Welcome to the U.S. Bancorp's Second Quarter 2025 Earnings Conference Call. This call will be recorded and available for replay beginning today at approximately 10 a.m. Central Time. I will now turn the conference over to George Andersen, Director of Investor Relations for U.S. Bancorp.

Thank you, Jo, and good morning, everyone. Today, I'm joined by our President and Chief Executive Officer, Gunjan Kedia, and Vice Chair and CFO, John Stern. In a minute, Gunjan and John will be referencing a slide presentation together with their prepared remarks. A copy of the presentation, our press release, and all 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 take any questions that you have. I will now turn the call over to Gunjan.

Thank you, George, and good morning, everyone. If I could please turn your attention to Slide 3. In the second quarter, we reported earnings per share of $1.11 on net income of $1.8 billion. Core growth across our diversified fee income businesses and continued expense discipline more than offset a lighter spread income. We delivered strong year-over-year EPS growth as adjusted of approximately 13%. Total fee revenue growth of 4.6% year-over-year reflected broad-based strength across our businesses and an ongoing focus on execution and organic growth. John will discuss how we are navigating the current hire for longer interest rate environment and taking action to strategically position our balance sheet for near-term margin expansion. Notably, on an adjusted basis, we delivered 250 basis points of year-over-year positive operating leverage. The fourth consecutive quarter of revenue growth outpacing expense growth. We generated an 18% return on tangible common equity, a return on average assets of 1.08%, and improved to a high-50s efficiency ratio. Asset quality trends and credit metrics remain stable, and capital levels came in well above regulatory capital minimums. Turning to Slide 4, we provide a high-level view of U.S. Bancorp today. A few things to highlight for this quarter, fee income now represents approximately 42% of total net revenue. We saw good sequential growth in total purchase volumes within Payment Services, and a Fortune 500 ranking improved from a year ago. Slide 5 provides an update on expense stabilization. This is one of our three major priorities. On the left, you will see that we have successfully delivered now seven consecutive quarters of stable expenses on an adjusted basis. We are driving meaningful productivity while also self-funding our investments in the franchise. For example, increases in payments and technology expenses were offset by reductions in personnel and occupancy costs. On the right, we have highlighted a few of the digital investments we have made over the last five years to create modern, secure, and scalable platforms. We are now harvesting these investments to drive long-term productivity and sustainable positive operating leverage. Slide 6 profiles our businesses and the strategies we are deploying to drive organic growth, our second major priority. The businesses highlighted in light blue represent areas where we are pursuing new strategies or transformative approaches. In our capital markets business, we are focused on introducing new product capabilities that leverage our existing balance sheet, such as ABS bonds, commodity hedging, and repo. The structured lending capabilities we are building are also delivering attractive growth in our C&I loans. In our payments business, which is our third key priority, consumer spend remains resilient, especially in the nondiscretionary spend, where we are slightly overweight. Corporate and government spend was muted this quarter, reflecting caution around economic uncertainty. Merchant Payment Services revenue, which is less than 7% of total firm-wide revenue grew 4.4% year-over-year, supported by our tech-led strategy and strong focus on five strategic verticals. The businesses highlighted in dark blue are areas where we expect continued growth through a sharper and more urgent execution focus. Finally, the mortgage, auto, and commercial real estate business portfolios highlighted on the slide in gray are core to our long-term growth strategies and are well positioned to grow when macro pressures ease. On Slide 7, we provide a snapshot of how our fee mix has evolved over the last 10 years in a positive way. While fee revenue as a percentage of total revenue was slightly higher a decade ago at about 45%, our revenue was skewed towards consumer fees, which have elevated exposure to market volatility and regulatory pressure. These dynamics contributed to fee income as a percentage of total revenue falling to 38% in 2023. We have been quite intentional in our strategy to invest in growing our trust and investment, wealth, and capital market advisory services. Today, institutional wealth and payments businesses collectively represent more than 75% of fee revenue. These are stable and profitable fees with underlying positive macro growth drivers, which support our sustainable revenue growth objectives. Turning to Slide 8, we are approaching the evolution of our balance sheet in an equally deliberate manner. At quarter end, C&I and credit card portfolios represented 47% of the balance sheet, up from 43% at the end of 2023. This quarter, these average loans grew 6.6% year-over-year, vastly outpacing total loan growth. These portfolios also support a higher percentage of multiservice clients at 51%, and we are prioritizing growth in these segments. To further optimize our balance sheet, we divested approximately $6 billion in mortgage and auto loans this quarter, taking advantage of a favorable rate environment for these asset sales to strategically reposition the balance sheet, both for stronger growth and in support of deeper client relationships. Let me now turn the call over to John, who will provide more details on the quarter and forward-looking guidance.

Thanks, Gunjan, and good morning, everyone. This is a good quarter for us as we made meaningful progress towards achieving our medium-term financial targets and work to position ourselves for future growth. If you turn to Slide 9, I'll start with some highlights, followed by a discussion of second quarter earnings trends. We reported earnings per share of $1.11 and generated $7 billion of net revenue on flat expenses. Ending assets of $686 billion were impacted by seasonally elevated quarter end deposit flows. Credit quality metrics remained stable. A modest reserve release of $53 million this quarter was largely reflective of favorable loan portfolio sales we executed to reposition the balance sheet. As of June 30, our CET1 capital level was 10.7%. Slide 10 provides key performance metrics. As the slide shows, we are making steady progress on our medium-term profitability and efficiency targets. Linked quarter, we delivered an improved return on average assets of 1.08% and saw our efficiency ratio fall to 59.2%. While net interest margin declined 6 basis points sequentially, approximately half of the decline was temporary in nature and will not carry into the third quarter. This decline was driven by strategic loan portfolio sales as well as high residential mortgage paydown activity in April. The remaining impact was driven by elevated deposit pricing pressures and rotation into higher rate products. Importantly, we remain focused on action and initiatives to strengthen net interest income, and those efforts are fully reflected in our guidance. Slide 11 provides a balance sheet summary. Total average deposits decreased 0.7% linked quarter to $503 billion in line with seasonal tax payment outflows and our emphasis on relationship-based deposits. Balance sheet management supported a funding mix that prioritized both noninterest-bearing and low-cost consumer deposits. Average consumer deposit balances increased $2.4 billion or 1.1% linked quarter, while the percentage of noninterest-bearing to total deposits remained stable at approximately 16% and the deposit beta was 42%. Average loans totaled $379 billion, a decrease of 0.1% on a linked-quarter basis. Balances were impacted by the sale of approximately $4.5 billion of residential mortgages and approximately $1 billion of auto loans. Excluding these sales, average loan growth was approximately 0.4% sequentially and 1.6% year-over-year. Notably, we strategically grew our C&I and credit card average loan portfolios by 7.1% and 4.4%, respectively, on a year-over-year basis. At June 30, the ending balance on our investment securities portfolio was $174 billion, an increase of $3 billion from the prior quarter end. Fixed asset repricing and reinvestment of proceeds from our residential mortgage sale into investment securities resulted in an 8 basis point increase to the average investment portfolio yield. Consistent with efforts to reposition the balance sheet, we opportunistically restructured approximately $1.25 billion of investment securities this quarter, resulting in a $57 million loss. The payback period on this transaction was less than two years and enhanced our net interest income trajectory. Turning to Slide 12. Net interest income on a fully taxable equivalent basis totaled $4.08 billion. Linked quarter, the competitive deposit environment more than offset the benefits of fixed asset repricing. Slide 13 highlights trends in noninterest income. Total noninterest income totaled $2.9 billion, reflecting security losses of $57 million from the repositioning of the securities portfolio. Excluding security losses, total fee revenue of approximately $3 billion increased 4.6% year-over-year. This was driven by core growth and new business momentum across payments, trust and investment management, and other fee revenue. Turning to Slide 14. Noninterest expense was $4.18 billion as we prudently managed expenses and further captured operational efficiencies across the business. Slide 15 highlights our credit quality performance. The ratio of nonperforming assets to loans and other real estate was 0.44% at June 30, an improvement of 1 basis point linked quarter and 5 basis points better than a year ago. The second quarter net charge-off ratio of 0.59% and allowance for credit losses of $7.9 billion or 2.07% of period-end loans remained stable sequentially. Turning to Slide 16. As of June 30, our CET1 capital ratio was 10.7%, a 2 basis point decline linked quarter. Given strong capital levels and earnings accretion, we elected not to replenish a maturing credit risk transfer, keeping our CET1 capital ratio flat sequentially. Results of this year's stress test, which revised our preliminary stress capital buffer to 2.6%, further demonstrated the company's ability to withstand a severe economic downturn, which is a testament to the strength, quality, and diversity of our balance sheet and prudent approach to risk management. Importantly, our CET1 capital ratio, including AOCI, improved to 8.9%. At the top of Slide 17, we show a comparison of second quarter results to our earlier guidance. As expected, slightly lower net interest income was more than offset by better-than-expected fee income of approximately $3 billion in prudent expense management. I'll now provide forward-looking guidance for the third quarter and full year 2025. Starting with the third quarter 2025 guidance, we expect net interest income for the third quarter on a fully taxable equivalent basis to be in the range of $4.1 billion to $4.2 billion. Total fee revenue is expected to be approximately $3 billion. This compares to the second quarter total fee revenue of $2.98 billion. Total noninterest expense is expected to be $4.2 billion or lower in the third quarter. We expect to deliver positive operating leverage of 200 basis points or more on an adjusted basis. I'll now provide full year 2025 guidance, which is consistent with our previous guidance. Compared to full year 2024, we expect total net revenue growth on an adjusted basis at the lower end of our 3% to 5% range. Our guidance assumes two rate cuts in 2025. For the full year, we expect to deliver positive operating leverage of 200 basis points or more on an adjusted basis. Turning to Slide 18. We continue to make measurable progress towards achieving our medium-term targets. As you can see on this slide, year-over-year, we have improved both our return on average assets and efficiency ratio, while delivering high teens return on tangible common equity and mid-single-digit fee growth. Let me now hand it back to Gunjan for closing remarks.

Thank you, John. And let me close on Slide 19. Second quarter results were supported by a unique mix of diversified businesses that delivered strong sequential and year-over-year EPS growth this quarter. The resiliency of our business model offset some rate-driven softness in spread income with good growth in fees and continued expense discipline. Notably, we executed on our key expense initiatives and delivered meaningful positive operating leverage for the fourth consecutive quarter. We are intentionally evolving our business mix to be more fee-intensive and attractive to greater diversification, while also shifting the balance sheet to support a higher percentage of multiservice clients and improved spread revenue. As we head into the back half of the year, we are well positioned and executing with urgency on our three key priorities: expense discipline, organic growth, and transformation of our payments business. Efforts this quarter supported meaningful progress towards our medium-term financial targets and the ability to deliver sustainable EPS growth. I am often reminded that the true strength of this company is driven by the day-to-day actions and choices of our talented teams. So on behalf of all my U.S. bank colleagues, I would like to thank our clients and our shareholders for their loyalty and support of our exceptional company. With that, we will now open the call for your questions.

Your first question comes from the line of Scott Siefers of Piper Sandler.

John, I was hoping to start out on some NII dynamics. Maybe if you could spend a moment discussing where the margin goes from here off the 2.66% base. I think you mentioned part of the linked quarter decline was sort of transitory based on the actions you took in the second quarter. So what do you see as the best launching point? And kind of what would it take to move it higher or lower from here? In other words, the main puts and takes and I guess the final piece of it is maybe where we stand on the 3% medium-term margin aspiration?

Thank you, Scott. You are correct about the net interest margin. The three basis points of the six basis points decline we experienced can be attributed to temporary factors linked to the sale that I mentioned, which impacted our balance sheet. We anticipate this to reverse. I also expect to see sequential growth in net interest income in the third and fourth quarters as we continue progressing. We are experiencing positive momentum on the asset side due to various strategic actions we've discussed. The repricing of fixed assets will accelerate and should perform better than in the first half of the year. Additionally, the strategic measures we implemented regarding loan sales and the repositioning of our investment portfolio will enhance the trajectory of our net interest income over the coming quarters. We believe our pipelines for C&I and card growth are solid. We have been growing C&I by 7% year-over-year and card by 4% to 5% year-over-year, and there are indications that commercial real estate growth is improving. Regarding deposits, we are actively adjusting our deposit mix. We have intentionally shifted away from high-cost corporate and single-serve clients to focus more on our consumer deposit base, particularly with our Bank Smartly product. We feel very positive about the direction of these changes. Therefore, we anticipate improvement in both net interest income and margin going forward. As for our 3% medium-term margin aspiration, there have been no changes. We acknowledge the margin dip this quarter, but we understand that these fluctuations are not always linear, and the drivers I mentioned will help us achieve that 3% over the medium term.

And Scott, let me add one other point. Even on deposit mix, even on the institutional side, you will observe very healthy growth in treasury management fees and our corporate trust fees. These are processing businesses that bring operational deposits that are also favorable to our mix. So that focus will also help our NIM trajectory.

Perfect. Okay, good. And then maybe just the follow-up. John, when you talked about or Gunjan, when you talk about expenses being, I think, $4.2 billion or lower in the third quarter. Maybe just a second on where that flex could come from, if necessary. And kind of more broadly, I guess one of the concerns I hear from investors is that cutting costs to meet the operating leverage targets might just be preventing some necessary investments. Can you just sort of address that? I'm certain you all don't feel that way, but maybe if you could just spend a moment addressing it, please.

Sure. We certainly don't feel that way. We feel all the initiatives and investments we have made, we are harvesting that for all these sorts of things. And as Gunjan mentioned in her comments, we are self-funding in a number of the initiatives that we have. And so we feel very good about the levers that we had. It's coming from things like the real estate that's going to be a continual driver, the combining of certain areas have found us efficiencies within our operations and other sorts of technology groups. The productivity changes we've made and platform enhancements we've made. AI is certainly a buzzword, but there are things that we are deploying that have been helpful and will continue to be helpful going forward. There's just a lot of efficiencies and things that we are executing on the expense side that's been helpful to us. And we have continued our investment. We continued our investment in terms of our tech spend, in terms of our investments in the business. That has not changed. And we feel really good about these things being pointed at our strategic objectives, where we want to grow.

And I'll just add, Scott, you've covered our company for a long time, and you've seen us operate very effectively at an efficiency ratio, much different from where we are today. It's a very streamlined, simple business mix. We are quite big in the businesses we are in. So our conviction that we can operate the company and invest in future growth at a slightly lower efficiency ratio is very real. And in addition to the digital investments that John talked about, I do want to say that the real productivity that is coming from having spent more than $5 billion in digital investments over the last five years is very real. And you will observe certain line items over time increase like technology, sales and marketing expenses, investments in our payments businesses because those are our strategic areas. And the real productive will be in some other categories. So we very much take the question that the productivity is not coming out of under investing in future growth.

I wanted to start, so Gunjan for you, a bigger picture question, if you will. So if we look at the guidance you provided to the market, hold expenses flattish, deliver positive operating leverage, 200 basis points or better, that's been the guide. You look at this quarter, you basically did that, right, 250 bps POL, maintain the outlook. Despite that, the stock. We'll see where it goes. It's down 4% right now pre-market. When you think of the financial targets, right, the desire to create shareholder value, is 200 basis points enough of an objective to get the stock working? And do you need to do more on the revenue side, right, to start moving the POL needle?

So it's a very thoughtful question, thank you. 200 basis points of positive operating leverage is very healthy in the long term. The opportunities and revenue growth. If you look at our portfolio and we really try to disaggregate some of our business lines, you can see the underlying strength of how we have evolved the portfolio. The opportunities for growth are very, very real. And that's where you will see us sort of flex the EPS growth. The expense side was an important area of focus for us just to get the positive operating leverage in place. I look back and reflect also on why the stock reaction. It's less about the targets not being appropriate, but whether there is enough sustainability and consistency of delivery against it, which is why we report out how we are progressing towards our medium-term target. We are very confident that as the confidence grows in our ability to march towards our medium-term targets in a consistent fashion, the stock would react to that.

Great question, Steven. Your observation is correct. We anticipate growth in commercial and industrial areas and card services, which will position us for higher asset growth, along with the other points I mentioned. We feel positive about the asset side. On the deposit side, we have noticed an increase in costs. However, we are focusing on the consumer side, which is fitting, as we are promoting our Bank Smartly product. This is an excellent offering where clients can set up both a card and a checking or savings account. Over 50% of users of this product are new clients for the bank. The statistics show that clients using this product have three times the services compared to our usual retail clients. Our acquisition costs are significantly lower, about a third of what they typically are due to the value proposition we provide. Over time, we are seeing enhancements in our deposit portfolio and improved flexibility in pricing as we move ahead. This will be crucial for managing our funding costs in the long run.

Got it. And John, I'm newer to your story. Why didn't that help this quarter, this part of the product? Why is it going to help next quarter but didn't help this quarter?

The deposit activity was associated with both the commercial and retail segments. It's important to note that this is not just a retail-focused situation. As we consider our future deposit portfolio, our flexibility in adjusting pricing is crucial, particularly as we manage different deposit options like CDs and savings rates in response to Fed rate changes. The flexibility we have in our retail offerings has improved due to this situation. On the commercial side, we already have a product with a high beta, which allows us to adjust rates in tandem with Fed movements effectively.

A couple of follow-ups there. One is on the C&I book. Can you give us some color on the driver of that acceleration in growth? And where we stand now with line utilizations?

Yes, Betsy, the growth in C&I was widespread. It was encouraging to see that the utilization rate increased slightly by about 30 to 40 basis points, continuing the trends from last quarter. We observed strong performance in our ABS lending portfolios and small business sectors, particularly in healthcare and similar areas, as well as in the SBA segment. Our middle market expansion markets have also contributed to year-on-year growth. Overall, there has been significant positive momentum, and our pipelines remain robust.

And Betsy, let me add just one other thing to your question. For the last few years, we've been very intentional with also introducing new product capabilities, more structured credit capabilities, just reflecting a more sophisticated client base and their needs. You're seeing the impact in these recent quarters of the groundwork that was laid over the last few years. And similarly, the credit cards, yes.

So that's advancing the private credit side of the business. Is that partly what's going on with the structured credit?

That's helping, too.

Helping as well. But it's broader than that.

Okay. And then just a ticky-tack question, but were there any gains or losses on the asset sales you did?

No. There's nothing meaningful other than the reserve release that you saw this quarter.

I think these are for you, John. Just still on the NIM. Did you say there was deposit competition that was one of the drags on the NIM? And also, I think I see RWA up $9 billion in a quarter when loans were flat and didn't quite understand why that happened.

Sure. Let me go to your second question first. On the RWA, yes, $9 billion up. I commented and just to reiterate, we had a couple of things happen. One, we elected to, we have some of those credit risk transfers that we've done in the past to roll off. That was about half. The other half was commercial loan growth that we saw at the end of the quarter. We saw strengthening, which is why we're commenting on C&I growth and saying that the pipelines are strong. There's a lot of activity. We felt like confidence improved throughout the quarter. So those are the underlying drivers for the RWA component. On the net interest margin side of the equation, I would say the deposit market is competitive. It has been for some time. I don't think anything is unique about this quarter versus others. Obviously, there was the market turmoil that started at the beginning of the quarter. But very quickly, people bounced. The clients have been very much resilient, and we feel like the pricing is appropriate and rational.

All right. Now just because we hear from some others that yield-seeking behavior has really died down quite a bit. But pulling the lens out just on asset liability management generally, I guess you're not running the firm just for the NIM or NII, you're running it for revenues and value creation over time. I get it. But is there anything that you need to change holistically with asset liability management or that you've done over the past year that may show some results. Again, I'm just looking back a couple of years and you guys were caught with the unrealized securities losses, and that was an issue. And now here's NIMs falling short, and it's deposits. And it just seems a little bit not in sync with the industry. Maybe, as you said, it's going to pick up the next couple of quarters, and this thing will be in the past. But just any general thoughts about the process of ALM at USB.

I appreciate your comments, Mike. What we're currently doing involves various actions aimed at positioning ourselves for the future. Some of the sales we discussed, along with the adjustments in our securities book, are proactive steps to advance our strategy. We have charts that illustrate our goals for the balance sheet and its growth towards better supporting multi-service clients and similar needs. Our Asset Liability Management processes are in place to handle interest rate risk and related matters. Overall, we are confident in our capabilities.

I'd just also add, Mike, that we are strategically evolving both sides of the balance sheet to support a higher NII trajectory. We have a very big mortgage book; it grew a lot during the post-COVID era. And that's why the focus on credit cards and commercial C&I loans, which have a better yield characteristic on the deposit side. We are, in addition to the consumer deposit focus, you'll see we are defending those and defending market share there. We're also really going out the treasury management and the Corporate Trust franchise, so that the institutional deposit profile is very good. So there's a lot of strategic efforts to create a faster NII trajectory.

And just lastly, the 3% NIM; is that something that could be seen in a year, two years, or five years? Any sense?

Well, for all the drivers that we talked about, we continue to expect that to be in the medium term. I would say that we have about four cuts over the cycle remaining within that assumption. More cuts are more helpful. Fewer cuts make it a little bit more of a slower pace. Those are kind of puts and takes to how we think about it. Otherwise, the initiatives that we're talking about here are positioning ourselves for that and interest income trajectory going forward.

Regarding the balance sheet trends, I appreciate the information on loan growth and some of the deposit dynamics. Considering the growth outlook moving forward, you previously characterized it as modest growth for both loans and deposits. Could you provide an update on your current perspective, especially since you're observing some acceleration in the underlying trends within commercial and seeing growth in card? How do you view this situation now?

Yes. Thanks, John. At the beginning of the year, we anticipated a modest pace of loan growth, which has generally occurred. However, we are now observing an acceleration and a strategic focus on commercial and industrial loans and credit cards, as reflected in our 7% year-over-year growth in C&I. We expect this trend to continue, along with card growth. Overall, we are currently in a stronger position regarding loan growth and see more opportunities than we did earlier in the year. Sure, absolutely. Let me start by discussing total revenue, which has two components. I will begin with the fee side. We are quite pleased with the momentum we are building. Gunjan mentioned several items in her comments. Regarding the institutional business, particularly in trust and fund services, we continue to gain market share and see positive market activity. Treasury management, as highlighted by Gunjan, is showing progress with our new capabilities, and merchant processing is experiencing increased year-over-year growth for several quarters now. We expect this trend to continue as we implement our strategies. Our tax credit activities within other revenue have also been performing well this year, and I anticipate our other revenue will exceed $150 million for the remainder of the year. All these factors, along with contributions from capital markets and other areas, lead us to feel optimistic about our fee trajectory moving forward, which is reflected in our guidance. Regarding net interest income, while growth has been a bit slower than earlier in the year, we believe that acceleration is possible due to the factors we discussed. This is included in our guidance for the third quarter. I'm not going to reiterate those points, but that summarizes our outlook and explains why we anticipate being at the lower end of the range. Yes, yes, absolutely.

My first question is for John. Could you share your LCR ratio? A lot of analysts have mentioned this, and we're all puzzled because none of your larger, similar, or smaller peers have discussed this significant commercial pricing pressure. Considering the overall flat loan growth this quarter and the sale of some loans, I'm curious if there was any liquidity optimization reason for offering higher rates on those deposits.

No, there are no liquidity concerns. We have very healthy LCR ratios and feel confident about our portfolio. All the actions we are taking align with our business and strategic objectives, especially regarding our positioning for net interest income moving forward. This is entirely related to those factors and does not involve liquidity issues.

Got it. My next question is for Gunjan. I believe Scott asked this at the beginning of the call, but I wanted to rephrase it. Clearly, the company is at a pivotal moment, and the stock hasn't reacted yet. Much of the discussion with long-term investors has focused on future priorities. You mentioned in your prepared remarks that expense management is the top priority and organic growth is second. You also used the term "harvest," which we haven't typically heard from someone at JPMorgan. My question is whether we may have underestimated the modernization USB has undergone over the past five years and if there is a potential for reallocating excess expenses. It seems like while focusing on expenses to achieve positive operating leverage may be beneficial in the short term, we should also consider the long-term interests of your shareholders who tend to prefer revenue leaders like JP or Morgan Stanley.

Erika, thank you, very thoughtful question, and I appreciate the opportunity to react to the totality of the thesis here on us. I know you know our company very well, but I'll just go back a few years to describe the reason for the priorities. We did a very attractive acquisition two years back, we were very efficient to integrate it, but we went into the banking crisis with a depleted capital base. Our focus at that point was to very quickly rebuild our capital, which we did. It caused some trade-offs in terms of expenses because we had just integrated a big bank and just not enough attention to the revenue growth story. My focus on the expenses is entirely short-term because it's the fuel that helps create positive operating leverage and also helps us invest in our growth businesses. I would say that our portfolio of businesses is actually very attractive. There's an extraordinary amount of organic growth opportunity in our 10 core businesses. They're very balanced across multiple business cycles. We definitely expect to be a growth story, but you really do have to build credibility and positive operating leverage and bring the efficiency ratio down because that's the model we want to scale over time. To your point on did you underinvest in the productivity benefits of the technology. Yes, these are very real. And on top of that, we are seeing the power of the AI tools that we are deploying. So we expect productivity to be a meaningful contributor to bottom-line growth. I'm hearing your questions and the concerns around it. But if you just step back we had 13% growth in EPS. We had very healthy positive operating leverage. We are down to 59.2% for our efficiency ratio. We had very strong fee growth that are strengthening over time in all the right ways, and the portfolio mix, both the fees and the balance sheet, is all strengthening and improving. So outside of the day-to-day noise of this particular quarter, if you just look at the trajectory of the franchise, we are in a very, very good position.

John, I may have missed it, and I apologize for that. Could you explain why you decided on the strategic sale of the portfolio you mentioned? Additionally, is there a possibility of further sales later this year involving parts of the portfolio?

Sure. I'll start on the mortgage side. That was about $4.6 billion in total. So consistent with our comments around growing the balance sheet, we obviously have a slide in our deck talking about why we want to position our asset mix to multiservice clients. The mortgages were legacy Union transactions with a single-service type client. There was a certain vintage, it was a certain yield type and thing that we found an opportunity with the rate market, etc., this quarter to effectively get out at par. We have reinvested those proceeds within the investment portfolio and gain a spread of probably $1.25 or so. We got a little less than half the quarter of the benefit this quarter and we'll pick up the rest full quarter, obviously, in the third quarter. The mindset here is really about shifting the balance sheet, being intentional about our asset mix and moving our balance sheet to support more multiservice clients, which is going to drive fee revenues, net interest income trajectory and all those things that we've been talking about.

We are expecting that the bills will pass and stable coin operators will be operating in the industry. In some ways, it's one more payment rail and so the first level of focus is just interoperability. When it starts to be operational, we should be able to accept and process stable coins as well as interoperate within the banking system. So that sort of what our focus is. We are quite ready to pilot our own stable coin. There's a lot of partnership capabilities in the industry that allows you to stand that up. We accept that this will be here. The use cases that we hear most about why this was needed or why that was important are cross-border in nature today. As you know, they are institutional in nature. We do not really have a big institutional cross-border payments business. Our payments businesses are a large card issuing business. They are a large merchant, which is very focused on small business and largely focused on the U.S. So we do not expect it to be material to our payments business anytime soon. I think the issue, though, is if it does become a consumer day-to-day B2B type of product or a pervasive institutional payments product, then it would compete with our treasury management services. There are a lot of things to be yet sorted out, both from a technology standpoint and the market structure. So I would just say at this point, we are quite ready to participate in it, quite ready to engage in the industry discussions around stable coin, but not anticipating immediate revenue impact to any of our businesses.

I appreciate the insights on loan growth and deposit trends you shared. Regarding the growth outlook, I remember you described it as modest for both loans and deposits before. Can you provide an update on your current perspective, especially since you're observing acceleration in the underlying trends in commercial and growth in card? How do you view that now?

Yes. Thanks, John. At the start of the year, we anticipated a modest pace of loan growth, and that has largely occurred. However, we are now observing an acceleration and strategic focus on commercial and industrial lending and card services, reflected in our 7% year-over-year growth in commercial and industrial loans. We expect this trend to continue, as well as the growth in card services. As of today, we feel we are in a better position regarding loan growth and see more growth opportunities than we did at the beginning of the year.

A couple of follow-ups there. One is on the C&I book. And can you give us some color on the driver of that acceleration in growth? And where we stand now with line utilizations that would be helpful.

Yes, Betsy, the growth in C&I was widespread and it was encouraging to see. While I could share a detailed list, the key points are that the utilization rate increased slightly, around 30 to 40 basis points, continuing the trends from the previous quarter. We experienced strong performance in our ABS lending portfolios and in small business, particularly in health care and similar sectors. Our expansion into middle markets has also been contributing to consistent year-on-year growth. Overall, there's been substantial growth, and we are maintaining strong momentum with solid pipelines.

And Betsy, let me add just one other thing to your question. For the last few years, we've been very intentional with also introducing new product capabilities, more structured credit capabilities, just reflecting a more sophisticated client base and their needs. You're seeing the impact in these recent quarters of the groundwork that was laid over the last few years. And similarly, the credit cards, yes. Go ahead.

I apologize for reiterating, but I need some clarity. I understand what you're doing with net interest income and adjusting the balance sheet with the sale of residential mortgages, which appears in the corporate segment. However, when I examine the corporate segment and hear about the multi-client and operational deposits, I notice that the net interest spread has been decreasing every quarter and has declined more significantly recently. Given what you've mentioned, why does that continue to decrease? Also, it declined in the last quarter on the consumer side as well. I'm trying to understand what's happening specifically on the corporate side.

Certainly. A few points to clarify. You're referring to Vivek and the segment reports we provide for both the consumer and commercial sides. So, regarding the mortgage sale, that will be reflected in the consumer segment. Concerning the net interest spread, what's primarily happening is on the funds transfer pricing, where there's less credit available for certain deposits, which is influenced by the pools and related factors. Therefore, it's best to look at the overall picture of net interest income for a clearer understanding.

John, I may have missed it, and I apologize for not asking about the strategic sale of the portfolio you mentioned. Could you explain why that decision was made? Additionally, will there be any further sales of parts of the portfolio later in the year?

Sure. I'll start on the mortgage side. That was about $4.6 billion in total. So consistent with our comments around growing the balance sheet, we obviously have a slide in our deck talking about why we want to position our asset mix to multiservice clients. The mortgages were legacy Union transactions with a single-service type client. There was a certain vintage, it was a certain yield type and thing that we found an opportunity with the rate market, etc., this quarter to effectively get out at par. We have reinvested those proceeds within the investment portfolio and gain a spread of probably $1.25 or so. We got a little less than half the quarter of the benefit this quarter and we'll pick up the rest full quarter, obviously, in the third quarter. The mindset here is really about shifting the balance sheet, being intentional about our asset mix and moving our balance sheet to support more multiservice clients, which is going to drive fee revenues, net interest income trajectory and all those things that we've been talking about.

We are expecting that the bills will pass and stable coin operators will be operating in the industry. In some ways, it's one more payment rail. So the first level of focus is just interoperability. When it starts to be operational, we should be able to accept and process stable coins as well as interoperate within the banking system. So that sort of what our focus is. We are quite ready to pilot our own stable coin. There's a lot of partnership capabilities in the industry that allows you to stand that up. We accept that this will be here. The use cases that we hear most about why this was needed or why that was important are cross-border in nature today. As you know, they are institutional in nature. We do not really have a big institutional cross-border payments business. Our payments businesses are a large card issuing business. They are a large merchant, which is very focused on small business and largely focused on the U.S. So we do not expect it to be material to our payments business anytime soon. I think the issue, though, is if it does become a consumer day-to-day B2B type of product or a pervasive institutional payments product, then it would compete with our treasury management services. There are a lot of things to be yet sorted out, both from a technology standpoint and the market structure. So I would just say at this point, we are quite ready to participate in it, quite ready to engage in the industry discussions around stable coin, but not anticipating immediate revenue impact to any of our businesses.

John, I wanted to quickly ask you about the third quarter net interest income outlook and the wholesale deposit costs. You mentioned in a previous conference that there has been a hesitation in providing deposits to customers. Regarding that, you noted that you could start reducing wholesale deposits when rates drop. Can you share if there's any change in how you view that from a beta perspective? In the past, your company adjusted rates more quickly, but this cycle seems to be slower. What has changed or is there a nuance in the current environment affecting that?

The comment at the conference was about some discussions happening at that time, but those have largely settled down. As the quarter progressed, the focus became on a competitive deposit environment, which is always a factor. We were particularly intentional this quarter in growing our consumer deposit base, which has been a priority for some time. This focus is more evident this quarter, especially since we reduced some higher-cost institutional deposits. There haven’t been significant changes in our beta assumptions. Earlier in the cycle, we anticipated achieving around 50% beta, which was based on expectations of sustained rate cuts. This cycle has played out differently, but if the rate cuts continue, we believe we can return to that level, driven by the mix of our institutional and retail deposits. We remain confident in that assumption.

A lot of focus here on deposit cost and deposit competition. But if I look at the actual increase in interest-bearing liability costs, the much bigger impact came in short-term borrowing costs, which were up $32 million and long-term debt costs, which were up I think close to $60 million. So in aggregate, those two things are up close to $90 million or about 3x the impact on funding cost of deposits. And it all entirely was due to much larger balances there. So just normally, you would have a corresponding positive impact on the asset side in terms of things like excess liquidity, but it doesn't seem to happen. Can you just, John, walk us through what happened here? And is that sort of just a one-time increase that should go away, but just what's going on on the liability side beyond deposits that seems to be a drag here?

Sure. Let me take the other side of the liability part of your question. So and I'll break it out. So on the short-term borrowings, we did have an increase this linked quarter. A lot of that has to do with the increase to fund the security purchases. This is the gross up on the loan sales. So when we put those loans and held for sale, we also did our security purchases and we knew the loan sale would occur within a month or so or 1.5 months and so we just used short-term borrowings temporarily to help support that. That goes away. That's part of the NIM story that I talked about earlier. That short-term borrowing cost goes away next quarter. Long-term debt, we have steadily improved our profile in terms of our debt coverage and things of that nature. We want to make sure we're in balance in terms of relationship between loans, deposits, and long-term debt. We feel like we've grown into that mix appropriately. So I don't see us growing that from here on out from this particular level; any issuance we do will just be here to replace other maturities and things like that. So the combination of those things is really got to the heart of your question.

And just lastly, the 3% NIM; is that something that could be seen in a year, two years, or five years? Any sense?

Well, for all the drivers that we talked about, we continue to expect that to be in the medium term. I would say that we have about four cuts over the cycle remaining within that assumption. More cuts are more helpful. Fewer cuts make it a little bit more of a slower pace. Those are kind of puts and takes to how we think about it. Otherwise, the initiatives that we're talking about here are positioning ourselves for that and interest income trajectory going forward.

Thank you, Jo, and to everyone who joined our call this morning. Please contact the Investor Relations department if you have any follow-up questions. You can now disconnect the call.

This concludes today's conference call. You may now disconnect.