Operator: Welcome to the US Bancorp Q3 2026 Earnings Conference Call. Following a review of the results, there will be a formal question and answer session. If you would like to ask a question, please press star then one on your phone. If you wish to withdraw your question, please press star then one again.
Operator: This call will be recorded and available for replay beginning today at approximately 10:00AM Central Time. I will now turn the conference call over to Brian Mauney, Director of Investor Relations for US Bancorp.
Brian Mauney: Thank you, operator, and good morning, everyone. Today I am joined by our Chairman and Chief Executive Officer, Gunjan Kedia, and Vice Chair and Chief Financial Officer, John Stern. In a moment, Gunjan and John will be referencing a slide presentation together with their prepared remarks. A copy of the presentation, our press release, and supplemental analyst schedules can be found on our website at ir.usbank.com.
Brian Mauney: Please note that any forward-looking statements made during today's call are subject to risk and uncertainty. Factors that could materially change our current forward-looking assumptions are described on page 2 of today's earnings presentation, our press release, and in reports on file with the SEC. Following our prepared remarks, Gunjan and John will be happy to take any questions that you have. I will now turn the call over to Gunjan.
Gunjan Kedia: Thank you, Brian. Good morning, everyone. Beginning on slide 3, we delivered another strong quarter, highlighted by record net revenue of approximately $8 billion and diluted EPS of $1.34, up approximately 10% from a year ago. Results in the quarter reflect strong execution against our three strategic priorities.
Gunjan Kedia: Net revenue grew 8.7% year over year. Disciplined productivity drove 240 basis points of positive operating leverage. In payments, our transformation efforts continued to gain traction with total payments revenue growing 6.5% year over year.
Gunjan Kedia: Turning to slide 4, fees continued to grow nicely and contributed 44% of total revenue again this quarter. Our fee complex is diversified and deepens client relationships, generates attractive returns, and contributes to a more balanced earnings profile.
Gunjan Kedia: While fee growth does come with higher expenses, productivity initiatives, including from our AI programs, helped improve our efficiency ratio and increased return on average assets year over year. On slide 5, we spotlight Global Capital Markets, an attractive growth opportunity across a range of economic scenarios. We closed the BTIG acquisition in June, and it contributed $226 million of fee revenue in Q3.
Gunjan Kedia: Our combined businesses are off to a wonderful start and already working very closely together to broaden how we serve our clients. We expect Capital Markets to grow from 8% to 10% or more of total company revenue over the next three to five years by focusing on three strategies.
Gunjan Kedia: One, continue to drive robust core organic growth across both franchises in line with their historical performance. Second, deepen wallet share with our clients where we deploy significant balance sheet resources.
Gunjan Kedia: The addition of BTIG strengthens our ability to serve a broader range of needs and capture greater fee revenue over time. Third, by adding product capabilities across both platforms. We look forward to sharing more on our Capital Markets strategy at a conference later this fall and are committed to providing more disclosures in due course as the business becomes a larger part of our revenue mix.
Gunjan Kedia: With fees and expenses in a healthy place, this year, we have increasingly turned our attention to strengthening net interest income and margin. An important lever of this growth is expanding our consumer and small business franchise, which provides a highly attractive source of funding.
Gunjan Kedia: Slide 6 is a busy chart. It captures our footprint and expansion strategies. We are densifying our branch presence and leveraging client centers that have long supported our national businesses.
Gunjan Kedia: We are supporting this ground game with targeted brand investments, including through our NFL partnership and new brand ambassadors such as Fernando Mendoza, Christian McCaffrey, and most recently, Jessica Alba for our small business segment. Turning to slide 7, we highlight small business banking.
Gunjan Kedia: We serve more than 2 million small businesses through a scaled, interconnected platform that contributes meaningfully to company revenue and is an invaluable source of stable, well-priced deposits. Over the past several years, we have built a unique foundation of banking, payments, and cash management capabilities.
Gunjan Kedia: This quarter, we launched several major initiatives to expand our reach with small businesses as we onboarded the Amazon co-brand partnership, expanded the Business Essentials suite of products, and established new banking teams in expansion markets.
Gunjan Kedia: We have a truly differentiated set of products and an enviable client footprint with small business, and this segment will be an important priority going into 2027. Finally, on slide 8, I want to spend a moment on corporate payments and treasury management, which together represent approximately 6% of our company revenues.
Gunjan Kedia: The corporate payments landscape has the potential to be transformed by the growing convergence of treasury management rails like ACH and wires, card rails, and new stablecoins and tokenized deposits. These businesses have delivered a strong quarter, benefiting from market share gains as well as tailwinds from fuel price increases in our fleet and freight businesses. Earlier this quarter, we launched our first USBDC stablecoin pilot.
Gunjan Kedia: While these trends are emerging, we are uniquely positioned to succeed in corporate payments, and we are investing to create interoperability across these rails to deliver both the benefits of new technologies and the safety and soundness of the banking system. Let me now turn it over to John.
John Stern: Thanks, Gunjan, and good morning, everyone. Q3 results reflected another strong quarter and demonstrated continued execution against our strategic priorities, generating meaningful revenue growth and significant positive operating leverage. Results remained firmly within all of our medium-term target ranges. If you turn to slide 9, we provide highlights for Q3.
John Stern: We reported earnings per common share of $1.34, with approximately $0.07 impact from reserve build this quarter. This equates to 10% year-over-year EPS growth, or 16% excluding the reserve build. Revenue was a record $8 billion, up 8.7% from a year ago, or up 6.4% adjusting for BTIG and securities losses.
John Stern: Meanwhile, expenses grew 7.1% year-over-year, or 2.0% excluding BTIG, implying 440 basis points of positive operating leverage excluding BTIG. Balance sheet trends remain constructive. Loans grew 1.0% and deposits grew 2.2% sequentially, while the net interest margin expanded 5 basis points to 2.84%.
John Stern: Credit quality metrics remained healthy across the board. Linked quarter non-performing assets declined 1.6%, and net charge-offs declined 2 basis points to 51 basis points. CET1 ratio remains stable at 10.8%, and tangible book value per share was up 5.4% year-over-year. Slide 10 provides our key performance metrics.
John Stern: Our profitability metrics continued to move up and to the right, while our efficiency ratio improved toward the better end of our medium-term target range. Slide 11 provides a summary of our loan and earning asset mix evolution.
John Stern: Average loans grew 8.0% year-over-year and 1.0% sequentially. Versus the prior year, growth continues to be driven by C&I, credit card, and commercial real estate, categories that typically deepen relationships and deliver incremental fee opportunities. The Amazon Small Business credit card portfolio contributed approximately $900 million and $1.7 billion to the Q3 average and period end loans, respectively.
John Stern: Importantly, our focus in these loan growth areas is naturally positioning our balance sheet to become more asset sensitive. For example, floating rate loans comprise 36% of earning assets as of quarter end, up from 32% four years ago. Slide 12 provides a summary of our deposits and funding mix.
John Stern: Total average deposits grew 2.9% year-over-year and 2.2% sequentially. Growth was driven by another record quarter of consumer deposits, along with strong growth in relationship-based deposits in businesses like investment services. Importantly, we achieved growth while staying disciplined with respect to pricing.
John Stern: Deposit costs increased 7 basis points sequentially, with approximately 2 basis points of impact from the September Fed rate hike. Notably, our total funding costs are up just 1 basis point quarter over quarter as our funding mix continues to improve. Turning to slide 13.
John Stern: Net interest income on a fully taxable equivalent basis increased 5.6% year-over-year and 2.3% linked quarter. The increase was driven by continued relationship-based loan and deposit growth, an improving earning asset and funding mix, and ongoing benefits from fixed asset repricing.
John Stern: Net interest margin improved 5 basis points sequentially to 2.84%, driven by improving loan yields and fixed asset repricing benefits. We currently expect net interest margin to increase by a similar amount in the Q4. Slide 14 highlights fee revenue trends within non-interest income.
John Stern: Total fee income increased 14.9% year-over-year, with broad-based strength across most fee categories. Capital markets growth of 69% year-over-year reflects a full quarter contribution from BTIG and approximately 10% growth across legacy capital markets. Moving to slide 15.
John Stern: Non-interest expense increased 7.1% versus the prior year, reflecting BTIG and continued investment in growth initiatives, marketing, technology, as well as compensation associated with the strong revenue generation for this quarter. These increases were partially offset by ongoing expense discipline across the bank.
John Stern: Slide 16 highlights the broad-based favorable trends we are seeing in credit quality. On the right side of the page, we highlight the longer-term evolution of our credit card portfolio. Card balances have increased at a brisk pace in recent years as our payments transformation takes hold.
John Stern: At the same time, FICO bands have marginally improved, and net charge-offs and delinquencies have trended lower. In short, we are growing the portfolio without compromising on underwriting standards. Turning to capital on slide 17. As of 30 September, our common equity Tier 1 capital ratio was 10.8%, stable compared to the prior quarter.
John Stern: Adjusting for AOCI, the CET1 ratio declines 30 basis points to 9.1%. On slide 18, we break out the components that drove the sequential changes in the AOCI adjusted CET1 and tangible common equity ratios this quarter. As it pertains to the adjusted CET1 ratio, strong earnings generation net of dividends added approximately 30 basis points of capital.
John Stern: This was offset by $12 billion of risk-weighted asset growth associated with heavy loan demand in the quarter and impact from our recently onboarded strategic small business partnership.
John Stern: Additionally, the significant increase in Treasury rates and widening credit spreads during Q3 impacted the ratio by an additional 40 basis points. Conversely, the tangible common equity ratio remained stable at 6.6% at quarter end. Strong earnings growth and lower ending assets offset the AOCI drag from higher rates.
John Stern: Despite a sharp move in rates this quarter, we maintained healthy capital levels and continue to have flexibility in how we manage the balance sheet. We expect our capital ratios to build from here, positioning us to resume share purchases over the next quarter or two. Turning to forward-looking guidance on slide 19 for Q4 and full year 2026.
John Stern: For Q4, on a year-over-year basis, we expect net interest income growth of 6% to 7% on a fully taxable equivalent basis. Total fee revenue growth in the range of 13% to 14%, with roughly half of the growth coming from BTIG, and non-interest expense growth of approximately 8%, or closer to 4% excluding BTIG.
John Stern: For the full year 2026, we now expect total net revenue growth of 8% to 9% compared to the prior year, or 6% to 7% excluding BTIG. This is improved from our prior guidance range of 5% to 7%. We now expect to deliver approximately 300 basis points of positive operating leverage for the full year, or approximately 400 basis points excluding the impact from BTIG. This is up from prior guidance of 200 and 300 basis points respectively.
John Stern: Moving to slide 20. This was another strong quarter for us, reflecting continued execution comfortably within all of our medium-term target ranges. We continue to see momentum across our business, which gives us confidence in our ability to build on these results and deliver consistent, sustainable returns over time. Let me now hand it back to Gunjan for closing remarks.
Gunjan Kedia: Thank you, John. As we look to the end of 2026, we are executing well against the strategic priorities we outlined at the beginning of the year and seeing that progress translate into stronger performance across the bank. Our diversified business mix, customer-centric approach, and disciplined execution position us to deliver attractive returns and long-term shareholder value. With that, we will now open the call for your questions.
Operator: At this time, as a reminder, if you would like to ask a question, press star then the number one on your telephone keypad. We will pause for just a moment to compile the Q&A roster. Your first question comes from a line of John McDonald from Truist Securities. Your line is open.
Operator: At this time, as a reminder, if you would like to ask a question, press star then the number 1 on your telephone keypad. We will pause for just a moment to compile the Q&A roster. Your first question comes from a line of John McDonald from Truist Securities. Your line is open.
John McDonald: Thank you. Good morning. Gunjan mentioned the increased focus on growing net interest income and strengthening the margin. John, could you unpack some of the drivers of your NII outlook from here, including what you see ahead for loan growth and deposit trends?
John Stern: Sure. Good morning, John. We are going to see similar themes in Q4 that we just saw in Q3. Loans have been strong, and they remain strong from a pipeline standpoint, so we expect similar type growth there.
John Stern: Of course, as a reminder, included in that, we have the Amazon small card book that we get the full quarter impact as well. Deposits are performing well. We continue to see nice growth in our consumer franchise as well as small business, and we see continued trends there.
John Stern: In terms of the net interest margin, we made the comment that margin should increase by amount this next quarter, and that is going to be just aided by the funding and asset mix that we have. That is improving as we have been talking about. There is a lot of momentum that we have, and that is reflected in our guide and what we discussed.
John McDonald: Just to follow up on that, in terms of the net interest margin drivers. Could you give us a little feel for how rising rates impacts it, maybe an update on fixed asset reprice and your deposit beta assumptions.
John Stern: Sure. We aim to be as neutral as we can be from an interest rate risk perspective. However, given this environment, we have been shifting more into asset sensitivity, and you are starting to see that come through in terms of loans. We have been shifting more into C&I, commercial real estate, and card, all predominantly floating rate assets, as you know.
John Stern: Then in the investment portfolio, that has been coming down, and we have been doing more in cash. So we have been shifting there a bit. In terms of, I think you asked about fixed asset repricing. I would say there that we continue to see about $10 billion or so per quarter of fixed rate assets that reprice, whether that is in the securities book or in the loan book, and that is coming on probably at about 125 basis point improvement or so.
John Stern: That is improved a little bit just because of the backup in rates as we have seen. Then finally, you asked about deposit betas. We think that betas pick up right where they left off from the last rate hike, so we are assuming about a 50% or so deposit beta to start out with and likely to continue as we see a couple of hikes kind of coming up in our forecast. So those are kind of the main points.
John McDonald: Got it. Thanks, John.
John Stern: Thank you.
Operator: Your next question comes from the line of Scott Siefers from TD Cowen. Your line is open.
[Analyst]: Morning, guys. Thank you for taking my question.
John Stern: Morning, Scott. Yep.
[Analyst]: First one, just a top level, and it's ended up being a much better year. I think we knew it was going to be a good year from the standpoint of positive operating leverage. It looks like it's coming in even better than expected.
[Analyst]: As you think about things looking ahead, maybe just sort of top-level thoughts on balance between profitability improvement, investment, just sort of top level how you're thinking about those things.
John Stern: Yeah. Sure, Scott. From our seat, obviously, we had strong growth in revenue, and that has been increasing and gaining momentum as the years come on. That's going to be the fundamental driver for why the increase in operating leverage this year from that 200 basis points now up to 300 basis points.
John Stern: We obviously have been onboarding a lot of revenue with the Amazon card book and BTIG coming online. That's north of $1 billion of revenue we've onboarded. We signaled this at the beginning of the year. We said that operating leverage, we wanted to be more of a driver from revenue growth because we know we can manage the expense side, and we have a lot of leverage to do that.
John Stern: As we look forward, and we're early in the budget process, so we're not giving any guidance. We anticipate operating leverage next year just kind of given similar drivers that we're seeing this year.
Gunjan Kedia: Scott, I would just add that we have runway on productivity initiatives. As you know, we have materially invested in our digital capabilities over five years, and that just delivers ongoing productivity, and we continue to be very intentional about how much we spend on technology investments.
Gunjan Kedia: All in all, I would say it's not a trade-off. We don't think about operating leverage for shareholders or investing into the business. The business model is capable of generating both of them in balance.
[Analyst]: Perfect. Okay. Thank you for that color. John, just maybe on the repurchase comment. There has been a lot of focus following just sort of the pause that you disclosed a month or so ago. Sounds like you will restart either this quarter or next quarter. Maybe just thoughts on kind of main factors you are thinking of as you anticipate returning to repurchase and maybe just sort of the balance between common equity Tier 1 build, TCE considerations, et cetera.
John Stern: Sure. Yeah. So maybe just to recap, Q3 had a lot of unique events in it for us. We had strong loan growth. We obviously had the Amazon book that added some capital demands, and then obviously the large rate move, which we all saw, of course. But for us, given our unique position and just our prudent nature, we decided to pause, but we have a high degree of confidence in our ability to generate capital.
John Stern: This quarter, after dividend distribution, we generated 33 basis points of capital. So we know we can build that back very quickly. I would just say what we are looking for this quarter is we are looking at loan demand. Where does that actually end up shaking out? Obviously, we believe that there will be growth, as I mentioned in a previous comment. But interest rates, we are watching that very closely.
John Stern: Then obviously, you have the added component of regulation. We anticipate some new rules coming down. So a combination of all that we are watching, and that will be the driver of whether it is this quarter or next. But in the meantime, we obviously are very much committed to the 70% to 75% payout from a distribution standpoint.
[Analyst]: Perfect. All right. Thank you.
John Stern: Thank you.
Operator: Your next question comes from the line of Manan Gosalia from Morgan Stanley. Your line is open.
Manan Gosalia: Good morning. I wanted to ask on commercial loan balances. The average loan balances were essentially flat sequentially. I think utilization rates declined slightly. Can you talk about what you are seeing in terms of underlying corporate borrowing demand?
Manan Gosalia: Given that rates were expected to go up, most of your clients borrow on the short end of the curve. Is there some reduction in demand overall? Or, in terms of the slowdown this quarter, was any of that related to capital levels and the ability to deploy capital, given the shift in the long end of the curve?
John Stern: Sure. Thanks, Manan. What I would say is that the underlying core C&I growth was very healthy and strong. We did have some runoff in some balances related to more in that NDFI space. Some of this is just new deals coming to market, didn't hurdle rates, and we have been more thoughtful on that of late. That is really the reason that you see the C&I component being pretty flat on a linked-quarter basis.
John Stern: We do anticipate that to increase as we look into Q4. The pipelines remain robust, and it is in all the areas that we have talked about in terms of food and beverage and energy and technology. Those are obviously very strong demand for loans at this point. Those are kind of the core things I would say on the C&I line.
Gunjan Kedia: Manan, I would add that the only place we have seen a little slowdown is commercial real estate, and residential mortgage continues to be very muted. Otherwise, C&I loan demand is quite robust and broad based.
Manan Gosalia: Got it. Can you unpack those comments you just made on the capital side a little bit more? You mentioned the potential for regulators to change the tailoring rules and how that might give you some flexibility. Are you saying that if the ten-year kind of stays where it is, plus you get some more color from the regulators on which way they are taking it, that you can start buybacks as soon as Q4?
John Stern: Yeah, that is a component. Obviously, we are all anxious for Basel III endgame. We have signaled that that is about a 5% or so improvement to the RWA. That is from the proposal. Things can change, so we need to see that. The tailoring comments have been in the news, so we are watching for that to see if anything comes online in that regard.
John Stern: Those are incremental pieces of information, but also, it is going to be rates and RWA/loan growth. Those are the three main components, and we will clearly update you. But it is clear we will be starting that back up, and we will glide back up into that 70% to 75%. As we just mentioned, we have a high degree of confidence in our capital build.
Manan Gosalia: Perfect. Thank you.
John Stern: Thanks.
Operator: Your next question comes from the line of Ebrahim Poonawala from Bank of America. Your line is open.
Ebrahim Poonawala: Good morning.
John Stern: Morning.
Ebrahim Poonawala: Maybe this is the first question. The slide 6 where you have the national footprint. Just talk to us in terms of what the strategy around the client centers is. Obviously, we've seen many of your peers announce significant branch expansion in new markets.
Ebrahim Poonawala: Is this a precursor to adding a ton of branches, or is this an indication that you don't see a ton of value adding hundreds of branches, and the client centers allows you to achieve and reach the same outcomes? Would love just your strategic sort of thought process behind that.
Gunjan Kedia: Good morning, Ebrahim. I'll just start by saying we do see value in branches, and we do see them as anchoring very high-quality customer relationships. Just to back up a little bit, we had been on a journey for really a decade to transform our branch network from what used to be a lot of small tier 3 service outlets to more advice hubs with most of our products being represented there.
Gunjan Kedia: That was a renovation strategy that is finishing up now, and we are beginning to lean into new branches. We have shared that our branch investment has increased from $200 million or thereabouts on average to $300 million, which is what we expect to do going forward. Those will be more new branches. Our first phase of that work is to densify within our own footprint.
Gunjan Kedia: As you see from the blue dots, we are in a vast territory, and we have real meaningful opportunity to get to 8% to 10% branch share in those markets within our footprint that have high household formation rates. There, our brand is already known. Our operations are already established, and the return is very high.
Gunjan Kedia: It is fully our expectation that over time we will inch out from that footprint to other branches. The client centers, on the other hand, are an interim answer that is faster for us to establish national presence. This is not a new strategy. Our commercial teams, our wealth teams, our mortgage teams, and our commercial real estate teams have been operating out of a footprint.
Gunjan Kedia: The Northeast is a big site for capital markets type of businesses as well. What we have done more recently is to say small business can also operate out of client centers. The strategy is both, and it is a matter of sequencing.
Ebrahim Poonawala: Got it. Safe to say, over time, those red dots, which feel quite lonely, will get accompanied by more blue dots.
Gunjan Kedia: We hope to make them less lonely, Ebrahim. Yes. Thank you.
Ebrahim Poonawala: Understood. Just one separate question on the broad-based C&I growth. Obviously, even in the last week, your markets are once again questioning the AI CapEx build-out. To the extent you have visibility, just talk to us.
Ebrahim Poonawala: When you think about broad-based C&I growth, how much of that are you able to see is a second, third derivative of the data center build-out versus just other industries we are seeing growth which may be less connected to the AI CapEx cycle? Thank you.
John Stern: Thanks, Ebrahim. Yeah. It is a topic that comes up frequently for us. We are looking to see if there is clues as to how much of growth and credit impact there is related to AI. Obviously, you have adjacent sectors like energy and telecom and things like that, areas that are seeing benefit in loan growth.
John Stern: Then there is other areas that are more broad based that are beyond that in terms of retail and food and beverage and insurance and all these other sorts of things. So it is broad based. I would actually add on top of that small business with SBA loans and things like that. There is a lot of momentum in the business community to want to grow, so that is on our mindset right now. So we are watching for that. But it is a topic we certainly look at.
Ebrahim Poonawala: Got it. Thank you.
Operator: Your next question comes from the line of John Pancari from Evercore ISI. Your line is open.
Gunjan Kedia: Morning, John.
John Pancari: Morning, John.
John Pancari: Morning.
John Pancari: Just want to see if you can maybe unpack a little bit of the trends you are seeing within the fee income space, particularly around treasury management and merchant processing and corporate payments.
John Pancari: Just some of the business color that you are seeing in terms of demand as well as as you look going into 2027, what is a good reasonable pace of growth as you continue to emphasize those businesses, and maybe similar color around the underlying pipeline that you are seeing in the capital markets side.
John Stern: Sure. A couple of things there. I will start on the treasury management and corporate payment side. Obviously saw some very strong growth on that side of the equation. Obviously, on the corporate payment side, we saw about 19% year-on-year growth. Most of that is new business as well as the spending from corporates and government is up quite a bit from last year at this time.
John Stern: Recall this time last year there was the impacts of tariffs and all that sort of thing. So we have lapped all that, and so there is good growth there. There is a little bit of fuel spend as well in there, but that is pretty nominal in terms of the growth rate. So we do expect continued growth in the CPS or corporate payment side of the equation.
John Stern: The treasury management side is continuing to see nice growth in that mid-single digit area. It is an important business. We have been making a lot of investments of late. We are doing a lot in terms of the payable and digital channels and capabilities. Going forward, we have high hopes in these two areas for sure.
John Stern: On the capital markets side, we continue to see strong growth there into the next quarter. Obviously, we had a very strong growth of 69% or so this quarter. BTIG will continue to be a strong component of that at about $200 million or so.
John Stern: Our core FICC or legacy capital markets led by commodities, foreign exchange, and Impact Finance are really showing some nice growth, and that is going to help us get some more in the double-digit type of growth on a year-over-year basis. We feel very good about those areas.
John Pancari: Okay. Thanks, John. That is helpful. On the margin side, just looking for a little bit more color, just what you are seeing in terms of competition. I heard you on the deposit beta commentary. What are you seeing there on deposit pricing in terms of market trends and how that is influencing your actions on the deposit side?
John Pancari: Similarly on the loan side, I know you mentioned a little earlier that within the C&I book, a couple of deals didn't hurdle, but you expect to pick up. What are you seeing, I guess, in terms of pressures on spreads and loan pricing on the lending side? Thanks.
John Stern: Sure. The answer is going to be pretty boring. We are not seeing a whole lot of change in both deposit and the loan side of the equation from a pricing standpoint. The post hike, the pricing that we are seeing is very consistent with what you would expect. There is nothing out of the ordinary. I would say similar on the loan side.
John Stern: There are loan spreads by and large tend to be pretty stable, and it is competitive of course, but it is manageable. On the C&I side of the equation, as I just mentioned, some of those things just didn't hurdle. Some of that is a little bit more we have been more prescriptive with the businesses in terms of making sure that things hurdle. It is a little bit of a dial turn for us that that occurred. We see broad-based growth in the C&I portfolio.
John Pancari: Okay, great. Thanks, John.
Operator: Your next question comes from the line of Ken Usdin from Autonomous Research. Your line is open.
Gunjan Kedia: Good morning, Ken.
Ken Usdin: Thanks. Good morning. John, can I just ask you to just walk through a couple more things on fees? Obviously the guide implies sequentially lower fees for Q4, and I know a lot of that is seasonal.
Ken Usdin: Can you just kind of remind us what usually happens in the payments lines? Does capital markets hold up at the Q3 level? I know you are saying $200 million of BTIG versus $226 million, and then can you size the amount of equity gains that were in the other line and what that line should usually look like? Thanks.
John Stern: Sure. Yeah. The Q4 from a year-over-year growth standpoint is going to look a lot like the Q3 with a couple of exceptions which explains the slightly down growth rate, although it is still very, very strong. Mortgage is going to be impacted by higher rates. We anticipate there to be more of a limited or low year-on-year growth, if any.
John Stern: Other revenue, we did have some gains that were more unique to this quarter. Our other revenue tends to be in that $125 million to $150 million range. We anticipate that to kind of normalize into that. Other than that, I think things like corporate trust continues to be very strong. I talked about capital markets and many of the payments lines. We see strong growth in corporate as well as retail cards.
John Stern: Merchant will probably be still in that 0% area for the next couple of quarters, as we have talked about. All the other areas are about as expected. It is shaping up to be a lot of momentum for us on the fee side of the equation.
Ken Usdin: Perfect. Thanks, John. Secondly, with the NIM up 5 this quarter and you are saying up about the same amount, that is a 2.90-ish exit. Can you just talk about, I know balance sheet size and mix will be an important part of this answer, but your comments previously about getting to a 3% NIM in 2027. Can you talk about just how that looks and what needs to happen in terms of the mix and size of the balance sheet vis-a-vis prior questions on rates and such? Thanks.
John Stern: Yeah. Ken, we continue to see a path on the 3% NIM at some point in 2027. You are starting to see that thesis play out, as we have talked about. It is a constant formula of just consistent asset repricing as I just mentioned. Obviously, the asset and funding mix is continuing to improve. We are just being thoughtful in terms of depositor acquisition versus cost.
John Stern: That is the formula and the ingredients that we need to continue to do what we are doing on the NIM side. Obviously, the curve and deposit competition may have something to say about that in the end, but we have a lot to like about in terms of the trajectory we are making on that path. We feel good about it.
Gunjan Kedia: I will add one thing, that we are very disciplined about improving both the deposit mix and the loan mix, which is helping the NIM situation. For Q4, we have the full year impact of the Amazon deal, which is a nice tailwind.
Gunjan Kedia: We are continuing to focus on credit card receivables, which are growing very well, the C&I loan and CRE. As that becomes a bigger part of our loan book and deposits become more relationship-oriented, it gives us strengthening NIM and NII growth for some time.
Ken Usdin: I got it. Thank you very much.
Operator: Your next question comes from a line of Chris McGratty from KBW. Your line is open.
Chris McGratty: Great. Thanks. I do have a question on credit, maybe the higher rate environment. Any comments from the team on the impact you have seen so far on consumer and also health of the commercial customer? I know you talked about moving some of the NDFI lending out in the quarter. Thanks.
John Stern: Sure. Morning, Chris. On the credit side, we haven't really seen a whole lot of change in that. It's obviously a watch item when we think about the impacts of higher rates. Right now, we're not seeing anything on the consumer side. Spend levels are high. Employment is strong. So there just continues to be strong patterns there despite sentiment and things of that variety.
John Stern: On the commercial side, corporates and commercial clients are well managed. They have strong balance sheets. They've been going through a lot over the last several years, and they've been very nimble. I think the area we are watching, obviously, is going to be in the commercial real estate side.
John Stern: You always want to watch when rates go up. Obviously when we underwrite, we build in a cushion for a rate move, so it's well understood and managed. It's going to be an area that we watch, but nothing at this point to call out.
Chris McGratty: Okay. Thanks, John. I think I may have asked this in prior quarters, but just in the broader balance sheet optimization discussion today with where rates have moved and the growth that's occurred, anything additionally that might be ripe for optimization, whether it be the funding base, perhaps syndicating more production into the capital markets for a quarter or two? Anything we should be aware of there? Thanks.
John Stern: Yeah. I think we're doing the actions, and I would just anticipate continued action from us. In this environment, you want to be very active in your management of the balance sheet. I've already mentioned several of those things that we've done. Maybe some other things you've probably noticed, you've seen that our long-term debt fell a couple billion dollars as well as the investment portfolio.
John Stern: We did repay some home loan bank advances that were long-term debt, but really there wasn't much maturity left in them. As I mentioned, the investment portfolio, we've been lowering that amount and going more into cash. So we're just doing a lot of things to kind of optimize the balance sheet for the rate environment that we're entering, and we feel good about taking action as needed.
Chris McGratty: Great. Thanks, John.
Operator: Your next question comes from the line of Gerard Cassidy from RBC. Your line is open.
John Stern: Thank you.
John Stern: Go on, Gerard.
John Stern: Morning, Gerard.
Gerard Cassidy: John. Back in your Investor Day, Gunjan, it was the fall of 2024, you talked a lot about interconnectedness. When you look at your slide 5 on the BTIG, you talk about deepening the client base. Can you share with us how that opportunity for the cross-sell into your existing client base for BTIG products and vice versa, how is that proceeding and what are the opportunities that you folks see for growing that business through that interconnectedness?
Gunjan Kedia: Thank you, Gerard. It has actually gone very well. As you know, when we did the BTIG deal, the biggest questions were around cultural fit, and the chemistry is very good, and the substantive ability to deepen relationships is very good.
Gunjan Kedia: As you know, we deploy a very significant balance sheet to our corporate relationships, and having more product to get your fair share of fee revenue is an important part of the interconnected pieces, and it is coming through very nicely. It has also been very encouraging to see it on the other side. We have developed a very sizable book in leveraged ETFs, and a lot of the trading opportunity that comes from that helps BTIG too.
Gunjan Kedia: We expect that this will be a very good deal for us, and we are very confident in getting the combined capital markets business to about 10% of total net revenue or more over time. That completes our product set. I will also answer a broader question on interconnectivity, which is really playing out with deposits right now.
Gunjan Kedia: There is a lot of discussion around deposit costs, deposit betas, and the Smartly product that we launched about two years back now, just around the Investor Day, connects our banking products to our credit card products and allows a person to optimize their card rewards based on their deposit relationships.
Gunjan Kedia: That product has been very successful for us. You have seen the funding mix improvements based on that, and that is exactly the pieces we are taking now to small business. This theme of interconnectedness is very present in the company.
Gunjan Kedia: It takes incentive changes, some changes to org structures, some development of skill sets, but we have had a lot of momentum there and will continue to be a very big part of our strategy even into next year.
Gerard Cassidy: Very good. As a follow-up, maybe you can update us since you have been very active in doing some bolt-on acquisitions, just as BTIG, for example, as well as the portfolio acquisition. Where are you guys standing now in terms of either more bolt-on acquisitions as you look out into the future or possibly even a depository acquisition? Thank you.
Gunjan Kedia: Sure. Our point of view remains consistent. We like bolt-on acquisitions. We are good at it, and they give us local scale and products. We do not think of them as fundamentally different from investing organically into our business. On depository acquisition, we find our organic strategies to have compelling strategic, financial, and execution characteristics, and we are very focused on that part of the strategy and have a lot of momentum there.
Gerard Cassidy: Appreciate it. Thank you, Gunjan.
Gunjan Kedia: Thank you.
Operator: Your next question comes from a line of Mike Mayo from Wells Fargo. Your line is open.
Mike Mayo: You increased your guide for operating leverage this year by 100 basis points, and I think you said one reason related to AI. That is a little surprising because it is hard for banks to actually quantify benefits, and banks usually talk about AI benefits in more general terms and productivity and stuff like that. Were you talking in a more general sense, or do you actually have numbers around it, and how are you using AI, and why do you think it is helping to improve your efficiency? Thank you.
Gunjan Kedia: Good morning, Mike. I think AI is one, not the only reason to drive good productivity, but it is an important lever, and has growing momentum and growing use cases for productivity within our world. We do continue to expect it to be a contributor to productivity. Some of the discussions around whether the token costs are overtaking returns is a relevant discussion.
Gunjan Kedia: We have invested in developing the capabilities to swap out expensive models for cheaper models, and we have some confidence over time that we will continue to get positive returns from our AI program on productivity.
Gunjan Kedia: More broadly though, the place where we are being more measured is on client-facing applications, just as we fully understand the concerns around privacy and some of the customer confidence issues around it. These things will get resolved in due course. We remain quite focused on the AI program and do have confidence around its contribution to our productivity.
Mike Mayo: As it relates to the cash sorting concerns that personal AI agents will drain deposits from the banking industry, how do you think about that potential threat and the value that US Bancorp provides to depositors, say, for privacy and trust? Thank you.
Gunjan Kedia: Mike, just first, we have not seen any AI cash sorting third-party agents try to interact with the bank. The logistics of doing something like this are very complicated. We do not expect it to be a near-term impact to us. Our customer base is very digitally savvy. The adoption rates are very high.
Gunjan Kedia: Our digital tools allow a fairly high amount of deposit price discovery and the ability to optimize automatically should a depositor choose to do that. All of these capabilities will strengthen with AI over time. We are not counting on it not to be that.
Gunjan Kedia: Again, our strategy is not to attract depositors only through deposit price. We have invested a lot in creating meaningful value propositions that help people manage their lives and manage the transactions. We are quite comfortable with transparency around deposit pricing. I would say a lot of discussion around that topic. We do not see it yet in day-to-day life.
Mike Mayo: All right. Thank you.
Operator: Your next question comes from the line of Erika Najarian from UBS. Your line is open.
Erika Najarian: Good morning.
John Stern: Good morning.
Erika Najarian: I had a few follow-up questions. Good morning. Going back to the exit rate on a net interest margin, I just wanted to drill down on this given Gunjan's remarks about focusing on strengthening NII. John, in the past, you have mentioned that you are liability sensitive to the short end.
Erika Najarian: As we think about the path from Q4 to that 3%, is the optimization on the funding side and the asset remix enough to offset that sort of initial liability sensitivity, assuming the curve flattens from the rate hikes? In other words, does that balance sheet optimization overwhelm that static positioning on the short end?
John Stern: Sure. On the mix and all this sort of thing, we have continued to and want to improve our asset mix to be more floating rate. That has been an area that we have talked about here and even put a slide in to show how much we have moved over the last couple of years and been methodical about that. The answer is yes. We think that the funding and the asset mix and the fixed asset repricing are enough to offset any competition on the beta side.
John Stern: That is what we are developing on the balance sheet side of the equation, and that is what gives us confidence, as I mentioned, just in terms of NIM path and all that sort of thing. Obviously we will watch the curve shape and what that looks like and how deposit competition fans out, but that is what our assumptions are at this particular juncture.
Erika Najarian: Got it. Just a follow-up question. You are certainly in a unique position in terms of category 2, and there is a big difference between sort of a cliff vest of your AOCI and a five-year phase-in. We are hearing that Basel III endgame will be finalized by year-end, and it just feels like tailoring has to come with it. Just given the phase-in component.
Erika Najarian: Do you have a sense on whether or not if we do get finalization of Basel III endgame, if that would be sort of the superseding rule for you versus the "cliff vest" on AOCI? In other words, you get to enjoy a five-year phase-in versus a cliff vest. If so, does that change anything in terms of how you are thinking about buybacks from either a timing or magnitude perspective?
John Stern: Yeah. I'll go back to my comments that we are looking certainly at the regulation as a component of deciding on buybacks. But it is going to be probably more dependent on RWA demands as well as interest rates, particularly in the short run. We are very much interested in rule changes that we expect to see here in Q4 that can shift what our ultimate RWA and capital demands are or what that looks like.
John Stern: We are also interested, obviously, if there is tailoring and how that gets applied. It is speculation at this point. We know just as much as you do and what we see in the press, but we are not planning on it. We are planning on growing our capital base. We are planning on all the things that we talked about in terms of balance sheet stewardship and optimization and all these things that are going to help us on our path.
Gunjan Kedia: Erika, I just want to double underline that we are fully ready to transition into CAT 2 regardless of the timing of the Basel 3 endgame. We have been preparing for it for a long time. When John talks about starting our buybacks in the next one or 2 quarters, we are not counting on any benefit from Basel 3 endgame. This is just capital accretion we get based on normal course business.
Erika Najarian: Got it. Thank you so much.
John Stern: Thanks, Erika.
Operator: Your next question comes from the line of Ben Gerlinger from Citi. Your line is open.
Ben Gerlinger: Good morning.
John Stern: Morning.
Ben Gerlinger: Just wanted to follow. It's helpful to hear the thoughts on overall growth and then kind of bolt-on opportunities if they do arise, if you do go that route. Just kind of thinking about the loan portfolio itself. You've kind of had some organic growth, and you've had some remixing with the card.
Ben Gerlinger: Just kind of thinking, not necessarily a Q4 comment or even a 2027 comment, but just down the road, how should we think about the relative mix and weighting between some of the loan categories and in the areas that you would seem more appealing today?
John Stern: Sure. Ben, I can start on that. I think what you have been seeing on the loan side of the equation, over the past several quarters, you will continue to see for the next several quarters in terms of leaning in on card, leaning in on C&I, and commercial real estate. There may be some bumps, like commercial real estate may not be as robust in the next quarter or two, just given the backup in rates, but all in, we are focusing in that way.
John Stern: When we started the year, I believe our residential mortgage area of our loans was in the 30% area in terms of loan mix. We do see that coming down, and more because of the growth in the other categories. So we are growing into it. So we anticipate the mortgage area will probably be in the mid-20s at some point over time.
John Stern: Again, it is going to be because of the growth in the other areas, not because we are diminishing our focus on the residential mortgage book. We continue to think that is a strong business over the fullness of time.
Gunjan Kedia: Ben, our thought process very much is that it is a relationship loan. So where you get fee revenue, you get deep relationships, you get sticky deposits. That is where we want to extend our balance sheet. The categories that lend themselves to this are credit cards. It is a big fee-based business.
Gunjan Kedia: The C&I loans with our corporate payments, our treasury management, and our investment services products makes that a very attractive loan. As we build out the capital markets, that becomes a good use of balance sheet as well.
Gunjan Kedia: The categories that we would be more measured on would then become auto, mortgage, and some of these more standalone, which over time will still be very important products for us, but as John said, just become more measured.
Ben Gerlinger: Got it. That is helpful. Thank you.
Operator: Your next question comes from a line of David Chiaverini from Jefferies. Your line is open.
Gunjan Kedia: David.
John Stern: Good morning.
David Chiaverini: Morning. Thanks for taking the question. Wanted to ask about the efficiency ratio outlook, your guide mid to high 50s. What could take US Bancorp to the high end versus the low end? To what extent does the interest rate environment influence that?
David Chiaverini: Right now, obviously, we're around 56, just under that, which we're very proud of in terms of making good progress there. Obviously the operating leverage has helped with the revenue growth that we've seen.
David Chiaverini: We continue to anticipate strong growth and continuing that operating leverage, and so our desire is to get closer to that mid part of the versus the mid to high 50s. That's an area that we're focused on. Obviously, the rate environment and the macro will drive things here and there, but that's been our focus and what we've been talking about.
Gunjan Kedia: I would say the high end will be if capital markets growth turns out to be very robust, and it'll be a good reason to be on a high end. That's a high efficiency ratio business. The low end will be our AI program. There's a lot to be discovered there. There's a lot of potential there, and you can see a path where that accelerates and really begins to impact the productivity of the firm.
David Chiaverini: Thanks for that. I wanted to ask about USBDC. You mentioned about how it launched in September. Did you launch this due to strong client demand, or is this more of getting the capability up and running in anticipation of increased client demand down the road?
Gunjan Kedia: It's certainly the latter. I very clearly have to say there is not much client demand at all. What there is now is client curiosity. Even from two quarters back, we have quite a few clients wanting to experiment with us on what this might do. The launch, as you know, is a pilot. The actual launch of the product will take some regulatory approvals here.
Gunjan Kedia: We do think that as companies think about combining the benefits of the banking system, which they do really appreciate, with some of the shortcomings. Mostly what we've heard is 24/7 real-time availability, especially over the weekends, cross-border. Most central banks don't have that kind of capability.
Gunjan Kedia: We are building out the product set in anticipation of being able to do something that creates value to customers. But we would not say that there is very robust demand just yet that has developed. Most of the conversations are around the corporate payment space.
David Chiaverini: Thank you.
Operator: And there are no further questions at this time. Mr. Mauney, I turn the call back over to you.
Brian Mauney: Yeah. Thank you to everyone who joined our call this morning. Please contact the Investor Relations department if you have any follow-up questions. Rob, you may now disconnect.
Operator: This concludes today's conference call. You may now disconnect.
