Welcome to the U. S. Bancorp Third Quarter 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 1 on your phone.
If you wish to withdraw your question, please press star then 1 again. This call will be recorded and available for replay beginning today at approximately 10AM central time. I will now turn the conference call over to Brian Mauney, Director of Investor Relations for U. S. Bancorp.
Thank you, operator, and good morning, everyone. Today, I am joined by our Chairman and Chief Executive Officer, Gunjan Kedia, and Vice Chair and Chief Financial Officer, John C. Stern. In a moment, Gunjan and John will be referencing a slide presentation together with their prepared remarks.
A copy of the presentation, our press release and supplemental analyst schedules can be found on our website at ir.usbank.com. Please note that any forward looking statements made during today's call are subject to risk and uncertainty. Factors that could materially change our current forward looking assumptions are described on Page 2 of today's earnings presentation.
Our press release, reports on file with the SEC. Following our prepared remarks, Gunjan and John, will be happy to take any questions that you have. I will now turn the call over to Gunjan.
Thank you, Brian. Good morning, everyone. Beginning on Slide 3, we delivered another strong quarter highlighted by record net revenue of approximately $8 billion and diluted earnings per share of $1.34, up approximately 10% from a year ago.
Results in the quarter reflect strong execution against our 3 strategic priorities, Net revenue grew 8.7% year over year, Disciplined productivity drove 240 basis points of positive operating leverage And in payments, our transformation efforts continue to gain traction with total payments revenue growing 6.5%. Year over year. Turning to Slide 4, fees continued to grow nicely and contributed 44% of total revenue again this quarter.
Our fee complex is diversified. And deepens client relationships, generates attractive returns, and contributes to a more balanced earnings profile. While fee growth does come with higher expenses, productivity initiatives, including from our AI programs, helped improve our efficiency ratio and increased return on average assets year over year.
On Slide 5, 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 the third quarter. 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 3 to 5 years by focusing on 3 strategies: 1, continue to drive robust core organic growth across both franchises. In line with their historical performance. 2, deepen wallet share with our clients where we deploy significant balance sheet resources. The addition of BTIG strengthens our ability to serve a broader range of needs and capture greater fee revenue over time. and 3, 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. 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 the expanding our consumer and small business franchise, which provides a highly attractive source of funding.
Slide 6 is a busy chart. It captures our footprint and expansion strategies. We are densifying our branch presence and leveraging client centers that have long supported our national businesses.
We are supporting this ground game with targeted brand investments, including through our NFL partnership, and new brand ambassadors such as Fernando Mendoza, Chris McCaffrey, and most recently, Jessica Alba for our small business segment. Turning to Slide 7, we highlight small business banking. We serve more than 2 million small businesses through a scaled interconnected platform.
That contributes meaningfully to company revenue and is an invaluable source of stable, well priced deposits. Over the past several years, we have built a unique foundation of banking, payments, and cash management capabilities This quarter, we launched several major initiatives to expand the 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. We have a truly differentiated set of products and an enviable client footprint with small business.
And this segment will be an important priority going into 2027. Finally, on Slide 8, I want to spend a moment on corporate payments and treasury management. Which together represent approximately 6% of our company revenues.
The corporate payments landscape has the potential to be transformed by the growing convergence of treasury management rails like ACH and wires, card rails, and new 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.
While these trends are emerging, we are uniquely positioned in corporate payments, and we are investing to create interoperability across these rails to deliver both the benefits of new technologies and the safety and soundness of the banking system. Let me now turn it over to John.
Thanks, Gunjan, and good morning, everyone. Third quarter results reflected another strong quarter and demonstrated continued progress 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 the third quarter. We reported earnings per common share of $1.34 with approximately $0.07 impact from reserve build this quarter.
This equates to 10% year over year EPS growth or 16% excluding the reserve build. Revenue was a record $8 billion up 8.7% from a year ago or up 6.4% adjusting for BTIG and securities losses. Meanwhile, expenses grew 7.1% year over year, or 2.0% excluding BTIG.
Implying 440 basis points of positive operating leverage excluding BTIG. Balance sheet trends remain constructive. Loans grew 1.0% and deposits grew 2.2% sequentially, while the net interest margin expanded 5 basis points to 2.84%.
Credit quality metrics remained healthy across the board. Linked quarter nonperforming assets declined 1.6% and net charge offs declined 2 basis points to 51 basis points. CET1 ratio remained stable at 10.8%, and tangible book value per share was up 5.4% year over year.
Slide 10 provides our key performance metrics. Our profitability metrics continued to move up and to the right. While our efficiency ratio improved toward the better end of our medium term target range.
Slide 11 provides a summary of our loan and earning asset mix evolution. Average loans grew 8.0% year over year, and 1.0% sequentially. Versus the prior year growth continues to be driven by C and I, credit card, and commercial real estate, categories that typically deepen relationships and deliver incremental fee opportunities.
The Amazon small business credit card portfolio contributed approximately $900 million and $1.7 billion to the third quarter average and period end loans, respectively. Importantly, our focus in these loan growth areas is naturally positioning our balance sheet to become more asset sensitive. For example, floating rate loans comprise 30% of earning assets as of quarter end, up from 22% 4 years ago.
Slide 12 provides a summary of our deposits and funding mix. Total average deposits grew 2.9% year over year. And 2.2% sequentially.
Growth was driven by another record quarter of consumer deposits along with strong growth in relationship based deposits. In businesses like investment services. Importantly, we achieved growth while staying disciplined with respect to pricing.
Deposit costs increased 7 basis points sequentially, with approximately 2 basis points of impact from the September Fed rate hike. Notably, our total funding costs are up just 1 basis point quarter over quarter as our funding mix continues to improve. Turning to slide 13.
Net interest income on a fully taxable equivalent basis increased 5.6% year over year. And 2.3% linked quarter. The increase was driven by continued relationship based loan and deposit growth, and improving earning asset and funding mix, and ongoing benefits from fixed asset repricing.
Net interest margin improved 5 basis points sequentially to 2.84% driven by improving loan yields and fixed asset repricing benefits. We currently expect net interest margin to increase by a similar amount in the fourth quarter. Slide 14 highlights fee revenue trends within noninterest income.
Total fee income increased 14.9% year over year, with broad based strength across most fee categories. Capital markets growth of 69% year over year reflects a full quarter contribution from BTIG and 10% growth across legacy capital markets. Moving to slide 15.
Noninterest expense increased 7.1% versus the prior year reflecting BTIG, and continued investment in growth initiatives, marketing, technology, as well as compensation associated with the strong revenue generation for this quarter. These increases were partially offset by ongoing expense discipline across the bank. Slide 16 highlights the broad based favorable trends we are seeing in credit quality.
On the right side of the page, we highlight the longer term evolution of our credit card portfolio. Card balances have increased at a brisk pace in recent years, as our payments transformation takes hold. At the same time, FICO bands have marginally improved.
And net charge offs and delinquencies have trended lower. In short, we are growing the portfolio without compromising on underwriting standards. Turning to capital on slide 17.
As of September 30, our common equity tier 1 capital ratio was 10.8%, stable compared to the prior quarter. Adjusting for AOCI, the CET1 ratio declined 30 basis points to 9.1%. On Slide 18, we break out the components that drove the sequential changes in the AOCI adjusted CET1 and tangible common equity ratios this quarter.
As it pertains to the adjusted CET1 ratio, strong earnings generation, net of dividends, added approximately 30 basis points of capital, This was offset by $12 billion of risk weighted assets growth associated with heavy loan demand in the quarter, and impact from our recently onboarded strategic small business partnership. Additionally, the significant increase in treasury rates and widening credit spreads during the third quarter impacted the ratio by an additional 40 basis points. Conversely, the tangible common equity ratio remained stable at 6.6% at quarter end.
Strong earnings growth and lower ending assets offset the AOCI drag from higher rates. Despite a sharp move in rates this quarter, we maintained healthy capital levels and continue to have flexibility in how we manage the balance sheet. We expect our capital ratios to build from here.
Positioning us to resume share repurchases over the next quarter or 2. Turning to forward looking guidance on Slide 19 for the fourth quarter and full year 2026. For the fourth quarter, on a year over year basis, we expect net interest income growth of 6% to 7% on a fully taxable equivalent basis total fee revenue growth in the range of 13% to 14%, with roughly half of the growth coming from BTIG.
And noninterest expense growth of approximately 8%. Or closer to 4% excluding BTIG. For the full year 2026, we now expect total net revenue growth of 8% to 9% compared to the prior year.
Or 6% to 7% excluding BTIG. This is improved from our prior guidance range of 5% to 7%. We now expect to deliver approximately 300 basis points positive operating leverage for the full year or approximately 400 basis points excluding the impact from BTIG.
This is up from prior guidance of 200 and 300 basis points respectively. Moving to Slide 20. This was another strong quarter for us, reflecting continued execution comfortably with all of our medium term target ranges, We continue to see momentum across our business which gives us confidence in our ability to build on these results and deliver consistent, sustainable returns over time.
Let me now hand it back to Gunjan for closing remarks.
Thank you, John. As we look to the end of 26, 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.
At this time, as a reminder, if you would like to ask a question, Your first question comes from a line of John McDonald from Truist Securities. Your line is open.
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?
Sure. Good morning, John. You know, we are gonna see similar themes in the fourth quarter that we just saw in the in the third quarter.
Loans have been strong, and they remain strong from a pipeline standpoint. So we expect similar type growth there. Of course, as a reminder, included in that, we have the Amazon small card book that, we get the full quarter impact as well.
Deposits are performing well. We continue to see nice growth in our consumer franchise as well as small business and we see continued trends there. And then in terms of the net interest margin, we made the comment that margin should increase by a similar amount this quarter, and that is going to be just aided by the funding and asset mix that we have.
That is that is improving as we have been talking about. So, you know, there is a lot of momentum, that we have, and that is gonna be. that is reflected in our guide and what we discussed.
And just to follow-up on that, in terms of the net interest margin drivers, could you give us a little feel for how rates rising rates impacts it? Maybe an update on fixed asset reprice and your deposit beta assumptions.
Sure. So, you know, we aim to be as neutral as we can be, from an interest rate 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 and I, commercial real estate, and card, all predominantly floating rate assets, as you know. And then in the investment portfolio, that has been coming down, and we 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 of 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 a 125-basis point improvement or so. And that is improved a little bit because of the backup in rates as we have seen. And then finally, you asked about deposit betas.
You know, 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 kinda coming up, in our forecast. So, that those are kind of the main points.
Your next question comes from the line of Scott Siefers from TD Cowen. Your line is open.
Good morning, guys. Thank you for taking my Yep. Hey.
I guess first 1, just sort of a top level 1. You know, it is it is ended up being a much better year. I think we knew it was gonna be a good year from the standpoint of positive operating leverage.
Looks like it is coming in even better than expected. I guess as you think about things, looking ahead, you know, maybe just sort of top level thoughts on balance between, profitability improvement, investment just sort of top-level how you are thinking about those things?
Yes. Sure, Scott. Yes.
I mean, our seat, we had strong growth in revenue and that has been and gaining momentum as the years come on. And so that is going to be the fundamental driver for why the increase in operating leverage this year from that 200 basis points now up to 300 basis points We have obviously been onboarding a lot of revenue, with the Amazon Cardbook and BTIG coming online. that is north of $1 billion of revenue we have onboarded. And we signaled this at the beginning of the year.
We said that operating leverage, we wanted to be more of a driver from revenue growth because we know we can manage the expense side. We have a lot of levers to do that. So, you know, as we look forward, you know, and we are early in the budget process, so we are not giving any guidance, but we anticipate operating leverage next year just kind of given similar drivers that we are seeing this year?
And, Scott, I would just add that we have runway on productivity initiatives As you know, we have materially invested in our digital capabilities over 5 years, and that just delivers ongoing productivity. And we continue to be very intentional about how much we spend on technology investments. All in all, I would say it is not a trade off.
We do not think about operating leverage for shareholders or investing into the business. The business model is capable of generating both of them in balance.
Per. Okay. Thank you for that color.
And then John, just maybe on the repurchase comments. I mean, there is 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 kinda main factors you are thinking of as you anticipate returning to repurchase and maybe just sort of balance between common equity tier 1 build, TCE considerations, etcetera?
Sure. Yeah. So maybe just to recap, the third quarter 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, the large rate move, which we all saw, of course.
But, you know, for us, you know, given our unique position and just our prudent nature, we decided to pause. We but we have a high degree of confidence in our ability to generate capital. I mean, this quarter, 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. And then, obviously, you have the added component of regulation.
We anticipate, some new rules coming down. So combination of all that, we are 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 cap.
Distribution standpoint.
Per. Alright. Thank you.
Thank you.
Your next question comes from the line of Manan Gosalia from Morgan Stanley.
Wanted to ask on commercial loan balances. The average loan balances were essentially flat sequentially. And, I think utilization rates declined slightly.
Can you talk about what you are seeing in terms of underlying corporate borrowing demand, given that rates were expected to go up, most of your clients are on the short end of the curve. Is there, you know, some reduction in demand overall? Or in terms of the slowdown this quarter, was any of that related to I guess, capital levels and the ability to deploy capital given the shift in the in the long end of the curve?
Sure. Thanks, Manan. You know, what I would say is that the underlying core C and I growth is very healthy and strong.
We did, have some runoff in some balances related to more in that NDFI space. And some of this is just, new deals coming to market did not hurdle areas, and we have been more thoughtful on that of late. And so that is really the reason that you see the C and I component being pretty flat, on a linked quarter basis.
We do anticipate that to increase. As we look into the fourth quarter. So the pipelines remain robust, and it is in all the areas that we have talked about in terms of food and beverage and energy and technology.
Those are, you know, obviously very, you know, strong demand for loans at this point. So those are kind of the core things I would say on the C and I line.
No, 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. But otherwise, C and I loan demand is quite robust and broad based.
Got it. And can you unpack those comments you just made on the capital side a little bit more? So you mentioned the for regulators to change the other end rules and how that might give you some flexibility.
So I guess you saying that if, you know, the tenure kind of stays where it is, plus you get some more color from the regulators in which way they are taking it, that you can start buybacks as soon as the fourth quarter?
Yes. I mean, that is a component. Obviously, we are going to we are all for Basel III endgame.
We have signaled that is about a 5% or so, improvement, to the RWA but that is from the proposal. You know, things can change, so we need to see that. The tailoring is.
Comments, have been in the news, and so you know, we are. We are watching for that to see if anything comes online in that regard. So those are incremental pieces of information.
But, also, you know, it is going to be rates and RWA slash loan growth. I mean, those are the 3 main components. And, we will we will clearly update you.
But, it is clear. We are we are going to be, you know, we will be starting that back up, and we will glide back up into that 70 to 75% as we as we as we just mentioned. We have a high degree of confidence in our in our capital build.
Your next question comes from the line of Ebrahim Poonawala from Bank of America. Your line is open.
Hey. Good morning. Good morning.
I guess maybe this is the first question. The slides 6, where you have the national footprint, Just talk to us in terms of what the strategy around the client centers is. Obviously, you have seen many of your peers announce significant branch expansion in new markets.
Is this a precursor to adding a ton of branches, or is this an indication that you do not 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.
Good morning, Ebrahim. So I will 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 there. That was the renovation strategy. That is finishing up now.
And we are beginning to lean into new branches. We have shared that our branch investment has increased from $200 million or thereabouts on average to $300 million, which is what we expect to do going forward. And those will be more new branches.
Our first phase of that work is to densify within our own footprint. As you see from the blue dots, we are in a vast territory, and we have real meaningful opportunity to get to 8% to 10% branch share in those markets within our footprint that have high household formation rates. There, our brand is already known.
We are our operations already established, and the return is very high. It is fully our expectation that over time, we will inch out from that footprint to other branches. The client centers, on the other hand, are an interim answer that is fast 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. The Northeast is the big site for capital markets type of businesses as well.
And what we have done more recently is to say small business can also operate out of client centers. So the strategy is both, and it is a matter of sequencing.
Got it. So I guess safe to say over time, those red dots which feel quite lonely will get accompanied by more blue dots. I guess.
We hope to make them less lonely, Ebrahim. Yes.
Thank you. Understood. And just 1 separate question on the broad based c and I growth.
Obviously, even in the last week, your markets are once again questioning the AI CapEx build out to the extent you have visibility. Just talk to us when you think about broad based C and I growth, how much of that are you able to see is the second, third derivative of the data center build out versus just other industries where we are seeing growth which may be less connected to the AI CapEx cycle. Thank you.
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.
I mean, obviously, you have adjacent sectors like energy and, telecom and things like that, areas that are seeing benefit in loan growth. But then there 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 I. So it is.
It is broad based. And I would actually add on top of that small business with SBA loans and things like that. Just a lot of. there is a lot of momentum in the business community to want to grow.
And so that is, on the. On our mindset right now, and, so we are for that. But it is a topic we certainly look at.
Your next comes from the line of John Pancari from Evercore ISI. Line is open.
Morning, John. Morning, John. Good morning.
I 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 virtual processing and corporate payments. Just some of the business color that you are seeing in terms of demand as well as kind of as you look going into 2027 with a good, reasonable pace of growth as you continue to emphasize businesses? And maybe similar color around the underlying pipeline that you are seeing in the capital market side.
Sure. So, yeah, a couple of things there. So I will start on the treasury management and corporate payments side.
Obviously, saw some very strong growth on that side of the equation. The you know, there is, in the corporate payment side, we are, 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, recall, this time last year, there was impacts of tariffs and all that sort of thing.
So that 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 in the CPS or corporate payment side of the equation. And then 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, and so, we are doing a lot in terms of the payable and digital channels and capabilities. And so, you know, going forward, we have a we have high hopes in these 2 in these 2 areas, for sure.
On the capital market side, we continue to see strong growth there, into the next quarter. Obviously, we had a very strong growth of 69% or so this quarter. And on the and we, BTIG will continue to be a strong, component of that at about $200 million or so But our core, FICC or legacy capital markets led by commodities, foreign exchange, and impact finance are really, showing some nice growth, and that is gonna help us, get some, you know, more in the double digit type of growth on a year over year basis.
So we feel very good about, those areas.
Okay. Thanks, John. it is helpful. And then on the margin side, just looking for a little bit more color just what you are seeing in terms of competition Mike, 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? And then similarly, on the loan side, I know you mentioned a little earlier that, you know, within the c and a.
C and I book, couple deals did not hurdle. You expect to pick up. You know, what are you seeing, I guess, in terms of pressures on spreads and loan pricing on the lending side?
Thanks.
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. And I would say similar on the loan side. There are, loan spreads, by and large, tend to be pretty stable.
Stable, and it is competitive, of course, but it is completely-- it is manageable. You know, on the C and I side of the equation, as I just mentioned, some of those things just did not hurdle and that. Some of that is a little bit more we have, we have been more prescriptive with the businesses in terms of, making sure that things hurdle.
And so it is a little bit of a dial turn for us that occurred. But, you know, we see broad based growth in the C and I, portfolio.
Okay. Great. Thanks, Sean.
Your next question comes from the line of Ken Usdin from Autonomous Research. Your line is open.
Hey. Good morning. Hey.
John, can I just can I just ask you to just walk through a couple more things on fees? So obviously, the guide implies sequential sequentially lower fees for the fourth quarter. And I know a lot of that is seasonal.
Can you just kind of remind us what usually happens in the payment lines? Does capital markets hold up at the third quarter level? I know you are saying 200 million of BTIG versus $226 million And then you size the amount of equity gains that were in the other line and what that line should usually look like?
Sure. Yes. So we are the fourth quarter from a year over year growth standpoint is going to look a lot like third quarter, with a couple of exceptions, which explains the slightly down growth rate, although it is still very, very strong.
You know, mortgages is going to be impacted by higher rates, and so we anticipate there to be more of a limited or low, year on year growth. If any. And then, and then other revenue we did have some gains, that were more unique to that this quarter.
And so our other revenue tends to be in that a $120 million to $150 million range. So we anticipate that to kind of, normalize into that. So other than that, I think things like corporate trust continues to be very strong.
I talked about capital markets. And many of the payments lines. We see strong growth in corporate as well as retail cards.
Merchant will probably be still in that 0% area for the next couple of quarters as we have talked about. And then all the other areas are about as expected. So it is shaping up to be a lot of momentum for us on the fee side of the equation.
Per. Thanks, John. And then secondly, with the NIM up 5 this quarter and you are saying up about the same amount, at the 290 ish exit, can you just talk about I know balance sheet size and mix will be an important part of this answer, but your comments previously about getting to a 3% NIM in 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.
Yeah. You know, Ken, we see a lot of we see 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 we have.
As I have just mentioned, the asset and funding mix, is continuing to improve. And then we are just being thoughtful in terms of deposit acquisition versus cost. So those are the formula.
That. that is the formula and the ingredients that we need, to continue to do what we are doing on the NIM side. You know, obviously, the curve and deposit competition may have something to say about that in the end, but have a lot to like about in terms of the trajectory we are making on that path. So, we feel good about it.
You know, I will add 1 thing that, we are very, disciplined about improving both the deposit mix and the loan mix, is helping the NIM And for the fourth quarter, we have the full year impact of the Amazon deal, which is a nice tailwind. But we are continuing to focus on credit card receivables, which are growing very well, the C and I loan and CRE. And as that becomes the bigger part of our loan book and deposits.
Become more relationship oriented, it gives us it gives us strengthening NIM and NII growth for some time.
I got it. Thank you very much.
Your next question comes from the line of Chris McGratty from KBW. Your line is open.
Maybe a question on credit, maybe the higher rate environment any comments from the team on, you know, 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.
Sure. So on the credit side, we have not really seen a whole lot of change in it is obviously a watch item when we think about the impacts of higher rates. Right now, we are not seeing anything, on the consumer side.
Spend levels are high. Employment is strong. So there just continues to be, strong patterns there despite sentiment and things of that variety.
So. And then on the commercial side, you know, corporates and commercial clients are well, managed. They have strong balance sheets.
They have been going through a lot over the last several years, and they have been very nimble. I think the area we are watching, obviously, is gonna be in the commercial real estate side. You know, you always wanna watch when rates go up.
And obvious. Obviously, when we underwrite, we build in cushion for rate moves. So, it is it is well understood and managed but we, but, you know, it is gonna be an area that we watch, but nothing at this point to call out.
Okay. Thanks, John. And 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 is occurred.
Anything additionally that might be ripe for optimization, whether it be the funding base, perhaps syndicating more production into the capital markets. For a quarter or 2? Anything we should be aware of there?
Yeah. You know, I think we were doing the actions, and we. I would just continued action, from us.
We. In this environment, you wanna be very active. In your management of the balance sheet, and I have already mentioned, several of those things that we have done.
Maybe some other things you have you have probably noticed, you have you have seen that our long term debt fell a few. A couple billion dollars as the investment portfolio, we did, repay some home loan bank advances that were long term debt, but, really, there was not much maturity left in them. So we are we are just being, and as I mentioned, the investment portfolio, we have been we have been lowering that amount and put.
Going more into cash. So we are just doing a lot of things to kinda optimize balance sheet for the rate environment that we are, entering, and we feel, you good about, taking action as needed.
Your next comes from the line of Gerard Cassidy from RBC. Your line is open.
Hey, John. Back in your investor day, Gunjan, I guess it was the fall of 24. You talked a lot about interconnectedness.
And when you look at your slide 5 on the BTIG, you talk about deepening the chronic base. Can you share with us how that opportunity for the cross sell into your existing client base for BTIG products and vice versa, how is that proceeding? And what are the opportunities that you folks see for growing that business through that interconnectedness?
Thank you, Gerard. it is actually gone very well. As you know, when we did the BTIG deal, the biggest questions were around cultural fit. And the chemistry is very good, and the substantive ability to deepen relationships is very good.
As you know, we deploy a very significant balance sheet to our corporate relationship. And having more product to get your fair share of free revenue is an important part of the interconnected piece and it is coming through very nicely. it is also been very encouraging to see it on the other side. We have developed a very sizable relation.
Book in leveraged ETFs. And a lot of the trading opportunity that comes from that helps BTIG too. So we expect that this will be a very good deal for us, and we are very confident in getting the combined capital markets business to about 10% of total net revenue or more over time.
And that completes the product set. I will ask I will also answer a broader question on interconnectivity, is really playing out with deposits right now. there is a lot of discussion around deposit cost, deposit betas, and the Smartly product that we launched about 2 years back now, just around the Investor Day. Connects our banking products to our credit card products.
And allows a person to optimize their card rewards based on their deported deposit relationships. That product has been very successful for us. You seen the funding mix improvements based on that.
And that is exactly the thesis we are taking now to small business. So this theme of interconnecting is very present in the company. It takes incentive changes, some changes to oak 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.
Very good. And then as a follow-up, obviously, maybe you can update us since you have been very active in doing some bolt on act 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 on depository acquisition? Thank you.
Sure. Point of view remains consistent. We like bolt on acquisitions.
We are good at it, and they give us local scale and products And we 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 and we are very, very focused on that part of the strategy and have a lot of momentum there.
Appreciate it. Thank you, Gunjan.
Your next question comes from the line of Mike Mayo from Wells Fargo. Your line is open.
Hi. So you increased your guide for operating leverage this year by 100 basis points. And I think you said 1 reason related to AI And 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.
So were you talking in a more general sense, or do you have numbers around it and how are you using AI and why do you think it is helping to improve your efficiency? Thank you.
Good morning, Mike. So I think AI is 1, 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.
And we do continue to expect it to be a contributor to productivity. Some of the discussions around whether the token costs are overtaking returns is a relevant discussion We have invested in developing the capabilities to swap out 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. 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 you know, customer confidence issues around it.
These things will get resolved in due course. So we remain quite focused on the AI program and do have confidence around its contribution to our productivity.
And as it relates to the cash sorting concerns, that yeah. Per AI agents will drain deposits from the banking industry. How do you think about that potential threat and the value that U. S. Bancorp provides to depositors, say, for privacy and trust?
Thank you.
So, Mike, just first, we have not seen any AI cache sorting third party agents tried to interact with the bank. The logistics of doing something like this are very complicated. I so we do not expect it to be a near term impact to us.
Our customer base is very digitally savvy. The adoption rates are very high. Our tools allow a fairly high amount of deposit price discovery and the ability to optimize automatically should a depositor choose to do that All of these capabilities will strengthen with AI over time.
We are not counting on it not to be that. But, again, our strategy is not to attract depositors only through deposit price. We have invested a lot in creating meaningful value propositions that help people manage their lives and manage the transactions And we are quite comfortable with transparency around deposit pricing.
So I would say lot of discussion around that topic We do not see it yet in day-to-day life.
Your next question comes from the line of Erika Najarian from UBS. Your line is open.
Hi, good morning. Wondering, I had a few follow-up questions.
You know, going back to the exit rate on the net interest margin, and I just wanted to drill down in this given Gunjan's remarks about focusing on strengthening NII. John, in the past, you have mentioned that your liability sensitive to the short end. So as we think about the path from the fourth quarter 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 the short end?
Sure. So, you know, on the on the, the mix and all this sort of thing, we have continued to and want to improve our asset mix to be more floating rate. That has been an area that what we have talked about here and even put a slide in and to show how much we have moved, over the last couple of years and been, methodical about that.
So you know, so the answer is yes. We think that the funding and the asset mix and the and the fixed asset repricing are enough to offset any competition on the beta side. 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. So obviously, we. We will watch the curve shape and what that looks like and how the deposit competition fans out, but, that is that is what our assumptions are at this particular juncture.
Got it. And just a follow-up question. You are certainly in a unique position in terms of, Category II, and there is a big difference between sort of a cliff vest of AOCI and a 5-year phase-in.
And, you know, we are hearing that Basel III endgame will be finalized by year end. And it just feels like tailoring has to come with it, right, just given the phase in. Component.
And I guess, like, do you have a sense on whether or not you know, if we do get finalization of Basel III endgame, if that would be sort of the superseding rule for you versus the quote, cliff vest on AOCI. In other words, you get to enjoy a 5-year phase-in versus the cliff vest. And if so, does that change anything in terms of how you are thinking about buybacks from either a timing or magnitude perspective?
Yeah. I will 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 the fourth quarter. That can shift, you know, what our ultimate, RWA, and capital demands are or what looks like. We are also interested, obviously, if there is if there is tailoring and how that gets applied. it is speculation at this point.
Right? We know just as much as you do and what we see in the in the press, and. 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.
But that is it. Yeah.
I just want to double underline that. We have fully ready to transition into CAD 2 regardless of the timing of the Basel III endgame. We have been preparing for it for a long time.
And when Don. John talks about starting a re buybacks in the next 1 or 2 quarters, we are not counting on any benefit from Basel III and Game. This is just capital accretion we get based on normal course business.
Got it. Thank you so much. Thanks, Erika.
Your next question comes from the line of Ken Usdin from Citi. Your line is open.
Hi, good morning. Good morning. Call. it is helpful to hear the thoughts on overall growth and then kind of bolt on opportunities if they do arise, if you do go that route.
Just kind of thinking about the loan portfolio itself. You kind of have had some organic growth, and you have had some remixing with the card. Just kind of think, not necessarily a fourth quarter comment or even 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 see more appealing today?
Sure. Ken, I can I can start on that? I think what you have been seeing on the loan side of the equation, you will continue to see, 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 and I and commercial real estate.
Now there may be some, bumps like commercial real estate may, not be as robust in the next quarter or 2 just given the backup in rates. But all in, we are focusing in that way. You know, when we started the year, I believe our mortgage residential mortgage area, 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 are growing into it. So we anticipate the mortgage area will probably be in the mid twenties at some point over time.
But, again, it is gonna 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.
Then 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. And the categories that lend themselves to this are credit cards. it is a big fee based business.
The C and I loans with our corporate payments, and our investment services products makes that a very attractive loan And then as we build out the capital markets, that becomes a good use of balance sheet as well. The categories that we would be more measured on would become auto, mortgage and some of these more stand alone, which over time they will still be very important products for us. But as Sean said, just become more measured.
Got it. that is helpful. Thank you.
Your next question comes from the line of David Chiaverini from Jefferies. Your line is open.
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?
And to what extent does the interest rate environment influence that?
Sure. So right now, obviously, we are around 56, just under that, which we are very proud of in terms of making good progress there. And, it is been obviously the operating leverage has helped with the revenue growth that we have seen.
You know, we continue to anticipate strong, growth and continuing that operating leverage. And so our desire is to get into closer to that mid part of the. Versus the mid to high fifties. that is an area that we are we are focused on.
Obviously, the rate environment and the macro will drive things here and there, but that is been our focus and what we have been talking about.
I would say the high end will be if capital markets growth turns out to be very robust, and it will be a good reason to be on a high end. that is a high efficiency ratio business. And the low end will be our AI program. there is a lot to be discovered there. there is a lot of potential there, and it is quite. You can see a path where that accelerates and really begins to impact the productivity of the firm.
For that. And then I wanted to ask about USB DC. You mentioned about how it launched in September.
Did you launch this due to strong client demand, or is this more of getting the capability up and running in anticipation of increased client demand down the road?
it is certainly the latter. I very clearly have to say there is not much client demand at all. What there is now is client curiosity.
Even from 2 quarters back, we have quite a few clients wanting to experiment with us on what this might do. The launch, as you know, is a pilot. We are.
The launch of the product will take some regulatory approvals here. We do think that as companies think about combining the benefits of the banking system, which they do really like, appreciate. With some of the shortcomings, mostly what we have heard is 24/7 real time availability, especially over the weekends, cross border, Most central banks do not have that kind of capability.
So 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. And most of the conversations are around the corporate payment space.
Thank you.
And there are no further questions at this time. Mr. Mauney, I turn the call back over to you.
Yes. Thank you to everyone who joined our call this morning. Please contact the Investor Relations department if you have any follow-up questions.
Robert, you may now disconnect.
This concludes today's conference call. You may now disconnect.
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