U.S. Bancorp. (USB) — Q1 2026 Earnings Call Transcript

Thank you, Regina, and good morning, everyone. In our Boardroom today, I'm joined by Chief Executive Officer, Gunjan Kedia; and Vice Chair and CFO, John Stern. In a moment, Gunjan and John will be referencing a slide presentation together with their prepared remarks. A copy of the presentation, our press release, and supplemental analyst schedules can be found on our website at ir.usbank.com. Please note that any forward-looking statements made during today's call are subject to risk and uncertainty. Factors that could materially change our current forward-looking assumptions are described on Page 2 of today's earnings presentation, our press release, and in reports on file with the SEC. Following our prepared remarks, Gunjan and John will be happy to take questions that you have. I will now turn the call over to Gunjan.

Thank you, Jen, and good morning, everyone. I will begin on Slide 3. This quarter, we delivered earnings per share of $1.18, a year-over-year increase of approximately 15%. Total net revenue of $7.3 billion increased 4.7% year-over-year, with broad-based growth across each of our three major business lines. Net interest income on a taxable equivalent basis increased 4.1% year-over-year, supported by robust core loan growth in commercial and credit card and a second consecutive quarter of record consumer deposits. Fee income grew 6.9% year-over-year, reflecting improved payments performance and momentum across capital markets and investment services businesses. Capital markets' performance was particularly strong as new product penetration with long-standing clients and favorable market volatility combined to drive strong revenue growth. We delivered positive operating leverage of 440 basis points in the quarter. Strong revenue growth and continued expense discipline improved our efficiency ratio by 260 basis points year-over-year. John will provide more details on our financial performance in his opening remarks. On Slide 4, we are spotlighting our Business Banking franchise. This segment contributes approximately 9% of our revenues and represents a compelling long-term opportunity for us. We have been building out new products and operational capabilities for this segment. We have also expanded our client teams to build deep, multi-serve relationships that are served in branches with direct bankers and exceptional digital experiences. That approach has driven high single-digit compound annual growth in both clients and fees over the past two years. Looking ahead, we are investing in integrated solutions, collectively branded Business Essentials. These solutions offer banking, card, spend management, and merchant solutions that support small businesses at every stage of their life cycle. Our recently announced partnership with Amazon is significant in size and will meaningfully expand our small business reach. This partnership is unique from traditional co-brand card arrangements in anticipating a clear pathway to broader banking relationships over time. On Slide 5, we highlight strong momentum in California, where we increased our scale and density with our Union Bank acquisition at the end of 2022. As previously reported, we realized merger-related expense savings of approximately $1 billion and are now focused on capturing the considerable revenue synergies offered by this acquisition. The map on the left illustrates our strong positioning in markets with a high concentration of small businesses. California is a powerful growth engine for us and is outperforming the broader franchise across multiple key dimensions. Moving to Slide 6. Within payments, we continue to see fee revenue growth consistently strengthening across all segments. In our credit card business, new products aimed at affluent transactors, along with significant increases in marketing, have resulted in double-digit growth in account acquisitions over the past four quarters and a strong start to the year. Merchant processing fee growth remained steady in the mid-single digits, reflecting disciplined execution across three core strategies: software-led products focused on five verticals and expanding direct distribution. And in corporate payments and prepaid, we are beginning to see growth rebound as spend levels normalize and installations of last year's strong business wins start to show through in results. I'll close on Slide 7. In capital markets, our organic product expansion as well as our pending BTIG acquisition are expected to drive sustained revenue growth. In payments, the Amazon partnership will meaningfully accelerate credit card revenue growth by the end of the year and expand our banking opportunity with the small business segments in the future. And in our consumer franchise, we look forward to building Financial Edge, a program to better serve the needs of NFL athletes and their families, and to build our brand nationally, both in partnership with the NFL. Let me now turn the call over to John.

Thank you, Gunjan, and good morning, everyone. First quarter results showcased another quarter of strong business momentum and ongoing execution against our medium-term financial targets. If you turn to Slide 8, I'll start with some highlights, followed by a discussion of trends for the first quarter. We reported earnings per common share of $1.18 and generated $7.3 billion of net revenue, representing 4.7% growth year-over-year. Improved revenue trends reflect strong loan growth in areas like C&I and credit cards, along continued momentum in fee-generating businesses like capital markets, investment services, and payments. Average total assets increased 0.7% linked quarter to $688 billion, reflecting steady client activity across the franchise. For the first quarter, ending assets were $701 billion. As a reminder, the Category II transition requires four quarters of average assets to be $700 billion or more. As expected, credit quality metrics remain stable, underscoring the resilience of our clients in an uncertain operating environment. As of March 31, our tangible book value per common share increased more than 15% on a year-over-year basis. Slide 9 provides our key performance metrics. We continue to operate comfortably within our medium-term targets for profitability and efficiency. Disciplined balance sheet management and strong returns drove a return on tangible common equity of 17%, while return on average assets was 1.15% this quarter. Net interest margin was flat linked quarter at 2.77% as core loan growth and stable deposit pricing were offset by elevated mortgage prepayments and somewhat tighter credit spreads. Turning to Slide 10. Over the last two years, we have increased our tangible common equity 31%, while continuing to deliver high-teens returns on tangible common equity given steady and improving earnings growth. The sequential step down this quarter reflects normal seasonality, along with the impact of continued AOCI burn-down, rather than any change in the underlying earnings or profitability trajectory. As we look ahead, we remain confident in our ability to deliver high-teens returns on tangible common equity. Slide 11 provides a balance sheet summary. Total average deposits were relatively flat on a linked-quarter basis, as record consumer deposits were offset by typical seasonality in our wholesale and investment services businesses, improving our deposit mix. Our percentage of noninterest-bearing to total average deposits remained stable at approximately 16%. Average loans totaled $394 billion, up 3.8% from the prior year or 5.3% when adjusting for loan sales in the second quarter of 2025. The growth was broad-based and centered around credit card, commercial, and commercial real estate. The ending balance on our investment securities portfolio as of March 31 was $174 billion. Turning to Slide 12. Net interest income on a fully taxable equivalent basis totaled $4.3 billion, an increase of 4.1% on a year-over-year basis, driven by robust loan growth, funding optimization, and ongoing benefits from fixed asset repricing. Slide 13 highlights fee revenue trends within noninterest income. Total fee income increased 6.9% on a year-over-year basis, supported by nearly 30% growth in capital markets, nearly 10% for trust and institutional fees, and ongoing momentum across our payments business. As a reminder, our capital markets business is focused on fixed income, foreign exchange, and derivatives, including our commodities business. Our pending BTIG acquisition adds equity and investment banking capabilities in the future. During the quarter, we also made updates to a select number of fee categories to better align our disclosure with how we manage the businesses. Prior results were restated for these classification changes, with no effect on total fee revenue. Turning to Slide 14. Noninterest expense totaled approximately $4.3 billion, up 0.8% linked quarter. On a year-over-year basis, ongoing productivity and continued expense discipline helped us fund strong investments in technology and marketing. Slide 15 highlights our ability to effectively manage our expense base while driving top-line growth. Disciplined expense management has become foundational to how we operate, showcased by our seventh consecutive quarter of positive operating leverage. Looking ahead, we see opportunities to build on our strong operating leverage story, supported in part by the ongoing deployment of AI and other automation tools to improve efficiency. Slide 16 highlights our credit quality performance. Our ratio of nonperforming assets to loans and other real estate was 0.38% as of March 31, an improvement of 3 basis points from the previous quarter, and 7 basis points from a year ago. The first quarter net charge-off ratio was 0.56%, increasing 2 basis points sequentially, driven by the seasonal nature of credit cards, while our allowance for credit losses of nearly $8 billion represented 2.0% of period-end loans. On Slide 17, we're providing a closer look at our business credit exposure within the non-depository financial institution loan portfolio given the increased attention on this segment. Business credit intermediaries represent approximately 3% of total ending loans, and these exposures are well structured. Our risk framework includes meaningful over-collateralization, clearly defined industry concentration limits, and first-lien collateral. Importantly, this reflects U.S. Bank's long-standing approach to risk management and underpins our comfort with both business credit and the broader NDFI portfolio. Turning to Slide 18. As of March 31, our common equity Tier 1 capital ratio was 10.8%, or 9.3% including AOCI. On Slide 19, we wanted to provide some initial thoughts following the updated Basel III proposals. We're encouraged by the initial proposals and expect to see meaningful RWA relief under both methodologies, particularly in areas like mortgage and investment-grade corporate lending, providing additional flexibility to support clients through disciplined balance sheet usage. While we await final outcomes around key elements such as the AOCI phase-in and the effective date of the new rules, the framework as proposed supports our return to historical capital deployment ranges under both scenarios. On Slide 20, we provide a comparison of our first quarter results to our previous guidance. For the first quarter, net interest income, fee revenue, and noninterest expense all exceeded our previous guidance. I'll now provide forward-looking guidance for the second quarter and the full year 2026. Starting with the second quarter 2026 guidance. Net interest income growth on a fully taxable equivalent basis is expected to be in the range of 6% to 7% compared to the second quarter of 2025. Total fee revenue growth is expected to be in the range of 6% to 7% compared to the second quarter of 2025. We expect total noninterest expense growth of 3% to 4% compared to the second quarter of 2025. I'll now provide full year 2026 guidance, which is consistent with our previous guidance. We expect total net revenue growth to be in the range of 4% to 6% compared to the prior year. We expect to deliver positive operating leverage of 200 basis points or more for the full year. And our guidance excludes the impact of the pending BTIG acquisition, which is expected to contribute approximately $200 million of fee revenue per quarter, with an anticipated close date in the back half of the second quarter. The impact of the Amazon small-business card and the NFL partnership are fully contemplated in our guidance. Turning to Slide 21. First quarter results represent another consecutive quarter of operating within all of our medium-term targets. While we are pleased with our continued momentum, our focus remains on delivering consistent, sustainable, and industry-leading returns over time. And we have a high degree of confidence in our ability to strengthen our performance and build on these results. Let me now hand it back to Gunjan for closing remarks.

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

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

Sure. Thanks, Scott. I appreciate that. Yes, no, we feel good about the outlook. As we mentioned in our guidance slide, we have a lot of growth opportunities, as we talked about. As we've mentioned in the past couple of quarters now as we think about 2026, we're really thinking about our revenues growing faster and that being the driver of positive operating leverage. And we have a desire really to invest some of the savings that we have into things like technology and marketing, some of the things that we've talked about in the past. And it also kind of depends on the nature of the revenues. If fee revenues grow faster, as an example, that's going to bring with it more expense just by the nature of the compensation and things like that. And then net interest income, of course, we welcome that as well. So from an operating leverage standpoint, we have a lot of flexibility, and we feel good about our outlook.

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

Yes, I'll start. On the commercial loan side, we experienced good core loan growth across various sectors. The large corporate segments that are performing well include food and beverage, energy, and healthcare. We are seeing mergers and acquisitions activity among these customers, along with increased capital expenditures. Small business lending also remains very strong, and we expect this trend to continue. While we've previously projected loan growth at around 3% to 4%, I believe it will actually be higher, likely in the mid-single-digit range for the full year. There is significant momentum in this area. Our utilization rate is currently just above 25%, which seems to be a good level and has been gradually increasing. However, I don't expect much more upside in that regard. Overall, core loan growth has been robust.

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

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

Yes. On the funding side, we are observing a competitive market for deposits, which is nothing new. However, we have experienced price stability across our portfolios. Our primary focus remains on growing consumer deposits, where we achieved a record increase, with a $7 billion year-on-year growth, nearly 3%. We are also concentrating on operational deposits on the wholesale side, leveraging those to enhance our relationships and generate fees. Consequently, we have effectively managed the deposit environment as usual. Regarding margins, they have remained flat this quarter. Positive influences included strong core loan growth and the stable pricing characteristics of our deposits. However, some loans we acquired were at tighter spreads, and we noted an increase in refinancing activity on the mortgage side, which was approximately 15% to 20% higher than last year. Moving forward, I anticipate that refinancing will decrease while core loan growth, deposit pricing stability, and our earning asset mix will continue to improve. Overall, we expect to see ongoing progress in our net interest margin.

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

Sure. John, you start...

I’ll begin by discussing our priorities for capital deployment. Our approach remains unchanged, focusing primarily on client and loan growth. We witnessed this growth in the past quarter and are committed to supporting our clients as needed. Additionally, we will prioritize capital deployment to our shareholders, with the dividend being a key aspect. This quarter, we increased our buyback from $100 million to $200 million, and I expect this trend to continue upward. Starting at $200 million seems reasonable, especially considering the strength we see in our pipelines. However, that figure could rise further as it is our goal to increase over time, especially as we reach our necessary capital levels.

Thank you, John. I do want to just reiterate that we are very committed to long-term capital distribution targets of 70% to 75%, and we are keen to get back to those levels with share repurchases. And we are very close, John, to just stabilizing our capital ratios in a Category II framework and, of course, very encouraged by the capital rules that might accelerate that. So that's the backdrop. On our bolt-on acquisition strategy, we are constantly looking at properties. They are usually not as big as the acquisition we did with BTIG. It would be unusual for us to think about another bolt-on in the capital markets world because we are focused on closing the BTIG deal and getting synergies out of that. But we stay open to that. Those tend to be quite accretive immediately. They are small deals that give you local scale in a particular product to fill a gap. On your broader M&A question, nothing has changed about our strategy. We are very excited about the organic growth opportunities we have in front of us and the momentum we have. So that is our focus.

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

Yes, John. We definitely still see a path to that 3%. The margin isn't always linear, and I've explained the factors for this quarter, both positive and negative. When I consider the underlying metrics, loan growth appears to be a strong indicator that will assist in shaping our earning asset mix and balance sheet size. Deposits are stabilizing, as I mentioned, and our asset mix is improving. Additionally, the small business acquisition from Amazon will come into play in the third quarter. These are the kinds of factors we will continue to focus on to help drive the net interest margin going forward.

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

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

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

Yes, that's a great question. We have certainly seen strong momentum in various fee categories. Capital markets have performed exceptionally well, and we're witnessing growth there. In payments, we're beginning to see a significant change. Additionally, corporate payments, especially after the second quarter, will no longer be impacted by last year's government spending, and we have promising pipelines in that sector. Our institutional businesses are also performing very well. Therefore, I would expect to lean towards the higher end of the 4% to 6% range for fee revenue.

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

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

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

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

Yes, thank you, Ebrahim. Regarding Category II, we are closely monitoring the forthcoming regulations. Currently, our focus is on understanding the existing rules. We are concentrating on our Category II level. With the proposed regulatory changes, we included a slide outlining the two different proposals for standardized and expanded versions. Both options are improvements over the current Category II framework and will provide us with greater flexibility. These changes will ultimately benefit our capital strategies.

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

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

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

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

And I'll add on California. Yes, it is competitive, as are any other regions that have a big opportunity. But it's a very, very big market too, and we are becoming very significant as a player there, and we are seeing the growth be higher than the rest of our franchise. I'll say a word about what is the significance of the new co-brand relationships we are doing. We built our digital platform to nationally serve co-brand card clients with banking services for the first time with State Farm. We improved that platform with Edward Jones, and it's unique in the market today. And it's very attractive to partners because you can provide a full range of service to your clients under sort of your user experience. The Amazon deal allows us to take that platform and then expand it to the small business side, at which point it becomes a very big asset to attract big co-brand mandates. So that's a lot of revenue. We have 1.4 million small businesses today. These are banking clients. And the Amazon deal will bring 700,000 new small businesses to the co-brand side, with the opportunity to attract them to the business side. So it's a pathway to a very different type of growth that doesn't need to come with sort of deposit pricing erosion or any of the usual ways banks grow their business. So we are very excited about these possibilities.

I would like to follow up on the State Farm and Edward Jones situation because it is unique. Can you grow card usage or fees in markets where you don't have a physical presence? Or is success there about converting the State Farm client into a core USB client? What factors determine success?

We think of it as an attractive value proposition for co-brand relationships, first and foremost. That's the easiest value proposition to the partner because they like to provide the banking services. We think it's a good front-edge brand build with the local client base on the ground. It does not compete in size with what the deposit gathering machine of a bank generally is. But the results show up here in a very unique way to go to market on our card business on attracting new clients for a bank of our size, that's the fifth largest bank, and we're very, very well known within our own franchises, but trying very, in a very disciplined way, to build our brand out outside of our franchise. And that's what the NFL deal is about too. So it is an idiosyncratic approach. It has been very economically lucrative for us. And because the platform is now built and now we're going to expand it to small business, it also supports our own product sets, like the Bank Smartly product set that is attracting very meaningful level of deposits along with the card loyalty programs.

You certainly have come a long way with your CET1 when you highlight over the last three years going from 6% to 9%. So the days of 'Are you going to be issuing capital?' are long behind you. But still, when you look back over time, the positive operating leverage is something relatively new. It's not U.S. Bancorp of old in terms of the efficiency ratio. And John, you mentioned this is the second quarter in a row of positive operating leverage. Is this something that you're going to kind of track quarter-to-quarter-to-quarter? And then on the other side of that, I'll contradict myself a little bit here, I think everybody wants to make sure you're investing for that growth, and you've highlighted all sorts of growth initiatives from partners to California, to small business, to middle market, to payments. If you were simply to highlight your three priority areas for investing for growth, what would those be? But first, the operating leverage, if you would.

You bet. Thanks, Mike. Yes, we've achieved seven consecutive quarters of positive operating leverage, and we take great pride in that. We are fully committed to maintaining positive operating leverage, and we are actively monitoring it. This year, our focus has shifted from merely managing expenses and identifying savings within the company—like we did last year—to investing those savings into various projects that we'll discuss shortly. Gunjan will touch on our priorities in a moment. We're particularly focused on areas such as small business, increased marketing efforts, and technology development. Our commitment to positive operating leverage remains strong, with a greater emphasis on driving it through revenue growth as we look toward 2026.

Thank you, John. Mike, what I'd add is last year we were very focused on expense management and fee growth. Both of those were natural extensions of the last five years of very heavy investments digitally into a really world-class product set. And the product set is very good, and it came with some sacrifice of efficiency ratio in the past. And going forward, our business mix is very, very helpful to delivering consistent positive operating leverage. And I want to just reiterate that we are very committed to sustaining that over time. The priorities in terms of growth are very simply to continue to grow out our fee categories. We want to always be known as very heavy in fee mix driving heavy returns for us as a bank. Our second real focus is to strengthen our consumer and small business franchise. And all of the examples that we are sharing here are towards that goal so that the consumer franchise and the core funding mix continues to strengthen over time. And we do want to go back to our DNA of being a very simplified, streamlined cost structure, which we think we can do. In the past, it was very much around the automations. And going forward, we are very focused on what AI can do. So that's the priorities: fee growth, strengthen the consumer franchise, and go down the journey of becoming an AI-native organization.

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

No, it does work that way. There is a leading gap between acquisitions and when revenue shows up. And that's just the reward structure and the upfront rewards of transitioning the book. So if you see what we've done really over the last six quarters is elevated our marketing and acquisition spend, and we track that very closely, across the two big types of segments: the balance revolvers and the transactors. We've always been quite strong on the balance side. If you look at our A&R, it has consistently exceeded HA data. But it was the fee side, the transactor side that we really accelerated acquisitions. Faster acquisitions are actually negative revenue on the core revenue pipeline. So you see this measured balance between acquiring new clients, and it's showing up in revenue. And so you see the acquisition numbers be much stronger, and they will lead to stronger strengthening revenue growth about four to six quarters out.

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

Yes, Erika. Regarding your first question about deposits, the short answer is yes. We believe our deposit mix has stabilized. We are highly focused on priorities like consumer deposit growth and wholesale activities. To provide more detail, we have been actively working to reduce higher-cost deposits like CDs and institutional deposits that are less valuable and more transactional. This is our main focus on the deposit side. As for fees, our expectation is towards the high end of the range due to the momentum we see across different categories, including payments and institutional services. Capital markets have also continued to perform well. On net interest income, we still expect mid-single-digit growth, reflecting the current market uncertainty. While we see stabilization in deposits and good core loan growth, some factors are experiencing tighter spreads, and the variable interest rate environment is something we are considering.

Got it. The second question is a follow-up on the capital discussion. Under the current rules, you will likely cross Cat II at some point next year. If you decide to go with the ERBA or enhanced risk-based approach, do you understand that the 5-year phase-in will be your main guideline? Or does the AOCI cliff come into play once you cross over? Or, as Gunjan mentioned earlier, does it not matter much due to the timing, and your AOCI would diminish by the time that's relevant anyway?

That's a good question, and it's one we need clarification on from the regulators. We are in a unique position regarding Category II. There is a timing overlap between when we expect to be compliant with Category II, which is anticipated to be under the current rules by 2027, and when the effective date of ERBA occurs. Additionally, there were comments about potential changes to the index rules. We are preparing for a Category II environment and ensuring compliance. Transitioning to a standardized or ERBA approach is straightforward for us from a technological standpoint. We will continue to monitor the situation and provide updates as necessary. Overall, we feel prepared and have significant flexibility with the capital rules and how they will evolve.

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

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

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

Yes, Ken, I appreciate that because we've been operating with a relatively flat expense base for several quarters now, around ten. We're now increasing that. I'll connect this to some of the responses we've given regarding positive operating leverage. We're committed to achieving positive operating leverage, driven by revenue. So if revenue reaches the levels we are forecasting, for instance, in the second quarter with growth in the range of 6% to 7%, that will necessitate higher expenses to allow for more investment in the business. If the revenue doesn’t manifest, we have methods to reduce expenses. Our track record over the past few years, and even decades, demonstrates our capacity to manage expenses effectively and make necessary adjustments. We have strong confidence in our ability to achieve positive operating leverage.

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

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

It's a combination. So there are things like branch investments and things like big technology builds that you don't think you can flex and change in the short term. But a lot of our expense is contra revenue in the sense of marketing expense for acquisition of card or marketing expense for brand building is very short-term flex. So that mix is flexible enough for us to think about it. And we do hear your point, I'm not ignoring it, that investors would prefer it to be more than 200 basis points. But as you know, the opportunity set in our portfolio is really very attractive. So we are leaning into it this year, while last year we realized that we really needed to put some points on board on positive operating leverage. And you saw from John's chart, we've reduced efficiency ratio by more than 400 basis points over the last two years. And we still have some aspirations to be just a lean bank, but not at the expense of really investing to capture some of the growth opportunities we have.

Gunjan, can you share with us your focus on organic growth? We know that in the banking industry, consumer transaction accounts or DDA deposit accounts are crucial for driving profitability from the liability side of the balance sheet. The industry has seen significant consolidation, with U.S. Bancorp being a major player in that regard. That's one approach to increasing core deposits. However, concerning organic growth, does U.S. Bancorp have any intentions to adopt similar strategies to those of your peers, such as expanding with nationwide or regional branches to enhance these core deposits? I understand that online digital efforts are key for capturing new growth, but it appears that a physical branch presence complements this strategy. What are your thoughts?

Gerard, well, we very much agree that the physical branch presence is very critical both to the quality of the deposits and the deposits per account. So the economics of a branch-based deposit acquisition are very attractive to us. As you know, we spend $200 million a year on our branch network. We still have work to do in changing the formats of the branch, to go from focus on servicing, which our legacy branch network very much had focused on, like these small branches, many times an in-store, what you see us building out even sometimes in the same location are these multiproduct branches where you can have a small business adviser, a wealth adviser, a mortgage adviser, and, of course, our banking and loan and small business specialists. So we are very committed to branch expansion. The slight nuance here is that our focus is on densifying those parts of our existing footprint where our brand is very powerful to become the top three depositor in that geography. And so that's been our focus. We're building our branches in places like Nashville, Phoenix is a big focus for us, Reno, and pockets of sort of really new, young growth is where we are building out the branches. What we want to do though is to leverage the uniqueness of our payments franchise and our digital capabilities to augment that branch-based growth. But all of this to say we strategically understand the need to be very highly focused on building out a high-quality consumer and small business franchise and improving the deposit quality over time. That's why we track the consumer deposits as a mix of our total deposits like a hawk now. And we are very focused on growing that mix. What would you add, John?

Yes, I think that's a great point. From a deposit perspective, as I mentioned, we've been increasing our deposits. We see a strong opportunity to enhance our efforts in the areas you highlighted, where we have the scale to really focus our investment and time. As we achieve scale in those markets, we can access desirable deposit features that aid in stabilizing our deposits, particularly by reducing the rotation on the consumer side. This is a significant focus for us, as Gunjan has mentioned.

Very good. The follow-up question is directed to you because you are well respected on credit quality throughout the cycle. You are one of the banks that has shown consistent conservativeness in underwriting. I want to return to the slides about the NDFI portfolios. It’s interesting that many banks are providing us this information, which is very helpful, and it doesn’t seem that these NDFI portfolios, even in the business credit intermediaries category, are particularly concerning due to the structure of the portfolios. This is more of an educational question, which I am asking for myself and likely others. What kind of scenario would need to occur for losses to arise in these types of credits? It seems unlikely that this would happen even in a typical credit cycle. Or am I mistaken?

Thank you, Gerard, for your insightful question. I want to emphasize a few points. Firstly, we introduced this slide a couple of quarters ago in response to some unique losses in the market, which led investors to question our portfolio. I believe that providing more information and education is beneficial. As we detailed on Page 17, we want to clarify the structure and its setup, indicating that we think there is a very low likelihood of losses in these types of structures. Specifically, with AAA CLOs, we typically haven’t observed losses. However, as a banker, I refrain from saying it's impossible because we maintain limits, adhere to underwriting practices, and apply rigorous risk management. There are numerous scenarios that could potentially trigger losses, though I cannot pinpoint a specific trigger. This precaution is why we enforce limits and uphold our standards. We aimed to convey that clearly on Page 17 and in the appendix.

I want to return to Amazon. You all seem very enthusiastic about the potential here. Gunjan, I believe you mentioned that it significantly enhances your card growth. John, you provided some figures, mentioning $1.6 billion in loans and around $75 million to $80 million in revenue. Could you elaborate on the scale of the opportunity? It appears this partnership has a lot of room to grow. What volumes, loans, and revenues can we expect? Additionally, what steps are you taking to ensure that this partnership is creating value for both you and Amazon?

Saul, we have a portfolio of co-brand partners, and the growth in that book is very reliant on the growth of the customer base of our partner. So to that extent, just because Amazon's ability to grow its small business base and their aspirations around this segment, give us optimism around our path forward. Just when we convert the book in the third quarter, what we are expecting is about $75 million to $85 million per quarter type of impact, which is meaningful from a growth standpoint. Our intention would be to have some of that show up in the revenue projections of the business, but some of that we'll reinvest in driving new client acquisition. But our goal here is to take our payments business to a more robust long-term growth trajectory. And that's what this platform helps us do, along with many others that we are building.

That’s useful. Staying on payments, I wanted to ask about the merchant acquiring business. The merchant processing fees have continued to grow nicely at a mid-single digit rate of 5%. However, the volumes have been somewhat weak over the last couple of quarters, with a 2% increase last year and a 1% increase this quarter. This growth is actually lower than the number of transactions, which have increased slightly more, suggesting a lower average ticket size. This seems a bit unusual given the current inflationary environment. Is there anything to interpret from this? Are you experiencing higher take rates? Does this indicate a shift in mix? Have you noticed changes in consumer behavior or spending patterns? I’m curious if there’s anything to understand from this, as you would typically want to see volumes increasing at a faster rate than they have in the past couple of quarters.

It's a great question. The fact is that only one or two clients have exited, which has not really affected the revenue numbers. The overall trends among our clients more accurately represent the growth rate that you observe. Specifically, the growth rates in card are in the 5% to 6% range, which aligns with our core merchant growth rate of 5.1% for the quarter. Additionally, payment trends have remained very robust. Despite the current sentiment, spending patterns for both high-FICO and mid-FICO consumers are similar, with discretionary and nondiscretionary spends showing comparable strength. Overall, we are experiencing broad-based strength in spending, despite the prevailing sentiment.

And over time, we do want to decouple from the volume growth. This is a vast industry and a lot of volume comes with very little revenue and a lot of risks. So we are going to be quite disciplined about only focusing on the revenue growth. And I do understand from your point of view, there's not that much visibility to revenue trends. A lot of the external reporting is only volume. And we'll try to bring as much transparency. But we are very committed to a profitable business that grows modestly and not chase after sort of big volume that comes with very, very thin revenue, which you can do in this market quite a bit.

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

You bet, Vivek. Yes. So with the change, we combined treasury management as well as corporate payments, that's kind of the classification change based on how we manage the businesses here within the company along with other changes that we put in the 8-K a week or two ago. In terms of the growth rate, just on the corporate payment side is where we're seeing the drag in that number. And that's really a reflection of last year at this time, recall, there was the tariff announcements and things of that variety and a lot of focus on government spend from DOGE and other things like that, that really we're beginning to lap that. In the second quarter, you'll start to see that lapped and fully in the third quarter. So we see the pipelines being really strong there. And so by the time we get to the third quarter, that will be more representative of what we believe that will be the true growth rate in that business.

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

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

No, that's private equity, I was talking private credit, because that's going to be different from BDCs? Or is that in your mind synonymous?

Yes, I believe Page 17 highlights much of our private credit exposures. I would describe it as a comprehensive list. The capital call facilities you mentioned relate to private equity, which represents another part of NDFI. I see this page primarily focusing on our private credit component and exposure.

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

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

I want to mention that Stephen recently discussed the use of AI at a conference. We manage a number of businesses with complex operations, such as fund services and corporate trust, where we excel. This provides us an opportunity to utilize AI to simplify our operations and the associated complexity. We understand how these processes work, which positions us to capitalize on this advantage more swiftly than any external competitor or fintech. That's our perspective on the matter.

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

I don't think so. What we're observing is that private credit has expanded primarily in leveraged spaces, such as hospitality and similar areas. Due to our credit underwriting and perspective, we aren't particularly focused on those sectors. Consequently, we've never really competed directly with private credit. The growth we are seeing is more in the large corporate sector. I mentioned various categories like food and beverage, energy, and utilities that are really starting to gain traction, which hasn't been the case in the past few quarters. This is why we wanted to highlight it and why we are optimistic about our future pipelines.

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

Yes. To connect a few comments we made earlier, I believe deposits will generally grow alongside loans, although it may not be a one-to-one ratio. It will likely be somewhat less. This is because our emphasis is primarily on consumer deposits and enhancing operational deposits while limiting or eliminating higher-cost options like CDs and one-time clients that only contribute deposits. Therefore, I anticipate that we will be more adaptable regarding deposit growth compared to loan growth.

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

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

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

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

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