and you're beginning to see that show up now. And you'll see payments show up sequentially, a little bit behind that, just because the sales cycles and the revenue models take time. That's why we talk about leading indicators. So it's less a matter of balancing between them, but one fueling the other, with the ultimate goal being EPS growth that is also accompanied by very high attractive returns. And you'll know John pointed out that we have, um, increased our, um,
Uh, we have maintained an increased, our return on tangible Capital very, uh, very um uh specifically. So going forward. You'll see the growth side of the equation become more present in our strategies. Uh first with all of the fee businesses our Evolution to a more attractive asset side with more leaning in on cni and credit loans and on deposits more attractive, balance sheet leaning in on the consumer side. So you see
[Company Representative]: We are feeling very good about the momentum organically over time and certainly see very real opportunity and quite a lot of runway on organic growth for us.
The knee growth and you see fee growth and then you you're going to start seeing the strategies for payments. So we're feeling very good about the momentum organically um over time and certainly see very real opportunity um and quite a lot of runway on organic growth for us.
[Analyst 1]: Just to clarify, Gunjan, given how you answered that question, U.S. Bancorp's focus, and obviously, like John said, you're sort of in the final phase of rebuilding capital. Your focus is inward and not outward in terms of bank acquisitions. Just want to be clear that that's the message that you're giving us.
[Company Representative]: Our focus is very much on organic growth.
[Analyst 1]: Thank you.
And so, to clarify, given how you answered that question, USPS's focus, and obviously, like John said, you're sort of in the final phase of rebuilding capital. Your focus is inward and not outward in terms of bank acquisitions. Just want to be clear that that's the message that you're giving us. Our focus is very much on organic growth.
Thank you.
George Andersen: Your next question comes from a client of Betsy Graysick of Morgan Stanley. Your line is open.
[Analyst 2]: Hi. Good morning. I just wanted to circle back to the discussion earlier on the Impact Finance and the implication for tax rate. Gunjan, I think you mentioned that you will be leaning into this effort that you have and that as you do lean into it, it should have some impacts on tax. Could you help us understand how much and over what kind of timeframe is this? I bring it up relative to the slide 32 that talks about key assumptions for medium term include current tax policy. I wasn't sure if current tax policy meant current tax rate or the expectation for tax rate to come down as you increase Impact Finance.
Your next question comes from the line of Betsy Grac of Morgan Stanley. Your line is open.
Hi, good morning.
Um, I just wanted to circle back to the discussion earlier on the impact financing and the implication for tax rates. I think you mentioned that you will be leaning into this.
Um, effort that you have, and that as you do lean into it, it should have some impacts on tax. Could you help us understand how?
Operator: Sure, Betsy. I think when I think about the Impact Finance components from the tax benefit that we've received, it is likely not going to change much from where we sit today. There's probably a 3 or so plus or minus point benefit to us in our tax rate that has been there for some time and will continue. The growth that we're talking about here on the fee side is related to transferability and syndications and things of that variety where we have been very good, where the tax policy changes have allowed that market to flourish with more freedom. I think that is where we have our ability to grow and where we get to see more fee revenues that I've been talking about there in terms of our assumed growth rate. That's really where it's at.
Much and over. What kind of time frame is this? And I bring it up relative to slide 32, which talks about key assumptions for the medium term, including current tax policy. I wasn't sure if current tax policy meant the current tax rate or the expectation for the tax rate to come down. As you increase impact, Finance,
Sure, Betsy. So, I think when I think about the impact of finance components from a...
Operator: The tax rate will continue that favorability, as we mentioned on the tax rate as well.
[Analyst 2]: Okay. Right now, it's about 3% benefit to tax rate, and even with increasing this business, you expect it to hover in that range.
Been there for some time and will continue the growth, uh, uh, that we're talking about here in the fee. Side is, is related to transferability, um, and, uh, and syndications and things of that variety where we have been, uh, very good where the tax policy, uh, changes have allowed that market to flourish, uh, with more, um, freedom. And I think that is what we're, uh, that is where we have our ability to to grow and where do we get to see more fee revenues that I'm. I've been talking about there in terms of our assumed growth rate. So that's really where it's at and the tax. Uh, rate will will continue that favorability as we mentioned on the tax rate as well.
Operator: That's exactly right.
[Analyst 2]: Okay, thank you.
Okay, so right now it's about 3% benefit to tax rate, and even with increasing this business, you expect it to hover in that range. I would. That's exactly right. Okay, thank you.
George Andersen: Your next question comes from Chris McGrady of KBW. Your line is open.
[Analyst 2]: Oh, great. Good morning, everybody. Looking at slide 19, I guess 18, 19 together, the building upon medium-term targets comment, you know several larger banks have either put out revised targets or hinted at targets this quarter. I guess my question is, given that you're more or less there, is that something that we might think is on the horizon over the near to intermediate term?
Your next question comes from the line of Chris McGrady of KBW. Your line is open.
Oh great, good morning everybody. Um, looking at slide 19, I guess 18 and 19 together, the building upon medium-term targets comment. Um, you know several larger banks have either.
Operator: Thanks, Chris. I appreciate the question. Obviously, we're pleased to be where we're operating here in terms of where we sit in terms of our medium-term targets. There's nothing formal, but you'll note in my prepared comments about how while we're pleased, this isn't the end. We anticipate to improve, and that's really what our focus is. There's no change to any of the medium-term targets. We think those are appropriate and right, but we do expect improvement of ourselves over time.
Put out revised targets or hinted at Targets this quarter. I guess my question is given that you're more or less? There is is that something that we might um think is on the horizon uh over the near intermediate term.
[Analyst 2]: Okay. John, if I could just push, I guess what would it take for you to revisit them? Is it just staying here for a bit of time and the operating environment staying good? What would specifically need to change?
Thanks, Chris. I appreciate, uh, the question, you know, obviously, we're, we're pleased, uh, to be where we're operating here. Uh, in terms of, uh, where we sit in terms of our medium-term targets. Uh, there's nothing formal all, but you'll note in my prepared, comments about how we while we're pleased. This is this isn't the the end we we anticipate to improve. And that's, that's really what our focus is so, um, um, there's no change to any of the medium-term targets. We think those are appropriate and right. Uh, but we do expect Improvement, uh, of ourselves over over time.
Operator: Yeah. I think it would be those two things that you just mentioned. I mean, as the operating environment improves, our execution exceeds even our own expectations. Those are going to be triggers that we would look to.
Okay. And and then John, if I could just push up, what would, I guess, what would it take for you to to revisit them? Is it just staying here for a bit of time? And the operating environment is staying good or what would specifically need to change.
[Company Representative]: I would just add we need to just consistently stay in the range, then start hitting the upper end of each range, and then we'll think about changing the ranges.
Yeah, I I think it would be uh, those 2 things that you just mentioned. I mean is that the operating environment uh, and improves our execution uh exceeds even our own expectations and then those are going to be triggers that we would we would look to I would just add we need to just consistently stay in the range and then start hitting the upper end of each range and then we'll think about changing the ranges.
[Analyst 2]: Okay. Great. Thank you.
Okay, great. Thank you.
George Andersen: Your next question comes from a client of Matt O'Connor of Deutsche Bank. Your line is open.
Your next question comes from the line of Matt O'Conor of Deutsche Bank. Your line is open.
[Analyst]: Good morning. Just a quick clarification. You talked about assuming slightly higher rates in the forward curve in 2026. If the forward curve plays out versus your rate assumptions, would that be directionally positive or negative for your net interest margin?
Uh, good morning.
Clarification. Um, you talked about assuming slightly higher rates in the forward curve, uh, in 2026. Uh, if the forward curve plays out versus your rate assumptions, would that be directionally positive or negative, uh, for your net interest margin?
Operator: I think, as I mentioned, we have four cuts in our forecast. I think the market's a little bit wider than that. If the forwards actually transpire, then that would be a net benefit. I think our longer-term rates are probably a little bit more higher than where the forwards are at this point. We would need to see a little bit more improvement there to get additional benefit on the fixed asset repricing. It's a little bit of a mix. On balance, it's about equal, I would say.
Yeah, I think the, um, you know, as I, as I mentioned, we have 4 Cuts in our in our forecast. I think the Market's a little bit wider than that. So, if the, if the forward is actually, um, transpired, then that would be a net benefit. If um, I think our longer term rates, uh, are probably a little bit more higher than where the forwards are at this point. Uh, and so we would need to see a little bit more Improvement there to get, um, additional benefit on the fixed asset rate pricing. So, it's a little bit of a mix on balance. It's it's it's about equal. I would say
[Analyst]: Okay. Positive on the short end, get back on the long end, and when you put it all together, about the same?
Operator: Exactly.
Okay, so positive on the short end and getting back on the long end. And when you put it all together, about the same.
[Analyst]: Okay. All right. Thank you.
Exactly.
Okay, all right. Thank you.
George Andersen: Again, if you would like to ask a question, press star, then the number one on your telephone keypad. Your next question comes from a client of Vivek Junyaja of J.P. Morgan. Your line is open.
[Analyst 3]: Thank you. Given that a lot of the bigger picture questions have been asked in the realm of some cleanup, John, I have a question for you. What is included in your other earning assets where the yield went up 300 basis points linked quarter with an interest income increase of $100 million, which is over 60% of the increase in your NII linked quarter? The yield is almost 8%. It's higher than any other asset on the balance sheet. What drove that and how sustainable is that, John?
Again, if you would like to ask a question, press star, then the number 1 on your telephone keypad. Your next question comes from the line of Vivec Juna of JP Morgan. Your line is open.
Thank you.
Um, given that a lot of the bigger picture questions have been asked in this,
This in the realm of some cleanup.
Operator: Thank you. We have to look at that line item along with the short-term liability line item. Those two things have a little bit more of a gross up of yield. If I step back in what's going on, we've increased our capacity and ability in the capital market space on tri-party repo, and our volumes have picked up quite a bit. We do have the ability to net those balances, so the balance sheet is smaller, to your point, about $1 billion or so on that particular line item. We keep the grossed-up amount on the yield, and that differential is going to show up in those two line items. If you net those things out, there's really no meaningful change to NII or net interest margin. You just have to look at the two of those items together. You'll note that short-term borrowings dropped about $7 billion.
Operator: That wasn't really repo related. That's about, again, about that $1 billion. Most of it was just short-term borrowings that we had used the prior quarter given the asset sales that we had, and we had obviously strong deposit growth, so we could just reduce that balance there.
[Analyst 3]: Okay. Thanks. Another one for either of you. Your C&I NPLs were up 30% linked quarter. Any color on what you're seeing, which industry sectors, what's the loss content like? Any color on that?
You have the ability to net, uh, those balances. Uh, so the balance sheet uh, is is smaller to your point about a billion dollars or so on that particular line item. Um, and but we we keep the growth step amount on the yield. Uh, and so that that differential is going to show up in those 2 line items if you if you net those things out. The there's really no um meaningful change to knee or net interest margin. You just have to look at the, the 2 of those items together. You'll note that short-term borrowings dropped about 7 billion dollars. Uh, that wasn't really repo related. That's about again about that billion dollars. Most of it was just short-term borrowings that we had used the prior quarter uh, given the asset sales that we had. And we had obviously strong deposit growth. So we could just uh, reduce that that balance there.
Thanks. Uh, and another one for either of you, your CNI NPLs are up 30% linked quarter. Any color on what you're seeing in which industry sectors? Uh, what's the last context? Like, um, what, you know?
Operator: Sure. A couple of things. You know, obviously there's some things that can be lumpy from time to time. We do have some exposure to First Brands. It's not material to our financials as it's already contemplated in the reserve. That partially explains the rise in commercial NPAs that you referenced.
Any color on that.
[Analyst 3]: Have you taken any kind of a loss or provision therefore for First Brands? In what form was that exposure to First Brands, John?
Sure. So, uh, a couple of things. Um, you know, it's obviously, there are some things that can be, uh, lumpy from time to time. We do have some exposure to First Brands; it's not material to our financials, as it's already contemplated in the reserve. But that partially explains, uh, the rise in commercial NPAs that you referenced.
Operator: It's just our secured borrowings that we have with them, and it's already any of the losses contemplated in our reserve already within the provision.
And have you taken any kind of a loss or provision therefore for first Brands and in what in what form was that exposure to First Branch John?
It's just our secured borrowings that we have with them, and it's already accounted for any of the losses contemplated in our reserve, already within the provision.
[Analyst 3]: Are there other similar structures like this that we should be worrying about, given I would have presumed that the first brand stuff showed up under your NDFI?
And others, other similar structures like this, that we should be worrying about, given... I would have presumed that the first brand stuff showed up under your NDF.
Operator: No. This is on the bank side of the equation. No, the answer is no. We see a lot of strength in the commercial side of the equation as well as on the retail side as we talked about with cards. We continue to look to see if there are things. We just are not seeing it.
No. Um, you know this is on the bank uh side of the equation and and know the answer is no there's uh we have a see a lot of strength in the in the uh uh commercial side of the equation as well as on the retail side, as we talked about with cards. So um we continue to to look to see if there's there are things and we we just are not seeing it.
[Analyst 3]: Gunjan, for you, what are you thinking of doing differently? Because First Brands is obviously a big surprise for the market.
For you. What are you thinking of doing differently? Because first Brands is obviously a big surprise for the market.
[Company Representative]: I don't think we'll do anything differently. We have very, very strong underwriting capabilities. I mean, you have a large book. You have one or two issues. You have to be very appropriately reserved for it, which we are. You have to be diligent to learn lessons from it. We have a lot of confidence in the quality of the credit book and our underwriting process. I'm not sure there's anything to be done differently, but to remain very vigilant and rely on your strong traditional underwriting strength.
I don't think we'll do anything differently. We are very, very strong underwriting, capabilities, and then you have a large book. You have 1 or 2 issues, you have to be very appropriately reserved for it. Which we are. You have to be, um, diligent uh, to to learn lessons from it? And we have a lot of confidence in the quality of the credit book and our underwriting process. So I'm not sure there's um, um, there's anything to be done different.
Differently. But be very, very vigilant and rely on your strong traditional underwriting strength.
[Analyst 3]: Okay, thank you both.
Thank you, both.
George Andersen: Your next question comes from a client of Scott Seifers of Piper Sandler. Your line is open.
Your next question comes from the line of Scott Seers of Piper Sandler. Your line is open.
[Analyst]: Thanks, guys. Good morning. I think most have been asked and answered. Maybe, John, I know we've had a little noise in the loan growth numbers this year with some of the actions you took earlier in the year. Are we at a point where we could expect to start to see more visible momentum? I know you saw some modest end-of-period growth in the aggregate, just curious on your thoughts from here and what you're seeing in terms of overall demand.
Thanks guys. Good morning. Uh I think most have been asked and answered but uh maybe John I know we've had a little noise in the lung growth numbers this year, with some of the actions you took earlier. In the year, we kind of had a point where we could expect to start to see more visible momentum. Um, I know you saw some modest end of period growth in the aggregate but just curious on your thoughts from here and what you're seeing in terms of overall demand.
Operator: Scott, just to clarify, are you talking about end-of-period, were you talking about deposits there or loans, or you're just in general?
[Analyst]: Oh, loans. Loans specifically.
Operator: I see. Got it. Okay. I think we had an opportunity in the second quarter as we had already talked about. I think that was something that we found attractive and acted on. It's obviously given us a benefit here in the third quarter. I don't see anything in particular on the horizon for that. You're always looking at opportunities as they come about. That's just something that we keep a pulse on. We're focused obviously on the organic side, growing accounts, making sure leaning into growth with our clients and that sort of thing.
[Analyst]: Gotcha. Okay, I think that actually does it. Thank you very much.
Are you uh Scott just to clarify? Are you talking about in the period where you're talking about deposits there or loans or you're just you're just in general? No, no, no. Lo loans loans with I see got it. Okay. Yeah, so, um, you know, I I think we had an opportunity in the second quarter as we had already talked about. And so I think that was um, something that we uh, found attractive and acted on. It's obviously given us a benefit here. Uh, in the third quarter. I I I don't see anything in a particular on the horizon for that, but obviously you're always looking at opportunities as they as they come about. Um, and so that's just something that we we keep a pulse on but we're we're focused. Um, obviously on the organic side growing accounts uh making sure leaning into growth with our clients and and that sort of thing.
Operator: Thank you, Scott.
Gotcha. Okay, I think that actually does it. So thank you very much. Thank you, Scott.
George Andersen: We have a follow-up question from the client of Ebrahim Punawala of Bank of America. Your line is open. Ebrahim, perhaps your line is on mute. My apologies. There are no further questions at this time. Mr. Andersen, I turn the call back over to you.
Uh, we have a follow-up question from the line of Abraham Poonawalla of Bank of America. Your line is open.
Abraham, perhaps your line is on mute.
Back over to you.
[Company Representative]: Thank you, George Andersen. Thank you to everyone who joined our call this morning. Please contact the Investor Relations department if you have any follow-up questions. You may now disconnect the call.
Thank you, John, you. And thank you to everyone who joined our call this morning. Please contact the investor relations department. If you have any follow-up questions, you may now disconnect the call.
George Andersen: This concludes today's call. You may now disconnect.
This concludes today's call. You may now disconnect.