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DATE

Thursday, July 17, 2025 at 4:45 p.m. ET

CALL PARTICIPANTS

Co-CEO — Ted Sarandos

Co-CEO — Greg Peters

Chief Financial Officer — Spencer Neumann

Vice President, Finance, Investor Relations, and Corporate Development — Spencer Wang

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TAKEAWAYS

Full-Year Revenue Guidance: Raised full-year revenue guidance to $44.8 billion–$45.2 billion, representing a midpoint increase of approximately $1 billion over the prior forecast, primarily due to foreign exchange effects and stronger-than-expected member growth.

Operating Margin: Full-year reported operating margin target increased to 30%, up from 29% previously; FX-neutral margin is now guided to 29.5% for the year, reflecting improved underlying membership growth and advertising performance.

Advertising Revenue: On track to roughly double for the year; Ad sales momentum is "a bit ahead of beginning-of-year expectations," with a global ad tech stack now fully rolled out.

Ad Tech Deployment: Greg Peters said, "We have completed the rollout of our own ad tech stack and the Netflix, Inc. ad suite to all of our ad markets now." enabling faster feature releases and improved ad targeting and measurement.

Consumer Metrics: Retention remains "stable and industry-leading," with no significant changes in plan mix, take rate, or engagement; recent price changes performed in line with expectations.

Content Spend: Content amortization is projected to exceed $16 billion this year. It has grown more than 50% from under $11 billion in 2020 to over $16 billion this year, supporting a broader and deeper content slate.

Engagement: Total view hours grew modestly in the first half of 2025, as reported by Greg Peters; per-owner-household engagement has been "relatively steady over the past two and a half years" despite competitive pressure.

Product Innovations: New user interface has been deployed to the first large wave of TV devices and is showing "performance that is better than what we saw in our prelaunch testing," improving content discovery and session metrics.

TF1 Partnership: Announced a partnership with France's TF1 to expand local content offerings, leveraging existing investments in live, advertising, and the new user interface to enhance local market relevance.

Gaming Initiatives: Further investment in games, highlighted by positive early impact from Grand Theft Auto and other licensed titles in 2025; emphasis remains on scaling value to members and retention rather than short-term monetization.

AI Adoption: Successful integration of generative AI in production enabled completion of VFX sequences "10 times faster" and at lower cost, as seen in an Argentine original series; this marked the first GenAI final footage to appear on screen in a Netflix original series or film.

Shareholder Returns and Capital Deployment: Continued preference for organic growth and returning excess capital via share repurchase, with management reaffirming a selective, disciplined approach to potential M&A opportunities.

SUMMARY

Netflix, Inc. (NASDAQ:NFLX) management emphasized an upgraded full-year 2025 revenue outlook of $44.8 to $45.2 billion and improved reported operating margin guidance from 29% to 30%, driven by favorable FX trends and accelerating member and ads business growth. The company completed the global rollout of its proprietary ad tech stack, enabling rapid feature innovation and positioning ad revenue to roughly double this year. Stable retention and engagement trends, combined with significant investment in original content and technology, were highlighted as key to future growth. Management announced the TF1 partnership to further enhance local content breadth in France and maintained a disciplined investment approach across new categories such as games and generative AI initiatives.

Ted Sarandos described new content releases and renewals, including international roles for successful franchises, as central to driving engagement, stating, "it is not about the single hit. So what it is is about a steady drumbeat of shows and films and soon enough games that our members really love"

Greg Peters disclosed, "We have seen an increased programmatic buying." from advertisers following the full ad suite rollout, with upcoming integration of additional demand sources like Yahoo to further expand the business.

Management provided the first confirmation that generative AI-powered final footage debuted in a Netflix original this year, demonstrating operational efficiencies in production scalability and speed.

Ted Sarandos confirmed live events and sports remain a "relatively small part of the total content spend" but acknowledged their outsized positive impact on acquisition metrics and a likely impact on retention.

Spencer Neumann reiterated, "we have historically been more builders than buyers," reaffirming organic growth and cash return as the principal capital allocation priorities despite anticipated media sector consolidation.

INDUSTRY GLOSSARY

Ad Tech Stack: The platform and infrastructure enabling programmatic delivery, targeting, and measurement of advertising inventory across Netflix's services.

TF1: A leading French television broadcaster with whom Netflix announced a localized content partnership.

Generative AI (GenAI): Artificial intelligence technologies used to automate or enhance creative tasks such as visual effects, content personalization, or recommendation systems.

Programmatic Buying: Automated, data-driven purchasing of digital advertising inventory.

Owner Household: A measurement unit excluding shared/borrowed accounts, used by Netflix to assess engagement per paying household.

Amortization (Content Amort): The systematic expense recognition of content production costs over time as titles are distributed and consumed.

iLine: Netflix's internal production innovation group, focused on visual effects and technical advances in entertainment content creation.

Full Conference Call Transcript

Spencer Wang: Good afternoon, and welcome to the Netflix, Inc. Q2 2025 earnings interview. I am Spencer Wang, VP of Finance, IR, and Corporate Development. Joining me today are Co-CEOs, Ted Sarandos and Greg Peters, and CFO, Spencer Neumann. As a reminder, we will be making forward-looking statements, and actual results may vary. We will take questions submitted by the analyst community, and we will begin with our results and our forecast. The first question comes from Steve Cahall of Wells Fargo. The question is, since the revenue increase in your forecast is primarily FX driven, we are curious about the components of the constant currency increase.

Is this due to a better underlying revenue growth, or are there specific expenses that are coming in better, like content amortization? I will take that one. Thanks, Steve. So I

Spencer Neumann: As you saw on the letter, we increased our full-year revenue guidance to $44.8 to $45.2 billion. That is up from the prior guide of $43.5 to $44.5 billion. So up about a billion at the midpoint of the range and a tighter range. As you noted, primarily reflects the FX impact from the weakening dollar relative to most other currencies. But the good news is we are also seeing strength in our underlying business. We have got healthy member growth, and that even picked up nicely at the '2 a bit more than we expected. We think that will carry through with our strong back half slate. So we are reflecting that in our latest forecast.

We are also seeing nice momentum in ad sales, still off a pretty small base, but good growth and it is on pace to roughly double our revenue in the year. And it is a bit ahead of beginning of year expectations. So when we carry all that through to operating margin, our operating expenses are essentially unchanged, which is part of your question. So they are basically unchanged forecast to forecast. So we are largely flowing through the expected higher revenues to profit margins.

So that is why our updated target full-year reported margin is up a point from 29% to 30% and that 50 basis point increase in FX neutral margin is really just that revenue lift from stronger membership growth and ads relative to prior forecast flowing through the margin.

Spencer Wang: Thank you, Spence. We will take our next question from Barton Crockett of Rosenblatt Securities. Why is operating margin guidance for the full year only 30% after the upside in February and a forecast 31.5% for the third quarter? Is there a timing issue, FX issue, or is there a new level of spending that will continue beyond the fourth quarter of 2025?

Spencer Neumann: Well, this is really mostly timing. So thanks, Barton. We primarily, as a reminder, manage to full-year margins. And we expect our content expenses will ramp in Q3 and Q4. We have got many of our biggest new and returning titles and live events in the back half of the year. We have also, you know, Q4 is typically a and generally almost always is a heavier film slate. Sure. We will talk about our expect we will talk about more of this on the call. Also be marketing to support that heavier slate, and we are continuing to aggressively build out our ad sales infrastructure and capabilities through the year. So all of that is to be expected.

We can manage to it. We manage to those margins. And even with that back half ramp in expenses, we expect operating margins to be up year over year in each quarter, including Q4, and as just noted, we do expect to deliver strong full-year margins as we just took up our guide to, you know, 29.5% FX neutral, 30% reported.

Spencer Wang: Great. Thanks, Spence. The next question comes from Tom Champion of Piper Sandler. How has your view of the consumer and the macro economy changed over the last ninety days?

Spencer Neumann: Similar to last quarter, we are carefully watching consumer sentiment in the broader

Greg Peters: economy. But at this point, really nothing significant to note in the metrics and the indicators that we get directly through the business. Those are retention that remains stable and industry-leading. There have been no significant shifts in plan mix or plan take rate. And the price changes we have done since the last quarter have been in line with expectations. Engagement also remains healthy. So things all look stable from those indicators and big picture entertainment in general and Netflix, Inc. specific have been historically pretty resilient in tougher economic times.

We also think that we are an incredible entertainment value not only compared to traditional entertainment, but if you think about streaming competitors, when we start at $7.99 in The United States, you think about all the entertainment you get we have a belief and expectation that demand for not only entertainment but for us specifically will remain strong.

Spencer Wang: Thanks, Greg. I think a nice follow-up to this question will be on advertising. So from Ben Swinburne of Morgan Stanley, can you share any data points around your upfront negotiations?

Greg Peters: Yep. As we noted in the letter, our US upfront is nearly complete. We have closed a large majority of deals with the major agencies. Those results have generally been in line or slightly better than our targets and consistent with our goal to roughly double the ads business this year. And what are advertisers excited about? Growing scale is something we definitely hear. Also, a highly engaged audience. So bigger audience, but also an audience that is more engaged relative to our peers. The rollout of our own ad tech stack, which helps deliver a bunch of features, and then our slate, which is generally amazing and includes a growing number of live events that advertisers are excited about.

Spencer Wang: Great. Follow-up question on advertising from Vikram of Baird. How have advertisers in The US responded to the Netflix, Inc. ads suite rollout since the April launch? What features and capabilities are attracting the most interest, and how is the initial feedback in other regions outside of The US?

Greg Peters: We have completed the rollout of our own ad tech stack and the Netflix, Inc. ad suite to all of our ad markets now. So we are fully on our own stack around the world at this point. That rollout was generally smooth across all countries. We see good performance metrics across all countries, and the early results are in line with our expectations. Now we are in this phase of learning and improving quickly based on the fact that being live everywhere means that you get a bunch of feedback about what we can do better, which is great.

As we mentioned before, the most immediate benefit from this rollout is just making it easier for advertisers to buy on Netflix, Inc. We hear that benefit, that ease, from direct feedback talking to advertisers. They tell us that it is easier. See it in our overall sales performance. We have seen an increased programmatic buying. So all of these are consistent, you know, with what we were expecting both qualitatively and from a metrics perspective. We are also, I guess, worth noting that we are going to roll out additional demand sources like Yahoo that will further open up the market for us.

Long term, being on our own stack, that improves the speed of our execution to deliver this, you know, pretty significant roadmap of features that we have in front of us. It is things like improved targeting and measurement. There is also leveraging advertiser and third-party data which we definitely hear demand for as well. And it will ultimately allow us to improve the ad experience for our members. Which is critically important. So that means better ads personalization. So the ads that I see are increasingly different from the ads that, let us say, Ted would see.

And they are more relevant for each of us, which is good for us as users, and it is good for the brands. Also going to be introducing interactivity in the second half of the year, so that is exciting. So that is all to say this is, you know, a pretty significant milestone for us, one we are super excited to get behind us because now we can shift into this steady release cycle where we are dropping new features all the time, both for advertisers and for members. And that is the development and release that we have in other parts of the business. So it is fun to be able to get to that point.

Spencer Wang: Thanks, Greg. I will move this along now to a set of questions around content as engagement. This one comes from Ben Swinburne of Morgan Stanley. 1% engagement growth year over year suggests engagement is down year over year on an average per member basis. How do we reconcile that with engagement growing on a per member household basis if that is still accurate?

Greg Peters: So total view hours did grow a bit in the first half of 2025, and that is despite a particularly back half-weighted slate. But to your point on engagement on a per member basis, we have mostly been focused for the last few years on measuring engagement on what we call an owner household basis. So this takes out the borrower effect, and we obviously think this is the best way to assess our engagement per member because it removes the tricky comparison impacts from paid sharing.

So that metric per owner household engagement has been relatively steady over the past two and a half years throughout the rollout of paid sharing, and amidst increasing competition for TV time as more viewing moves to streaming and gets this on-demand benefit. So we are glad to have held that normalized engagement level, but we clearly also want to increase it. And to that end, we are optimistic and expect that our engagement growth in the second half of this year will be better than in the first half given our strong second half slate.

Spencer Wang: Thanks, Greg. Great segue to Doug Inmuth's question from JPMorgan. The content in the back half of the year looks strong with Squid Game 3 already the third most popular non-English series ever, and Wednesday and Stranger Things releasing in the coming months. You often say that no single title drives more than 1% of total viewing. So how do you think about the business currently as being quote, hit boosted or hit driven, and are you confident that both original and licensed content momentum can continue in 2026?

Ted Sarandos: Yeah. I will take that. And thank you, Doug. On the first part of your question, we are definitely riding this long-term trend of linear to streaming. And that has a natural adoption curve. But we can accelerate our growth with big hits. But as you said, each one of them, even in success, is going to drive about 1% of total viewing. So you need a lot more than just a big hit every once in a while. So to your point, it is not about the single hit. So what it is about a steady drumbeat of shows and films and soon enough games that our members really love and continue to expect from us.

So, like, by way of example, we had 44 individual shows nominated for Emmys this year. So that is what quality at scale looks like. We ended the quarter with a huge return to Squid Game. Thanks for acknowledging. I will go into the second half with the return of Wednesday and Stranger Things. And a really strong slate of supporting titles and favorites, like and new shows. Like next week or this week, we have Eric Bonnett's Untamed. Next week, we have Leanne Morgan's new comedy show Leanne. Both look really great. And that is just to name a few.

And the back half of the year also has perhaps the most anticipated slate of new movies that we have ever had. That starts on the 25th with Happy Gilmore 2, followed by we have a new Knives Out film. We have new films from Noah Baumbach, from Guillermo del Toro, from Catherine Bigelow. And it does not stop there. It does roll right into 2026, and that is the second part of your question. And we are looking forward to movies like the rip from Ben Affleck and Matt Damon. Shirley starred on a new movie called Apex, which is a phenomenal action movie. Millie Bobby Brown is back in Enola Holmes 3.

Recall that in 2023, Enola Holmes 2 was our biggest movie. So we are looking forward to that new sequel.

Spencer Wang: And Greta Gerwig's Narnia is going to be phenomenal.

Ted Sarandos: And then on top of that, we talk about Return of Bridgerton, One Piece, Avatar: The Last Airbender, all three huge successes around the world. The Gentleman, Four Seasons, Point Break, I am sorry, Running Points. Sorry. Beef, which as you recall in 2023, won just about every award imaginable and was a gigantic success for us. It is back for a new season in '26. Three Body Problem, Love is Blind, Outer Banks, and not just from The US, from France, we have LuPan. From Spain, we have Berlin. We have a new season of a hundred years of from Colombia. So big hit returning shows and new series. From each of our regions around the world.

And the new stuff we have got coming up like man on fire, reimagining of little house on the prairie, The Duffer brothers from Stranger Things have a brand new show. The Burrows. We have got the Human Vapor from Japan. Operation Safred Cigar from India, can this love be translated from Korea? So again, popular programming, new and returning from all over the world in 2026. Unscripted shows like the reboot of Star Search, we have got into the doll universe. With Wonka's golden ticket, which we are really excited about.

In our live, we have got a few surprises for you next year, but of course, we have our NFL Christmas Day doubleheader that we are really thrilled about too. So we are really incredibly excited about the back half of this year and confident that it keeps rolling in 26.

Spencer Wang: Thank you, Ted. We will take the next question from Rich Greenfield of LightShed Partners. Who asks, are you concerned by the stagnation in your viewing share domestically?

Spencer Neumann: Think Rich is probably referring to the Nielsen gauge data. Do you need to spend more on programming or spend differently to materially move your viewing share higher?

Ted Sarandos: Yeah. Thanks, Rich. Look, our goal continues to be to continue to grow our share over the long term. And over the past few years, you are right, we have been able to maintain our share even as we work through a growing number of TV-based streaming services, some free, some paid. And the impact of paid sharing that Greg mentioned earlier as well as this, you know, 2025 slate that was more back half-weighted than we typically have in previous years. But over the long term, we tend to keep growing as the other 50% of TV viewing migrates from linear to streaming. And we will do that by doing what we have always done, continuously improve the service.

So in mind, since 2020, our content amort has grown more than 50%. You know, from under $11 billion to more than $16 billion. That we expect to do this year. And over that same time period, we definitely had we saw a big increased spending, but also increased engagement. Increased revenue, increased profit, and increased profit margin. So that is our model in action.

It is our objective to sustain healthy revenue growth, reinvest in the business to improve on all aspects of the service, and that includes growing content spend, strengthening expanding the entertainment offering, and to drive that positive flywheel of growth by adding value to our members and all the while growing engagement revenue and profit around the world.

Spencer Wang: Great. Thank you, Ted. I will move to Alan Gould from Loop Capital next. Can you provide more information on the TF1 partnership? Why did you choose to add TF1 in France as opposed to other broadcasters as your first partner, why is now the right time to create such a partner? Should we anticipate similar partnerships in other countries?

Greg Peters: Yeah. Perhaps to start with the rationale for the partnership. You would think with that long list of amazing titles that Ted just rattled off, we would have enough to satisfy every person on the planet. But it turns out we actually consistently hear from our members that they want more. They want more variety, more breadth of content. So the fundamental purpose for this TF1 partnership is all about that goal. Of expanding our entertainment offering. How do we enhance the value we deliver to members? Want to provide more content, more variety, more quality. So just as you have seen us do with licensing and production, this is just another mechanism to expand that offering.

And in this case, it is specifically about highly relevant local for local content in a country that has strong demand for that local content. This is an accelerated way to satisfy that need. Why now? Why was this time the right time? Well, we have invested a lot in a bunch of enabling capabilities that are either required or highly leveraged by this deal. You can think live, ads, the new UI, among other things. And then why TF1 versus some other partner? Well, we know each other really well. We wanted our first partner to be in a big territory. We wanted to pick the leading local programmer.

We wanted to be highly aligned in terms of the deal and the shape of the partnership and the values that we thought we could generate mutually by working together for our customers. And we both look at this as an opportunity to learn, to figure out how do we scale the local content that TF1 is producing to more customers in France. So we are looking forward to seeing what consumers think. You never really know until you get out there and get the real reactions. And then, obviously, we will factor that into our plans going forward.

Ted Sarandos: Thanks, Greg.

Spencer Wang: From Robert Fishman of MoffettNathanson, with reports suggesting Apple is now in the driver's seat for F1 rights. Uh-huh. Unintended, I guess. Plus UFC and MLB still looking for new deals and the NFL may be looking to come to market a year earlier. Can you share updated thoughts on how you are approaching sports rights for Netflix, Inc. and where you draw the line on something that can move the needle?

Ted Sarandos: Wow. Thanks for that, Robert. Remember, sports are a subcomponent of our live strategy. But our live strategy goes beyond sports alone. Our live strategy and our sports strategy are unchanged. You know, we remain focused on ownable big breakthrough events that because our audiences really love them. Anything we chase in the event space or in the sports space has got to make economic sense as well. You know, we bring a lot to the table, the deals that we make have to reflect that. So live is a relatively small part of the total content spend. And we have got about 200 billion view hours.

So it is a pretty small part of view hours as well right now. That being said, not all view hours are equal. And what we have seen with live is it has outsized positive impacts around conversation, around acquisition, and we suspect around retention. And but so right now, we are very excited where we sit. Very excited with the existing strategy. We are excited about the Canela Crawford fight and September and the SAG Awards and our weekly WWE matches. And the NFL, of course, which is a great property, and we are happy to have Christmas Day doubleheader, which includes Dallas versus Washington. And Detroit versus Minnesota.

So today, our live events have all primarily been in The US, keep in mind. So over time, we are going to continue to invest and grow our live capabilities for events around the world in the years ahead. So we are excited, but the strategy is unchanged.

Spencer Wang: Thanks, Ted. Good follow-up question on that one from Steve Cahall of Wells Fargo. What investments have you made to increase your capabilities in producing live events? What have you been able to do in-house in 2025 that you could not do last year? And how long will it take before you have the capability to produce large-scale events like NFL games?

Ted Sarandos: Yeah. Thanks, Steve. I would say remember, when we started original scripted programming, we had zero production capability. House of Cards was in fact thinking about our first three years of original programming, all of those shows were produced by others. Have to go three years later, we have produced Stranger Things in-house. Today, we still have shows that are produced by others. Universal, Twentieth Television, which is Disney, Paramount, Lionsgate, Warner Television, there is lots of available infrastructure to produce TV. And that is true of live events and sports as well. If we when we do more and more, we may choose to bring some of that in-house.

We have already produced a few, and we are just as likely to continue to use partners with existing production infrastructure and work to make sure that those productions are bespoke and they feel like they could only be on Netflix, Inc. So you should not think about the mix of partnerships and self-producing as a we think about it as a scaling tool. Not backfilling some, like, lack of ability in some area of the company. So and I should note by example, CBS is a phenomenal partner producing NFL games with us, and we are thrilled to work with them again this year on Christmas Day.

Greg Peters: Maybe take this opportunity just to some commentary on the general capability we have been building with live. Know, when we start something new, we pretty much expect that we are not going to be brilliant at it at the beginning. What? But we yeah. That is true. And we do not have any real reason to believe that. But we do not let that stop us from kicking off initiatives that we believe have a strong strategic rationale even though we know we need to develop that capability. Of course, our job is to get out there and learn by doing and get world-class as quickly as we possibly can.

And if you look at our current capabilities around live, we are in just a completely different place today compared to when we first started. As a good example that just happened last Friday, we had our first concurrent pair of live events. We had Taylor versus Serrano globally delivered alongside WWE SmackDown, was delivered ex-US. Both events at scale and delivered with extremely high quality. So it is great progress we have seen, and we have got a great roadmap ahead of us to continue to enhance those experiences. For folks.

Spencer Wang: Thank you both. Last question on the content side or the topic of content comes from Ben Swinburne of Morgan Stanley. What are the learnings from the success of K-Pop Demon Hunters? More animated musicals with fictional bands, question mark. That is a question from a man who probably has that movie playing on repeat in their home if I am guessing correctly. K-Pop Demon Hunters is a phenomenal success out of the gate. One of the things that I am really proud of the team over

Ted Sarandos: is original animation, not sequel, not live-action remake. Original animation feature is very tough and has been struggling for years. And I think the fact that our biggest hits now, Leo, Seabeast, and now K-Pop Demon Hunters, are original animation. So we are super thrilled about that. The mix of music and pop culture, getting it right matters. Good storytelling matters. The innovation in animation itself matters. And the fact that people are in love with this film and in love with the music from this film that will keep it going for a long time. So we are really thrilled. And now the next beat is where does it go from here?

So know, we put in the letter how just how successful the music has been. And continues to be, and we think that will drive fandom for this fictional K-Pop band that we have. But more importantly, for the song Golden and for the song Soda Pop, these are enormous hits, and they all came from a film that is available only on Netflix, Inc. So we are really excited that we can pierce the culture with original animated features considering that folks have been poking us on it.

Spencer Neumann: Let us do it again later in the year within your dreams. Right, Ted? Absolutely. In your dreams, another very

Ted Sarandos: funny one and also completely original. So Yeah.

Spencer Wang: Great. I will move us on now to a few questions on plans as well as product. So from Michael Morris of Guggenheim, he asks, Netflix, Inc. continues to broaden content genres notably with live sports and the recently announced TF1 partnership. Is there a path to additional tiers of service based on types of content available, or will Netflix, Inc. always make all content available at the ad-free/ad-supported price points?

Greg Peters: I have learned to never say never, so I would say we remain open to evolving our consumer-facing model. Think we have got a few principles, important principles that we are carrying with us that I do not see changing significantly. One is we want to provide members choice. Right? So how do we have a different set of plans, a different price points, different features that allows folks to opt in to what is the right Netflix, Inc. for them. Also, how do we provide good accessibility to new members around the world? We want to grow, and that means making that we have got accessible price points.

And then finally, the plans we offer, they have to know, ensure that we are having reasonable returns to the business based on the entertainment value that we deliver, and we are hoping to grow those and so those returns would grow as well. Now obviously, the reason to do that is we can continue to reinvest in adding more entertainment and building a better experience. And maybe one other thought too is there is a component of complex in ChoiceDax that we have to consider in how we think about our offering. It is structured. So having said all that, though, I think we believe that the bundle is a great value for members.

It allows members around the world to access a wide range of entertainment in a very easy way at a very reasonable price. So I would expect that will remain an important feature of our offering for the foreseeable future.

Ted Sarandos: A lot of value and simplicity.

Spencer Neumann: Yeah.

Spencer Wang: Great. From Rich Greenfield of LightShed Partners, help us understand why your new UI/UX is so important as you expand live content. Beyond live, can you provide some color on what metrics have improved since the launch of the new UI, such as speed of users finding a title and change in failed sessions.

Greg Peters: As we said previously, it is really hard for a new UI to immediately compete, be better than the UI that we have had for the past ten years that has been iteratively evolved and improved. But now that we have actually rolled out this new UI to the first large wave of TV devices, we are actually seeing performance that is better than what we saw in our prelaunch testing. To some degree, that is expected because we made some improvements based on the results of that testing phase. So it is exciting to see that those delivered actual better results.

But the rate of that change actually gives us increased confidence that this new experience will drive better performance, by the variety of metrics we look at some of which include the ones that Rich is mentioning in relatively short order. And then maybe just a point on why are why do we build this and launch this new experience the first place? Why was this so important? Bluntly, the previous experience was designed for the Netflix, Inc. of ten years ago, and the business has involved considerably since then. We got a wider breadth of entertainment options. We got TV and film, more of those, of course, from around the world, but now also games and live events.

If you think about the discovery experience that is best suited for these new content types, it is inherently different. Helping our members understand that there is a really good reason for them to launch Netflix, Inc. and tune in at 7PM on a Friday night versus just showing up whenever they were free and wanted to be entertained. That is a totally different job, and we really need a different user interface to do that job well. Add to that, we saw the opportunity to leverage newer technologies, like real-time recommendations that respond dynamically to what you need from us in that specific moment.

So the Netflix, Inc. you get on a Tuesday night is different from the Netflix, Inc. you get on a Sunday afternoon. But all of those rationales together and what we are seeing in terms of the performance so far, we are very confident that we have got a much better platform in this new user experience to build from to continue to improve, and that will help us meet the needs of the business over the years to come.

Spencer Wang: Thanks, Greg. The next question comes from Steve Cahall of Wells Fargo. YouTube is the only streamer that exceeds Netflix, Inc. in terms of US share of TV time. Do you see an opportunity to bring notable YouTube creators and their content exclusively to Netflix, Inc.? How big could this opportunity be?

Ted Sarandos: Thanks, Steve. Look. We want to be in business with the best creatives on the planet. Regardless of where they come from. Some of them are here in Hollywood. Others are Korea, some are in India. And some are creators that distribute only on social media platforms, and most of them have not yet been discovered. So, for those creators doing great work, we have phenomenal distribution. Desirable monetization, brilliant discovery in our UI, and a hungry audience waiting to be entertained. So Steve, you recently I think I listened to you on a podcast where you talked about our business model and on this I believe on this very topic.

And we largely agree with you and believe that working with a wide set of content creators makes a lot of sense for us. And as you said, if I am remembering it right, not everything on YouTube will fit on Netflix, Inc. We could not agree with that more. But there are some creators on YouTube like Miss Rachel that are a great fit. If you could saw on the engagement report, she said 53 million views in 2025 on Netflix, Inc. So she clearly works on Netflix, Inc. And we are really excited about the Sidemen and pop the balloon and a wide variety of and video podcasters that might be a good fit for us.

And particularly if they are doing great work and looking for different ways to connect with audiences.

Greg Peters: And maybe broadening this out for a second, and taking that question to look at sort of all of the competitors. That we face for our share of TV time. We have always said that the market for entertainment is very large. And we face competition from all kinds of directions. So whether it is linear, or streamers or video games or social media, it is also a very dynamic, competitive market as we and all of our competitors seek to provide better and better options for consumers.

And one of those changes, one of those vectors of dynamicism has been that sort of steady inevitable shift to streaming and on-demand as more services move deliver their content in a way that we all know consumers want. That creates increasing competitive pressure for us that we have got to respond to. We also see free services as a form of strong competition. Free is very powerful from a consumer perspective. So it is not surprising that some free services are growing in engagement. But I think Ted said it well earlier in the call, not all hours are created equal. And we have a different profit model from other services, a strong profit model.

So we are going to compete to win more moments of truth for sure. But especially compete to win those most profitable moments. And back to your specific question, it is worth remembering there is about 80% of total TV view share that neither Netflix, Inc. or YouTube are winning right now. We think that represents a huge opportunity for which we are competing aggressively and we aim to grow our share.

Ted Sarandos: The vast majority of our money and attention is focused on that 80%.

Spencer Wang: Thank you. Next question from Justin Patterson of KeyBanc. Could you please talk about your generative AI initiatives? Where do you think GenAI will be most impactful over time, revenue or expense efficiency?

Spencer Neumann: Well, I may take start with the with GenAI.

Ted Sarandos: We remain convinced that AI represents an incredible opportunity to help creators make films and series better, not just cheaper. There are AI-powered creator tools. So this is real people doing real work with better tools. Our creators are already seeing the benefits in production through previsualization and shot planning work and certainly visual effects. It used to be that only big-budget projects would have access to advanced visual effects like de-aging. Remember last quarter, we talked about Pedro Paramo. Well, that is just no longer the case. And, you know, this year, we had El Atonata. It is a very big hit show for us. From Argentina.

In that production, we leveraged virtual production and AI-powered VFX there was a shot in the show that the creators wanted to show a building collapsing in Buenos Aires. So our iLIGHT team iLIGHT team partnered with their creative team using AI-powered tools they were able to achieve an amazing result with remarkable speed. And in fact, that VFX sequence was completed 10 times faster than it could have been completed with visual, traditional VFX tools and workflows. And, also, the cost of it would just not have been feasible for a show in that budget. So that sequence actually is the very first GenAI final footage to appear on screen in a Netflix, Inc. original series or film.

So the creators were thrilled with the result. We were thrilled with the result. And more importantly, the audience was thrilled with the result. So I think these tools are helping creators expand the possibilities of storytelling on screen, and that is endlessly exciting.

Greg Peters: And maybe to cover a few of the other areas. You know, the member experience is a place where we feel like there is tons of opportunity to leverage these new generative technologies to improve the experience. You know, we have been in the personalization and recommendation business for, you know, two decades. But yet we see a tremendous room and opportunity to make it even better by leveraging some of the more newer generative techniques.

We are also rolling out have piloted right now a conversational experience that uses allows our members to basically have a sort of natural language discussion with our user interface saying, you know, I want to watch a film from the eighties that is, you know, a dark psychological thriller, get some results back, maybe iterate through those in a way that you just could not have done in our previous experiences. So that is super exciting and, you know, we see that all of the work that we do there essentially is a force multiplier to that large content investment we are making.

If we do a better job there, that means every dollar that we spend means more value back to our members by connecting them with the titles that they are truly going to love. Advertising is another really great area. You know, we have seen it is a high hurdle to create a brand forward spot in a creative universe of one of the titles that we are currently carrying. But it is very compelling for both watch and for those brands, and we think these generative techniques can decrease that hurdle iteratively over time and enable us to do that in more and more spots.

So there is a bunch of places where we think we have got an advantage in terms of data and scale where we can leverage these new generative techniques to deliver just more benefits for our members and for our creative community.

Spencer Neumann: Yeah.

Ted Sarandos: If you do not mind me coming back for one second, I just rolled off iLine as if everyone knows what iLine is. I probably should clarify that iLine is our production innovation group inside of our VFX house at Scanline, and they are doing a lot of this work with our creators. So I just realized that I just threw that out there as everyone knew.

Spencer Wang: Thanks for clarifying, Ted. Let us see. Our next question comes from Brian Pitts of BMO Capital Markets. With your evolving gaming ambitions, including partnerships with Grand Theft Auto and the recently announced Roblox agreement, can you talk to near-term monetization opportunities within gaming?

Greg Peters: Sure. We look at the near-term monetization opportunity with games very similar to how we have looked at other new content categories can think unscripted or film or on and on. And that is essentially if we deliver more value in our offering, we get increased user acquisition, we get increased retention, we get increased willingness to pay. So it drives all of the sort of core fundamentals of our business. We have seen those positive effects, albeit in a small way relative to the size of our overall business. When it comes to members playing games on the service. We already have those positive proof points.

And we are going to ramp our investment in this area, which is currently quite small compared to our overall content investment. As we ramp the size of those positive effects. So we want to remain disciplined not investing too far ahead of demonstrating that we know how to translate that investment into value for our members. We have seen good progress, as you note, with licensed games like GTA. We have seen good progress with games we developed like Squid Game Unleashed, so you will see more from us in both of those categories. As well as a whole new set of interactive experiences that we think that we are either in a unique or differential position to deliver.

So we are super excited to roll those out over the next year. And then we remain open to the core question. We remain open to evolving our monetization model, but we have got to get to a lot more scale before that becomes a really materially relevant question. So we are going to do that work first. It is probably worth restating, the TAM for this market is very, very large. We remain convicted about our strategic opportunity and excited to make more progress.

Spencer Wang: Thanks, Greg. We will take our last question. From Jessica Reif Ehrlich of Bank of America Securities. Given your healthy balance sheet and what appears to be a coming wave of M&A and media globally, are there certain types of assets that would strengthen your moat i.e., what is your view of owning successful IP or studio assets as they come to market?

Spencer Neumann: I will take that one, Spencer. Thanks, Jessica. Well, we agree. Continued consolidation of studio and network assets is likely. But at least with respect to consolidation, within legacy media, we do not think it materially changes the competitive landscape. As you also know, we have historically been more builders than buyers, and we continue to see big runway for growth without fundamentally changing that playbook. You heard a lot of that today. So we look at a lot of things. We apply a framework or lens to those opportunities when we look at, you know, is it a big opportunity? Does it strengthen our entertainment offering? Does it strengthen our capabilities? Does it accelerate our strategy?

And we look at all of that relative to the opportunity cost of distraction or other alternatives. We have been pretty clear in the past that we also have no interest in owning legacy media networks so that also kind of reduces the funnel for us. But you know, in general, we believe we can and will be choosy. We have got a great business. We are predominantly focused on growing that organically, investing aggressively in responsibly into that growth. And returning excess cash to shareholders through share repurchase and you will see us continue on that path.

Spencer Wang: Great. Thanks, Spence. And that will wrap up our Q2 earnings call. So we thank you all for taking the time to join us, and we look forward to seeing you all next quarter. Thank you.

Ted Sarandos: Conditioning. Yeah. And much like France and France, they have three hot

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DATE

Thursday, July 17, 2025 at 4:45 p.m. ET

CALL PARTICIPANTS

Co‑Chief Executive Officer — Ted Sarandos

Co‑Chief Executive Officer — Greg Peters

Chief Financial Officer — Spencer Neumann

Vice President, Finance, IR, and Corporate Development — Spencer Wang

Need a quote from one of our analysts? Email [email protected]

TAKEAWAYS

Full-Year Revenue Guidance: raised guidance from the prior range of $43.5 billion to $44.5 billion, primarily due to foreign exchange tailwinds and stronger member growth.

Operating Margin: Reported margin target increased to 30%, up from 29%. FX-neutral margin up 50 basis points on membership and ads revenue lift, with operating expenses unchanged from the prior forecast.

Advertising Revenue: Ad-supported business is expected to approximately double revenue, tracking slightly ahead of beginning-of-year expectations and supported by the global ad tech stack rollout and strong upfront results.

Member Metrics: Retention rates remain stable and industry-leading; no major changes observed in plan mix or plan take rate; engagement remains healthy according to management metrics.

Engagement Growth: Per-owner-household engagement has remained stable for two and a half years through the rollout of paid sharing and increased competition.

Content Investment: Content amortization is projected at more than $16 billion for 2025. Content amortization has grown more than 50% since 2020, designed to support both new and returning global titles.

Regional Partnerships: TF1 partnership in France initiated to accelerate highly localized content offerings, leveraging new capabilities including live and advertising integration.

Live Content Milestone: Successfully delivered concurrent global live events using internally developed infrastructure, with plans to expand live offering and maintain partnership-based production model.

Generative AI Adoption: Achieved a tenfold speed improvement in VFX delivery for “El Atonata” using GenAI-powered production tools in 2025, marking first GenAI final footage in original content.

Gaming Strategy: Monetization approach remains focused on driving acquisition, retention, and willingness to pay; management describes game-related investment as disciplined and incremental relative to overall content spend.

User Interface Overhaul: The newly launched UI is delivering better performance than prelaunch testing across the initial rollout to the first large wave of TV devices, with improvements observed in a variety of metrics tracked by management.

M&A Discipline: Management reaffirmed focus on organic growth and disciplined evaluation of potential acquisitions, reiterating no interest in owning legacy linear TV networks.

SUMMARY

Management upgraded full-year revenue and reported margin guidance for 2025, as increasing FX benefits and stronger member growth flowed directly to profitability while operating expenses remained flat in forecasts. The global rollout of Netflix, Inc.'s ad tech stack fueled rapid expansion in advertising sales and simplified inventory access for marketers worldwide. Recent product launches—such as the enhanced user interface and generative AI-powered production—have delivered demonstrable performance gains. Management outlined a disciplined strategy for live and sports content, emphasizing scalable infrastructure, partner models, and a global roadmap to expand the live offering within economic constraints.

CFO Neumann explained, "we expect operating margins to be up year over year in each quarter, including Q4, and as just noted, we expect to deliver strong full-year margins, as we just raised our guidance to 29.5% FX-neutral and 30% reported for full-year 2025."

The company completed the global implementation of its proprietary ad technology, enabling programmatic sales and the introduction of additional demand sources, including Yahoo, to broaden advertiser reach.

Co-CEO Peters said, "we are in this phase of learning and improving quickly based on the fact that being live everywhere means that you get a bunch of feedback about what we can do better, which is great."

With the new TF1 partnership, Netflix, Inc. is testing a model for scaling local content through collaborations with leading linear broadcasters; consumer response will guide potential expansion of this approach.

Co-CEO Sarandos noted ongoing commitment to reinvestment: "It is our objective to sustain healthy revenue growth, reinvest in the business to improve on all aspects of the service, and that includes growing content spend, strengthening and expanding the entertainment offering, and to drive that positive flywheel of growth by adding value to our members"

INDUSTRY GLOSSARY

TF1: France’s leading broadcast television network and Netflix, Inc.'s inaugural traditional broadcaster partner for localized content expansion.

Paid Sharing: A Netflix, Inc. policy restricting account use to a single household, aiming to convert password-sharing users into paying subscribers.

Ad Tech Stack: Proprietary technology platform enabling programmatic advertising, advanced targeting, and self-serve tools for Netflix, Inc.'s ad-supported streaming plans.

GenAI: Generative artificial intelligence technologies used to accelerate content production, personalization, and advertising at Netflix, Inc.

iLine: Netflix, Inc.’s in-house production innovation group within its Scanline VFX division, specializing in advanced visual effects using AI-powered tools.

Full Conference Call Transcript

Spencer Wang: Good afternoon, and welcome to the Netflix, Inc. Q2 2025 earnings interview. I am Spencer Wang, VP of Finance, IR, and Corporate Development. Joining me today are Co-CEOs, Ted Sarandos and Greg Peters, and CFO, Spencer Neumann. As a reminder, we will be making forward-looking statements, and actual results may vary. We will take questions submitted by the analyst community, and we will begin with our results and our forecast. The first question comes from Steve Cahall of Wells Fargo. The question is, since the revenue increase in your forecast is primarily FX driven, we are curious about the components of the constant currency increase.

Is this due to a better underlying revenue growth, or are there specific expenses that are coming in better, like content amortization? I will take that one. Thanks, Steve. So I

Spencer Neumann: As you saw on the letter, we increased our full-year revenue guidance to $44.8 to $45.2 billion. That is up from the prior guide of $43.5 to $44.5 billion. So up about a billion at the midpoint of the range and a tighter range. As you noted, primarily reflects the FX impact from the weakening dollar relative to most other currencies. But the good news is we are also seeing strength in our underlying business. We have got healthy member growth, and that even picked up nicely at the '2 a bit more than we expected. We think that will carry through with our strong back half slate. So we are reflecting that in our latest forecast.

We are also seeing nice momentum in ad sales, still off a pretty small base, but good growth and it is on pace to roughly double our revenue in the year. And it is a bit ahead of beginning of year expectations. So when we carry all that through to operating margin, our operating expenses are essentially unchanged, which is part of your question. So they are basically unchanged forecast to forecast. So we are largely flowing through the expected higher revenues to profit margins.

So that is why our updated target full-year reported margin is up a point from 29% to 30% and that 50 basis point increase in FX neutral margin is really just that revenue lift from stronger membership growth and ads relative to prior forecast flowing through the margin.

Spencer Wang: Thank you, Spence. We will take our next question from Barton Crockett of Rosenblatt Securities. Why is operating margin guidance for the full year only 30% after the upside in February and a forecast 31.5% for the third quarter? Is there a timing issue, FX issue, or is there a new level of spending that will continue beyond the fourth quarter of 2025?

Spencer Neumann: Well, this is really mostly timing. So thanks, Barton. We primarily, as a reminder, manage to full-year margins. And we expect our content expenses will ramp in Q3 and Q4. We have got many of our biggest new and returning titles and live events in the back half of the year. We have also, you know, Q4 is typically a and generally almost always is a heavier film slate. Sure. We will talk about our expect we will talk about more of this on the call. Also be marketing to support that heavier slate, and we are continuing to aggressively build out our ad sales infrastructure and capabilities through the year. So all of that is to be expected.

We can manage to it. We manage to those margins. And even with that back half ramp in expenses, we expect operating margins to be up year over year in each quarter, including Q4, and as just noted, we do expect to deliver strong full-year margins as we just took up our guide to, you know, 29.5% FX neutral, 30% reported.

Spencer Wang: Great. Thanks, Spence. The next question comes from Tom Champion of Piper Sandler. How has your view of the consumer and the macro economy changed over the last ninety days?

Greg Peters: Similar to last quarter, we are carefully watching consumer sentiment in the broader economy. But at this point, really nothing significant to note in the metrics and the indicators that we get directly through the business. Those are retention that remains stable and industry-leading. There have been no significant shifts in plan mix or plan take rate. And the price changes we have done since the last quarter have been in line with expectations. Engagement also remains healthy. So things all look stable from those indicators and big picture entertainment in general and Netflix, Inc. specific have been historically pretty resilient in tougher economic times.

We also think that we are an incredible entertainment value not only compared to traditional entertainment, but if you think about streaming competitors, when we start at $7.99 in The United States, you think about all the entertainment you get we have a belief and expectation that demand for not only entertainment but for us specifically will remain strong.

Spencer Wang: Thanks, Greg. I think a nice follow-up to this question will be on advertising. So from Ben Swinburne of Morgan Stanley, can you share any data points around your upfront negotiations?

Greg Peters: Yep. As we noted in the letter, our US upfront is nearly complete. We have closed a large majority of deals with the major agencies. Those results have generally been in line or slightly better than our targets and consistent with our goal to roughly double the ads business this year. And what are advertisers excited about? Growing scale is something we definitely hear. Also, a highly engaged audience. So bigger audience, but also an audience that is more engaged relative to our peers. The rollout of our own ad tech stack, which helps deliver a bunch of features, and then our slate, which is generally amazing and includes a growing number of live events that advertisers are excited about.

Spencer Wang: Great. Follow-up question on advertising from Vikram of Baird. How have advertisers in The US responded to the Netflix, Inc. ads suite rollout since the April launch? What features and capabilities are attracting the most interest, and how is the initial feedback in other regions outside of The US?

Greg Peters: We have completed the rollout of our own ad tech stack and the Netflix, Inc. ad suite to all of our ad markets now. So we are fully on our own stack around the world at this point. That rollout was generally smooth across all countries. We see good performance metrics across all countries, and the early results are in line with our expectations. Now we are in this phase of learning and improving quickly based on the fact that being live everywhere means that you get a bunch of feedback about what we can do better, which is great.

As we mentioned before, the most immediate benefit from this rollout is just making it easier for advertisers to buy on Netflix, Inc. We hear that benefit, that ease, from direct feedback talking to advertisers. They tell us that it is easier. See it in our overall sales performance. We have seen an increased programmatic buying. So all of these are consistent, you know, with what we were expecting both qualitatively and from a metrics perspective. We are also, I guess, worth noting that we are going to roll out additional demand sources like Yahoo that will further open up the market for us.

Long term, being on our own stack, that improves the speed of our execution to deliver this, you know, pretty significant roadmap of features that we have in front of us. It is things like improved targeting and measurement. There is also leveraging advertiser and third-party data which we definitely hear demand for as well. And it will ultimately allow us to improve the ad experience for our members. Which is critically important. So that means better ads personalization. So the ads that I see are increasingly different from the ads that, let us say, Ted would see.

And they are more relevant for each of us, which is good for us as users, and it is good for the brands. Also going to be introducing interactivity in the second half of the year, so that is exciting. So that is all to say this is, you know, a pretty significant milestone for us, one we are super excited to get behind us because now we can shift into this steady release cycle where we are dropping new features all the time, both for advertisers and for members. And that is the development and release that we have in other parts of the business. So it is fun to be able to get to that point.

Spencer Wang: Thanks, Greg. I will move this along now to a set of questions around content as engagement. This one comes from Ben Swinburne of Morgan Stanley. 1% engagement growth year over year suggests engagement is down year over year on an average per member basis. How do we reconcile that with engagement growing on a per member household basis if that is still accurate?

Greg Peters: So total view hours did grow a bit in the first half of 2025, and that is despite a particularly back half-weighted slate. But to your point on engagement on a per member basis, we have mostly been focused for the last few years on measuring engagement on what we call an owner household basis. So this takes out the borrower effect, and we obviously think this is the best way to assess our engagement per member because it removes the tricky comparison impacts from paid sharing.

So that metric per owner household engagement has been relatively steady over the past two and a half years throughout the rollout of paid sharing, and amidst increasing competition for TV time as more viewing moves to streaming and gets this on-demand benefit. So we are glad to have held that normalized engagement level, but we clearly also want to increase it. And to that end, we are optimistic and expect that our engagement growth in the second half of this year will be better than in the first half given our strong second half slate.

Spencer Wang: Thanks, Greg. Great segue to Doug Inmuth's question from JPMorgan. The content in the back half of the year looks strong with Squid Game 3 already the third most popular non-English series ever, and Wednesday and Stranger Things releasing in the coming months. You often say that no single title drives more than 1% of total viewing. So how do you think about the business currently as being quote, hit boosted or hit driven, and are you confident that both original and licensed content momentum can continue in 2026?

Ted Sarandos: Yeah. I will take that. And thank you, Doug. On the first part of your question, we are definitely riding this long-term trend of linear to streaming. And that has a natural adoption curve. But we can accelerate our growth with big hits. But as you said, each one of them, even in success, is going to drive about 1% of total viewing. So you need a lot more than just a big hit every once in a while. So to your point, it is not about the single hit. So what it is about a steady drumbeat of shows and films and soon enough games that our members really love and continue to expect from us.

So, like, by way of example, we had 44 individual shows nominated for Emmys this year. So that is what quality at scale looks like. We ended the quarter with a huge return to Squid Game. Thanks for acknowledging. I will go into the second half with the return of Wednesday and Stranger Things. And a really strong slate of supporting titles and favorites, like and new shows. Like next week or this week, we have Eric Bonnett's Untamed. Next week, we have Leanne Morgan's new comedy show Leanne. Both look really great. And that is just to name a few.

And the back half of the year also has this perhaps the most anticipated slate of new movies that we have ever had. That starts on the 25th with Happy Gilmore 2, followed by we have a new Knives Out film. We have new films from Noah Baumbach, from Guillermo del Toro, from Catherine Bigelow. And it does not stop there. It does roll right into 2026, and that is the second part of your question. And we are looking forward to movies like the rip from Ben Affleck and Matt Damon. Shirley starred on a new movie called Apex, which is a phenomenal action movie. Millie Bobby Brown is back in Enola Holmes 3.

Recall that in 2023, Enola Holmes was our biggest two was our biggest movie. So we are looking forward to that new sequel.

Spencer Wang: And Greta Gerwig's Narnia is going to be phenomenal.

Ted Sarandos: And then on top of that, we talk about Return of Bridgerton, One Piece, Avatar: The Last Airbender, all three huge successes around the world. The Gentleman, Four Seasons, Point Break I am sorry, Running Points. Sorry. Beef, which as you recall in 2023, won just about every award imaginable and was a gigantic success for us. It is back for a new season in '26. Three Body Problem, Love is Blind, Outer Banks, and not just from The US, from France, we have LuPan. From Spain, we have Berlin. We have a new season of a hundred years of from Colombia. So big hit returning shows and new series. From each of our regions around the world.

And the new stuff we have got coming up like man on fire, reimagining of little house on the prairie, The Duffer brothers from Stranger Things have a brand new show. The Burrows. We have got the Human Vapor from Japan. Operation Safred Cigar from India, can this love be translated from Korea? So again, popular programming, new and returning from all over the world in 2026. Unscripted shows like the reboot of star of Star Search, we have got into the doll universe. With Wonka's golden ticket, which we are really excited about.

In our live, we have got a few surprises for you next year, but of course, we have our NFL Christmas Day doubleheader that we are really thrilled about too. So we are really incredibly excited about the back half of this year and confident that it keeps rolling in 26.

Spencer Wang: Thank you, Ted. We will take the next question from Rich Greenfield of LightShed Partners. Who asks, are you concerned by the stagnation in your viewing share domestically?

Spencer Neumann: Think Rich is probably referring to the Nielsen gauge data. Do you need to spend more on programming or spend differently to materially move your viewing share higher?

Ted Sarandos: Yeah. Thanks, Rich. Look, our goal continues to be to continue to grow our share over the long term. And over the past few years, you are right, we have been able to maintain our share even as we work through a growing number of TV-based streaming services, some free, some paid. And the impact of paid sharing that Greg mentioned earlier as well as this, you know, 2025 slate that was more back half-weighted than we typically have in previous years. But over the long term, we tend to keep growing as the other 50% of TV viewing migrates from linear to streaming. And we will do that by doing what we have always done, continuously improve the service.

So in mind, since 2020, our content amort has grown more than 50%. You know, from under $11 billion to more than $16 billion. That we expect to do this year. And over that same time period, we definitely had we saw a big increased spending, but also increased engagement. In increased revenue, increased profit, and increased profit margin. So that is our model in action.

It is our objective to sustain healthy revenue growth, reinvest in the business to improve on all aspects of the service, and that includes growing content spend, strengthening expanding the entertainment offering, and to drive that positive flywheel of growth by adding value to our members and all the while growing engagement revenue and profit around the world.

Spencer Wang: Great. Thank you, Ted. I will move to Alan Gould from Loop Capital next. Can you provide more information on the TF1 partnership? Why did you choose to add TF1 in France as opposed to other broadcasters as your first partner, why is now the right time to create such a partner? Should we anticipate similar partnerships in other countries?

Greg Peters: Yeah. Perhaps to start with the rationale for the partnership. You would think with that long list of amazing titles that Ted just rattled off, we would have enough to satisfy every person on the planet. But it turns out we actually consistently hear from our members that they want more. They want more variety, more breadth of content. So the fundamental purpose for this TF1 partnership is all about that goal. Of expanding our entertainment offering. How do we enhance the value we deliver to members? Want to provide more content, more variety, more quality. So just as you have seen us do with licensing and production, this is just another mechanism to expand that offering.

And in this case, it is specifically about highly relevant local for local content in a country that has strong demand for that local content. This is an accelerated way to satisfy that need. Why now? Why was this time the right time? Well, we have invested a lot in a bunch of enabling capabilities that are either required or highly leveraged by this deal. You can think live, ads, the new UI, among other things. And then why TF1 versus some other partner? Well, we know each other really well. We wanted our first partner to be in a big territory. We wanted to pick the leading local programmer.

We wanted to be highly aligned in terms of the deal and the shape of the partnership and the values that we thought we could generate mutually by working together for our customers. And we both look at this as an opportunity to learn, to figure out how do we scale the local content that TF1 is producing to more customers in France. So we are looking forward to seeing what consumers think. You never really know until you get out there and get the real reactions. And then, obviously, we will factor that into our plans going forward.

Ted Sarandos: Thanks, Greg.

Spencer Wang: From Robert Fishman of MoffettNathanson, with reports suggesting Apple is now in the driver's seat for F1 rights. Uh-huh. Unintended, I guess. Plus UFC and MLB still looking for new deals and the NFL may be looking to come to market a year earlier. Can you share updated thoughts on how you are approaching sports rights for Netflix, Inc. and where you draw the line on something that can move the needle?

Ted Sarandos: Wow. Thanks for that, Robert. Remember, sports are a subcomponent of our live strategy. But our live strategy goes beyond sports alone. Our live strategy and our sports strategy are unchanged. You know, we remain focused on ownable big breakthrough events that because our audiences really love them. Anything we chase in the event space or in the sports space has got to make economic sense as well. You know, we bring a lot to the table, the deals that we make have to reflect that. So live is a relatively small part of the total content spend. And we have got about 200 billion view hours.

So it is a pretty small part of view hours as well right now. That being said, not all view hours are equal. And what we have seen with live is it has outsized positive impacts around conversation, around acquisition, and we suspect around retention. And but so right now, we are very excited where we sit. Very excited with the existing strategy. We are excited about the Canela Crawford fight and September and the SAG Awards and our weekly WWE matches. And the NFL, of course, which is a great property, and we are happy to have Christmas Day doubleheader, which includes Dallas versus Washington. And Detroit versus Minnesota.

So today, our live events have all primarily been in The US, keep in mind. So over time, we are going to continue to invest and grow our live capabilities for events around the world in the years ahead. So we are excited, but the strategy is unchanged.

Spencer Wang: Thanks, Ted. Good follow-up question on that one from Steve Cahall of Wells Fargo. What investments have you made to increase your capabilities in producing live events? What have you been able to do in house in 2025 that you could not do last year? And how long will it take before you have the capability to produce large-scale events like NFL games?

Ted Sarandos: Yeah. Thanks, Steve. I would say remember, when we started original scripted programming, we had zero production capability. House of Cards was in fact thinking about our first three years of original programming, all of those shows were produced by others. Have to go three years later, we have produced Stranger Things in house. Today, we still have shows that are produced by others. Universal, Twentieth Television, which is Disney, Paramount, Lionsgate, Warner Television, there is lots of available infrastructure to produce TV. And that is true of live events and sports as well. If we when we do more and more, we may choose to bring some of that in house.

We have already produced a few, and we are just as likely to continue to use partners with existing production infrastructure and work to make sure that those productions are bespoke and they feel like they could only be on Netflix, Inc. So you should not think about the mix of partnerships and self-producing as a we think about it as a scaling tool. Not backfilling some, like, lack of ability in some area of the company. So and I should note by example, CBS is a phenomenal partner producing NFL games with us, and we are thrilled to work with them again this year on Christmas Day.

Greg Peters: Maybe take this opportunity just to some commentary on the general capability we have been building with live. Know, when we start something new, we pretty much expect that we are not going to be brilliant at it at the beginning. What? But we yeah. That is true. And we do not have any real reason to believe that. But we do not let that stop us from kicking off initiatives that we believe have a strong strategic rationale even though we know we need to develop that capability. Of course, our job is to get out there and learn by doing and get world-class as quickly as we possibly can.

And if you look at our current capabilities around live, we are in just a completely different place today compared to when we first started. As a good example that just happened last Friday, we had our first concurrent pair of live events. We had Taylor versus Serrano globally delivered alongside WWE SmackDown, was delivered ex US. Both events at scale and delivered with extremely high quality. So it is great progress we have seen, and we have got a great roadmap ahead of us to continue to enhance those experiences. For folks.

Spencer Wang: Thank you both. Last question on the content side or the topic of content comes from Ben Swinburne of Morgan Stanley. What are the learnings from the success of K-Pop Demon Hunters? More animated musicals with fictional bands, question mark. That is a question from a man who probably has that movie playing on repeat in their home if I am guessing correctly. K-Pop Demon Hunters is a phenomenal success out of the gate. One of the things that I am really proud of the team over

Ted Sarandos: is original animation, not sequel, not live-action remake. Original animation feature is very tough and has been struggling for years. And I think the fact that our biggest hits now, Leo, Seabeast, and now K-Pop Demon Hunters, are original animation. So we are super thrilled about that. The mix of music and pop culture, getting it right matters. Good storytelling matters. The innovation in animation itself matters. And the fact that people are in love with this film and in love with the music from this film that will keep it going for a long time. So we are really thrilled. And now the next beat is where does it go from here?

So know, we put in the letter how just how successful the music has been. And continues to be, and we think that will drive fandom for this fictional K-Pop band that we have. But more importantly, for the song Golden and for the song Soda Pop, these are enormous hits, and they all came from a film that is available only on Netflix, Inc. So we are really excited that we can pierce the culture with original animated features considering that folks have been poking us on it.

Spencer Neumann: Let us do it again later in the year within your dreams. Right, Ted? Absolutely. In your dreams, another very

Ted Sarandos: funny one and also completely original. So Yeah.

Spencer Wang: Great. I will move us on now to a few questions on plans as well as product. So from Michael Morris of Guggenheim, he asks, Netflix, Inc. continues to broaden content genres notably with live sports and the recently announced TF1 partnership. Is there a path to additional tiers of service based on types of content available, or will Netflix, Inc. always make all content available at the ad-free/ad-supported price points?

Greg Peters: I have learned to never say never, so I would say we remain open to evolving our consumer-facing model. Think we have got a few principles, important principles that we are carrying with us that I do not see changing significantly. One is we want to provide members choice. Right? So how do we have a different set of plans, a different price points, different features that allows folks to opt in to what their is the right Netflix, Inc. for them. Also, how do we provide good accessibility to new members around the world? We want to grow, and that means making that we have got accessible price points.

And then finally, the plans we offer, they have to know, ensure that we are having reasonable returns to the business based on the entertainment value that we deliver, and we are hoping to grow those and so those returns would grow as well. Now obviously, the reason to do that is we can continue to reinvest in adding more entertainment and building a better experience. And maybe one other thought too is there is a component of complex in ChoiceDax that we have to consider in how we think about our offering. It is structured. So having said all that, though, I think we believe that the bundle is a great value for members.

It allows members around the world to access a wide range of entertainment in a very easy way at a very reasonable price. So I would expect that will remain an important feature of our offering for the foreseeable future.

Ted Sarandos: A lot of value and simplicity.

Spencer Neumann: Yeah.

Spencer Wang: Great. From Rich Greenfield of LightShed Partners, help us understand why your new UI/UX is so important as you expand live content. Beyond live, can you provide some color on what metrics have improved since the launch of the new UI, such as speed of users finding a title and change in failed sessions.

Greg Peters: As we said previously, it is really hard for a new UI to immediately compete, be better than the UI that we have had for the past ten years that has been iteratively evolved and improved. But now that we have actually rolled out this new UI to the first large wave of TV devices, we are actually seeing performance that is better than what we saw in our prelaunch testing. To some degree, that is expected because we made some improvements based on the results of that testing phase. So it is exciting to see that those delivered actual better results.

But the rate of that change actually gives us increased confidence that this new experience will drive better performance, by the variety of metrics we look at some of which include the ones that Rich is mentioning in relatively short order. And then maybe just a point on why are why do we build this and launch this new experience the first place? Why was this so important? Bluntly, the previous experience was designed for the Netflix, Inc. of ten years ago, and the business has involved considerably since then. We got a wider breadth of entertainment options. We got TV and film, more of those, of course, from around the world, but now also games and live events.

If you think about the discovery experience that is best suited for these new content types, it is inherently different. Helping our members understand that there is a really good reason for them to launch Netflix, Inc. and tune in at 7PM on a Friday night versus just showing up whenever they were free and wanted to be entertained. That is a totally different job, and we really need a different user interface to do that job well. Add to that, we saw the opportunity to leverage newer technologies, like real-time recommendations that respond dynamically to what you need from us in that specific moment.

So the Netflix, Inc. you get on a Tuesday night is different from the Netflix, Inc. you get on a Sunday afternoon. But all of those rationales together and what we are seeing in terms of the performance so far, we are very confident that we have got a much better platform in this new user experience to build from to continue to improve, and that will help us meet the needs of the business over the years to come.

Spencer Wang: Thanks, Greg. The next question comes from Steve Cahall of Wells Fargo. YouTube is the only streamer that exceeds Netflix, Inc. in terms of US share of TV time. Do you see an opportunity to bring notable YouTube creators and their content exclusively to Netflix, Inc.? How big could this opportunity be?

Ted Sarandos: Thanks, Steve. Look. We want to be in business with the best creatives on the planet. Regardless of where they come from. Some of them are here in Hollywood. Others are Korea, some are in India. And some are creators that distribute only on social media platforms, and most of them have not yet been discovered. So, for those creators doing great work, we have phenomenal distribution. Desirable monetization, brilliant discovery in our UI, and a hungry audience waiting to be entertained. So Steve, you recently I think I listened to you on a podcast where you talked about our business model and on this I believe on this very topic.

And we largely agree with you and believe that working with a wide set of content creators makes a lot of sense for us. And as you said, if I am remembering it right, not everything on YouTube will fit on Netflix, Inc. We could not agree with that more. But there are some creators on YouTube like Miss Rachel that are a great fit. If you could saw on the engagement report, she said 53 million views in 2025 on Netflix, Inc. So she clearly works on Netflix, Inc. And we are really excited about the Sidemen and pop the balloon and a wide variety of and video podcasters that might be a good fit for us.

And particularly if they are doing great work and looking for different ways to connect with audiences.

Greg Peters: And maybe broadening this out for a second, and taking that question to look at sort of all of the competitors. That we face for our share of TV time. We have always said that the market for entertainment is very large. And we face competition from all kinds of directions. So whether it is linear, or streamers or video games or social media, it is also a very dynamic, competitive market as we and all of our competitors seek to provide better and better options for consumers.

And one of those changes, one of those vectors of dynamicism has been that sort of steady inevitable shift to streaming and on-demand as more services move deliver their content in a way that we all know consumers want. That creates increasing competitive pressure for us that we have got to respond to. We also see free services as a form of strong competition. Free is very powerful from a consumer perspective. So it is not surprising that some free services are growing in engagement. But I think Ted said it well earlier in the call, not all hours are created equal. And we have a different profit model from other services, a strong profit model.

So we are going to compete to win more moments of truth for sure. But especially compete to win those most profitable moments. And back to your specific question, it is worth remembering there is about 80% of total TV view share that neither Netflix, Inc. or YouTube are winning right now. We think that represents a huge opportunity for which we are competing aggressively and we aim to grow our share.

Ted Sarandos: The vast majority of our money and attention is focused on that 80%.

Spencer Wang: Thank you. Next question from Justin Patterson of KeyBanc. Could you please talk about your generative AI initiatives? Where do you think GenAI will be most impactful over time, revenue or expense efficiency?

Spencer Neumann: Well, I may take start with the with GenAI.

Ted Sarandos: We remain convinced that AI represents an incredible opportunity to help creators make films and series better, not just cheaper. There are AI-powered creator tools. So this is real people doing real work with better tools. Our creators are already seeing the benefits in production through previsualization and shot planning work and certainly visual effects. It used to be that only big-budget projects would have access to advanced visual effects like de-aging. Remember last quarter, we talked about Pedro Paramo. Well, that is just no longer the case. And, you know, this year, we had El Atonata. It is a very big hit show for us. From Argentina.

In that production, we leveraged virtual production and AI-powered VFX there was a shot in the show that the creators wanted to show a building collapsing in Buenos Aires. So our iLIGHT team iLIGHT team partnered with their creative team using AI-powered tools they were able to achieve an amazing result with remarkable speed. And in fact, that VFX sequence was completed 10 times faster than it could have been completed with visual, traditional VFX tools and workflows. And, also, the cost of it would just not have been feasible for a show in that budget. So that sequence actually is the very first GenAI final footage to appear on screen in a Netflix, Inc. original series or film.

So the creators were thrilled with the result. We were thrilled with the And more importantly, the audience was thrilled with the result. So I think these tools are helping creators expand the possibilities of storytelling on screen, and that is endlessly exciting.

Greg Peters: And maybe to cover a few of the other areas. You know, the member experience is a place where we feel like there is tons of opportunity to leverage these new generative technologies to improve the experience. You know, we have been in the personalization and recommendation business for, you know, two decades. But yet we see a tremendous room and opportunity to make it even better by leveraging some of the more newer generative techniques.

We are also rolling out have piloted right now a conversational experience that uses allows our members to basically have a natural language discussion with our user interface saying, you know, I want to watch a film from the eighties that is, you know, a dark psychological thriller, get some results back, maybe iterate through those in a way that you just could not have done in our previous experiences. So that is super exciting and, you know, we see that all of the work that we do there essentially is a force multiplier to that large content investment we are making.

If we do a better job there, that means every dollar that we spend means more value back to our members by connecting them with the titles that they are truly going to love. Advertising is another really great area. You know, we have seen it is a high hurdle to create a brand forward spot in a creative universe of one of the titles that we are currently carrying. But it is very compelling for both watch and for those brands, and we think these generative techniques can decrease that hurdle iteratively over time and enable us to do that in more and more spots.

So there is a bunch of places where we think we have got an advantage in terms of data and scale where we can leverage these new generative techniques to deliver just more benefits for our members and for our creative community.

Spencer Neumann: Yeah.

Ted Sarandos: If you do not mind me coming back for one second, I just rolled off iLine as if everyone knows what iLine is. I probably should clarify that iLine is our production innovation group inside of our VFX house at Scanline, and they are doing a lot of this work with our creators. So I just realized that I just threw that out there as everyone knew.

Spencer Wang: Thanks for clarifying, Ted. Let us see. Our next question comes from Brian Pitts of BMO Capital Markets. With your evolving gaming ambitions, including partnerships with Grand Theft Auto and the recently announced Roblox agreement, can you talk to near-term monetization opportunities within gaming?

Greg Peters: Sure. We look at the near-term monetization opportunity with games very similar to how we have looked at other new content categories can think unscripted or film or on and on. And that is essentially if we deliver more value in our offering, we get increased user acquisition, we get increased retention, we get increased willingness to pay. So it drives all of the sort of core fundamentals of our business. We have seen those positive effects, albeit in a small way relative to the size of our overall business. When it comes to members playing games on the service. We already have those positive proof points.

And we are going to ramp our investment in this area, which is currently quite small compared to our overall content investment. As we ramp the size of those positive effects. So we want to remain disciplined not investing too far ahead of demonstrating that we know how to translate that investment into value for our members. We have seen good progress, as you note, with licensed games like GTA. We have seen good progress with games we developed like Squid Game Unleashed, so you will see more from us in both of those categories. As well as a whole new set of interactive experiences that we think that we are either in a unique or differential position to deliver.

So we are super excited to roll those out over the next year. And then we remain open to the core question. We remain open to evolving our monetization model, but we have got to get to a lot more scale before that becomes a really materially relevant question. So we are going to do that work first. It is probably worth restating, the TAM for this market is very, very large. We remain convicted about our strategic opportunity and excited to make more progress.

Spencer Wang: Thanks, Greg. We will take our last question. From Jessica Reif Ehrlich of Bank of America Securities. Given your healthy balance sheet and what appears to be a coming wave of M&A and media globally, are there certain types of assets that would strengthen your moat i.e., what is your view of owning successful IP or studio assets as they come to market?

Spencer Neumann: I will take that one, Spencer. Thanks, Jessica. Well, we agree. Continued consolidation of studio and network assets is likely. But at least with respect to consolidation, within legacy media, we do not think it materially changes the competitive landscape. As you also know, we have historically been more builders than buyers, and we continue to see big runway for growth without fundamentally changing that playbook. You heard a lot of that today. So we look at a lot of things. We apply a framework or lens to those opportunities when we look at, you know, is it a big opportunity? Does it strengthen our entertainment offering? Does it strengthen our capabilities? Does it accelerate our strategy?

And we look at all of that relative to the opportunity cost of distraction or other alternatives. We have been pretty clear in the past that we also have no interest in owning legacy media networks so that also kind of reduces the funnel for us. But you know, in general, we believe we can and will be choosy. We have got a great business. We are predominantly focused on growing that organically, investing aggressively in responsibly into that growth. And returning excess cash to shareholders through share repurchase and you will see us continue on that path.

Spencer Wang: Great. Thanks, Spence. And that will wrap up our Q2 earnings call. So we thank you all for taking the time to join us, and we look forward to seeing you all next quarter. Thank you.

Ted Sarandos: Conditioning. Yeah. And much like France and France, they have three hot

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DATE

Thursday, July 17, 2025 at 4:30 p.m. ET

CALL PARTICIPANTS

Chairman — Thomas Peterffy

Chief Executive Officer — Milan Galik

Chief Financial Officer — Paul Brody

Director of Investor Relations — Nancy Stuebe

Need a quote from one of our analysts? Email [email protected]

TAKEAWAYS

Commission Revenue: $516 million for the second quarter, up 27% year-over-year; would have been $15 million higher absent the SEC fee cut, representing an additional 3% increase for the quarter.

Overnight Trading Volumes: Grew over 170% compared to the second quarter of 2024, reflecting continued global demand for after-hours trading.

Net New Accounts: Added 250,000 net new accounts in Q2 2025, pushing year-to-date additions to over 528,000 as of Q2 2025, more than were added in all of 2023.

Client Credit Balances: Rose 34% year-over-year to $144 billion, despite higher client trading activity.

Client Equity: Increased 34% year-over-year to $604 billion; up 16% for the quarter, compared to an 11% rise in the S&P 500.

Pretax Income: Pretax income surpassed $1 billion for the third consecutive quarter, driven by record commissions, net interest, and total net revenue.

Pretax Profit Margin: Reached a record 75% pretax profit margin, with well-controlled expenses.

Net Interest Income: Reported at $860 million, a quarterly record and 9% higher year-over-year (GAAP); excluding a one-time $26 million tax recovery, $834 million.

Total Customer DARTs (Daily Average Revenue Trades): Increased 49% year-over-year to 3.6 million trades per day.

Headcount: Reached 3,087 as of June 30, 2025, up 5% over the prior year.

Stock Split and Dividend: Completed a four-for-one stock split on June 17 and raised the annual dividend from $1.00 to $1.28 per share (32¢ on a split-adjusted basis).

Interest Rate Sensitivity: A 25 basis point reduction in the benchmark Fed funds rate is estimated to reduce annual net interest income by $73 million, based on balances as of June 30, 2025; a 1% drop across all benchmarks would reduce it by $335 million.

Product and Platform Enhancements: Launched "Forecast X" for retail clients in Europe, US, Canada, and Hong Kong; added investment themes to facilitate idea generation; rolled out thousands of global software releases and product changes in the quarter.

Cryptocurrency Initiatives: Progressed new partnerships and added cryptocurrencies, stablecoin funding, asset transfer capability, and plans for staking and expanded European crypto access.

Introducing Broker Pipeline: Integrations and pipeline activity increased over the prior quarter, bolstered by returning competitor clients and product expansion.

SUMMARY

Interactive Brokers Group, Inc.(NASDAQ:IBKR) management emphasized rapid global customer expansion and a record pace of core financial metrics during a quarter marked by turbulent markets and strong investor engagement. The completion of a stock split and dividend increase signals capital return priorities, while enhancements to overnight trading, product offerings, and crypto functionality were positioned as key to driving future growth.

Paul Brody stated, "Net interest income also received a benefit from lower interest expense on customer cash balances, as rates have declined worldwide over the past year."

Milan Galik explained, "The pipeline remains very strong." referencing new and returning introducing broker relationships, with conversions rising sequentially.

Chairman Peterffy said, "I expect this environment to be very, very favorable to brokerage firms in general. And investment banks in general and specifically for Interactive Brokers."

During Q&A, it was noted that zero DTE options activity stayed steady versus the previous quarter, with particular strength in S&P 500 contracts and new engagement in "Forecast X" index products.

The company disclosed continued disappointment with the pace of crypto market share gains despite low costs, but outlined forthcoming features to potentially address barriers to asset transfers.

INDUSTRY GLOSSARY

DARTs (Daily Average Revenue Trades): A standard industry measure indicating the average number of revenue-generating trades per day executed for customers.

Zero DTE Options: Options contracts that expire on the same day they are traded, popular for intraday index and, potentially, single stock strategies.

ATS (Alternative Trading System): Electronic trading venues outside traditional exchanges, facilitating alternative execution and liquidity, especially in overnight trading.

Full Conference Call Transcript

What we experienced in the second quarter felt like a roller coaster in reverse. Instead of the market moving upward, getting to a high level, then dropping precipitously to a series of volatile ups and downs, we got the precipitous drop first, with the S&P reaching a low on April 8, then a spike of volatility followed by the market grinding upwards towards quarter end. The uncertainty and volatility during the quarter led to an accompanying spike in trade volumes. Also over the quarter, we saw the shrinking life of market dips. Investors, whether looking for securities with momentum behind them, or simply worried about missing out on a rally, bought the dip.

In equities, we saw customers actively using our platform tools to find companies to invest in that met their particular parameters. This included an expansion of the magnificent seven to include companies that may be beneficiaries of the world embrace of artificial intelligence. As AI is incorporated into more environments, by quarter end, the market had recovered to surpass its February peak, closing up over 10%. And since quarter end, it has continued upwards from there. Volatility and uncertainty often spark increased market activity. Combined with our strong net new account growth, this led to our client trading volumes expanding for stocks, options, and futures. Our commission revenue increased by 27% compared to last year.

Though this figure may slightly understate the actual growth. The SEC fee rate, which is included within our commission revenue, was reduced to zero halfway through the quarter. Without this fee, we would have generated an additional $15 million in commission revenue, which would have represented a 3% increase on our total of $516 million. We continue to see increasing activity in our overnight trading hours. We offer the most comprehensive overnight product set, with over 10,000 US stocks and ETFs, plus US equity index futures and options, and on the fixed income side, global corporate bonds, US treasuries, and European and UK government bonds.

Given our global client base, for some customers, overnight hours here are their daytime trading hours that they want to operate in, and, therefore, are particularly sought after.

Operator: Our overnight volumes grew over 170% from second quarter 2024 to second quarter 2025.

Nancy Stuebe: Given our rapid growth, continuous additions and enhancements to our platforms, and periodic volume surges, having a platform that is scalable is critical. We enhanced our ATS this quarter by improving its performance and ability to handle large spikes in volume by up to 20x on high volume days, ensuring we are better equipped for market surges and capable of delivering top-tier execution for our clients. We also made enhancements to our smart order router, which is designed to provide best execution, which includes price improvement and the possibility of receiving rebates. It is this price execution advantage we offer that keeps our sophisticated customer base engaged on our platform.

Operator: And that encourages new clients.

Nancy Stuebe: We saw strong account growth as we added more investors to our platform. This quarter, we added 250,000 net new accounts, bringing our year-to-date total to over 528,000, more than we added in all of 2023. Our application processing is highly automated and continually becoming even more so, allowing us to handle surges in new accounts efficiently without adding significantly to our headcount or cost base. New accounts meant more cash in those accounts, raising our client credit balances 34% to a record $144 billion, despite strength in trading volumes indicating our customers are using the cash they deposit to participate in the markets.

Our client equity rose 34% to $604 billion, up 16% for the quarter versus 11% for the S&P. More accounts and higher volumes translated into strong financial results. Quarterly commissions, net interest, total net revenue, and pretax income were all records, with our pretax income reaching over a billion dollars for the third consecutive quarter. Our expenses remained well controlled, and our pretax profit margin was an industry-leading 75%, a record for us. Finally, on the platform side, automating substantial parts of the brokerage business and using all tools and the judicious inclusion of artificial intelligence is the heart of what we do.

In the second quarter alone, we rolled out thousands of software releases and product configuration changes around the globe. This is a scale of automation and effort that we handle routinely, within highly regulated environments around the globe, to give our clients the global access and edge they demand. In terms of how the business looked on the client front, we continue to see growing numbers of investors worldwide wanting access to international, and particularly US markets. Regarding introducing brokers, our pipeline of potential continues to onboard iBrokers to the platform and add prospective ones to it at a steady pace with steady demand around the world. In terms of new efforts and product introductions, we had a busy quarter.

Forecast X is now live for retail clients across most of Europe, as it is for the US, Canada, and Hong Kong. We also expanded into forecast contracts on financial markets, including indices like the 500, as well as Forex and crypto. These have seen strong interest. Yesterday, we introduced investment themes, a powerful new discovery tool designed to help investors quickly turn market trends into actionable trading ideas. With investment themes, clients can begin with broad topics like generative AI or nuclear energy and instantly uncover companies tied to those themes. No ticker symbols or prior research needed.

Alternatively, they can start with the ticker symbol and view detailed company profiles, including insights into competitors, related industries, and global revenue sources, helping them assess regional risks and growth opportunities. We believe investment themes will streamline our clients' investment process, helping them uncover opportunities and make informed decisions faster than ever before. With respect to our stock, we completed our four-for-one stock split on June 17 and increased the dividend as announced in the previous quarter. As for capital allocation, while we have not stopped looking at potential acquisitions, we realize there are few opportunities at a price that makes sense for us.

We will keep looking, but as we have been noting, returning capital to shareholders via increases in the dividend makes sense for now.

Paul Brody: We will be adding our four millionth customer in the third quarter, just one year after adding our three millionth. While the market may move in any direction in the short run, we are looking to capture the long-term trend towards more global investing across multiple customer types and jurisdictions, giving investors the ability to invest in the companies they like, paying in the currencies they have, around the clock.

Nancy Stuebe: This trend and our ability to serve it with a much lower cost structure and a much broader product and tool set is what sets us apart and will continue to do so in the years ahead. With that, I will turn the call over to Paul Brody. Paul?

Paul Brody: Thank you, Nancy. Thanks, everyone, for joining the call. We'll review the second quarter results, and then, of course, we'll open it up for questions. Starting with our revenue items on Page three of the release, we are again pleased with our financial results this quarter as we again produced record net revenues and pretax income. Commissions rose to a record $516 million, 27% above last year's second quarter. We continue to see higher trading volumes from our growing base of active customers, with options and futures both setting new quarterly volume records.

Net interest income also reached a quarterly record of $860 million, despite lower benchmark rates in some of the major currencies and a risk-off posture adopted by investors responding to tariff-driven market uncertainty at the beginning of the quarter. We recognized a one-time credit of $26 million related to recovery of taxes withheld at source, which is reflected in segregated cash interest. Without this, our net interest income still reached a record $834 million. Higher segregated cash balances and strong securities lending contributed to these results. Net interest income also received a benefit from lower interest expense on customer cash balances, as rates have declined worldwide over the past year.

Other fees and services generated $62 million, down 9% from the prior year, driven by more cautious risk-taking by clients, leading to lower risk exposure fees, partially offset by positive contributions from higher market data and FDIC sweep fees. Other income includes gains and losses on our investments, our currency diversification strategy, and principal transactions. Note that many of these non-core items are excluded in our adjusted earnings. Our other income was a $42 million gain, both as and as adjusted. Turning to expenses, execution, clearing, and distribution costs were $116 million in the quarter, up just 1% over the year-ago quarter despite significantly higher volumes in options and futures, which carry higher fees.

Midway through the quarter, the SEC fee rate was cut from $27.80 per million to zero. Had it been in effect the entire quarter, commission revenue and execution and clearing expense would both have been an estimated $15 million higher. The SEC fee is a pass-through to customers, so it does not impact our profitability. As a percent of commission revenues, execution and clearing costs were 18% in the second quarter, for a gross transactional profit margin of 82%. We calculate this by excluding from execution, clearing, and distribution $22 million of non-transaction-based costs, predominantly market data fees, which do not have a direct commission revenue component.

Compensation and benefits expense was $163 million for the quarter, for a ratio of compensation expense to adjusted net revenues of 11%, unchanged from last year's quarter. IBKR stock incentive plan bonuses vest in the second quarter, which leads to higher taxes paid for FICA and other social insurance than in other quarters. The total of these extra taxes was $5 million over the year-ago quarter. As always, we remain focused on expense discipline, as reflected in our moderate staff increase of 5% over the prior year. Our headcount at June 30 was 3,087. G&A expenses were $61 million, up from the year-ago quarter, mainly on higher advertising expenses.

Our pretax margin was 75% for the quarter, both as reported and as adjusted. Income taxes of $98 million reflect the sum of the public company's $50 million and the operating companies' $48 million. The public company's effective tax rate was 18.1%, within its usual range. Moving to our balance sheet on page five of the release, our total assets ended the quarter 33% higher than in the prior year quarter-end, at $181 billion, with growth driven by higher segregated cash balances and higher margin lending. New account growth helped drive our record customer credit balances. We continue to believe that our strong financial standing and competitive interest rates provide customers with an attractive place to hold their idle cash.

We have no long-term debt. Profit growth drove our firm equity up 22% to $18.5 billion. We maintain a balance sheet geared towards supporting growth in our existing businesses and helping us win new business by demonstrating our strength to prospective clients and partners, also considering overall capital allocation. The consistent strength of our business and our healthy balance sheet supported our raising the dividend in the second quarter from $1 per year to $1.28, or 32¢ on a split-adjusted basis. In our operating data on pages six and seven, our customer trading volumes tracked industry growth over the prior year quarter in our three major product classes.

Options and futures contract volumes rose 24% and 18%, respectively, and stock share volumes rose 31%. On page seven, you can see that total customer DARTs were 3.6 million trades per day, up 49% from the prior year and strong in all product classes. Commission per cleared commissionable order of $2.05 was down from last year, primarily due to the elimination of the SEC fee mid-quarter and the performance of our smart order router leading to the capture of higher exchange rebates, which as pass-throughs, serve to lower both our commission revenues and our execution and clearing costs.

Paul Brody: Page eight shows our net interest margin or NIM numbers. Total GAAP net interest income was $860 million for the quarter, up 9% on the year-ago quarter. And excluding the $26 million recovery of taxes withheld at source, it was $834 million. This quarter's NIM is also adjusted by removing this one-time credit of $26 million from segregated cash interest. The adjusted NIM net interest income was $861 million. We also include, for NIM purposes, certain income that is more appropriately considered interest, but that for GAAP purposes is classified as other fees and services, or as other income.

Net interest income reflects strength in segregated cash interest and securities lending, as well as a decrease in interest expense driven by lower benchmark interest rates on customer cash balances. A few central banks, the UK, Australia, and Europe, reduced rates again this quarter, while others, including the US, Canada, Hong Kong, and Switzerland, held steady. Year on year, the average US Fed funds rate fell 100 basis points or 19%. Despite this decline, our segregated cash interest income was up 2% on higher balances, while margin loan interest decreased 6% on lower rates, but was bolstered by higher lending balances. The average duration of our investment portfolio remained at less than thirty days.

The US dollar yield curve remains inverted from the short to medium term, we continue to maximize what we earn by focusing on short-term yields, rather than accept the lower yields and higher duration risk of longer maturities, particularly in an unpredictable economic environment. The strategy also allows us to maintain a relatively tight maturity match between our assets and liabilities. Securities lending net interest was stronger this quarter, after a long period in the industry with few of the hard-to-borrow names that drive revenue, there was an uptick in hard-to-borrows that we were able to capitalize on. What we have mentioned in the past still holds true.

Some of the typical drivers of securities lending, including IPOs and merger and acquisition activity, are somewhat more active than in 2024 but without a substantial impact on the securities lending market. Nevertheless, we have been consistently raising the total notional dollar value of securities we lend. As benchmark interest rates rose from near zero in 2022, more of what we earned from securities lending became classified as interest on segregated cash. We estimate that if the additional interest earned and paid on cash collateral were included under securities borrowed and loaned, then securities lending net revenue would have been $251 million for the quarter, versus $194 million in the prior year quarter, a 29% increase.

Interest on customer credit balances, the interest we pay to our customers on the cash in their accounts, declined on lower benchmark rates, even though we built up higher client cash balances from new account growth and from risk-reducing sales resulting in cash balances. As we have noted in the past, the high interest rates we pay on customer cash, currently 3.83% on qualified US dollar balances, is a significant attraction to new customers. Fully rate-sensitive customer balances ended the current quarter at $22.8 billion versus $18.6 billion in the year-ago quarter.

Now for our estimates of the impact of changes in rates, given market expectations of rate cuts sometime in 2025, we estimate the effect of a 25 basis point decrease in the benchmark Fed funds rate to be a $73 million reduction in annual net interest income. Note that our starting point for this estimate is June 30 with the Fed funds effective rate at 4.33%, and balances as of that date. Any growth in our balance sheet and interest-earning assets would reduce this impact. About 27% of our customer cash balances is not in US dollars, so estimates of the US rate change exclude those currencies.

We estimate the effect of decreases in all the relevant non-US benchmark rates would reduce annual net interest income by $8 million for a 25 basis point decrease in those benchmarks. At a high level, a full 1% decrease in all benchmark rates would decrease our annual net interest income by $335 million. This takes into account rate-sensitive customer balances and firm equity. In the second quarter of 2024, we estimated that a 1% decrease in all benchmark rates would decrease our annual net interest income by $307 million. In the past year, the US Fed funds benchmark did in fact fall 1%, and other countries' rates for the most part fell about the same.

However, this quarter's net interest income represented an annualized increase of $225 million driven by higher balances. In conclusion, we posted another financially strong quarter in net revenues and pretax margin, reflecting our continued ability to grow our customer base and deliver on our core value proposition to customers while scaling the business. Our business strategy continues to be effective, automating as much of the brokerage business as possible, continuously improving and expanding what we offer, while minimizing what we charge.

Paul Brody: With that, we will now open up the line for your questions.

Operator: Thank you. As a reminder, if you would like to ask a question, please press 11 on your telephone. You will then hear an automated message advising your hand is raised. We also ask that you please wait for your name and company to be announced before proceeding with your question. One moment while we compile the Q&A roster. And our first question today will be coming from the line of Craig Siegenthaler of Bank of America. Your line is open.

Craig Siegenthaler: Hey. Good evening, everyone. Hope you are all doing well. So, I wanted to follow up with a comment that Thomas made at a conference in May. I actually, I think it was Thomas. The commentary was regarding decelerating account growth. However, account growth in the quarter was still really strong, 32% clip, in line with last quarter. So I was just hoping you could help clarify those comments you made. And should we expect somewhat slower growth in the summer months into 4Q as we have seen in previous years?

Thomas Peterffy: So I would like I always like to overdeliver. That is why I projected lower account growth than I really believed would take place, and I continue to do that for the future.

Craig Siegenthaler: Great. Well, Thomas, we like it when you overdeliver too. Just for my follow-up, the Genius app, I think, just passed in the house several minutes ago, so that is pretty much done. The Clarity Act is making its way through Congress of two digital asset initiatives. Thomas, I am wondering, will broader demand for digital assets could this cause you to rethink your current digital asset model, which relies on a Paxos partnership? But also does not allow your clients to use nonfacility wallets with their IBKR accounts. I know I think you have felt pretty strong in the past about holding crypto on the balance sheet, which is one issue. So I will take this one.

This is Milan. Thanks for the question. You might have seen in the news that Interactive Brokers has an investment in a cryptocurrency exchange called Zero Hash.

Milan Galik: The news was published this week or a week ago, that there is a continued capital raise down by Zero. Actually, we obviously we participated in it in order to keep our percentage ownership steady. We have a good partnership with Zero Hash. We work together on a number of items that we are going to be delivering in the next quarters. We have already added several cryptocurrencies in the past quarter, and there are numerous initiatives that we are working on. We are going to be making it possible for the clients to fund their accounts with stablecoins.

We are working on the asset transfer capability in the crypto space, so we will be able to take in crypto asset transfers. And then later during the year, we will be adding staking. Obviously, at the same time, we are working on expanding our ability to offer cryptocurrency trading geographically. At the moment, we are focusing on Europe, and we are hopeful that we will be able to add the capability to our European customers in the coming quarters.

Craig Siegenthaler: Great, Ed. Sounds exciting. Good to hear, Milan. And, guys, thanks for taking my questions.

Paul Brody: Thank you.

Operator: Thank you. Our next question will be coming from the line of James Yaro of Goldman Sachs. Your line is open.

James Yaro: Thanks a lot for taking the questions. I just wanted to start with any perspectives that you might have on the tokenized equity products that we are seeing across a variety of brokerages and crypto firms for European customers on US stocks. Maybe you could just talk about the advantages and disadvantages of this product in your view. Guess, you know, is it something that you would consider offering? I am not sure exactly why, but if so, that would be helpful. And then, I guess, your perspective on whether this product represents any sort of additional competition in Europe relative to your business.

Milan Galik: So I will focus on two different stock tokens that are currently available. One was made available to the European clients of Robinhood. I think they made it available in July. And I think it probably best if I contrast our offering to the offering that they just launched. So what they put online in the form of tokens on US stocks is a fundamentally worse product than what our European clients had access to for years. Our clients have access to more than 10,000 real US shares and ETFs, twenty-four hours a day, five days a week.

In contrast, the stock tokens that Robinhood made available to the European clients are a derivative on 200 or so symbols, which means that the client does not have ownership interest in the stock. Instead, he or she has an OTC contract against Robinhood. The customer cannot transfer the position to another broker if he wanted to. He would have to sell the position and transfer the cash.

As to the cost, if you look at Robinhood's own key investor information document, which is a document every broker has to offer to their clients about every financial instrument they make available for trading, a hypothetical $10,000 investment cost declined $10 while our client pays a fraction of that, a dollar or so. So that is the Robinhood offering. There is also Kraken XShares that are available. Kraken, as you know, is a significant cryptocurrency exchange. They made 60 or so tokens available, which are similarly secured notes backed by the underlying in a Jersey entity that they have.

The creation and redemption keys for these XShares are half a percent each, and there is a management fee of a quarter of a percent per year. Now, unlike in the case of Robinhood, Kraken lets you withdraw the tokens to your own self-custody wallets and then trade the token on the DeFi network. But that obviously leads to some problems. There was an article a couple of days ago in the Wall Street Journal which talked about the very significant price differences between the tokens and the underlying shares.

And on Sundays, I think specifically on July 5, Amazon was reported to show the price that was four times as large as the stock price from the previous closing price. And the same similarly, an Amazon X, which is the token issued by Kraken, suffered even while the dislocation on Jupiter. There was a lack of liquidity available for the client who submitted an order for $500. And, briefly, the Amazon's token was trading at the price a 100 times larger than the closing price on the previous day. So all in all, stock tokens at this time seem like a great opportunity to do much worse than buying an ordinary share.

James Yaro: Okay. Thank you, Milan. That is really helpful color. Could you just talk a little bit about the execution cost differences that you are seeing on your platform in overnight versus during market hours? I know that is a tough one because you know, I am generalizing across a variety of stocks today. And then maybe you could just talk about your expectations for how execution costs, you know, outside of market hours could evolve over time.

Milan Galik: There is obviously a difference between the stocks and options and futures on the other hand, between the overnight hours and the regular trading hours. So if you look at the exchange-traded products like options and futures, the execution costs are the same whether you trade them overnight or during the day. The execution cost for stocks is very different because the stocks are currently not offered outside of extended trading hours. So every platform that offers them, and Interactive Brokers has a substantial offering in this space, has a different price than what one would pay to an exchange. Interactive Brokers has its own ATS, EOS ATS, where overnight stocks are trading.

And it is also connected to a blue ocean that is another significant ATS in the space. So the combination with these two venues allows us to offer thousands and thousands of stocks and ETFs during the overnight trading with a lot of liquidity at very low cost.

James Yaro: Okay. Thanks a lot.

Milan Galik: Thank you. One moment. Our next question will be coming from the line of Benjamin Budish of Barclays. Your line is open.

Benjamin Budish: Hi. Good evening, and thanks for taking the question. Maybe first, just a high-level question. You have talked a lot about the pickup in international growth quite a bit over the last many years. I am just curious in terms of overnight trading specifically, it sounds like that is growing much faster than international growth more broadly. Curious, is that sort of a behavior change? Is that sort of more stocks and options being made available? It sounds like your offering has been consistent for some time. But just curious if you could unpack what you are seeing there.

I know I think Thomas mentioned also at a conference earlier that you have an expectation that is going to be quite meaningful as a percentage of total volumes over the next ten to twenty years. So curious for your commentary on sort of the recent drivers of that outsized growth.

Milan Galik: Well, for us, especially the overnight US stock offering is important because we have significant clientele in Europe and Asia, and our overnight hours correspond to their day during the day hours. So by us offering the US stock trading overnight, we are satisfying the appetite of the overseas clients in these geographies so that they can trade and access US markets during the day. Given that we have significant clientele overseas, that part of an offering for us is very important. And more and more of our introducing brokers are realizing that and are turning on this offering for their clients.

As far as the importance of the overnight trading in the long general, I think we will see the same progression as we have seen over the past decade or so. You I am sure you remember that the regular trading hours for NYSE stocks or even Nasdaq stocks, those markets open at 09:30 and close at 4 PM. And then the so-called extended hours have been added. Those markets now open at 4 AM and close at 8 PM. And the amount of volume we see during those trading sessions is growing, as well as the volume we show in the overnight session.

So over time, the differences between the trading hours will not disappear, but will diminish for sure. There will still be some special time periods like on open trading, at 09:30 and on closed trading at 4 PM, because a lot of ETFs and mutual funds mark their NAV using those prices. But we will see more and more overnight trading in the future.

Benjamin Budish: Very helpful. Maybe one more sort of in the weeds question perhaps for Paul. Just in terms of your interest rate sensitivity, it looks like this quarter versus last quarter, maybe a slightly higher percentage of cash is not in US dollars, but the sensitivity to a 25 basis point change in rate seems like it is a much lower dollar number. Just curious, is it like a lower absolute starting level of rates? Or the driver of that sort of lower sensitivity?

Paul Brody: Right. That is a good question, Ben. So, primarily, there are some once again, low rate low interest rate currencies. There are several of them out there that are either nearing or just breached the zero line back into negative territory. So that leads to nonlinearity of the up and down scenarios. Because when you cross over the zero point, you know, we are either passing through or we are not passing through the full spread gets compressed, and then it returns. So, yes, that overall number was somewhat lower than in the past because those two rates are coming down.

Benjamin Budish: Okay. Very helpful. Thank you so much.

Operator: Thank you. And the next question will be coming from the line of Dan Fannon of Jefferies. Your line is open.

Dan Fannon: Great. Thank you. I was hoping to expand upon your comments around sec lending clearly improved this quarter. You talked about an increase in some hard-to-borrow securities. Curious about how diverse that was. And as we think about an environment where IPOs are picking up, is it reasonable to assume that should be on an upward trajectory given the kind of current trends?

Paul Brody: Well, if, so in terms of how diverse it was, not especially. There are some several high flyers in there. But so our results are coming from two places. Right? We generally, with more accounts than more equity and more participation, we see a rise in our general level of both customers who are shorting stocks and they are recovering. Or customers with margin stocks that we are able to lend out or fully paid stocks in our fully paid program to lend out and share the benefits with the customer. And then, of course, the specials come in on top of that.

And as I said, you know, a few high flyers can you know, make a substantial difference in the overall p and l. As to what is going to happen in the future, you tell me. It is a general you know, markets for IPOs and m and a activity and so forth leads to you know, more of this the and, you know, and these hot stocks from an interest from a stock loan rate standpoint come from a greater proportion of shorts to available stock to cover those shorts. So the you know, corporate deals and so forth tend to lead to those kind of conditions.

If those pick up, you know, then the likelihood is so will some of the hard-to-borrow stocks.

Dan Fannon: Great. That is helpful. And then I was hoping you could expand upon the introducing broker comments you know, thinking about the size of the partners that are coming on and also the backlog you mentioned also I think was reasonably good. Just curious how you would characterize that versus say maybe a year ago and how those conversations have progressed.

Milan Galik: If we look at the number of integrations that we heard in the second quarter, they increased compared to the Q1 of this year. The pipeline remains very strong. The pipeline includes new entrants to the market, existing firms that broaden their offering in terms of even products or countries or asset classes. One interesting note I would make is that some firms that we spoke to in the past who at the time decided not to go with Interactive Brokers, but chose a competitor or chose to do an in-house build, are coming back around to us and reengaging. They do realize that our offering is superior. Our cost is superior as well, so they come to us.

So I am very happy with what I see in the pipeline both in terms of conversion as well as what is in the backlog.

Dan Fannon: Great. Thank you.

Operator: Thank you. As a reminder, if you would like to ask a question, please press 11 on your telephone. Our next question will be coming from the line of Kyle Voigt of KKBW. Your line is open.

Kyle Voigt: Maybe just a question on client credit balances, which grew, I think, over 6% in the month of June, which is the highest since March. You just speak about the main drivers of what you saw in June specifically? Was it more new cash being deposited into accounts? Was it rebalancing from existing clients? Is there something else driving that significant cash increase that we saw in June?

Paul Brody: I think it was a combination of those things. You know, new cash coming in was as strong as it has been in the last several months. It does have its ups and downs. April was particularly strong, both in taking in new cash and in that risk-off environment of April when a lot of stocks were being sold. That generates cash balances. And, you know, because clients feel comfortable leaving those cash balances with us, they simply go up and reinvest them. I do not think there was anything else specific to June that was notable.

Kyle Voigt: Okay. Just for a follow-up, we have seen a recent reacceleration in zero DTE trading percentages in the broader options market. Was curious to hear about whether you have been seeing that in your own customer base in recent months? And then also curious to hear about your view of rolling out zero DTE on single stocks. What else needs to be done from the brokerage industry standpoint? In terms of functionality to be able to offer this? And how close are we, in terms of being able to see that product hit the market, do you think?

Milan Galik: I did not pay a lot of attention to how the zero DTE percentages are changing. They are roughly the same as they were in the previous quarter. I would point out one interesting thing, and that is the zero DTE options trading is doing very well, and those options are very busy, especially the ones on the S&P 500 index. If you look at the forecast x forecast x just listed a few weeks ago, contracts, yes and no contracts, that are in some sense similar to the zero DTE options. And we listed those on a number of different indexes. And we see significant engagement from our clients. Happy with that.

As far as the stocks are concerned, that is a little bit more complicated issue. As I mentioned, the popular zero DTE options are the index options. They settle in cash. The stock options they settle into physical. So you get a stock delivered if you exercise your long call. Now you can submit your exercise request after the stock market is closed, after the main session closes at 04:00. You have, I think, half an hour or sixty minutes to submit your exercise instructions. So there will be some amount of extra volatility in the stock on the days when they publish their earnings or when there is a significant news issue.

So you may see some unexpected exercise and assignment activity on those days. And that is an issue that the industry recognizes. We ourselves wrote a comment letter about that. So one way to solve that would be to list zero DTE stock options that settle in cash, but that would come with its own set of problems. So we will see what the ultimate decision is going to be, but there are some issues that the cash-settled index options did not have.

Kyle Voigt: Great. Thank you.

Milan Galik: Thank you.

Operator: And our next question will be coming from the line of Patrick Moley of Piper Sandler. Your line is open.

Patrick Moley: Yeah. Good evening. Thanks for taking the question. Thomas, I had one for you. I caught your interview on CNBC before the call here. You sounded very bullish. I think you said that you know, you do not really see much that could derail this rally here. And that you could see, you know, this rally continue for the next two or three years. So with that in mind, I am just hoping you could elaborate on, you know, what that could mean for overall retail trading activity if we do see markets continue to grind higher?

And then in terms of IBKR's platform specifically, what are some of the read-throughs there if that is the environment that we are entering into? Thanks.

Thomas Peterffy: Well, as I have said, I expect this environment to be very, very favorable to brokerage firms in general. And investment banks in general and specifically for Interactive Brokers. This is a great time for us. And it is a great time for your firm too. All of your firms. And maybe just a follow-up on crypto. Milan, I think last quarter, said that you were somewhat surprised at just how much how little market share you had taken since beefing out the crypto offering. Just given how much lower cost the offering was. So just curious if that is still what you have seen. Have you seen any market share gains there?

And then this push to kind of build out the offering even more is that a factor of you just recognizing that you think you need to have a more robust offering in order to attract more retail customers to the platform. Any color there on that strategy? Would be great. Thanks.

Milan Galik: So my disappointment in terms of how much market share we are getting in the crypto space remains. I am still disappointed given how much less expensive we make it for our clients to buy crypto. But I do expect, and I do hope for some asset transfers coming our way, which right now, it is impossible if you already have holdings in cryptocurrencies and you want to switch brokers, you would have to sell those currencies, turn them into cash, and that is what you would have to deposit with us. So supporting asset transfers should open the doors to some new clients to recognize that our prices are lower, they should bring our assets to our platform.

That is my hope. As to why is it that we are paying attention to crypto, we have been paying attention to it for a while. But the environment has changed with the new administration, which is significantly friendlier to the crypto space than the previous one, we obviously have to react to that. Our investors as well as clients, financial advisers, individual clients do expect to have means to enter the space through us. So we need to do we need to add it to our offering.

Patrick Moley: Okay. Great. That is it for me.

Paul Brody: Thank you.

Operator: This does conclude today's Q&A session. I would like to turn the call back over to Nancy for closing remarks. Please go ahead.

Nancy Stuebe: Thank you, everyone, for participating today. As a reminder, this call will be available for replay on our website, and we will also be posting a clean version of our transcript on the site tomorrow. Thank you again, and we will talk to you next quarter end.

Operator: This concludes today's program. Thank you all for joining. You may now disconnect.

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DATE

• Thursday, July 17, 2025. at 10 a.m. EDT

CALL PARTICIPANTS

• Chief Executive Officer — Thomas Travis
• Chief Credit Officer — Jason Estes
• Chief Financial Officer — Kelly Harris

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TAKEAWAYS

• Net Interest Margin (NIM): Remained at the higher end of the historical range, despite mild anticipated future degradation as stated by Thomas Travis.
• Loan Growth: The deal pipeline "looks solid right now," according to Travis; Q2 originations surpassed Q1 and growth momentum is expected to continue in Q3 2025, pending unpredictable paydowns.
• Core Yield on New Loans: Recent portfolio additions are yielding slightly below the 7.6% core yield reported for Q2 2025, as noted by Jason Estes.
• Expense Outlook: Projected Q3 total expenses of $10 million, split between $1 million in oil and gas and $9 million in other expenses, per Kelly Harris.
• Oil and Gas Asset Recovery: Internal Q3 projection of $2 million in fees, including oil and gas-related fees, expected to remain within the 36%-38% core range, without material disruption from current expense or revenue trends. 75% of cash outlay has been recovered, with full recovery expected by mid-2025.
• M&A Strategy: Company continues to engage in discussions, with a pronounced focus on "MOE" deals; prior signed LOIs did not proceed due to discipline on terms.
• Credit Quality: Continued improvement in "a little cleaner, you know, a little smaller MPA number" has been observed over the last several quarters, with very clean past dues and adherence to underwriting fundamentals as discussed by Jason Estes.
• Portfolio Mix Trends: Shift within energy loans from service deals to production loans, with energy exposure now almost half of the level it was seven or eight years ago; hospitality and C&I portfolios noted for high churn and active customer base management.
• Deposit Costs: Deposits remain relatively stable, though management anticipates slight increases to support growth in Q3 2025, offset by focusing on attracting zero-cost transaction accounts.
• Interest Rate Sensitivity: Management expects loan and deposit betas to move "one for one" on the first few rate cuts, with loan floors helping offset potential margin compression.

SUMMARY

Bank7 (NASDAQ:BSVN) management signaled confidence in sustaining above-average NIM and operational efficiency while preparing for minor margin moderation if deposit costs rise. Full cash recovery from oil and gas assets remains on track, and the lending pipeline signals sustained growth for Q2 2025, barring unpredictable paydowns. The company maintains active M&A dialogue but has held firm on deal discipline, focusing on fit and value creation.

• M&A conversations remain frequent, with market participants' improved Accumulated Other Comprehensive Income (AOCI) expected to loosen deal activity in key dynamic geographies.
• Liquidity and portfolio granularity are supported by churn and asset turnover in the energy, hospitality, and C&I sectors, facilitating customer base renewal and segment growth.
• Jason Estes stated, "our past dues are very clean," reflecting management's continued focus on credit quality and risk controls despite broader economic uncertainties.
• Talent acquisition may occur selectively in North Texas, but management emphasized culture and credit discipline over rapid expansion in response to recent regional M&A trends.

INDUSTRY GLOSSARY

• MOE (Merger of Equals): A business combination in which two companies of similar size consolidate, typically with shared governance and integration of operations.
• AOCI (Accumulated Other Comprehensive Income): A component of equity reflecting unrealized gains and losses not included in net income, affecting tangible capital and M&A dynamics in banking.
• MPA (Mentioned Pass Assets): Bank-specific term used internally to denote credits closely monitored because of risk factors, prior to official regulatory classification as criticized or classified.
• Loan Beta / Deposit Beta: The responsiveness of loan or deposit yields to changes in benchmark interest rates, indicating asset and liability sensitivity in rate cycles.

Full Conference Call Transcript

Thomas Travis: Thank you. Welcome to the call. We obviously had a great quarter as you can see in the results. Before we get to that, a couple of weeks ago, today, there was a really bad flood in my hometown of Kerrville, Texas. And so anyone on the call that has money left in their budgets for relief fund, there's a great organization, their Kerr County Relief Fund. They really need support. So consider that when you're looking at your expenditures in that area. I'm sure that the people down there will put it to good use. Back to the call, it was one of our best quarters ever.

And we always have to recognize that those results happen because of our talented group of bankers. They drove strong loan and deposit growth. And we thank them very, very much. As you can see, we maintained our NIM on the higher end of our historical range, and we also continue to benefit from that low efficiency ratio. When you put those factors together, with the solid loan growth, we experienced nice strong core earnings. We're very comfortable with our asset quality and always give a shout out to Jason Estes and his team. They've done an excellent job of maintaining a high-quality credit book. While at the same time growing that portfolio. So we're very proud of our results.

We're pleased to continue to provide shareholders with excellent top-tier results. And without further ado, I guess we're standing by for any questions. You may have. Thank you.

Operator: We will now begin the question and answer session. To ask a question, you may press star then 1 on your touch-tone phone. If you are using a speakerphone, please pick up your handset before pressing any keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then 2. At this time, we will pause for just a moment to assemble our roster. And your first question today will come from Woody Lay with KBW. Please go ahead.

Woody Lay: Hey, good morning, guys.

Thomas Travis: Morning, Woody.

Woody Lay: Wanted to start on loan growth. Obviously, a really strong quarter on the growth front, and it's been a really successful first half of the year when many others in the industry have kind of lagged in growth. You know, I know your growth can be a little bit lumpy quarter to quarter, but how are you thinking about the growth momentum in the back half of the year?

Thomas Travis: Always depends on the lumpy paydowns. I think our deal pipeline, it looks solid right now. You know, I think we've signaled that the last couple quarters in a row that you know, things in Oklahoma, things in Texas, economically are they're just in a really good spot. We're thankful to do business where we do business. And so you know, going into Q3 again, pipeline looks strong. But you just never know on the chunky pay downs you know, what's really coming. I think it was fourth quarter of last year.

You know, we just had a big wave of companies selling, people selling assets, various things that lead to a little bit of unpredictability there in the payoff side. But from the origination side, Q1 was strong. Q2 was stronger slightly. You know? And I think Q3 is lining up to be similar, but we'll see.

Woody Lay: And then how do you think about the NIM outlook given the growth? Deposit costs are relatively stable in the quarter. Just given the expectation for strong growth, could we see deposit costs start to move up to fund the growth? And how does that impact the NIM?

Thomas Travis: Yeah. I think that's a fair way to state what we see real-time is that to keep up on the deposit side, it does cost a little bit more money. We're always focused on, you know, offsetting some of that higher-priced money with the transaction accounts, you know, the zero-cost accounts. And so bankers have done a really nice job of dragging that business in. And, you know, hopefully, we can continue to do so, but I think we've been talking for a few quarters in a row about, yeah, we expect a slight degradation, but we do expect to remain in our historical ranges. And that holds true today.

Woody Lay: Got it. And then last for me, you know, we've seen deal activity pick up in your backyard. Just any update on the M&A front? For you all?

Thomas Travis: Woody, we've come close a couple of times over the last twelve months. We've actually had a couple of signed LOIs and then you know, we're very disciplined in our approach. And for various reasons, those didn't happen. We continue to meet with various potential partners. We're very focused on we'd love to do an MOE, but we just continue to have a lot of meetings and do a lot of evaluations. And yeah, I think the tendency for people now is they improved their AOCIs somewhat which is gonna loosen up the market we're gonna just continue to evaluate opportunities in what we consider to be dynamic markets and common cultures.

And it's just hard to predict when one of those might break loose.

Woody Lay: Alright. That's all for me. Thanks for taking my questions.

Thomas Travis: Thank you.

Operator: And your next question today will come from Nathan Race with Piper Sandler. Please go ahead.

Nathan Race: Hey, guys. Good morning. Thanks for taking the questions.

Thomas Travis: Hi, Nathan. Good morning.

Nathan Race: Just following up on the margin commentary. Curious maybe, Jason, if you can kind of touch on some of the competitive pricing dynamics you're seeing and just kind of where you're seeing new loans come on the portfolio relative to the 7.6% kinda core yield the second quarter?

Jason Estes: Yeah. I think it would be slightly lower than the 7.6, but you know, still I think, you know, if you go back a year ago, or two years ago, there were fewer banks really aggressively looking for loans, after March 23. And I would consider today's environment very historically normal from a pricing standpoint, you know, within the competitive set, you know, here in Texas and Oklahoma, it just seems pretty benign. You know, and that's nice to see some return to normalcy. So, yeah, there's always pricing pressure, Nate. But right now, feels like people have kinda settled in on the deposit and the loan side. Which is part of what led to the results.

Nathan Race: Got it. That's helpful. Then just kinda thinking about the appetite to maybe add some producer going forward. There's obviously been some M&A announcements within, you know, two of your key MSAs recently. So just curious kinda what the appetite is, maybe add some talent maybe relative to the existing capacity across the teams.

Thomas Travis: Nate, I met with a person in Dallas on Monday, and we you know, we've looked at a few lift-out possibilities and those are delicate things as you can imagine. And you know, I think the dynamic when you look at a lift-out or people coming out of those situations is always the credit comes first, and then the deposits to help fund that growth seems to be a slower dynamic. And so we evaluate those and you may see us do something in the North Texas region but I don't know that it's going to be that anything that's materially dynamic at first. You know, we're very, very careful and culture is very, very important to us.

And so we'll see how that goes in the next couple of months.

Nathan Race: Okay. Great. Maybe, one last one for me for Kelly. You know, I strip out some of the oil and gas impacts within the expenses, I think you run around $8,800,000 coming out of the quarter. So just curious how you're thinking about kind of expense run rate over the back half of this year.

Kelly Harris: Yeah, Nate. I believe Q2 is probably a solid guide. Internally, we are showing a little bit of expense creep. So you could increase that slightly, but it's probably a good start. I think, from a Q3 perspective. Fees $2,000,000 split evenly with oil and gas and core. And then on the expense side, we're using $10,000,000 with a million in oil and gas and $9,000,000 on the expenses.

Thomas Travis: Okay. I don't think it's had a real meaningful impact to our efficiency ratio. Correct. It's you know, we're still in that core 36 or 37, 38% core.

Nathan Race: Right.

Thomas Travis: And so I guess I would argue it's probably splitting hairs at this point, Nate.

Nathan Race: Right. And then can you just remind us what the remaining life is on the oil and gas assets? Should that largely run off by the end of or should the recovery much conclude by the end of next year? Before then?

Thomas Travis: I think I when I read your piece, you said that we had recovered 75% of our cash outlay. Is that what you said in your piece this morning, Nate?

Nathan Race: Correct. Versus, I think, 68% at the end of last quarter.

Thomas Travis: Right. And I think that's pretty accurate. Yeah. We should recover fully cash on cash, middle of next year, I think, is what we're projecting. So three to four more quarters. We've achieved our goal there, Nate. It's working really, really well. And we've achieved our goal on that. And so it's going to just continue to perform that way and become really not material anymore. Then that's a good thing.

Nathan Race: Right. Got it. I appreciate all the color. Congrats on a great quarter, guys.

Thomas Travis: Thank you.

Operator: Thank you. And your next question today will come from Matt Olney with Stephens. Please go ahead.

Matt Olney: Yeah. Thanks for taking the question, guys. Just a few follow-ups here. Kelly, I think I missed your commentary you just made about the fees for the third quarter with and without the oil and gas revenue. Can you just go over that again?

Kelly Harris: Yeah. We're internally projecting $2,000,000 in fees not split evenly between the oil and gas and the core.

Matt Olney: Got it. Okay. Helpful. Thank you, Kelly. And then going back to the loan growth discussion, it looks like a portion of that growth was within energy lending. Just looking for any more color on kind of the opportunities you see on that side. And then just overall growth that you're seeing in 2Q in the pipeline, Just any color on the overall granularity of these loans? I think some of these loans can be smaller singles and doubles, but I think also you've open to some larger chunkier loans. Just any more color on the quick granularity what you're seeing these days?

Thomas Travis: Sure. Matt, it's always a mix with us, you know, and I would say going back to the first of this year, know, I think if you look our production loans, you know, that's really where we're up. You know, $3,035,000,000. In that energy bucket. And what's happened in our energy portfolio really since we went public is, you know, just this shift away from service. The service deals we're in are big fund deals typically. And it shifted a lot more to production. You know, just think it hedged oil and gas production. And so you know, that's kind of a story for this first half of the year as well.

And then, you know, from a C and I standpoint, there's some strength there this year that's getting a little bit clouded by some exits. Within that portfolio. And so we've really had a nice origination year in the C and I portfolio. And then you know, owner-occupied real estate, we've had a good year there. We're up you know, about $19,000,000 net. And then a little bit of growth in our dollars outstanding in the hospitality portfolio. But, again, that's another one like energy and like C and I, those and the hospitality between those three portfolios, there's just a lot of churn.

And so, lots of exits, lots of asset sales, and then you know, we're constantly trying to reload that customer base. And so, you know, we're benefiting from some of these exits on the deposit side, and so we like to stay real active in those three books. Because it's really helped us grow the company here over the last ten years. I would add to Jason's comments that if you look at a long-term horizon, going back to for the last seven or eight years, the energy exposure today is almost half what it was seven or eight years ago.

And because of the growth in the other segments, and the other the hospitality segment is down exposure-wise from a percentage basis. And so we haven't expanded those verticals. And in fact, in the energy, it's come down quite a bit. And I really as Jason said, it doesn't have anything to do with us exiting a segment. It has everything to do with the ability to grow the other parts of the portfolio and specifically in the Dallas-Fort Worth region. So I think it's important to remember the long-term dynamics that are in play there.

Matt Olney: Okay. Well, I appreciate the color on that. And then I guess going back to the margin discussion, I think you kind of hit on some a little bit of pressure in the third quarter we already discussed. Just remind us of your rates and sensitivity and, I guess, the market's currently expecting a September Fed funds cut. And I guess with that on your balance sheet, I'm just now assuming there could be a little bit more incremental margin headwind in the fourth quarter, if that's the case. But just remind me if you were well distributed to rates.

Kelly Harris: Yeah, Matt. This is Kelly. The first few rate cuts we were able to the loan beta and deposit beta one for one. We anticipate more of the same for the next couple of rate cuts. And as floors kick in, we'll definitely help out on the liability side.

Thomas Travis: That's great. You can see I can think you can see some of that dynamic on page 10. We tried to illustrate the floors and what the dynamics are. I would say generally that we always talk about our NIM. And when we talk about NIM, we're looking at the net NIM without loan fee income. And historically, we're very close to the high end of our historical range. And so I think it's a natural thing that we are very well positioned for when rates do come down, and we're not concerned about it because we have so many floaters and floors. And we're funding it on the other side properly.

But I think that it's important that we all remember the long-term averages that we experience in that net NIM and I'm delighted that we've been able to keep it where it is. I mean, I got a little bit of bone to pick with Nate. I saw Nate did say he's I didn't realize Nate last quarter that you had predicted us to be even higher than where we are. I feel like a pole vaulter that just pole vaulted 20 feet, and Nate's like, well, you should have done 21. But I'm half kidding, Nate.

But, seriously, I think when you look at NIM, it's really important to remember the long-term dynamics of the match balance sheet the floors, and that look. If we bleed down into the more typical historical range, that's okay. And it wouldn't surprise us.

Matt Olney: Okay, guys. Thanks for the color. Appreciate it.

Thomas Travis: Thank you.

Operator: Thank you. And your next question today will come from Nathan Race with Piper Sandler. Please go ahead.

Nathan Race: Unrelated question to your last comment, Tom, but just wondering if Jason can maybe just comment on what he's seen in terms of criticized, classified, migration in the quarter and just how you're thinking about, you know, credit quality and charge-offs over the balance of this year and into next?

Jason Estes: Yeah. I'd say, you know, if you go look back over the last several quarters, you know, it's just kind of this continuous path toward a little cleaner, you know, a little smaller MPA number. Really, nothing has changed you know, over the last, I'd say, six to nine months internally. You know, our past dues are very clean. Economic environment here is good. We stick to our underwriting fundamentals. We're not adding new business lines. It's just more of the same.

And you know, there's a little bit of uncertainty, I think, in the economy, you know, if you just look at the headlines and see the tariffs and different things going on with immigration policy and it's pretty remarkable you know, as we talk to our clients and these business owners and how they operate and you know, you'll see someone have to deal with the issue here or there, but all in all, it's just been a really good you know, run of multiple quarters here where we operate. I mean, the economy is strong.

Nathan Race: Okay. Great. That's helpful. And Tom, I'll be sure to set a low core margin bar for you in the future.

Thomas Travis: Appreciate it. You know, we appreciate it, Nate. You know, it's easier to meet low expectations. You know that.

Nathan Race: Indeed. Thanks, guys.

Thomas Travis: Thank you.

Operator: This will conclude our question-and-answer session. I would like to turn the conference back over to Thomas Travis for any closing remarks.

Thomas Travis: Well, we're again, we're delighted with the quarter, with the first half of the year. We're cautiously excited about the rest of the year. Just the great markets that we operate in. And the great team of bankers that we have, and we're just delighted to continue to provide shareholders with absolute top-tier results, and we're gonna keep doing what we've always done. And so thank you. Bye-bye.

Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

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DATE

Thursday, July 17, 2025 at 9 a.m. ET

CALL PARTICIPANTS

Chairman, CEO, and President — John Ciulla

President and Chief Operating Officer — Luis Massiani

Chief Financial Officer — Neal Holland

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TAKEAWAYS

Return on Tangible Common Equity: 18% for the second quarter, illustrating continued profitability.

Revenue Growth: Revenue grew 1.6% compared to the prior quarter.

Loan and Deposit Growth: Loans and deposits each grew over 1% sequentially in Q2 2025.

EPS: $1.52 for Q2 2025, an increase from $1.30 in the first quarter (GAAP EPS for Q1 2025).

Efficiency Ratio: 45.4% efficiency ratio, maintaining operational efficiency while investing in the business.

Tangible Book Value per Share: Tangible book value per common share reached $35.13, up over 3% from the prior quarter.

Common Equity Tier 1 (CET1) Ratio: Increased; management affirmed a short- to medium-term CET1 target of 11% for the remainder of 2025.

Net Charge-Off Ratio: 27 basis points for net charge-off ratio, positioned within Webster's long-term normalized charge-off range of 25-35 basis points.

Provision for Loan Losses: $47 million provision for credit losses, $31 million lower than the previous quarter (Q1 2025), driven by credit performance improvement.

Allowance for Loan Losses: $722 million or 1.35% of loans, reflecting increased balance sheet growth rather than changes in the economic outlook.

Net Interest Income (NII): Projected full-year 2025 NII guidance of $2.47 billion to $2.5 billion; assumes two Fed funds rate cuts starting in September.

Net Interest Margin (NIM): 3.44% net interest margin, down four basis points from the prior quarter, with expectations to end the year between 3.35% and 3.40%.

Deposits: Total deposits increased by $739 million, including a $200 million uptick in noninterest-bearing deposits at period end (but with $200 million lower average balances over the quarter).

Share Repurchases: 1.5 million shares repurchased at an average price of $51.69, with an additional $700 million authorized for future buybacks.

Asset Quality Trends: Nonperforming assets declined 5%, and commercial classified loans declined 4% sequentially.

Loan Portfolio Activity: C&I originations exceeded $2 billion; commercial real estate originations totaled $1.2 billion, while balances in this segment decreased due to payoffs.

HSA Bank Opportunity: The reconciliation bill's new provisions are expected to yield $1 billion to $2.5 billion in incremental HSA deposits over the next five years, and $50 million to $100 million of incremental HSA Bank deposit growth is anticipated as early as next year.

InterSync: The rebranded deposit platform continues to provide granular deposits and liquidity diversification.

Marathon Asset Management Joint Venture: Operational as of next quarter, with $242 million of loans moved to held-for-sale status in preparation for contribution; meaningful fee income expected to build in 2026.

Tax Rate: Effective tax rate was 20% year-to-date, of 2025, expected to move to 21% in the second half.

Rent-Regulated Multifamily Loan Exposure: Portfolio totals $1.36 billion, with only eight loans exceeding $15 million and a current debt service coverage ratio of 1.56 times.

SUMMARY

Management reported broad-based growth in earnings, assets, and deposits compared to the prior quarter, while maintaining efficiency and capital strength. They highlighted a material inflection point in asset quality, with criticized commercial loans and non-accruals both declining. Executives anticipate significant long-term deposit growth from HSA Bank due to legislative changes, with the majority of the expanded opportunity tied to newly eligible bronze ACA plan participants. The company confirmed its Marathon joint venture is set to bolster balance sheet flexibility and future fee income, with fee income expected to begin ramping in 2026, positioning Webster to pursue larger loan deals and grow capital markets revenue streams. Tangible book value per share increased to $35.13 alongside disciplined share repurchase activity, with a consistent deployment framework tied to capital availability and market opportunities. The outlook remains for full-year 2025 NII of $2.47 billion to $2.5 billion, and NIM (Net Interest Margin) is expected to moderate toward a 3.35%-3.40% range as year-end approaches.

Management described continued investments in technology, business development, and risk management as part of preparations for growth toward the $100 billion asset threshold.

Executives do not anticipate material expense changes in HSA Bank operations from expanded direct-to-consumer outreach, with incremental marketing spend expected but no substantial change in expense trajectory.

Deposit cost guidance for the back half of 2025 assumes movement dependent on Fed rate cuts and ongoing market competition; management maintains effective neutrality to interest rate changes in near-term scenarios.

The company expects the sponsor finance pipeline to recover, supported by increased sector activity and new capabilities from the Marathon joint venture, which will also support larger bilateral transactions and broader deal structures.

Brokered deposits are managed within a 3%-5% range of total deposits, with anticipated seasonal fluctuations but stable long-term contribution.

Leadership changes include the appointment of Jason Schugel as Chief Risk Officer and Fred Crawford as a new board member, both cited as bringing valuable large-bank expertise as Webster approaches regulatory asset size thresholds.

Management stated, "We do not see new pockets of credit deterioration developing anywhere across any industry or sector." and reaffirmed that existing classified loan exposure is concentrated in CRE office and healthcare service categories.

INDUSTRY GLOSSARY

HSA Bank: A Webster Financial Corporation segment providing health savings accounts and related health spending solutions distributed via employers and individual channels.

InterSync: Webster's rebranded deposit platform (formerly Interlink) designed to broaden access to granular, low-cost deposits and enhance liquidity diversification.

B2B2C model: Business-to-business-to-consumer; HSA Bank operates by distributing products through organizations to end consumers.

Marathon Asset Management Joint Venture: A partnership between Webster and Marathon to expand Webster's private credit origination capabilities, contribute loans, and generate fee income through asset management.

Classified Loans: Loans designated as carrying elevated credit risk requiring monitoring or remediation, typically including 'substandard,' 'doubtful,' or 'loss' classifications.

Full Conference Call Transcript

John Ciulla: Thanks, Emlen. Good morning, and welcome to Webster Financial Corporation's second quarter 2025 earnings call. We appreciate you joining us this morning. I'm going to start with a recap of our results and the competitive positioning that drives them. Our President and Chief Operating Officer, Luis Massiani, is going to provide an update on exciting developments in our operating segments, and our CFO, Neal Holland, will provide additional detail on financials before my closing remarks and Q&A. Highlights for the second quarter are provided on Slide two of our earnings presentation. Our results were solid with a return on tangible common equity of 18%, ROA of nearly 1.3%, and growth in both loans and deposits of over 1% linked quarter.

Overall revenue grew 1.6% over the prior quarter. Our financial results put our company on a trajectory to meet the outlook we established in January, despite a less certain macroeconomic picture at points in the first half of the year. We achieved this outcome while maintaining our strong operating position and balance sheet flexibility. Our common equity tier one ratio increased, and our loan to deposit ratio remained roughly flat. With our strong capital position and new capital generation, the board authorized an additional $700 million in share repurchases, and we bought back 1.5 million shares in the quarter. Additionally, the inflection point in asset quality that we projected to occur in mid-2025 is materializing.

Both criticized commercial loans and non-accruals were down in the quarter. Our net charge-off ratio was 27 basis points, within our long-term normalized charge-off range of 25 to 35 basis points. We do not see new pockets of credit deterioration developing anywhere across any industry or sector. Similar to our view a quarter ago, we have not yet seen any impact to credit related to various tariff proposals. While remaining vigilant to any potential effects from proposed tariffs, we do not have disproportionate exposure to industries we believe could be most impacted, and our borrowers have had additional time to develop strategies to manage costs, their supply chains, and pricing.

Our strong operating position and distinctive business provide us a lot of flexibility and growth opportunities, an advantage that will serve us well as tailwinds accumulate for the banking industry. We feel we have the most differentiated deposit profile within our peer group, in particular, our healthcare financial services segment comprised of HSA Bank and Amitros, our growing source of low-cost, long-duration, and very sticky deposits. The B2B2C model of these businesses enables efficient operation and distribution. Provisions included within the recently passed reconciliation bill also accelerate growth in HSA deposits. In addition to the healthcare financial services segment, we also have strong deposit franchises in our consumer and commercial bank.

We also operate InterSync, previously known as Interlink, and rebranded this quarter. Interlink provides us access to granular deposits and is another differentiating feature for Webster as a source of liquidity. As a predominantly commercial bank, we have a diversity of loan origination channels with distinct risk-reward characteristics. These provide us the opportunity to add assets in the loan categories that provide the most appealing risk-reward characteristics at a given point in time. We anticipate that the asset management partnership with Marathon we announced last year will be effective as of later today, and we believe that it will enhance sponsored loan growth and drive fee revenue in 2026 and beyond.

The combination of our funding advantage and diversified loan origination engine allows us to grow at an accelerated rate relative to peers over the long term. Ultimately, with our distinctive business composition, we have a lot of liquidity. We run a highly efficient and profitable bank. We generate a lot of capital. This provides us with both a solid defensive position and a great deal of optionality on offense, whether that be organic growth, strategically compelling tuck-in acquisitions, or returning capital to shareholders. I will now turn it over to Luis to discuss emerging strategic opportunities for Webster, including at HSA Bank and within the commercial segment, each of which have recently experienced strategically important developments.

Luis Massiani: Thanks, John. Starting with HSA Bank, we were pleased to see three favorable provisions for HSA accounts incorporated in the reconciliation bill, which was signed into law earlier this month. In our view, these provisions will significantly increase the addressable market for the HSA industry and HSA Bank, mainly driven by bronze ACA plan participants newly gained eligibility to fund an HSA account as part of their healthcare plan. We estimate the potential deposit opportunity for HSA Bank over the next five years ranges from $1 billion to $2.5 billion of additional deposits, starting with incremental growth next year of $50 million to $100 million.

There is likely to be a somewhat lengthy ramp-up period for adoption as newly eligible consumers begin to understand the benefits of an HSA account and how best to use it for their health and financial wellness. We are further encouraged that for the first time, eligibility for HSA accounts has been decoupled from high deductible health plans, and that several provisions that were initially included but did not make the final spending bill have strong support in both the House and Senate. Additional substantive legislation in 2025 is likely, including the possibility of another reconciliation bill.

If all of the provisions that were in the original spending bill passed by the House were to become law, we believe this could double our range of opportunity for incremental deposits. Turning to asset management, we have reached operational realization of the private credit joint venture we had previously announced with Marathon Asset Management. In the second quarter, we moved $242 million of loans in held-for-sale status as these loans will be contributed to the joint venture, which we expect will be up and running in the third quarter.

The economics of our asset management strategy will be determined by the long-term performance of the joint venture, but we anticipate the benefits will be significant as we strengthen our competitive position in the private credit market. Webster will be able to lead larger bilateral deals, participate in larger syndications, accelerate on-balance-sheet loan growth and spread income, and offer clients a broader set of deal structures beyond senior positions without changing our existing on-balance-sheet credit profile. Webster will retain full banking relationships, including opportunities for cash management, capital markets, and deposit business.

The asset management platform will also drive economic value by generating fee income, which we anticipate will be limited for the remainder of 2025 but will then begin to ramp in 2026. We are also continuing to invest across all other areas of our bank, both in our lines of business as well as operations, technology, and risk. Business pipelines are building nicely for the second half of 2025, with a well-diversified mix of commercial and consumer loan and deposit opportunity. We have continued to make targeted investments in technology and business development in areas including metros, HSA, InterSync, and the consumer and commercial banking verticals, which should allow us to further strengthen our deposit channels and funding profile.

I will turn it over to Neal for a detailed review of financial performance.

Neal Holland: Thanks, Luis, and good morning, everyone. I'll start on Slide four with a review of our balance sheet. Total assets were $82 billion at period end, up $1.6 billion from last quarter with growth in loans, cash, and securities. Deposits were up over $700 million. The loan to deposit ratio held flat at 81% as we maintained a favorable liquidity position. Our capital ratios remained well positioned, and we grew our tangible book value per common share to $35.13, up over 3% from last quarter. At the same time, we repurchased 1.5 million shares. Loan trends are highlighted on Slide five. In total, loans were up $616 million or 1.2% linked quarter.

Excluding the one-time transfer of $242 million of loans moved to held for sale, loan growth would have been $858 million or 1.6%. We provide additional detail on deposits on Slide six. We grew total deposits $739 million. Deposit costs were up three basis points over the prior quarter, as we experienced the seasonal mix shift effect of the second quarter in HSA and public deposit accounts. On Slide seven, are income statement trends. Interest income was up $9 million from Q1, and noninterest income was up $2.1 million. Expenses were up $2 million. At an efficiency ratio of 45.4%, we maintain solid efficiency while investing in our franchise.

Overall, net income to common shareholders was up $31 million relative to the prior quarter. EPS was $1.52, versus $1.30 in the first quarter. In addition to a solid PPNR trend, we also saw a significant reduction in the provision this quarter. Our tax rate was 20%. On Slide eight, we highlight net interest income, which increased $9 million driven by balance sheet growth and the higher day count quarter over quarter. The NIM was down four basis points from the prior quarter to 3.44%. There was a discrete benefit from a nonaccrual reversal that added two basis points to the NIM this quarter. Excluding this, the NIM would have been 3.42%.

Drivers of lower NIM include seasonal deposit mix shift, higher cash balances, and slight organic spread compression. Slide nine illustrates our interest income sensitivity to rates. We remain effectively neutral to interest rates on the short end of the curve, with modest shifts expected in our net income for up and down rate scenarios. On Slide 10 is noninterest income. Noninterest income was $95 million, up $3 million over the prior quarter. The modest increase reflects growth in deposit service fees and a lower impact from the credit valuation adjustment. Slide 11 has noninterest expense. We reported expenses of $346 million, up $2.1 million linked quarter.

The modest increase in expenses was primarily the result of in human capital, partially offset by seasonal benefits expense. We continue to incur expenses that enhance our operating foundation as we prepare to cross $100 billion in assets. One significant investment came to fruition in the second quarter. I'm happy to say that this is the first quarter we are reporting earnings on our new cloud-native general ledger. On Slide 12, detailed components of our allowance for credit losses, which was up $9 million relative to the prior quarter. The increase in the allowance was predominantly tied to balance sheet growth. Our CECL macroeconomic scenario was relatively stable, and we saw good asset quality trends quarter over quarter.

After booking $36 million in net charge-offs, we recorded a $47 million provision. This increased our allowance for loan losses to $722 million or 1.35% of loans. Our provision was down $31 million from the prior quarter. Slide 13 highlights our key asset quality metrics. As you can see on the left side of the page, nonperforming assets were down 5%, and commercial classified loans were down 4%. On Slide 14, our capital ratios remain above well-capitalized levels, and we maintain excess capital to our publicly stated targets. Our tangible book value per share increased to $35.13 from $33.97, with net income partially offset by shareholder capital return.

Our full-year 2025 outlook, which appears on Slide 15, points to improvements in NII and the tax rate for the year. We now expect NII of $2.47 billion to $2.5 billion on a non-FTE basis. This assumes two Fed funds rate cuts beginning in September. We expect the full-year tax rate will be in the range of 20 to 21%. Year to date, we are in a 20% effective tax rate due to discrete benefits, but we expect the rate to return to 21% in the second half of the year. With that, I will turn back to John for closing remarks.

John Ciulla: Thanks, Neil. In summary, it was a good quarter for Webster, generating solid growth and high returns. We are executing on new opportunities to grow our business. Our proactive approach on credit risk management has allowed us to remain in front of potential problems. Tailwinds are building for regional banks. With some additional time to digest and plan for tariffs, our clients are moving forward with business development plans, and it appears that loan growth is set to accelerate. We are starting to observe changes in banking regulations, such that they are appropriately tailored to the complexities and size of individual institutions, and they should help enable US banks to strengthen their competitive position.

As I stated last quarter, Webster is positioned to prosper in a variety of operating environments, including an accelerating investment cycle. We are excited to demonstrate Webster's full potential. We have excess capital to deploy, diverse loan origination channels, a differentiated and competitively advantageous funding profile, and are focused on new business opportunities. I want to take a moment to welcome Jason Schugel to our executive management committee. Jason joined us as Chief Risk Officer this week, as we had previously announced Dan Bligh's intent to retire. Jason has fifteen years of experience at a category four bank, most recently as chief risk officer. Particularly valuable experience as we grow our bank toward $100 billion in assets.

Dan served as our chief risk officer for fifteen years and built an exemplary risk team over a period of substantial change for Webster and the banking industry. We wish him the best in his retirement. We were also happy to announce recently that we added Fred Crawford as a new board member. Fred joins the board with impressive C-suite large financial institution expertise. Finally, I'd like to thank our colleagues for their efforts so far this year. We saw positive financial and strategic outcomes virtually across the board this quarter. This type of result does not materialize without a significant amount of effort and engagement throughout our organization. Thanks again for joining us on the call today.

Operator, we'll now open the line to questions.

Operator: Your first question comes from the line of Chris McGratty with KBW. Please go ahead.

Andrew Leisher: Hey. How's it going? This is Andrew Leisher on for Chris McGratty.

John Ciulla: Hey. How are you?

Andrew Leisher: Just starting on capital. Just given the current environment and outlook for potential deregulation, what is your willingness to reduce CET1? And then just overall thoughts on near-term pace of the buyback? Thanks.

John Ciulla: Sure. I know we stated that our medium-term and short-term goal is 11%. And that over the long term, as markets stabilize, that we could see that target move back towards a 10.5% range. I would still say that for the balance of '25, that 11% target is probably the right amount. And we'll talk further about that going forward. But we do think over time that we can reduce the level comfortably and safely of our CET1 ratio. And the second question, I think, was on capital management and share buybacks. I think we say every quarter, we take a really disciplined approach to it. First prize is continuing to grow our balance sheet with good full relationship loans.

If that's not available to us, we do have, and we continue to look seriously at opportunities to continue to enhance our healthcare services vertical and other areas of the bank where we think we can grow deposits and fees inorganically through tuck-in acquisitions. If neither of those are available, we look to return capital to shareholders through dividends or share buybacks. And so I think if the first two don't materialize, given our capital level, you'll likely see us continue some level of share buyback in the second half.

Operator: Your next question comes from the line of Casey Haire with Autonomous Research. Please go ahead.

Casey Haire: Great. Thanks. Good morning, everyone. Question on the NIM outlook. The cash build, are you guys good with where the cash balances are today? And then also, I think you guys talked about a long-term debt issue coming in the second half of the year. Just wondering how that's going to impact?

Neal Holland: Yeah. On the cash, we're getting right to the levels that we're hoping to get to. In this quarter, building cash had a one basis point impact to NIM. We expect an additional one basis point throughout the rest of this year over the next few quarters. So a little bit of impact there, but not overly material. And we are still expecting a new debt issuance in the back half of the year that will have one basis point impact to NIM.

Operator: Your next question comes from the line of Mark Fitzgibbon with Piper Sandler. Please go ahead.

Mark Fitzgibbon: Hey, guys. Good morning. Neil, just to follow-up, I was curious on deposit cost for the second half of the year given your expectation for two rate cuts. And also InterSync's sort of strong deposit growth. How are you thinking about deposit costs?

Neal Holland: Yeah. So maybe I'll take a step back and talk about our interest rate sensitivity for a second. So we positioned pretty neutral. So if we don't get the two cuts in the back half of the year, we don't expect any material impact to our overall net interest margin. But going specifically to your deposit question, obviously, if we get additional cuts, we expect to continue to move our deposit costs down. If we don't get two additional cuts, you know, we are seeing some pretty significant competition on the deposit side, so don't see material opportunity to move down deposit cost. But the team is active in that area, and it's something that we're closely monitoring.

Mark Fitzgibbon: Okay. And then just to follow-up, John, unrelated. If the category four threshold gets lifted, how important does bank M&A become for Webster? And if so, you know, what would you be sort of looking for in potential targets? Whether business line or geography or any other any on that would be much appreciated.

John Ciulla: Sure, Mark. I mean, I think our stance right now and, you know, clearly, is some noise around the fact that there may be an indexing of that $100 billion mark or maybe even an elimination of it. We're kind of standing pat to say, that happens when and if it happens. And it impacts kind of the way we stayed and how aggressively we continue to build out certain regulatory requirements. So I think, you know, that we're attuned to it. There's no question about the fact that we've said that, you know, we're not really in the market for whole bank M&A.

Part of the reason was that we do something transformational if we did, and we were not going to do that until we were ready to cross $100 billion. I think the clear thing we want to get across is that's not our primary goal regardless of whether the $100 billion mark moves or not. So I think it's fair to say for you that gives us more optionality if that number either moves up or is eliminated. And if the right circumstances exist, we would be more able to engage in whole bank acquisition.

But I think if you think about what we're talking to our board about and what we're doing as a management team right now, it's really a focus on organic growth, tuck-in acquisitions that continue to build out our deposit profile and strengthen our healthcare services vertical. So I would still say it's unlikely to see us engage in the short to medium term in active bank M&A.

Operator: Thank you. Next question comes from the line of Jared Shaw with Barclays Capital. Please go ahead.

Jared Shaw: Hey. Good morning.

John Ciulla: Morning.

Jared Shaw: I guess maybe on the HSA news, you know, it's great that the total addressable market is expanding. Does that require you to make any investments in new delivery channels or new outreach channels to capture that additional pool or, you know, how should we think about the expense associated with going after that market?

Luis Massiani: Yeah. No. Great question, Jared. No material change in the expense trajectory of HSA. We actually already run a pretty significant direct-to-consumer channel, and this is going to be the opportunity that's presented itself with these changes. It is slightly different from what we typically do through the employers, and it is more of a direct-to-consumer channel. But we actually do have a direct-to-consumer channel today that generates a not insignificant amount of new accounts and, you know, new account openings and pretty sizable business that we run direct-to-consumer today already. So no major change.

There will be, obviously, some elements of different types of marketing and some marketing spend that we'll have to, you know, that we'll have to figure out as we go. And, you know, the reason for being somewhat cautious on just the ramp-up that we're going to see is that, you know, HSA is, you know, just because everybody getting over the new eligible consumers that can have an HSA can now have an HSA doesn't mean that they're going to take it up, you know, immediately. And so do envision that there's going to be some spend on the marketing and education front.

No changes that we need to make from a technology or operational perspective, but this is going to be a long-term investment in, you know, identifying the new consumers, educating them on how they should be using an HSA benefits. Both short-term and long-term. And so there will be some element of investment that we'll make in that education process, but it's not going to materially change the OpEx trajectory of the business.

Jared Shaw: Okay. Alright. Thanks. And then if I could follow-up, on the allowance and provision. You know, with the improving broader credit backdrop, how should we think about the allowance build from here and the provision? Is that being targeted as a percentage of loan originations, or should we be thinking that as a percentage of the average loans?

Neal Holland: Jared, as we say every quarter, the CECL program and process is pretty much tied to risk rating migration, loan growth, weighted average risk ratings in the portfolio, and we generally don't give guidance on it. I think we are comfortable in our total coverage ratio when you triangulate and look at peers and our category four peers and our current peer group, I think we're in a pretty good place right now. You know, I think growth in our coverage would come from balance sheet growth or credit deterioration. I think, you know, we took a great move, I thought, strategically in the first quarter of changing our weighting for a recession scenario.

So we really felt like that was a good move to get us in the right spot. We did not back off our sense of what the future holds. So I think one of the things we're proud of is that our provision came down significantly driven by credit performance underlying, not driven by a change in what we think the outlook is. We still have a pretty good balance and a pretty good assessment of or a pretty good portion of assuming that there could be recession risk in the future.

So I feel like where we are is conservative, appropriate, and, you know, it'll be driven by loan growth and credit performance in the second half of the year.

Operator: The next question comes from the line of Matthew Breese with Stephens Incorporated. Please go ahead.

Matthew Breese: Hey. Good morning. Two things on originations. You know, first, C&I originations picked up quite a bit this quarter. Over $2 billion. How much of that feels sustainable, and how are spreads holding up there? And then two, commercial real estate originations were strong as well at $1.2 billion. Balances were actually down. So maybe you could talk about that dynamic and how payoffs are playing a role in commercial real estate today.

John Ciulla: Yeah. I'll take a shot and then ask Luis and Neil if they want to add anything. I mean, I think another thing we were proud of this quarter is that our originations came really across the entire bank in all categories, commercial and consumer. We had a really nice quarter with respect to commercial middle market, traditional C&I. And as you mentioned, at the end of the day, we actually reduced our CRE concentration. Quite frankly, not intentionally. That pipeline is building. We've said we're really comfortable where we are in that 250-ish range.

And so we do have a building pipeline in CRE with high-quality full loans, and hopefully, you'll see that category contribute to what we believe will be strong back half of the year loan growth across the board. And with respect to your specific question about is it replicable, given the fact that it wasn't in any one category and we're seeing pipeline build, we do think that we can see similar loan growth quarterly over the course of the rest of 2025.

Luis Massiani: Yeah, Matt. The only thing that I'd add there is that there was a little bit of pent-up demand where you saw earlier in the year, you know, first quarter all the noise that we were seeing with tariffs and so forth. I think that a part of this is just back-ended growth in originations and volumes that we saw ramping up over the course of the second quarter. And one of the things that gives us a lot of confidence going into the second half of the year is that the pipeline of activity in both commercial C&I and commercial real estate has gotten better over the course of May and June.

And today, we sit in a place where we have, I think, greater visibility of what we're going to be seeing from a loan growth perspective for the second half of the year. So nothing specific to point to as to why there's $2 billion in originations. It was on the C&I side. It was across the board, and the positive is that we're starting, you know, we're continuing to see type of activity across all the business lines and verticals, so we feel pretty good about the second half of the year for originations.

Matthew Breese: Great. And my second question is just in light of Mamdani's ascendancy here towards the mayorship in New York City. And, of course, this is if he wins. You know, how much of a valuation impact do you think there could be to, you know, the heavier rent-regulated buildings? Could this asset class become more of a problem for you, and do you have at your fingertips what kind of allowance against this asset class you already have?

Luis Massiani: So we don't have the allowance on the rent-regulated itself. You know, let me see if we could track it down while we're here. But, you know, you kind of hit the nail on the head in the question, Matt, which is it's an if. You know, it's not for sure and for certain that Zorin is going to win, you know, maybe he does. You know, we had moved away from the rent-regulated business particularly from a new originations perspective for quite some time. So it's not anything that we feel would derail what we're doing on the origination side. And the portfolio that we have is very seasoned.

It was originated, you know, well, you know, a long time ago with good debt service coverage ratios and LTVs. And so even though we do have, you know, a decent-sized portfolio of rent-regulated, it's not anything that we've originated recently. It's well-seasoned. And the credit stats on the portfolio are very, very good. But, you know, it's not a portfolio that we have historically reserved for significantly because the credit profile has been very good, and we expect that's going to continue to be the case. Particularly with the types of properties that we have there.

I tell you the path forward from a valuation perspective, you know, I'm not going to say that we've seen the exact types of commitments that are being made there now with rent freezes, but this is an asset class that has gone through multiple iterations of this type of risk, and it's continued to, you know, been somewhat resilient over time. And is there going to be a valuation effect? There will. But we don't think that it's anything that would have any material impact on our book of business given how seasoned it is, and, you know, we'll have to manage, you know, deal with whatever, you know, eventualities come up if it does happen that Mondavi wins.

Neal Holland: And, Matt, just again to reiterate, $1.36 billion in total exposure, only eight deals over $15 million, really small average loan size. And, you know, really good LTVs and current debt services. So I think, you know, we don't think of that as we are not overly exposed to that asset class. And I think more than 60%, or somewhere between around 60% of what we underwrote in rent-regulated multifamily was underwritten after the rent-regulated laws came into effect in 2019, meaning we weren't anticipating significant rent increases in order to service the debt. So really granular, very small part of our overall portfolio, and so, again, we don't see a material credit impact even if there's further regulation.

Matthew Breese: Appreciate all that. Thank you.

Operator: Your next question comes from the line of Anthony Elian with JPMorgan. Please go ahead.

Anthony Elian: Hi, everyone. The credit quality metrics inflected as you would expect by this part of the year. But should we expect the metrics you highlight on Slide 13 to improve further in the coming quarters? I understand there will be one-offs, but you know, is this declaring victory on credit quality now, or should we expect these metrics to improve even further? Thank you.

John Ciulla: Yeah. I think you kind of asked and answered the question. You know, we're always low to predict credit performance, and I probably get myself in trouble for not being more aggressively positive. But underlying here is the fact that our risk rating migration has really stabilized, and we're not seeing any new pockets of problems either in any sector, any geography, or any business line, which is really encouraging. And the other thing that I would remind everybody is even the NPLs and classifieds that are outstanding, they're really concentrated in those two portfolios that we continue to talk about for a long time.

So 45% of our on the balance sheet right now are either CRE office or healthcare services, and 25% of our classified loans are in those two categories. Two categories now, which are both well below a billion dollars. We've worked through them significantly. We don't have significant originations in either of those two categories. So that gives us another sense that, yes, directionally, over time, we think we should continue to see trending down in those two asset categories. And, obviously, with the caveat that because we're a commercial bank with larger exposures that in any one quarter, you could see things bump around.

Anthony Elian: That's fair. Thank you.

Operator: Your next question comes from the line of David Smith with Truist Securities. Please go ahead.

David Smith: Good morning. Just on the topic of credit continuing to improve, is there any further benefit to recovery of interest income, you know, in the NII forecast as other nonaccruals work down over time?

Neal Holland: Yeah. Again, that's one where, you know, obviously, if we had line of sight to it and we would be dealing with it, accelerating it. So I would say if you look at every single one of our quarters, ins and outs and nonaccruals tend to have an impact. You either accelerate if you have a resolution, you know, previously deferred income, or you start to get a drag if you've got a new nonperformer. I guess the best thing to say would be, we anticipate nonperformers to trend down. So we hope that the positive impact outweighs the negative impact.

But nothing in our forecast would lead us to believe that we have sort of any material impact on NII either way in the second half of the year.

David Smith: Alright. Thank you.

Operator: Your next question comes from the line of Bernard Von Gizycki with Deutsche Bank. Please go ahead.

Bernard Von Gizycki: Hey, guys. Good morning. Neil, first question just on noninterest-bearing deposits. There's a nice uptick of about $200 million in the quarter. And I know that previous guidance was expecting the PPAs remain flat on a full-year basis. Just any thoughts on how you're thinking about any potential growth in the second half and how we should think about full year?

Neal Holland: Yeah. Noninterest-bearing was interesting quarter. As you pointed out, we were up $200 million points to point. But if you get into the average balance movement, we were actually down $200 million the quarter. So we did see a little bit of a positive movement towards the end of the quarter. We continue to believe that, you know, if you trend back historically over the last five or six quarters, obviously, as an end of and banking, we've seen decline in DDA accounts. Our belief is we're at the bottom of that decline, and we'll start to see some, you know, mild growth coming in the back half of the year.

We're not counting on outsized growth to hit our guidance, but we do believe we've kind of reached that bottom and should see a return to the trend for Webster Bank and for the banking industry as a whole.

Bernard Von Gizycki: Okay. Great. And just one follow-up for Luis. Just on HSA, like you mentioned on the three provisions included in the final bill, most of the benefit that you mentioned is coming from the bronze HSA plan participants. But the other two, regarding the direct primary care and telehealth, anything how big were those, would you say, of the one to two and a half billion you kind of cited? Was this just kind of like a rounding error? Or just anything you can give just on, like, sizing since the bronze are, like, the bigger component?

Luis Massiani: Yeah. It's slightly more than rounding error, but I think you could still characterize it as a rounding error on the last two. The big driver of this is the fact that you now have, you know, under today's enrollment rates in the bronze package about 7 million consumers that are now going to be eligible to, you know, to pair up their bronze package with an HSA account.

That's largely the driver of this, and that's again why this, you know, for us is a long-term path of identifying the 7 million consumers and then trying to figure out where, you know, how best to educate them on how to use an HSA, which is going to take some time to do. But it is largely that is the driver of the deposit growth for the most part.

Neal Holland: Yeah. That clearly is the big one. The other two are valuable. You know, the telehealth, for example, a risk to the industry. And it's great to see that, passing and that risk removed from the industry. So we're very happy by the other two, but I agree with Luis that it really is majority the one provision that's driving our estimate.

Bernard Von Gizycki: Okay. Great. Thanks for taking my questions.

Operator: Thank you. The next question comes from the line of Daniel Tamayo with Raymond James. Please go ahead.

Daniel Tamayo: Hey. Good morning, guys. Thanks for taking my questions. Most of my questions asked and answered at this point. But I guess first, just you've talked about the C&I and CRE broadly, but curious on the sponsor side that been a little bit light lately, if you're seeing any changes in demand there, if you're kind of baking in any pickup in that book in the back half of the year as the other categories start to pick up.

Luis Massiani: Yeah. Short answer is yes. It was very late in the first and, you know, early part of the second quarter of this year, even going back to the third and fourth quarter of last year, there was, you know, we had already started to see a downward trend in, you know, origination activity. That, you know, pipeline of business on the sponsor side has ramped up nicely in the second part of the second quarter. And we do envision that we're going to get back to, you know, a better growth trajectory and growth profile there.

And we do think that the addition of the, you know, just becoming a improving and strengthening our competitive position through the joint venture with Marathon is also going to be helpful to on-balance-sheet origination. So we're going to be able to look at more deals than what we looked at in the past. We're going to be able to target slightly larger deals than what we have been able to in the past.

And so when you factor in return to greater just sector activity for, you know, for PE in general, combined with what we are doing on just improving our competitive position as an originator, all of that should result in a better growth trajectory in the back half of this year.

Daniel Tamayo: Great. Thanks, Luis, for that. And then I guess just quickly on the deposit side. So you had the seasonal factors that impacted your growth or inflows of the brokered CDs in the quarter. Curious if you can kind of how you're thinking about the movement of the portfolio maybe in the third quarter. But overall, just thoughts on where you think that category shakes out for you as you look at the contribution of brokered as a percentage of deposits longer term? Thanks.

Neal Holland: Yes. So brokered, we run brokered fairly low as a percentage of our total deposit mix. In season one and season three, we see nice increases in our public deposit accounts. In quarter two and quarter four, as we see those trend down, we bring in more broker deposits to help offset those. So as you think about Q3, you'll likely see, you know, potentially brokered come down as those public deposits move up. You'll see that trend reverse again in Q4. But we really run our broker deposits kind of in that 3-5% of deposit range, so range we're real comfortable with, and that's how we think about the seasonal movement in the broker deposits.

Operator: Your next question comes from the line of Kumar Braziler with Wells Fargo. Please go ahead.

Kumar Braziler: Good morning.

Neal Holland: Hey, Kumar.

Kumar Braziler: Following up on the Marathon commentary, I'm just wondering to what extent does that loan growth come just from looking at larger deals? And is that a two-way street where things that Marathon might originate will end up on your balance sheet? Or is that just what you're originating will end up on the JV?

John Ciulla: It largely we think that the more swings at the plate will come from the fact that we can participate and compete for larger transactions without increasing the on-balance-sheet hold sizes. I would say that, yes, there is a two-way street there that could benefit us from an origination perspective. Although our origination channel and capabilities will be the majority of the originations related to what we would put in the joint venture. So excited about it. Again, this will be, as Luis mentioned in his comments, there'll be a ramp period before we start to get noninterest income. But we do think that we'll benefit relatively shortly from a more competitive offering and a larger implied balance sheet.

Kumar Braziler: Okay. Great. And then as a follow-up, just looking at margin trajectory, realizing that it benefited a little bit from some interest recoveries here in 2Q, but can you just maybe talk to some of the competitive landscapes around the deposit side, some of the spread tightening on new loan production and is the expectation that we're still kind of tracking towards a 3.40 margin as we go through the back end of the year, or does maybe some of the loan growth commentary mitigate some of those pressures?

Neal Holland: Yeah. So we're still expecting net interest margin of approximately 3.4% this year. And so if you think about that in the first half of the year, we were obviously a little bit above that 3.4% level. So we kind of expect to exit the year somewhere between 3.35 and 3.40. And I've mentioned a couple items. You know, we'll have a little bit more cash on the balance sheet. We've got a debt restructure in the back half of the year. We've got a little bit of pressure on our securities portfolio called a basis point or two as we have some mix shifts there.

Then there'll be some modest spread impact, and that really depends on how fast we grow the balance sheet. And so there's some variables there on where we end on the back half of the year. But as you mentioned, and I mentioned earlier, deposit competition is challenging in the market right now. I think our teams are doing a great job of maintaining clients and winning new relationships, but it's a challenging environment. We're also have put on some, you look at the risk rating of our new loan origination, they're at an even higher quality than our overall loan portfolio. So that's causing a little bit of organic spread compression as we move forward.

So we're reiterating our full-year NIM guidance. But do expect that the back half of the year to be a little bit less of the net interest margin side of the first half. And I always want to add that we don't manage the organization in NIM. You know, we're most focused on NII and NIMs and outcome, but did want to provide that color on some of the factors we're thinking about in the back half of the year.

One thing I would say to tie that to the earlier question, if we do see continued increase M&A activity and what Luis talked about with respect to sponsor pipeline improves, that gives us a chance to outperform as our higher-yielding loans could impact positively the margin.

Kumar Braziler: Great. Thank you.

Operator: Your next question comes from the line of Ben Gerlinger with Citi. Please go ahead.

Ben Gerlinger: Hi. Good morning.

Neal Holland: Morning, Ben.

Ben Gerlinger: Just kind of following up a little bit tangential on the Timur's question. The marathon. With the larger loan size, do you think it's maybe a little bit bigger company? And then with the fee income opportunity and part of you, you guys tease it a little bit that it's going to take a little while to ramp up. And it's more of a 2026 question than 2025. But once we get that flywheel really going, the contribution to fee income, are we talking, like, a couple million incremental per quarter, or are we talking, like, tens of million per quarter once you get the full thing going? So probably more like a run rate late 2026.

Luis Massiani: Yeah. I think that there's two opportunities as we think about the potential for, you know, what the impact of the joint venture is going to be. When we're referring to the, you know, the fee income that, you know, we're talking about asset management income, and, you know, that is, you know, for, you know, the first vehicle that we're going to be running, it's going to be more of the, you know, you said tens of millions is not that big. It's going to be smaller than that, but it's going to be a good recurring source of income that we will be generating, and we'll continue to provide more details.

And you'll see those, you know, you'll see it ramping up in the, you know, through the P&L over time. The just as good of an opportunity, if not better, and you and I think you hit the nail on the head when you said, you know, larger, you know, larger transactions means larger companies will mean larger opportunity to be able to do capital markets business, swaps, indications, as well as, you know, just treasury management and deposit opportunity plays there as well.

You're going to start seeing that fee income being generated, you know, more, you know, more closely tied to the origination activity of the vehicle, which will be up and running in the third quarter, and we should we're going to start originating. You know, we anticipate, you know, loans into the vehicle at that time. So a two-pronged approach. You know, a good impact of the JV is what's going to happen on our own balance sheet with just, you know, greater origination activity and then all of the loan fee activity that happens off of those originations, which we are largely going to retain at Webster Bank.

And then, longer term, you'll have, you know, an income that will be driven off of the, you know, what the eventual performance of the portfolio becomes in the vehicle as well as, you know, how large the vehicle becomes in the perspective of, you know, kind of the number of loans that are held in, you know, on the platform.

John Ciulla: And one important point I want to make on this is and because I think it's this isn't new activity for us. This isn't us having to go out find new sponsors or we're chasing things. This is simply gives us the capacity to continue to deliver full relationships, cash management, deposits, loan fees, originations with existing sponsors who, as the markets change with private credit, have moved more to private credit. We still do tons of business with them. But on the larger deals, they move away from us because of our balance sheet. So it's important point to know that this isn't changing risk profile. This isn't changing activity. We don't need to hire new people.

We have very sophisticated people in that sponsor group. To just giving them more tools to take advantage and deliver for their existing clients.

Ben Gerlinger: Gotcha. That's helpful. I just want to dig a little deeper than that. Do you have the kind of let's call it, back office or banking opportunities for kind of legacy marathon relationships now? Is it really trying to keep separate church and state between Webster, JV, and Marathon? On, like, opportunity in front of you.

John Ciulla: I wouldn't comment on that now. I think over the long term, they're a great firm. And I think there are more things we can do together. One of them would be what you talked about with respect to having a good banking services product for other borrowers. But that's not on the drawing board now, and I wouldn't comment on that.

Ben Gerlinger: Do appreciate it.

Operator: Next question comes from the line of Laurie Hunsicker with Seaport. Please go ahead.

Laurie Hunsicker: Great. Hi. Thanks. Good morning. Two questions. Number one, what was your share buyback price on the 1 million shares in the quarter? And then number two, just going back to the rent-regulated multifamily, that $1.4 billion, do you have an approx debt service coverage and then anything to think about or know about on that $185 million of maturities coming up over the next twelve months?

Neal Holland: Yeah. Our Q2 share repurchases were at $51.69.

Laurie Hunsicker: Thank you.

Neal Holland: And our current debt service coverage ratio on the portfolio is 1.56 times.

Laurie Hunsicker: Perfect. Thank you so much. Oh, and anything on that $185 million of maturities that we should be thinking about?

Neal Holland: No. Normal course.

Laurie Hunsicker: Right. Thanks, guys.

Operator: I will now turn the call back over to John Ciulla for closing remarks. Please go ahead.

John Ciulla: Thank you very much. We appreciate everyone participating this morning. Have a great day.

Operator: Ladies and gentlemen, that concludes today's call. Thank you all for joining, and you may now disconnect.

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DATE

Thursday, July 17, 2025 at 10 a.m. ET

CALL PARTICIPANTS

Chairman and Chief Executive Officer — Bruce Van Saun

Vice Chairman and Chief Financial Officer — John F. Woods

Vice Chairman and Head of Commercial Banking — Donald H. McCree

Vice Chairman and Head of Consumer Banking — Brendan Coughlin

Investor Relations — Kristin Silberberg

Operator — Denise [last name not provided]

Need a quote from one of our analysts? Email [email protected]

RISKS

Allowance for credit losses on the general office portfolio declined for the first time since concerns began, as management reduced reserve coverage while working through the backlog.

Management acknowledged, "a delay in the completion of several significant M&A deals" with over $30 million in anticipated fees deferred to July 2025, citing ongoing market uncertainty as the reason for this shift.

Tariff-related issues and ongoing "machinations around tariffs" continue to present uncertainty in the second half, presenting a potential risk to deal activity and loan demand.

TAKEAWAYS

EPS: $0.92, up $0.15 or 19% from Q1 2025.

Net Interest Income (NII): Net interest income increased 3.3% from Q1 2025, driven by five basis points of net interest margin (NIM) expansion to 2.95% and modest growth in interest-earning assets.

Fees (Noninterest Income): Rose 10% sequentially, led by record quarters in wealth and card, with capital markets growth despite some M&A fee delays.

Efficiency Ratio: Improved to below 65% as expenses remained broadly flat sequentially, delivering about 5% positive operating leverage.

Shareholder Returns: Repurchased $200 million in common shares at an average price of $39, with total capital returned of $385 million (including dividends); repurchase authorization increased to $1.5 billion as of June 2025.

CET1 Ratio: Reported at 10.6% CET1; adjusting for the AOCI opt-out, CET1 was 9.1%.

Loan Growth: Period-end total loans were up 1% sequentially. Excluding non-core runoff of $700 million, spot loans increased approximately 2%.

Private Bank Performance: Private bank loans rose $1.2 billion to $4.9 billion; average private bank deposits up $966 million; $0.06 EPS contribution from private bank segment.

Deposit Mix: Noninterest-bearing deposits rose to comprise 22% of total book. Stable retail deposits are 67% of total deposits versus a peer average of about 55%.

Deposit Costs: Interest-bearing deposit costs declined by two basis points. Achieving a 54% cumulative down beta.

Credit Trends: Net charge-offs decreased to 48 basis points from 51 in Q1 2025 after adjusting for the non-core education loan sale; nonaccrual loans declined 4% sequentially.

Allowance for Credit Losses: Reduced slightly to 1.59% of loans, with general office portfolio reserve at $3.222 billion (11.8% coverage), reflecting active utilization of reserve as charge-offs occur.

Guidance: Management projects Q3 NII up 3%-4% sequentially, NIM improving about five basis points, noninterest income expected to be up low single digits, expenses projected to be up approximately 1% to 1.5%, and stable CET1 including planned $75 million share repurchases. Full-year outlook unchanged from January guidance.

Net Interest Margin Outlook: Management reaffirmed targets for NIM to reach 3.05%-3.10% by Q4 2025, 3.15%-3.30% in Q4 2026, and 3.25%-3.50% in 2027, with hedging strategies protecting downside in a lower rate scenario.

Strategic Initiative: Announced the launch of a multi-year "reimagining the bank" transformation program leveraging GenAI and AgenTik AI technologies, with work commencing in Q2 2025, led by Brendan Coughlin and a dedicated project team.

Private Bank Growth Target: Progressing toward a $12 billion deposit target for year-end 2025, with mid-July deposit levels exceeding $9.5 billion.

SUMMARY

Citizens Financial Group, Inc.(NYSE:CFG) management identified an inflection point, with all three business lines—commercial, consumer, and private banking—reporting net loan growth for the first time in recent quarters. Executives pointed to sequentially lower non-core runoff and higher line utilization in subscription and private credit lines as key drivers of results. Fee income saw a material boost from record wealth and card performance, as well as capital markets activity, although several M&A deals slipped into July, impacting the fee timeline. This included new wealth teams added in strategic markets and ongoing white-space opportunity cited as an earnings lever. Leaders detailed the next-generation "reimagining the bank" strategy, focused on comprehensive digital transformation and efficiency using emerging AI capabilities. Loans are secured by strong credit quality, with management citing high FICO scores (high 700s), prudent underwriting, and improved credit indicators as discussed in recent quarters, and commercial real estate headwinds diminishing as reserves were actively deployed and backlogs worked through.

John F. Woods explained that "private bank continues to steadily grow its profitability contributing $0.06 to EPS this quarter, up from $0.04 in the prior quarter" and exceeding prior quarter loan growth.

Brendan Coughlin noted, "We had a 95% growth rate linked quarter on originations on mortgage" within the private bank.

Bruce Van Saun highlighted that our diversity helped as strength in equity underwriting and loan syndications offset weaker debt capital markets and a delay in the completion of several significant M&A deals.

Deposit franchise demonstrated outperformance, with low-cost deposits in the retail franchise exceeding peer averages by over 300 basis points year-to-date, benefiting funding cost management.

Loan pipeline and capital markets deal flow are expected to remain robust in the second half of 2025, with over $30 million in anticipated fees from delayed M&A transactions expected to be recognized in July 2025 and healthy syndication market participation.

While competition for loans and deposits remains pronounced, management indicated focus on multiproduct, relationship-led growth to maintain pricing discipline and margin preservation.

The general office portfolio saw its first decline in ACL coverage since concerns began; This is the first quarter where we're really charging off against the reserve and don't feel the need to reprovide for those charge-offs, according to John Woods.

INDUSTRY GLOSSARY

BSO: "Balance Sheet Optimization" — Citizens' program to reduce lower-return assets (e.g., select CRE, noncore loans) and reallocate capital to strategic lending and relationship growth areas.

GenAI: Generative Artificial Intelligence — AI systems that produce content or solutions autonomously, cited as a key tool for Citizens' digital transformation.

AgenTik AI: Proprietary or next-gen artificial intelligence referenced in context of operational and client-facing enhancements at Citizens; precise competitive position or vendor unnamed in call.

ACL: Allowance for Credit Losses — Bank reserve for estimated losses on loans and lease financings, actively managed based on credit trends, loan mix, and macroeconomic factors.

Noncore Runoff: The scheduled paydown or sale of loans and portfolios no longer aligned with Citizens' ongoing strategy, notably including certain CRE and student loan exposures.

CET1: Common Equity Tier 1 Capital — Core capital measure under regulatory frameworks, directly highlighted in capital management and buyback disclosures.

Full Conference Call Transcript

Bruce Van Saun: Thanks, Kristin, and good morning, everyone, for joining our call today. We announced strong financial results today that exceeded expectations. Notwithstanding tremendous uncertainty in the macro environment during the quarter. Highlights include strong NII growth of 3.3% sequential quarter, faced by NIM expansion of five basis points and the resumption of net loan growth across consumer, private bank, and commercial. Good fee growth of 10%, which was paced by wealth, card, and mortgage. Good expense discipline with expenses broadly flat resulting in 500 basis points of operating leverage and credit trends remaining favorable and continued meaningful share repurchases. It's worth noting that capital markets still managed to have a pretty good quarter notwithstanding the uncertainty in the environment.

Our diversity helped as strength in equity underwriting and loan syndications offset weaker debt capital markets and a delay in the completion of several significant M&A deals. We expect that we will record over $30 million in fees on these deals in July and our pipelines remain strong setting us up well for the second half. Our balance sheet remains rock solid across capital liquidity, funding, our credit reserve position. Continue to execute well on our strategic initiatives. The private bank had strong growth in loans and AUM, with average deposits up nicely but spot deposits impacted somewhat by the timing of inflows and outflows. We remain on track to hit all full-year targets.

The business is on track to deliver in excess of 5% accretion to Citizens bottom line and a 20% plus ROE in 2025. In addition, efforts across New York City Metro private capital, payments, and BSO are all tracking well. We've commenced work on a project we are calling reimagining the bank which will be led by Brendan and other top leaders. The objective is to redesign how we serve customers and run the bank. Taking advantage of new technologies like GenAI and AgenTik AI. This requires changes to our organizational model, our underlying technology and data architecture, and imparting new skills to our colleague base. It will be multi-year in nature, and ultimately serve as our next top program.

Stay tuned for more details later in the year. With respect to the second half, we believe that economic conditions and markets are trending favorable, though further machinations around tariffs continue to present a degree of uncertainty. Unfortunately, the fundamentals to drive higher deal activity and a pickup in loan demand remain intact. And we feel well-positioned to capture the opportunity and to deliver good results. We remain comfortable with the full-year guide for 2025 we gave back in January, we're well-positioned to sustain that momentum into the medium term. In short, we feel good about our positioning overall from a strategic business and financial standpoint.

We will stay focused on execution and the things we can control as we continue our efforts towards building a distinctive great bank. With that, let me turn it over to John.

John Woods: Thanks, Bruce, and good morning, everyone. As Bruce mentioned, we delivered strong second quarter results with really good revenue performance and disciplined expense management resulting in positive sequential operating leverage of about 5%. Saw lending begin to pick up during the quarter with net growth across commercial, consumer, and private bank, more than offsetting our noncore Runda. Referencing slides five and six, we delivered EPS of $0.92 for the second quarter, a $0.15 or 19% improvement over Q1. Net interest income for the quarter was up 3.3% driven by margin expansion and interest-earning asset growth. Fees were up significantly linked quarter.

Wealth and card fees were a record for the quarter, and capital markets showed modest growth despite market uncertainty which resulted in several meaningful M&A deals pushing into July. Mortgage also increased largely due to an improvement in MS valuation. Expenses were well managed and net charge-offs came in as expected. With respect to our balance sheet, we continue to maintain robust capital, strong liquidity levels, and a healthy credit reserve. We ended the quarter with CET1 at 10.6%, while also executing $200 million in stock buybacks during the quarter. And importantly, we are executing well against our key strategic initiatives. Paced by continued momentum in our private bank and private wealth build-out.

The private bank continues to steadily grow its profitability contributing $0.06 to EPS this quarter, up from $0.04 in the prior quarter, and we delivered the strongest quarter of loan growth so far, adding $1.2 billion in loans. Also, we continue to make good progress in New York Metro, and our top 10 program is on target and progressing well. With work commencing on a multiyear transformational top program to reimagine how the bank operates. Next, I'll talk through the second quarter results in more detail, starting with net interest income on slide seven. Net interest income increased 3.3% linked quarter driven by continued expansion of our net interest margin and modestly higher interest-earning assets.

As you can see from the NIM walk at the bottom of the slide, our margin improved five basis points to 2.95% given the time-based benefits of noncore runoff and reduced drag from terminated swaps, as well as favorable fixed asset repricing. In addition, we continue to optimize our funding and well in our down rate deposit playbook as our interest-bearing deposit cost decreased two basis points. Moving to slide eight, Fees are up 10% linked quarter. Capital markets improved modestly, driven by higher equity underwriting and loan syndication fees. Bond underwriting fees were lower due to a tariff-driven pause in activity for part of the quarter.

Similarly, M&A advisory fees were lower with some sizable deals pushing into July given the market uncertainty during the quarter. We expect that we will record over $30 million in fees on these deals in July. We continue to perform well in middle market sponsored book runner deals, ranking third by deal volume in the second quarter. And our deal pipelines across M&A and DCM remain strong in terms of the number and value of transactions given pent-up demand. Our wealth business delivered a record quarter with increased transaction activity and higher advisory fees from continued positive momentum in fee-based AUM growth, in private bank.

Our card business also delivered a record quarter driven by a seasonal improvement in purchase volumes. Importantly, in consumer, we recently launched a new suite of Mastercard credit cards designed to address the distinct financial needs and preferences of our customers which should help us accelerate growth in this business. Mortgage revenue growth reflects an improvement in MSR valuation as well as seasonal growth in production. Lastly, other income was a bit higher than usual this quarter as we had a few things break our way. This line can move around a little from quarter to quarter.

On Slide nine, expenses are broadly stable linked quarter helping to drive positive operating leverage of about 5% and improve our efficiency ratio to below 65%. Our latest top program is progressing well and is on target to deliver a $100 million pretax run rate benefit by the end of the year. We've undertaken an effort to develop a much broader program to use new technologies to better serve customers and run the bank. We'll give you more on that later in the year. On slide 10, period-end loans were up 1%. This includes non-core portfolio runoff of roughly $700 million in the quarter. Excluding non-core, loans were up approximately 2% on a spot-based basis.

The private bank delivered its strongest loan growth quarter so far, which period-end loans up about $1.2 billion to $4.9 billion. Commercial loans were up slightly given some new money lending growth and a pickup in line utilization. We are past the peak in terms of client BSO exits, which is also creating less drag to growth. And core retail loans grew driven by home equity and mortgage. Next on slides eleven and twelve, we continue to do a good job on deposits, improving the mix with an increase in noninterest bearing to 22% of the book and lowering our overall deposit costs. Average deposits were up 1% driven by increases in lower-cost categories across consumer and the private bank.

We continue to focus on optimizing our deposit funding, with a further reduction of higher-cost treasury broker deposits this quarter and a decline in retail TVs. We delivered strong retail CD retention rates even as we reduced yields. This was a meaningful driver of our improving deposit cost this quarter as our deposit franchise continues to perform well in a competitive environment. Our interest-bearing deposit costs are down two basis points this quarter, translating to a 54% cumulative down beta. And importantly, stable retail deposits are 67% of our total deposits, which compares to a peer average of about 55%. Moving to credit on slide 13.

Net charge-offs of 48 basis points are down from 51 basis points in the prior quarter after adjusting for the seven basis point impact of the non-core education loan sale in Q1. Retail net charge-offs improved across both core and non-core down about 10 basis points after adjusting for the noncore education loan sale. This was partly offset by a modest increase in commercial net charge-offs primarily driven by an increase in C&I relating to several small idiosyncratic credits. Of note, nonaccrual loans continue to trend favorably and were down 4% linked quarter, reflecting a decline in C&I. Retail nonaccrual loans also decreased with a reduction in other retail and continued runoff of the non-core auto portfolio.

As we look across the portfolio, believe that credit trends are showing signs of improvement and that nonaccrual loans for this cycle likely peaked in the third quarter of 2024, and net charge-offs peaked in the first quarter of 2025. Turning to the allowance for credit losses on slide 14. The allowance was down slightly to 1.59% this quarter, as the portfolio mix continues to improve due to non-core runoff reduction in the CRE portfolio, and lower loss content front book originations across C&I retail real estate secured. The economic forecast supporting the allowance reflects a mild recession and macro impacts from tariffs, similar to last quarter.

The general office balance of $2.7 billion continued to decline modestly in the second quarter, driven by paydowns and charge-offs. The reserve for the general office portfolio is $3.222 billion which represents 11.8% coverage. It's worth noting that this is the first quarter since the general office concerns began that our ACL coverage level declined. We allowed the reserve coverage to come down slightly, utilizing the reserve as we make progress with the workout backlog and the rest of the book remain stable. Note that the cumulative charge-offs plus the current reserve translates to a total expected loss rate of about 20% against the March 2023 general office loan balance. Consistent with their view at the end of Q1.

Moving to slide 15, We have maintained excellent balance sheet strength. Our CET1 ratio is 10.6%, adjusting for the AOCI opt-out removal, our CET1 ratio was stable at 9.1%. Given our strong capital position, we repurchased $200 million in common shares at a weighted average price of $39 And including dividends, we've returned a total of $385 million to shareholders in the second quarter. Our share repurchase program was also increased to $1.5 billion by the board of directors in June. Moving to Slide 16, We are well-positioned to drive strong performance over the medium term with our overall three-part strategy.

A transformed consumer bank, the best-positioned commercial bank among our regional peers, and our aspiration to build the premier bank-owned private bank and private wealth franchise. In support of these businesses, we've commenced work on a broad reimagining the bank initiative that will drive meaningful benefits by revisiting how we operate front to back and leveraging new technologies like AI to serve customers in new ways and run the bank better. This will become a multiyear transformational top program and we will have more to say about this as the planning progresses later in the year. Moving to slide 17, our private bank continued to make excellent progress.

We delivered our strongest loan growth quarter so far adding $1.2 billion of loans to end the second quarter at $4.9 billion. This reflects growth in commercial as line utilization has picked up given increasing client activity as well as growth in mortgage. Average deposits were up $966 million for the quarter and stable on a spot basis given a temporary surge in deposits at the end of the first quarter and some outflows at the end of the Q2. We've seen good deposit gathering momentum early in the third quarter, with deposit levels over $9.5 billion in mid-July. The overall mix continues to be very attractive with about 36% in non-interest bearing, the end of the quarter.

We added three more strong wealth teams this quarter, one each in Northern New Jersey, New York City, and Los Angeles. We ended the quarter with $6.5 billion in AUM, up $1.3 billion for the quarter. With a $0.06 contribution to EPS from the private bank in the second quarter, we are tracking well against our targeted 5% plus accretion to Citizens bottom line in 2025, and to deliver a 20 to 24% return on equity for the year and over the medium term. Moving to Slide 18. We provide our guide for the third quarter, which contemplates a 25 basis point rate cut in September.

We expect net interest income to be up approximately 3% to 4% driven by an improvement in net interest margin of approximately five basis points with interest-earning assets up slightly. This pickup in net interest margin is primarily attributable to time-based benefits of noncore runoff. Reduced drag from terminated swaps, and a benefit from fixed asset rate repricing. We expect noninterest income to be up low single digits led by rebounding activity in capital markets which will be partially offset by reductions in mortgage and other income. We are projecting expenses to be up approximately 1% to 1.5% reflecting continued private bank build-out and broadly strong fee revenues.

We expect to deliver positive operating leverage for the second quarter in a row. Credit trends are expected to improve modestly from the second quarter charge-off level. And we should end the third quarter with CET1 stable, including share repurchases of roughly $75 million which could be impacted by the amount of loan growth. Our full-year outlook remains broadly in line with the guide we provided in January, which contemplated a pickup in business activity in the second half of the year. Looking out to the medium term, we see a clear path to achieving our 16% to 18% ROTCE target.

Expanding our net interest margin is also an important driver and we continue to project to be 3.05% to 3.1% in 4Q '25. 3.15% to 3.3% in 4Q '26, and in the 3.25% to 3.5% range in 2027. Slide 21 in our appendix provides some incremental details on our net interest margin progression to 2027. This combined with the impact of successful execution of our strategic initiatives and improving credit performance will drive ROC meaningfully higher through 2027. To wrap up, we delivered strong second quarter results that came in ahead of expectations highlighted by growth in net interest margin, good fee performance, and positive operating leverage.

We ended the quarter with strong capital, liquidity, and reserves, which puts us in an excellent position to support our clients and continue driving growth and progressing our strategic initiatives. With that, I'll hand it back over to Bruce.

Bruce Van Saun: Okay. Thank you, John. Denise, let's open it up for Q&A.

Denise: We are now ready for the Q&A portion of the call. Please unmute your phone and record your name clearly when prompted. Your name is required to introduce your question. To withdraw your question, and our first question to date comes from Ryan Nash with Goldman Sachs. Your line is open.

Ryan Nash: Hey, good morning, everyone.

Bruce Van Saun: Hi. Bruce, you saw nice loan growth in the quarter. Obviously, a decent amount of it was idiosyncratic given the gains that you're making in private bank. So I know there's a lot of moving pieces with loan growth, runoff in CRE, strategic runoff. But maybe can you just talk about what you're seeing in terms of growth in sort of the private bank and then everything else? And how you're feeling about sentiment from borrowers for the remainder of the year? Thank you.

Bruce Van Saun: Sure. I'll start and then I'll take I'll pass it to Brendan and Don for more specific color. But I'd say it's felt a little like an inflection point that we finally saw all three of the businesses. Commercial, consumer, private bank have net loan growth and at the enterprise level we had loan growth that exceeded the kind of DSO and non-core rundown actions that we're taking. And when we look into the second half, I would say we're constructive on kind of the macro and the fact that there's been pent-up demand put money to work in the sponsor space. We're starting to see kind of some new deal flow.

We're starting to see a pickup in line utilization. There and a little bit also in the pure corporate banking side. Think the private bank is finding its footing in terms of we kind of get have the operation up and running. Initial focus is attracting the relationships and gathering the deposits in the operating accounts. And I think it's been a little slower to see the loan demand pick up, but we're now starting to see that. So some of the growth in the quarter was line utilization on some of the PE BC subscription lines we have. But also the individual consumer borrowing, particularly around mortgage that's starting to pick up as well.

And so we expect that now to continue clearly a little drop in rates if it happens in the second half would be a bit of a tailwind there. And then in consumer, we've been kind of just very steady. We have a great HELOC product lead the market in HELOC market share. That continues to be a product that is in demand. As well as mortgage being another area where we see consistent modest growth, but nonetheless its growth. And then we launched a whole new card complex during the quarter and we would expect to see balances in the card space pick up a bit.

So I'd say we see growth continuing really across the complex and the other net positive is some of the BSO is starting to wind down and become less of a headwind. So the non-core reductions are smaller as we go forward. Some of the work that's been done in commercial that's smaller as we go forward. And so that'll free up the overall net number to be a little bit more positive. So with that, why don't I go first to Brendan, and then we'll go over to Don.

Brendan Coughlin: Sounds good. That was all well said. So maybe I'll just supplement that with a few numbers. In the core retail business, excluding noncore, we were about $400 million quarter on quarter, about a $1 billion year on year. So we're seeing steady high-quality relationship-led growth. The HELOC progress that we're making has been substantial and with external numbers that are available on you know, record title recordings, it appears we've been number one in the States on originations in the last couple quarters, and the credit quality has been very, very high. High seven hundreds FICOs, mid-sixties CLTV. So we're very pleased with the yields above 7% So I've had room we're not playing across the country.

And we're only playing in or 15 space and number one. Nationally. So and those all come with deep deposit relationships as well given the structure of the product and our strategy. So we're very pleased with that. As Bruce mentioned, we're incredibly excited about the new credit card product launch. It will be mostly oriented around cross-selling into our retail customer base versus trying to be a national issuer. But we believe the products are very competitive. In fact, we're seeing, 30% of our early sales in our higher-end massive fluent oriented card, that we're calling Summit Reserve, which is a metal black card and also comes with an annual fee.

So it can reposition the profitability of the credit card business over time, and we expect balances, as purchase activity to scale in the in the back half of the year, start to see some modest high-yielding growth there. So we feel like we're well-positioned in consumer for that to and maybe accelerate a little bit on the yield side with card. In the private banking space, we're seeing really an unlock and growth across the board, $1.2 billion in growth linked quarter. 31% of the balances are consumer. That's up a little bit. From last quarter. We had a 95% growth rate linked quarter on originations on mortgage.

So, but we're hearing, in the market is that our customers, obviously, were dealing with higher interest rates for a while as we launched the business. You all saw that those metrics were heavy deposit led early on, and they're starting to adjust the new normal where interest rates are and business activity is starting to flow through. So the relationship started with day-to-day operating deposits and it's now moving into lending, which is great to see. Yields are strong, six fifty five on the private bank, which is four thirty three basis points over the deposit cost.

So we still have, margin in this business that is NIM accretive, which is driving the, obviously, ROE accretion at the at the top of the house. For us to deliver the rest of the year private banking, we need an average of you know, billion 1 a quarter versus billion 2 we just did. So we feel pretty good that story can continue and the pipelines are strong and demand is really increasing, you know, hopefully with volatility in the market staying in the same zone we're in now or better, we feel really positive. And then on the non-core side, just as Bruce mentioned, the rundown is easing.

Last year, we were running down about a billion a quarter. For the back half of the year it will be about a half a billion a quarter. So still a little bit of headwinds there but that's reducing which should be net accretive and hopefully allow us to all the front book activity we're seeing in the customer businesses to start to scale up.

Don McCree: Okay. Todd?

Bruce Van Saun: Yes. So I'll pick up where Brendan ended, is we've been reducing our book ex CRE by about $1 billion a quarter on our BSO agenda, and that's we're basically almost done with that. So that's gonna be a headwind that goes away. We'll continue to reduce CRE a little bit to the tune of $500 million a quarter or so, but that'll be a little bit of a drag. But we're I mean, what we're seeing is broad business optimism across the board. This quarter, it was really led by the private complex, which everybody knows we've put a lot of resources, a lot of strategic emphasis on.

So we saw a lot of great utilization in our subscription lines and our private credit lines. That was probably about 75% of our loan growth in quarter with about 25% coming from C&I. But as I'm out talking to C&I customers, they're starting to see the uncertainty around the different policy questions abate. So you've got the budget bill passed. You've got the Middle East solved. You've got tariffs moving behind us, and they're beginning to invest in their businesses again. And we're seeing quite dynamic pipeline growth across core C&I.

We're also people remember, we Bruce mentioned and John mentioned that New York Metro were two and a half, three years into now, but we've also opened up in Florida and California in terms of middle market growth and we're seeing very nice new business generation in those markets, which is generating not only loan growth, but it's generating full wallet relationships which we're really encouraged by. So, you know, very different from where I was six months ago. I'm very optimistic about what we see going forward. See how quickly it materializes, but it seems like the environment is a good tailwind to the next couple quarters. Yeah.

I would just put one asterisk on what you said, Don, is like, the worst case outcomes on tariffs seem to be behind us. I But, you know, it's still kind of out there as something to contend with, but I'd say most folks feel that we'll negotiate that results in fairer trade. There'll be a higher tariff rate, but it's not something that is going to knock people off their pack. And they're and they're adjusting their business models to deal with. Correct. So, let's hope that, is the case as we go forward. But in any case, I think that has turned into something that's not as big of concern in terms of causing uncertainty.

Also think besides the tax bill getting through regulatory appointees getting confirmed and having pushing that aggressive deregulatory agenda will also be positive in the second half of the year. Okay. Okay.

Ryan Nash: Ryan. Anything else?

Ryan Nash: Yes. No, that was a great in-depth response. I just I feel bad that John didn't get a chance to answer so maybe I'll just throw one out there. Well, I'll throw one out there for him and obviously, it's been great to see the NIM expansion and you sort of reiterated all the NIM expectations over the medium term. I guess, given the potential that we could have a more dovish Fed at some point in not so distant future, maybe just talk about what steps you are taking, if at all, to sort of try to lock in the higher end of those margin expectations.

And even if we're in a more dovish environment, can we see sort of the midpoint to higher in terms of the net interest margin? Thank you. No more for me.

John Woods: Yes. I appreciate that Ryan. And so I guess what I would talk about is, you know, we have this range, that we've talked about over the medium term of $325 million to $350 million And in our material we talked a little bit about what rate environment that range would be consistent with.

That rate environment, even with the Fed funds level that is, frankly, even below 3%, I'd say that, something even in the neighborhood of $2.75 which should be a significant amount of dovishness, a significant amount of reductions from the Fed, would still be consistent with the low end of that range of $3.25 And, and anything higher than that you know, what we what we message was, you know, something in the neighborhood of $3.50 probably puts us in the middle of our range and at $3.37 NIM. And anything that, you know, higher for longer gets us to the high end of that range. So we're feeling very, increasingly confident. In that in that range.

And, what we've been doing to try to quarter over quarter to protect that downside is opportunistically, you know, putting on hedges. In a forward starting way. And those hedges generally are well north of where we think the Fed will likely come out. So there'll be there'll be stable to providing protection against that lower end. So did a little bit of hedging in the second quarter, a little bit in the first quarter, and we'll continue to opportunistically look for our spots given rate volatility. And, that's playing out really as expected. And so, you know, feeling pretty good about that range.

Bruce Van Saun: Yep. I'll just I'll just add is that you don't wanna spend all your powder on the down scenario. So we've left some of the out years a bit open because you could get in a situation where you have stagflation and then wanna, you know, be able to participate and get the benefit of that in a in a higher rate environment. So, that's kind of a judgment call, but I think we have a really good buy box discipline, so to speak.

So we're we're waiting to see little spikes, and then we'll put some more on, but we're still kind of open to the possibilities that we could end up in a different scenario than what is the consensus scenario of the Fed kind of moving down. Thanks for the color. Yeah.

Denise: Thank you. The next question comes from Erika Najarian with UBS. Your line is open.

Erika Najarian: Yes, hi. Good morning. I just wanted to ask about the write hand side of the balance sheet in terms of the strategy for the second half of the year. Given everything that I've heard, from Brendan and Don, it sounds like it's going to be, a good second half for growth. And I've noticed, John, that you did have great NIB growth in the quarter. Total deposits were down a little bit.

As we think about the second half of the year and potentially a growth year outlook, how are you thinking about sort of growth versus optimizing the mix And or is there sort of more BSO consider that's coming on the asset side that could help fund that growth?

John Woods: Yeah. I think it's a tale of both of those, Erica. But well, I'll start off with the deposit side. I think we're pretty pleased with our low-cost deposit trends So the mix improved in the second quarter. Compared to the first quarter, in the on DDA and low cost overall. And that those contributions you know, are driven predominantly by, our private bank, you know, growth that comes in at 36% of non-bearing. So that's accretive to top of the house. But also the core retail deposit base has just been performing exceptionally well. Versus, versus peers from all that we can tell. So there's very strong momentum there.

And then we have really good seasonal factors that contribute on the commercial side in the second half typically. So all of that lines up for what we believe to be stable to improving mix on the deposit side while actually still being able to grow deposits to support, our loan growth outlook. And a stable, LDR. Output too. Stabilize it. Yeah. We excellent liquidity with very good LDR. So it gives point there. And then on the and then, of course, on the left side of the balance sheet, we are still rotating capital. You know, maybe to a declining degree.

But we've done a really nice job of rotating all of that capital out of noncore and deploying it into highly strategic opportunities in the front book across all three businesses, all three legs of the stool. So that's been really efficient. And that front book back book is extremely powerful and will continue for some time. You know, in the noncore space. And you heard Don talk about the fact that he's still rotating capital in C&I, although to a decreasing level such that we're seeing some of this growth fall to the bottom line.

Bruce Van Saun: Okay. I'm gonna just briefly ask for a brief comment. With color so we don't chew up too much of the clock. But Brendan, maybe anything to add on kind of strategies in the second half for consumer or private bank? And then, Don, I'll flip it to you also for a brief comment.

Brendan Coughlin: Yeah. Just quickly or to John's point, the benchmarks we see show that our low-cost deposits in the retail franchise are outperforming peer averages by over 300 basis points for the year so far, which is giving us a lot of optionality on how we manage our deposit strategy. So we generally have been flattish quarter on interest-bearing deposits, but we've actually grown retail core relationship deposits and released a little bit of bearing deposits on the Citizens Access side, which has given us a lot of ability to manage margin and the total yield on the consumer business is down three basis points as a result.

So all of that is giving us, the ability to, rotate to a higher quality deposit book, more relationship led, and given us some flexibility on the yield side. We had a lot of CD maturities, $8 billion in Q1, $6 billion in Q2. We're retaining about 87% of that. But the yields on that are down a 120 basis points when we save those balances. That's also allowing us to drive costs down. And we have you know, large maturities coming due. It's a little bit in the second half than the first half of the year, but we still have big maturities We expect that to continue to give us some cost value.

And on the private bank side, won't add a lot. You know, we've we've got confidence in the outlook on growth. 36% low, non-interest bearing, 42% low cost we had in seaweed. So the portfolio is of real high quality. We're starting to see the consumer side starting to gear up, on some growth. As well. We just expect those trends to continue through the summer and into the fall. We're pleased with that and that should give us the ability to have a decent cap in city. Idiosyncratic deposit growth.

Don McCree: And I'll be super brief. I'd I'd say the two things. Excited about on the deposit side is we are getting a nice win rate in our expansion markets, which is full wallet win rates. And then we've had a couple interesting wins on the payment side and other big merchant acquiring account and a couple other embedded finance type of accounts, which is coming with some nice low-cost deposit growth. So it's changing our mix a little bit, and the liquidity team on the commercial side of the house has done a great job building a bunch of product functionality, which is away from just the core client functionality. So we see nice momentum on that front. Good.

Bruce Van Saun: Anything else, sir?

Erika Najarian: Yeah. And just one more for you, Bruce. Just on the capital Obviously, large peers, their requirements have started to move down with this year's stress test. Potentially more with other types of recalibration. With Basel III endgame potentially getting finalized. You know, maybe the AOCI burden is, you know, just a third near term than the 150 basis point adjustment that we have fully accounting for it today. I guess, like, you know, in terms of regional banks CET1 and ex capital definition, how much of it can sort of ride with the momentum of the GSIBs versus potentially being also upheld by the ratings agency.

I know one ratings agency I know one of your peers talked about, that being a bit of a binding constraint for the regionals, and I'm wondering if you had any thoughts on that.

Bruce Van Saun: Yeah. Sure. So I would say it's it's good when you come through a turbulent period like we had in the industry through 2023 and first half of 2024, to build capital and run a little conservatively. And so I think you've seen all the regionals building their capital think the rating agencies view collectively is that profitability took a bit of a dip and needs to be kind of restored. And then also there was this overhang of commercial real estate office that needed to work itself through.

And so hold more capital until we see the flex point where profitability has rebounded and you've got through the kind of workout phase and substantially through when credit appears to be in good shape. So I'm hopeful that rating agencies start to look more out the front view mirror and don't hold on to that view for too long. But I think it's still there and it's probably on investors' minds too, is let's just make sure that we're in a good environment and then potentially capital can come down a bit. So I don't think it's going to happen right away. I think we've been running a bit above our 10% to 10.5% CET1 range.

Ultimately, I think we'll be able to bring it back into that range. And still probably stay a bit on the conservative side. That's been our MO really since the IPO is to run a little conservative on capital and there's some real benefit that come from that. If you have a fortress balance sheet, the industry economy is going to go through cycles. That means the industry is going to go through cycles, and there's gonna be opportunities with this When the West Coast banks failed, we were in position to go bid and ultimately to do the startup of the private bank. In a tough environment.

So actually running with a little more conservative in your capital structure proves to be a long-term benefit. So that's where I think it is Erica.

Ryan Nash: Thank you. K.

Denise: Thank you. The next question comes from Matt O'Connor. Your line is open. With Deutsche Bank.

Matt O'Connor: Thank you. I was hoping you could just elaborate a little bit on the reimagining the bank initiative, maybe any color if there's kind of a point person running it and how it's different from the top initiatives that we've seen over the last several years?

Bruce Van Saun: Okay. I'll start, and I think I'll flip it to Brendan. Who will be on point for this one. But you know, if you if you go back in the annals of our top program, number six, about five years ago. Was a bigger more complex program that kinda took a two-year time frame and had more technology investment to deliver the benefits. And so a lot of times when we focus on these annual top programs, we're going after faster wins that aren't as complex and across the enterprise and involve rolling out new technologies.

But we paused and did a two-year program in top six, I think we're at a at a flex point now what's happening with new technologies. That it's worth doing something similar for the next top program. And I think it's it's kind of broader top program may sound limiting. And, you know, when you say reimagining the bank, it's how you're serving your customers, what you can do for your customers, the efficiency of how you're running the bank, how you can just say things like, you know, I have all these people in the call centers. What are ways to deliver better outcomes and more cost-effectively what would it take to ultimately drive that?

What has to happen from a technology standpoint? Standpoint, a organizational standpoint, etcetera? So we're taking that step back now. We're talking with lots of outside consultants looking at scenarios across all industries across the planet in the banking industry, what is kind of the cutting edge right now in terms of how these technologies are being deployed that can be kind of a seismic shift in how your banks operating. It sounds you know, I don't wanna I don't wanna set expectations too high, but we are really at a exciting period now So we basically set up XCO like, mini XCO sponsorship group, is gonna be led by Brendan.

We have a kind of day-to-day lead project team from some key people across the bank that will focus on this mainly as their job now for the next few quarters. And then we have some idea on the silos that we can go attack So we're kind of setting up the structure and then we're gonna unleash this very shortly. But with that setup maybe Brendan you could add to that.

Brendan Coughlin: Yeah. I guess my thoughts here would be you know, after going through the IPO for ten years and then through COVID, I think for Citizens, it's natural reflection point on the next chapter for the bank. And kinda what got us here might need to shift a little bit on what's gonna get us to the next phase. And so good to just pull way back and have a broad lens on that. And then to Bruce's point, you combine that with the market dynamics that things are changing very, very fast. The use cases on AI are becoming a little bit more real versus hopes and dreams.

And, how do we combine those two dynamics to simplify the business model, get really crisp on where we wanna win, and then really reimagine how the bank works to get things done in a win-win fashion, faster, cheaper for the bank, better from a customer experience standpoint from our for our customers. So all things from operating, metrics and artificial intelligence and cost to our people strategy and corporate real estate to simplifying you know, our vendors and, getting really, really focused. Everything's on the table.

And so but what the work to be done over the next couple of months is just to hone that and get really focused on where we wanna get to, which is mentioned, hear from us as soon as we get, get more specific on what we're gonna tackle. But you know, it's been five or six years since we did the last really big top and that's probably the right timeline to move from, smaller programs back to a really large one.

Bruce Van Saun: And I would I would just, also add, Matt, that we get to some really good numbers in the medium term without this. And so we are aiming big on what the potential benefits can be, which could be quite beneficial to the overall financial metrics. Some of that is we'd like to free up the capacity to do more investment in some of our growth initiatives. So you know, you get that virtuous circle going.

And so you create some self-funding for the things that you think are going to drive the future So you are able to now accelerate the investment cycle and drive kind of top-line growth and efficiency growth And clearly, you're not gonna spend everything that you save. You're gonna some of that will drop through and benefit the margin and benefit ultimately the shareholder. But then there's some longer-term considerations where you can free up some investing dollars to actually accelerate the build-out of things like the private bank. So we're pretty excited by it. I don't want to oversell it at this early stage, but tuned. We'll be talking more about it in the next couple of calls.

Matt O'Connor: That's helpful. And then just as you think about kind of some of the upfront cost for this, are you thinking you can self-fund it like you've able to offer in the past or anything that we should be mindful of in terms of notable items and things like that? Thanks.

Bruce Van Saun: I guess it's TBD, Matt, is what we've decided to do now is if there these are modest costs, and they tend to repeat with each top program. We're kind of not posting them separately and breaking them out. But if there were some big things that look more like an expenditure of capital, and would affect the run rate, we can either call them out or we can notabilize them, but we haven't come across that bridge at this point.

Matt O'Connor: Okay. Thank you.

Denise: The next question comes from Ken Usdin with Autonomous Research. Your line is open.

Ken Usdin: Hey, thanks. Good morning. Just two quick ones. So first on the fee side, thanks for giving that color about the $30 million in the third quarter in capital markets. And we see the guide clearly Just wondering if you could talk a little bit more just about that capital markets pipeline, what you're seeing underneath on the advisory side and other capital markets and how you're feeling about the outlook there?

Bruce Van Saun: Sure. Let me just start and I'll quickly flip it Bon. But what I would say that is a real positive is that we do have some diversity in the fees within capital markets. So we started to see interestingly the equity market start to come to life and so we participated in some IPOs in the second quarter. Banks indicated low market stayed strong throughout the quarter. There was a pause in debt market deals early in the quarter. And then the kind of overall macro uncertainty is probably has the biggest impact on M&A. And people's willingness to go forward with deals and close deals.

So I think that right now we have a huge tailwind because of the deals that pushed that could have closed in Q2 or were expected to that pushed into Q3. But beyond that, we're seeing that pipeline refill We think the equity market continues a bit syndicated loan market, and then the debt market should come back as well. So we might be firing on all cylinders, but I'll turn that over to Don.

Don McCree: I won't go all the way there because I'll get I'll get my budget changed for the year. But we are seeing you know, remember that you know, away from m and a, which is obviously advisory and actually working with a lot of our private companies for generational change transactions, which is what our core franchise is. There's a big, big, pent-up kind of desire to transact. And know, it's only been recently where you're starting to see valuations come in line between buyers and sellers and a couple of the big things we've we've are kinda complete in July had nice economic kickers to them and were selling these companies for really high valuations.

The second thing I'd say is you know, on the on the financing side of things, whether it be syndicated lending or the bond businesses or even some of the equity businesses, it's largely been a refinancing of capital structure exercise, and we haven't really seen the new money engine kick in size yet. And it feels to me like that happening as I'm looking at our pipelines that we're starting to see the and it's not just continuation funds from the private equity guys, is the flavor of the month, but they're beginning to actually transact in a much more significant way.

So you're seeing the whole private complex beginning to, you know, come forward and look to put capital to use, whether that is a third quarter event or a fourth quarter event, I'm not totally sure yet, but the pipelines feel pretty good. So I'm I'm more optimistic than I've been in a while in terms of momentum across the diversified portfolio that Bruce mentioned in terms of cap markets.

Ken Usdin: Okay, great. And then just it's clear to see like the mortgage over earning in quarter, so that's clear in the forward guide. Just the other was a bunch smattering of items. Was there anything notably sizable in there or what a better run rate is for that other piece? Thanks, guys.

Bruce Van Saun: I would just say there, Ken, that you know, that other income line has got a collection of small things that you kinda have to take a view of the full year on that you're gonna some quarters where things run a little light and some quarters where they run a little heavier. And so I think that kind of evens out over the course of the year. So there's nothing really sizable and noteworthy to call out there. It just seemed like a few things broke our way and less things broke our way in the first quarter. Yes.

Denise: The next question comes from Steven Alexopoulos with TD Cowen. Your line is open.

Steven Alexopoulos: Hey, good morning everyone. Hi. I wanted to start, so first on the private bank, so if we look at the $12 billion deposit target for the end of this year, know the trends aren't linear, but just given what we saw at 2Q versus 1Q, what gives you confidence? It's roughly $3 billion or so growth for the second half. Can you talk about that?

Brendan Coughlin: Yes. Well, as John mentioned in his comments, mid-July, we're already up over 9 and a half billion. And so the $8.7 if you look at the average deposit growth was quite healthy, had some positive noise at the end of Q1 that slowed back out seasonally, and then we had some lumpy couple of days at the end of this quarter. So looking at the average balances is probably the right way to do it on the underlying momentum, and we're starting to see that ramp back up. So you know, it is true.

We'll need a strong, a strong summer and fall and a strong close to the year to get to get to the numbers, but we see the demand there. The platform is scaling. Our bankers are hitting their stride. They're getting used to the platform and used to the bank. We still see the white space as nobody has truly emerged to cover it. We're still seeing strong inflows. And, so demand is demand is high. It's gonna be about execution, and, and the underlying pace, I think, needs to be in line to maybe slightly better than what we saw in the second quarter for us to get there. But we've got confidence that's the case.

We also have had some new teams that have gone in Southern California as an example that are turning their feet under them. So we have some positivity there and very targeted. We've added a few folks in a handful of the markets. So, there's a lot of dynamics going inside. It certainly is an ambitious, target for us, but we do have confidence we can get there.

Steven Alexopoulos: Okay. That's helpful. And then for my follow-up, so this commentary around reimagining debate, the bank is really fascinating. When you talk to most banks, and they talk about AgenTeq AI, it tends to be call center and CRM focused. It seems that this is much broader. Are guys is this like everything on the table, client experience, cost saves, risk mitigation? Are you looking at everything? And then if you are, amazing if you could pay for that, not see an increase in expenses because if you look at the large banks, need to spend first to start seeing the benefits. Could you unpack that a bit for us?

Brendan Coughlin: Yeah. Everything is on the table, and we are bullish on long-term value creation from AI and AgenTik AI. But there's some tried and true things in there too in the program too that will help self on part of the journey. That aren't necessarily, the kind of the new, modern technology-led initiatives like vendor simplification at a broader scale with much more of a strategic lens, taking a look at, you know, how we're public company structure from a real estate standpoint. There's a lot of other more traditional things that we've we've hygiene cleaned up, on the various top initiatives, and now we're gonna take you know, an even bigger step back.

So it will be a myriad of things. And so our hope is and this is what we're going to scope out through the summer period, that we can, know, sequence all these investments in a way that has it smart and logical and, have some quick wins that can maybe supplement some the ideas that take a longer time. But the reason the reason we're having a much longer window in this top versus the other top is that some of these initiatives do take a little bit more time for the ship to come, and we wanna take that medium-term, longer-term lens on this.

So we're planting the right seeds, not just to impact the next year or two, but impact the next three to five years. And so it's a big I think a big difference in how we're approaching this program that allows us to be a lot more strategic.

Bruce Van Saun: Yeah. And I would just add also that the pace of innovation in this space, particularly around AgenTex, is really mind-boggling. So when you look back six months ago and where was this and how ready for purpose were some of these solutions to kind of where are they today. And I know, Brendan, you just spent a day with a bunch of fintechs and startups to try to look at this and kick the tires a little harder, but it's quite dramatic. And so the big banks may be spending a lot of money and doing some kind of pioneer work.

Oh, I think they'll be kind of more ready-made turnkey solutions available that hopefully we can take advantage of.

Steven Alexopoulos: Got it. Terrific. Thanks for the color.

Denise: Up next is John Pancari with Evercore. Your line is open.

John Pancari: Good morning. Just want to ask a little bit around competitive dynamics. You have a couple of peers out there citing some intensifying competition. We've heard both a bit on the loan pricing side as well as on deposits. And so I just want to see if you can us a little bit more color what you're seeing there in terms of on the deposit side, your confidence in your data expectations? And are you seeing any of that pressure? And then on the loan pricing side, specifically, as you see some acceleration, in loan growth and your strategies there, are you Are you seeing some intensifying competition from banks and nonbanks?

Don McCree: Let's start with Don on commercial. Yes. So John, yes, the answer is it's competitive out there. It's always competitive. But I think our secret sauce and what we're trying to do is stay focused on know, multiproduct relationships with mid-sized companies, and we've carved out a niche. And I think we've got an incredibly strong delivery model, which allows us not to just think about making loans or gathering deposit, but doing a multitude of things with our with our customers, and that's what we've tried to build over the last ten years. And it's it's interesting. The teams that we've hired in Florida and California have said the same thing to me, which is wow.

The way we're showing up as a company across product and industry expertise and core banking, is so different than my old firm showed up. It's becoming the differentiator of trying to win of being able to win business and win you know, broad wallet relationships with people. I mean, we're never gonna make a lot of money lending money to a to a company. I mean, it's about everything else we do with that company. So know, that's the way we try to make the market. And I've never been in a situation in my one years of doing this where I haven't had a ton of competition.

And you just gotta be day to day more focused and day to day better to create the kind of relationships that you want to bring onto the balance sheet and then also pass on the things where you're not going to make a lot of money, where it's just a price gain. And that's what BSO has been about for us. So we're really trying to rotate capital to where we can build those enduring relationships. And you know, knock wood so far so good. And know, the whole if you look at private credit, which is what a lot of people like to talk about, we're now bankers to the private credit complex.

And we've created an amazing business banking the private credit complex that actually is in a very equivalent way, replacing our leveraged finance kind of fee stream and our leverage finance earning stream with a much more attractive earning asset on the private credit side of things. So trying to stay ahead of the trends and trying to stay smart about where the where the market is going and then having your delivery cost being reasonable, which is what Brendan's gonna try to lead in terms of the reimagining the bank is really the name of the game. How do you do generate good earning assets and good deposit growth with a reasonable expense base? Got it.

Same things on my businesses. I'd say it's it is really intense. It's always been intense. I think it's largely been unchanged. Recently. So there's a lot of competition out there. There's always some irrational folks pricing out there. I think we were spending a little bit more time on is that if rates pull back, yeah, how do we play that? And do some competitors play it a little bit more irrationally on the deposit side and hold serve for a while to gain deposits and deteriorate margins or chase the market down really fast on lending. We'll see. What happens. But right now, we're we're competing well in a really intense market.

You know, when it's relationship led to Don's point, you tend to have a little bit more flex in yield pricing on both sides, deposits and lending. If you got through the primary banking relationship, you have to be the very best, and that helps a lot as we've regrounded the franchise and deep relationship based banking, both in retail and private banking. And the only thing you can count on us on is being return focused. So we're not gonna chase the market down if competitive dynamics get super intense, we'll make sure we're doing the right thing for capital allocation and the right returns.

We're very committed to on private, as an example, to have a 2024% return profile. So we're going to stick to our guns there. Price loans and deposits that we believe is appropriate for market conditions and then we'll have to compete and win on relationships. And we're doing that so far and I don't expect that to

John Woods: Yeah. Just two just two quick items here, just to add on top of that. One is, spreads are holding in. We're holding our discipline on the kind lending side of things and returns in retail and consumer look good. On the deposit side, we've had this outlook of low to mid 50s cumulative beta over the medium term and already through the end of the second quarter. We're at 54%, which is, you know, better than better than median, better than average, and a really, really strong performance, so far this cycle. And we'll, we have all of the, all of the foundation and mindset is there to continue that performance over the medium term. Maybe one more point.

I think we've made this on other calls that we've had. Probably a little bit more leverage than some of the other peers when you think about Citizens Access and now the private bank. So depending on how competitive dynamics flex across all the segments. We can know, capitalize where there's better crowd.

John Pancari: Okay. Great. Thanks. And then and then, Bruce, just curious on your updated thoughts around the M&A backdrop. We've seen some resumption of deals amid regional banks just wanted to get your thoughts there. And I know you've kind of implied that over time, if you get the you've got to work towards your results, and then that will drive a multiple in your stock and everything. Just curious how you see Citizens as being a potential player in the wave of consolidation that we could see?

Bruce Van Saun: Yep. So I think nothing's really changed there, notwithstanding it. Small deal that was announced last week. But our focus right now is driving this organic growth. We have a huge opportunity here to get our ROTC back where we'd like it to be to capture that white space that First Republic vacated and build up our private bank and private wealth business and really drive the growth in the New York City metro market that is sitting there in front of us to execute on. So I want to not get distracted and make sure that job one to continue to drive great execution and drive the ROTCE higher.

I have said though if there's a really attractive opportunity down the road, I have total confidence in this leadership team and our ability to integrate that and execute on that. But, you know, you'd have to be pretty high barred. I mean, sure that you had the financials, the strategic, the cultural fit in order to go do something. But I think that's more kind of down the road than it is imminently.

John Pancari: Got it. All right. Thanks, Bruce.

Bruce Van Saun: Yep. Denise? That's all you.

Denise: Oh, I'm so sorry. I had my mute button on. That is from Manon Gosalia with Morgan Stanley. Your line is open.

Manan Gosalia: Hey, good morning all. I had a quick question on credit. Given that the office reserve was down about 50 basis points, can you update us on what you're seeing in the space? And I guess, if things are improving, how you're thinking about managing that reserve in the overall ACL over the next few quarters?

John Woods: You want to start, Chuck? Yes, I'll just go ahead and start off there. Thanks for the question. Are seeing some really good trends in credit as you saw in some of our results broadly charge-offs being down from last quarter to this and expect it to be down again. So you've got a we're we're keeping an eye on that, but the trends look good. Non-accrual trends look very good. And lastly, as you're asking about respect to general office, I mean, this is think the thing to keep an eye on is the dollar amount of reserves that we're allocating to this book. We've we are down this quarter, about 30 million or so.

That rate will jump around a little bit, but this is the first quarter where we're really charging off against the reserve and don't feel the need to reprovide for those charge-offs. That reflects some expectation of stability and valuations as well as, you know, an understanding and an outlook with respect to probability of default that are all feel, you know, well controlled and ring-fenced at this stage. So that's been a big level of uncertainty that we have a sense here may be starting to get behind us. We've we've had peak credit losses are behind us, we believe, for this for this cycle. As well as, I think, we mentioned peak, peak in non-accruals.

So I think that is all trending well. And I think the last thing to keep in mind is our front book, back book. So as we're running off other areas of the book, such as CRE, outside of general office, Most of the front book has a lower provision and ACL need compared to what's getting run off, including in noncore. So a lot of those trends, would be consistent with coverage levels being adequate now and possibly some opportunity to moderate that over time. You know, as long as the macro holds in.

So, you know, just you know, to wrap it all up, a lot of really solid tailwinds on the credit side, and feeling like, that looks good for the rest of the year.

Don McCree: Do you wanna add anything on Office? No. I just I just say that, you know, I don't think we've moved a Office property into our work at group in the last year. So, you know, the problem children who are going through the work out process and where we've got the reserves put up are well identified and well through their restructuring process. And the rest of the book, there's some good tailwinds in terms of the office environment in different cities across country, notably New York City, which is, which is quite strong. So I think, you know, if you go back two or three years from now, we had a lot of uncertainty.

Right now, we feel like we've got a really box We're we're comfortable with where we've got things reserved, as John said.

Manan Gosalia: That's very helpful. And then Bruce, I don't think I heard you talk about Stablecoin when you spoke about the reimagining the bank initiative. Is that an area of focus? And if that is, how are you thinking about the investments there? And in general, what impact do you think that will have on bank?

Bruce Van Saun: I wouldn't put that under the umbrella of reimagining the bank. I think that's more kind of an initiative for us to develop under kind of our overall payments business and payment strategy. And I think it's got a lot of buzz right now and there's some potential use cases that may ultimately establish themselves and cross-border payments is one everybody's talking about. But we're certainly monitoring developments there. We see you always want to make sure that you're capturing opportunities and minimizing risk when you see these trends develop.

But I think we've got, you know, smart people at these things we're talking to our customers we want to be there to serve our customers So I think we're positioned well, but I wouldn't call it out as something that in the near term is, that dramatic that'll have a that dramatic of an impact on us. And a lot of times you're going to look to do these developments in consortia with other banks or leveraging some of your key vendors like Fiserv. And so we're looking at all of that, but I don't I don't think there's a significant investment that's staring us in the face at this point.

Manan Gosalia: Fair enough. Thank you.

Denise: Thank you. The next question comes from Chris McGrady with KBW. Your line is open.

Chris McGrady: Great. Thanks for fitting me in. Bruce, on capital allocation broadly, given the momentum you have in your capital markets business is there a case to be made to be upping capital to these businesses? Any Anywhere you'd like to lean in a little bit more?

Bruce Van Saun: I think it's more of an OpEx question than a capital question. And so we've been adding coverage bankers and key industry verticals and corporate finance specialists And so we'll continue to do that. We've added coverage bankers in the middle market as mentioned in some of the expansion areas building up New York Metro and investing in Florida and California. So a lot of this is people cost. I think we have a good capital allocation to do the business that we focus on and underwriting limits etcetera for a bank our size that are prudent.

I think it would be a mistake potentially to say, well, let's just take more swings and raise that capital limit and do bigger deals. We tend to run into the big boys as we move up market and we also want to stay prudent in terms of the risk we're willing to take and making sure that we stay granular. So I'd say probably no in terms of additional capital We could continue to see some loan growth in terms of the sponsors that we cover we might broaden that universe a little bit so that might be one place that we earmark a little bit of capital.

But mostly right now it's about OpEx and making sure we have really great people lined up with where we see the best opportunities.

Don McCree: Yeah. I think that's right. And I think where you'll see us over index is probably building depth and industry specialization, as Bruce said, in of our corporate finance teams. I think we've got plenty of talent on our core underwriting desks and our core capital markets businesses and, we don't feel capital constrained. You know, at all for the business that we're trying to undertake. So we have a good comp complement of M&A. Professionals as well. And so And a lot of that doesn't take capital. Right? So that's pure advisory. If we were adding to that, it would maybe be to complement industry verticals.

If we go out and buy another boutique, it might be a place where we think we're a little short, and we could benefit from some expertise. But I don't see a huge amount taking place there either. Agree.

Chris McGrady: Okay. I appreciate that. And then the follow-up, the comments about charge-offs peaking likely in the first quarter and NPLs last third. If I separate the office discussion, which you which you just handled, anything notable to call out in terms of inflows or inflow reversals over the last couple of quarters to give you confidence in those numbers? Thanks.

John Woods: Yeah. No. The things are things are, are playing out, you know, as expected, you know, very nicely. And so I think the macro stability I think we were a little conservative with the this quarter. You know? So I think we're well positioned for any uncertainties going forward with respect to tariffs or unemployment, which we which we actually raised a touch in the second quarter. But to remain conservative on that, outlook. But when it comes to the back book performance, it's actually know, playing out as expected and, and now we expect charge-offs to be down slightly as we mentioned. So, yeah, nothing to really call out.

And I and I think part of that is just our risk appetite and where we focus our strategy So in consumer, we're focused more on mass affluent. Affluent is our sweet spot, so we have kind of less exposure to the mass customer who's the first segment to get stretched. And so you don't see any trends in our delinquencies or anything concerning at all. And then again, on the corporate side, we've moved up market a little bit and we've grown kind of the upper end of middle market and mid corporate and those tend to be a bit stronger credits as well.

And so we don't really see any hotspots across And where we do have risk exposures like leveraged finance for highly diversified with very small holds. Yep. We just distribute, you know, 90% of those transactions. So our average hold is, like, $12 million. So and the overall that overall book has been declining over the last couple of years. So we have a very kind of well-developed distribution strategy to make sure it doesn't stick to our balance sheet. Yep.

Denise: The next question comes from Scott Siefers with Piper Sandler. Your line is open.

Scott Siefers: Hey, thanks guys. I think most of my questions have been answered. I did want to ask Bruce or Brendan how does the private bank build out look after we get past this year or you hit the $12 billion deposit, $7 billion loan and $11 billion assets under management. Target. You know, will we kind of be you've talked about the white space, so presumably, there's much more to do. But is there a point where we get to toward more of a critical mass where profitability kinda begins to fly well upon itself, or will we continue to add more teams at similar pace to the last year or so?

Bruce Van Saun: Yeah. Let me start, and, Brandon, you can offer some color. But you know, I think it was really important when we when we initiated this startup that we put some markers out there, and we stayed disciplined, and we demonstrated that we could grow this business in a prudent fashion in a sustainable fashion profitably and that we would generate good returns. And so, we've felt that discipline, we've made and it partly it also makes sense because there's a lot to build in support before you really turn the crank. You want to make sure you've got the service levels and the systems of the customer interfaces at the right level.

So that all came together saying that we're gonna grow gradually through 2025 Once we hit those markers, which we expect to do, then where do you go from there? And I think continuing to add more private banking teams in attractive locations is part of the equation. Opening more private bank offices that are kind of attractive ground level facilities. We just opened one this week in New York City. You can go in for a cookie in fifty second and on the corner of 50 Second And Sixth. It's an awesome showcase for the private bank.

So we'll be doing more of that We're ramping up the wealth teams, so we can have kind of better solution set for folks both banking needs and their wealth needs as well. And so I would expect that to continue. But know, if you go out three to five years, this can grow quite a bit from being, you know, five to 6% accretive to the bottom line. It can easily scale up from there, and I think we can do it profitably. So, Brendan?

Brendan Coughlin: Yeah. Only thing I would add is that it's it's incredibly important. To us that we stay true to the financial guardrails we put in place. In terms of having this be you know, the loan growth be driven by first securing high-quality funding, and that will be a governor, on our growth that we won't we won't get out over our skis and that we have this be a financial profile that has return accretion to the franchise versus dilution. So those things are heavy considerations. Having said that, I agree with everything Bruce said. The opportunity is still very big. And as we consider growth, you know, ties a little bit into the reimagining the bank.

If we can self-fund the journey, maybe we'll go a little faster. But, we're gonna stay very true to the value proposition in the guardrail. We believe there's a white space in the integration of banking and wealth. And so we need talent that believes that too and can scale. And we certainly have other markets. That we operate in today in retail and commercial that we're not yet in private banking that are great markets for us to round out our full bank proposition and plant a private banking flag as well as sort of some of the newer like Florida and California that still provide a lot of running room for growth.

So right now we're focused on delivering the year but we definitely see opportunity for sustained growth into the future in '26 and beyond. So we'll give you more color on that actually when we get to the January guide and we talk about 2026. But, you know, I'd I'd like to be leaning forward as early as next year to actually continue to scale it up.

Scott Siefers: Perfect. All right. Thank you.

Denise: Thank you. The next question comes from Ebrahim Poonawala with Bank of America. Your line is open.

Ebrahim Poonawala: Good morning. Appreciate the call has gone on too long. Just a couple of quick follow-ups. One, in terms of outlook for deposit costs, it feels like CDs still have some room to go. Then we saw the checking account rates move up quarter over quarter. So just wondering if we don't get any rate cuts, John, our deposit costs still trending lower through the second half of the year.

John Woods: Yeah. You may have heard from Brendan that we had a nice rotation in the CD book. There was about $8 billion that matured in the second quarter. That we're actually, you know, rotating into much lower cost CDs that are a 120 to a 150 basis points below, where, where the maturity rates are. So the really nice front book, back book there. It steps down a tiny bit in the third quarter. So down a touch, maybe in the neighborhood of $6 billion in maturities, but still a really nice tailwind. For that front book back book and there's still more in the fourth quarter.

So I think we have got we've got nice benefit to be able to have the opportunity on the on the deposit side. I think I think as I mentioned earlier, keeping an eye on our deposit yeah, our cumulative deposit beta where we perform quite well. We're at 54% through the end of the second quarter. That's better than average we feel very good about deposit cost for the rest of the year based on not only interest-bearing costs themselves, but also some opportunities to stabilize and improve the mix.

Ebrahim Poonawala: Got it. And just one quick one for you, Don. We think about the lending outlook, I'm not sure if you addressed this. Any sign any uptick on the sponsor led side, anything about capital call line lending? Are seeing any pickup there? And how much of that's kind of baked in for the back half? Thanks.

Don McCree: Yeah. We've seen we've seen about a 8% increase in capital call utilization in the second quarter. So that drove a little bit of our loan growth in general. And the trending I heard from the team yesterday is they continue to expect further growth and utilization as we get it. We're not we're not adding a lot of new capital call lines, but we're just seeing utilization revert to normal, and we're about six points below our long-term average utilization in our capital call line. So you've seen the deal announcements going on out there, capital call lines get driven by not the deals we're doing, but obviously, the broad activity of the PE complex.

And they're beginning to get more active. So we think we there's some continued upside in utilization on that side of things. Things. Great. I think that's our last question.

Bruce Van Saun: Great. Before I leave, I just want to take the opportunity to thank John Woods for his contribution along our transformation journey. It's been great working with you, John. And, anyway, we wish you well on your next chapter.

John Woods: Thank you, Bruce.

Bruce Van Saun: Okay. And, with that, let me thank everybody for dialing in today. We appreciate your interest and support. Have a great day.

Denise: Thank you. That concludes today's conference call. Thank you for your participation. You may now disconnect.

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DATE

Thursday, July 17, 2025 at 10 a.m. ET

CALL PARTICIPANTS

Chairman & Chief Executive Officer — Nick Pinchuk

Senior Vice President & Chief Financial Officer — Aldo J. Pagliari

Vice President, Investor Relations — Sara Verbsky

Need a quote from one of our analysts? Email [email protected]

RISKS

Commercial & Industrial Group Weakness: Segment sales fell 7.6% organically in Q2 FY2025 and operating margin contracted 320 basis points to 13.5% in the quarter, primarily due to project delays and international market disruptions, particularly in Asia Pacific and Europe.

Decreased Tool Storage and Loan Originations: Originations in Financial Services declined 4.9% in Q2 FY2025, largely from reduced demand for discretionary big-ticket items, such as tool storage.

Increased Operating Expenses: Operating expenses as a percentage of net sales rose 170 basis points to 28.5% from prior-year levels for the second quarter, driven by higher personnel costs and the absence of a prior-year legal settlement benefit.

Negative Foreign Currency Impact: Unfavorable foreign currency exchange contributed 50 basis points of headwind to the gross margin in Q2 FY2025.

TAKEAWAYS

Consolidated Sales: $1,179.4 million (GAAP, Q2 FY2025), flat, with organic sales down 0.7% in Q2 FY2025 after $8.6 million of favorable currency translation in Q2 FY2025.

Gross Margin: 50.5% gross margin for the second quarter, down 10 basis points from last year, with 50 basis points of foreign currency pressure offset by savings from rapid continuous improvement (RCI) initiatives.

Operating Income: Opco operating income was $259.1 million for Q2 FY2025, down 7.6% in the quarter, excluding a prior-year gain of $11.2 million from a nonrecurring legal win in Q2 FY2024.

Operating Margin: Consolidated operating margin before financial services was 22% for Q2 FY2025, 180 basis points below last year, mostly due to increased investment and removal of the legal payment benefit.

Earnings per Share: $4.72 GAAP diluted EPS for Q2 FY2025, a decrease of $0.35 from the second quarter of the prior year, including a $0.16 per share prior-year legal payment benefit in Q2 FY2024 and a $0.09 pension amortization headwind in the quarter, plus a $0.06 negative EPS impact from foreign exchange.

Snap-on Tools Group Sales: $491 million in sales for the Snap-on Tools Group for Q2 FY2025, reflecting a 1.6% organic gain, with US up low single digits and international sales were flat; operating margin remained at 23.8% for the quarter.

Repair Systems & Information Group (RS&I) Sales: $468.6 million for Q2 FY2025, with a 2.3% organic gain and 60 basis-point margin improvement to 25.6% from 25% reported in 2024; OEM dealership business up double digits.

Financial Services Performance: Revenue was $101.7 million in the second quarter, up $1.2 million from the second quarter of the prior year; Operating earnings for financial services declined to $68.2 million from $70.2 million in 2024; loan originations declined 4.9% to $293 million.

Commercial & Industrial (C&I) Group Sales: $347.8 million for Q2 FY2025, with a 7.6% organic sales drop, mainly driven by double-digit declines in Asia Pacific and Europe, as well as project delays in US aviation and the military.

Cash Flow from Operations: Cash provided by operating activities was $237.2 million for Q2 FY2025, a decline from $301.1 million in the prior year period, primarily due to higher working capital requirements and lower net earnings.

Balance Sheet & Capital Actions: Quarter-end cash of $1.46 billion for Q2 FY2025, with $111.8 million in dividends paid and $79 million in share repurchases; $357.9 million of share repurchase authorization remains as of quarter end.

Inventory & Receivables: Inventories increased by $54.3 million since year-end 2024, with inventory turns of 2.4 on a trailing twelve month basis and day sales outstanding was 65 days, down one day sequentially.

Management Capital Guidance: Expected corporate expenses of $27 million per quarter for the remainder of FY2025.

Product Innovation: New products across segments—including next-generation cordless ratchets, the CTM 550 cordless torque multiplier, and a redesigned Triton diagnostic unit priced at $4,500–$5,000—met technician demand for quicker payback tools.

Segment Margin Performance: RS&I achieved its twelfth operating income margin expansion in 13 quarters, while Snap-on Tools reported one of its top margin levels ever despite uncertainty, with an operating margin of 23.8%.

SUMMARY

Snap-on Incorporated (NYSE:SNA) reported flat consolidated sales (GAAP) for Q2 FY2025 and a 0.7% organic sales decline, with performance pressured by reduced volumes and unfavorable foreign exchange in Commercial & Industrial (C&I), but offset by organic gains in Snap-on Tools and RS&I. The gross margin (GAAP) of 50.5% reflected operational resiliency, successfully countering currency and tariff headwinds through rapid continuous improvement. Management emphasized ongoing investment in product innovation, notably expanding diagnostic offerings and advancing faster payback tools to capture shifting technician preferences. Financial Services originations declined 4.9% and tool storage sales came under pressure amid ongoing customer hesitation around high-ticket items, which management attributed to turbulence from macroeconomic and trade policy shocks. Snap-on closed Q2 FY2025 with lower net income (GAAP), reduced quarterly operating cash generation, and a stable balance sheet supporting continued dividend payments, share repurchases, and a cautious approach to capital allocation. Looking forward, management reaffirmed guidance on expense structure and anticipated pension costs, while remaining vigilant on further trade developments, supply chain risk, and potential acquisition opportunities.

Chairman Pinchuk said, "we navigated the roller coaster and exited the quarter stronger than when we entered." highlighting confidence in core franchise performance and strategic execution.

CFO Pagliari stated that Unfavorable currency translation—chiefly the Swedish krona versus the euro and US dollar—was the primary cause of a 50-basis-point decline in gross margin.

Inventory investment and extended supply chain lead times resulted in higher working capital, which, along with lower net earnings, reduced operating cash flow by $63.9 million in the second quarter compared to the prior year.

While management observed project delays in C&I and pockets of hesitation among independent shop customers, order books strengthened as the quarter progressed, suggesting partial accommodation to macro shocks.

Rising personnel and brand investment costs, combined with the absence of a prior-year $11.2 million legal recovery, were the main drivers of increased operating expense ratios.

No speculative M&A pipeline specifics were given, though management commented that we have a pretty large landscape of small to mid-size targets focused on repair shops and critical industries.

INDUSTRY GLOSSARY

RCI (Rapid Continuous Improvement): Snap-on's internal lean manufacturing and operational efficiency initiative, designed to drive cost savings and offset external pressures.

RS&I (Repair Systems & Information Group): Segment focusing on diagnostic equipment, shop management software, and services for professional repair shops and OEM dealerships.

Snap-on Franchisee Conference (SFC): Annual event for Snap-on's franchise network, relevant for forward demand signals and near-term order flow.

Full Conference Call Transcript

Nick will kick off our call this morning with his perspective on our performance. Aldo will then provide a more detailed review of our financial results. After Nick provides some closing thoughts, we'll take your questions. As usual, we've provided slides to supplement our discussion. These slides can be accessed under the Downloads tab in the Web viewer as well as on our website, snapon.com, under the Investors section. These slides will be archived on our website along with the transcript of today's call.

Any statements made during this call relative to management's expectations, estimates, or beliefs or that otherwise discuss management's or the company's outlook, plans, or projections are forward-looking statements and actual results may differ materially from those statements. Additional information and the factors that could cause our results to differ materially from those in the forward-looking statements are contained in our SEC filings. Finally, the presentation includes non-GAAP measures of financial performance which are not meant to be considered in isolation or as a substitute for their GAAP counterparts. Additional information regarding these measures is included in our earnings release issued today, which can be found on our website.

With that said, I'd now like to turn the call over to Nick Pinchuk. Nick?

Nick Pinchuk: Thanks, Sara. Morning, everybody. As usual, I'll start the call by covering the highlights from our second quarter. And I'll tell you right now, we're encouraged by the results. Resilience and balance against an environment that's been quite turbulent. It's like one long mad minute where the commercial ground keeps shifting. But with the resilience of our markets, the balance of our portfolio, our advantages in products, brand, and people, we navigated the roller coaster and exited the quarter stronger than when we entered. So that's my view.

And as we proceed today, I'll fill you in with more color on our financial results, on our markets, the current environment, the progress we made, and I'll give you another take on what I think it all means. Then Aldo will move to a more detailed review of the financials. Let's talk about the results. Our sales of $1,179,400,000 as reported were flat to last year. Including $8,600,000 in favorable foreign currency translation, our organic sales were down seven-tenths of a percent. They were mixed, but overall balanced. Opco operating income for the quarter was $259,100,000, 7.6% below last year, which included $11,200,000 from the nonrecurring 2024 legal win.

OI margin was 22%, lower by 180 basis points versus last year, which included a higher basis points from that legal matter. Notably, the gross margin was 50.5%, 10 basis points behind last year reflecting continued resilience. Rapid continuous improvement balanced 50 basis points of unfavorable currency transactions. In effect, our OpCo OI gap primarily represented our ongoing investment in maintaining and strengthening our advantage of product, brand, and people, believing as we did in the pandemic, that it's best to emerge from the disruption at full strength and we believe we're on course to do just that. For financial services, operating earnings of $68,200,000 were down 2.8% from last year's $70,200,000.

And combined with the OpCo results, the overall OI margin for the quarter was 25.5%, which compared to the 27.4% recorded last year, which included the legal benefit. This time was 90 basis points. EPS for the quarter was $4.72, 35¢ below last year. 16¢ from last year's legal payment was included in the 2024 number and this year's level included a 9¢ impact higher pension amortization costs. In other words, there were 25¢ of headwinds in the year-over-year comparison of EPS. So now let's speak about the market. So those are results, but now let's speak about the market. We believe the automotive repair environment continues to be favorable. We did see mixed but improved results with the technician.

The tools group was up low single digits in the US network, while the international vans were flat. And from what we're hearing directly from the franchisees in the text, from the grassroots, I believe vehicle repair emphatically remains a very favorable place to operate, and the industry metrics continue to confirm that view. Miles driven, average vehicle age, household spend on repairs, tech count, and tech wages, they're all up. Now the macro environment is still turbulent. But the tech, uncertainty has stabilized. And having said that, it remains significant. In all that, however, the tools group pivot does appear to be gaining traction. And overcoming the ants. You can see it in our second quarter results.

We like the way the numbers are moving. It's a positive sign. On the other side of auto repair where repair systems and information, the RSNI group is displaying encouraging progress, expanding Snap-on's presence with repair shop owners and managers with particular strength in OEM dealerships. Things are looking okay. Upgrading facilities and equip you know, the OEM dealerships upgraded facilities and equipment to match the growing complexity of the new models. Now there are pockets of hesitation on garage projects. With some independent shops thinking that delay in the turbulence is the right move. But in general, the shops know that deeper complexity is rolling. And the challenges are coming, and they must be ready.

So in general, the sentiment remains strong, and you can see it all over the RSNI results. And for critical industries. Now here, we saw uncertainty and hesitation early in the period. Liberation Day and the weeks that followed create a lot of windage in project planning and execution. Many businesses adopted a wait-and-see approach waiting to let the trade program develop before pulling the trigger. And we did see postponements. As the quarter progressed, however, the initial shock gave way to what I would call accommodation. Project Flow came back, and our order book has grown.

The critical industries built momentum through the quarter, and they remain a very attractive place to operate despite what we believe may have been a shock blip in the quarter. So, overall, I describe our markets as continuing to offer opportunities that we believe display momentum. Challenges do exist, there are headwinds. But we're confident with our advantages and strengthening product lines that solve critical tasks in our extraordinary brand, that marks the serious, the critical, and the professional. And our very experienced team. That's capable, committed, and battle-tested will prevail against the difficulties and can continue moving positively. So now let's move to the segment.

The commercial and industrial group was the place where most impacted by the shock early in the quarter. You know what? It has the largest international presence, and its critical industry vision has a substantial slice of project business. So the group's second quarter as reported volume decreased 6.5%, including $4,500,000 in favorable foreign currency translation and an organic sales decline of 7.6%. C and I's operating income was $46,900,000 below 2024 levels by $15,300,000. Operating margin was 13.45%. Down 320 basis points. But we did see upward motion as the quarter progressed. As the customers accommodated to the environment. So we're confident in and committed to extending in the critical industries.

And we'll keep strengthening our position with C and I as we move forward observing the task, using the insights create to create products that make work easier. A great example is the next generation our next generation of the next generation quarter-inch drive fourteen four volts cordless ratchet. Increased power and speed, 40 foot-pounds of torque for breaking loose stubborn fasteners, and once freed, the tools 400 rpm kick in and the fasteners fly off. It's a real-time saver. I'm working in North Carolina plant. Just released two models with CTRA 25 offering a compact frame and a CTRA 27 with an extended neck. Two tools to maximize efficiency with techs working at hard-to-reach out-of-the-way applications.

And there are other great features of the tools. The brushless motors provide improved durability and longer run time. The variable speed trigger gives the tech more control. Preventing, you know, in this situation that overtighten, that can damage components, and a ring of fire creates a 360 degrees of daylight. Beaming from six LEDs generating 27 lumens, illuminating even a cavernous workplace. All of this is serving to make work much easier. The CTR eight twenty-five and eight twenty-seven compact frame and long neck designs techs love them. They know they need both of them. And based on a strong recession, it's now clear that they're destined for our million-dollar hit product list.

Now the specialty torque business remains red hot. It actually had a strong quarter. Part of the reason is that our lineup continues to expand. Moving to meet the increasing complex challenges of essential bolting and tensioning. And recently, we introduced the new CTM five fifty unit It joined the so it joined our rolling over a cordless torque multiplier. This tool is 66% lighter and 20% smaller than its big brother, the one-inch CTM 800. And it delivers effortlessly. It delivers torque all the way 160 foot-pounds to 550 foot-pounds. It's ideal for tackling a range of tasks. In a growing number of heavy-duty applications that require precise torque. The new tool enables much greater efficiency and comfort.

It replaces and it replaces the commonly used impact gun and torque wrench combinations with a single tool eliminating several, you know, cumbersome steps providing a much safer and more ergonomic path to repair. It's a design that combines the efficiency of our extraordinary Norbard gear designs with the brushless motors or our power tools operation to make problem torque. To make precision torque at high output, the a breeze. And, you know, the unique Snap-on Advanced Cooling system, no pun intended, means extended use and increased durability. The CTM also has multiple connection options.

Enabling the accuracy of the pre-procedure to be documented and reviewed ensuring that the job was done correctly and that the bus or semi-truck or bulldozer will operate as designed and safely and without failure. Our CTM five fifty, sophisticated, powerful, versatile, with the durability to tackle the harshest environments servicing the needs of the critical. And as you might imagine, it's been well received. Well, that's c and I. Absorbing the shock. Moving forward, delivering solutions that make critical work easier, safer, and more productive. Now on to the tools group. Organic sales were up 1.6% with a low single-digit improvement in The US and the international network flat to last year.

The operating income was $116,700,000, and that compares with $114,800,000 in 2024 with an operating margin of 23.8% flat to last year. But still one of the group's top margin levels ever. Achieved against the wind. As I said, technicians are still cash-rich for competence poor. They're still hesitant to tie themselves to long-term obligations. Originations were down 4.9%. Sales items like large tool, storage box, boxes decreased in the quarter, but our connection with grassroots customers indicate that the uncertainty has stabilized. And over the period, the tools group pivot to faster payback items, gain tech gain traction against the continuing wars, the rapid-fire announcements in the capital, and the threat of inflation.

All through the quarter, we kept working. Shift in production. Refocusing marketing and promotional campaigns. And most important of all, introducing innovative new products that make an immediate impact offerings that created a short-term payback. So for tech servicing, growing comp sec servicing vehicles of growing complexity, access is big. They need help reaching, squeezing, contorting their way into compact areas. Trying to make repairs without the dismantling things like parts like components like fenders or grills or dashboards. Every day, we're there in the garage observing these tasks, developing the solutions that make the work easier and more profitable. It's Snap-on's principle value-creating mechanism well in the during the quarter, the tools group launched a number of new products.

Each delivering unparalleled access. And matching the customer's preference for faster paybacks One is the SGA s one zero two, two a two-piece radiator pick. Pick set. Each unit is seven inches from handle to the tip. And offers and offers a unique design. One is hooked shaped, ideal for pulling hoses away, and the other is straight. Perfect for pushing the coolant lines free. The complete set is built on our l in our Oakmont, Alabama facility. And, you know, it might seem trivial, I assure you, modern vehicle engine bays are jam-packed. Hoses are no longer out in the open.

And now even basic repairs more often than not requires re require removing fan shroud shrouds or a range of other parts. But with these tools, a tech can extract the hose with ease. Conventional setups have similar geometries, but they require much more space to function. Our new picks get great access and they do save a lot of time, and a text of notice. Another quick payback is our f k c 72. A three-inch h drive, stuffy length, hand ratchet. Collision in our Elizabethton, Tennessee plan. It's our, smallest three h interaction ever. I mean, it's tiny. About the length of your pinky. And, you know, there are a lot of narrow passages in the car.

Well, this stuff, you can go wherever your fingers can reach. But even though it's small, it offers great strength courtesy of Snap-on's unique dual pull system. And the 72 tooth design enables five degrees a five-degree swing art another access enabler. And the sealed head increases reliability, keeping the debris that can muck up the works from entering the gear mechanism. It's another snap-on must-have for Sirius Tech, and it helped drive the pivot in the core. Perhaps best of all, just released, the redesigned 15-inch extra-long needle nose plier set cold forged at our Milwaukee plant. Now that's a process that's difficult to man to master. Yeah.

But if you get it right, Milwaukee's one of the few who can, it results in greater strength and delivers tighter tolerances without additional and more costly machining. The long the long plier neck reaches to restricted openings, creating access. And the cold forging process and the associated shaft strength enabled 85% more gripping power than other models. And that makes this tool a real-time saver. I mean, if you drop a part in a recessed area, no need to disassemble the workpiece. These units will navigate through the confined space, and they'll grab the lost component without letting go, making sure of a quick making sure and quick retrieval. That's a great and significant advantage.

Each of these new products makes work easier and repairs faster. And all three have already achieved what we call our $1,000,000 hit product status. And meeting with tech in the last quarter, we talked about this, about the bottom end of the bigger ticket items. After meeting the techs and meeting the techs preference for faster payback tool storage, our plan Algona, Iowa released a special offering of entry-level KRA twenty-four twenty-two classic series roll tab. Doctors, 55 inches wide. Go from one piece welded body which is with reinforced corners and a 14 gauge steel bottom panel that supports a payload of 2,400 pounds. Over a ton of tools.

It's ideal for organizing a tech investments with the two drawers spanning 50 inches wide one five-inch deep for deep sockets, and a three-inch drawer for storing long flybars and extensions. The box is functional. Rugged, and it's relatively economical. But we'll get your attention in this hooray It's the array of eye-popping two-tone paint schemes. One, a black case with extreme green doors and black trim is my personal favorite. I can tell you, it is bright. Any tech would stand out with this beaming box in this space. Siri just came out. And it's already had significant demand. So that's a tools group. Pivot. Gaining on uncertainty.

Back to growth, exiting on the quarter with momentum, and great American-made products were the big drivers. Now RSNI. Sales in the second quarter were $468,600,000. With an organic gain of 2.3%, a high single-digit advancement in diagnostic information. And strong double-digit improvements in our OEM businesses. Operating earnings for RS and I were $119,800,000, up $6,200,000 or 5.5%. And the operating margin of 25.6% was 60 basis points better than 02/2024. Now just a little fun fact. The OI margin for RS and I has increased year over year for 12 of the last 13 quarters. Sixth Street, That's the RISE software and the power of RCI Boom shackalacka.

Arsenide shine through the turbulence leveraging our customer connection and launching innovative products. One example is our is if you call him, Triton, born in our San Jose facility. Positioned in the middle of our intelligent diagnostics offering, provides a wireless connection between the car and the handheld, Techs can move freely around the bay, under the car, under the car inspecting, troubleshooting, and testing without restraint. And this is important. It does that without losing the lightning speed that's the hallmark of our wired unit. And trying this two-channel lab scope lab scope now provides zoom capability, and this is crucial.

When a waveform glitches happen in a blink of an eye, and they often do, They're hard to catch on a standard unit. So Triton customers can now record playback the test, magnify the pattern, zero in on the abnormally, identify intermittent problems. That's right. Flex it's flexibility, speed, zoom capability, eight-hour battery life for extended use, and four times the memory. Handling more procedures and data handling more procedures and data than ever. The launch easily exceeded prior releases. As you might expect, the gang this gangbusters platform is powerful in tech hands. It's a clear winner in the shops. Arch and I is on a roll.

Great diagnostic units, powerful databases, Mitchell Pro demand repair information, the proprietary power of intelligent diagnostics. Effective shop management system, continuing upward progress, driven by great hardware, significant advantage of the software, and a dedication to RCI. We're gonna keep driving and expand RS and I's position. We're repair shop owners and managers offering more new products developed by our value creation process, and we're confident it's a winning formula. Well, that's our second quarter. Marked by both challenge and advancement. C and I down. Impacted by the shock of liberation day and a bout of wait and see but some recovery. Is underway as a combination develops.

The tools group The pivot to quicker paybacks, gaining traction, Sales up 1.6% organically. OI margin, 23.8%, flat to last year. But representing the third highest in the group's history. Against the wins. And RS and I, sales up 2.2%, OI margin, 25.6%. Up 60 basis points. Software rising and RCI delivering again. It all came together for overall sales of $1,179,400,000. Flat. Gross margins, 50.5%, down 10 basis points. Unfavorable incur unfavorable currency transaction and the impact of value volatile trade policy balanced by RCI. And OI margins of 22% down, 80 basis points adjusting for last year's legal benefit. Primarily reflecting the conviction to keep investing in product and brand and people. Results demonstrating operational strength.

All achieved in difficult conditions. It was an encouraging quarter. I'll turn the call over to Aldo. Aldo, Thanks, Nick. Our consolidated operating results for the second quarter are summarized on Slide six. Net sales of $1,179,400,000 in the quarter were unchanged from last year.

Aldo Pagliari: Reflecting an $8,600,000 organic sales decline that was offset by favorable foreign currency translation. Sales in our automotive repair markets were up. Gains both in our franchise van channel and in activity with OEM dealership and in independent repair shop. Owners and managers. Within the industrial sector, or our C and I group, sales were down year over year reflecting the economic and geopolitical uncertainty that occurred throughout the period. Consolidated gross margin of 50.5% compared to 50.6% last year. And included 50 basis points of unfavorable foreign currency effects. Partially offset by benefits from the company's RCI initiatives.

While Snap-on is relatively advantaged in the current tariff environment, generally manufacturing products in the markets where they are sold Our cost can be affected by trade policies. In the quarter, we mitigated the effects of incremental tariffs, managing material and other costs, so that there was no meaningful impact on gross margin. With respect to the unfavorable foreign currency effects in the quarter, much of this was due to transaction impacts of the year over year strengthening of the Swedish krona versus the euro and the US dollar. As we have factories in Sweden serving both the C and I and RS and I groups.

In C and I, manufacture cutting tools for our European and emerging markets, while in the RS and I, our car aligner facility, produces collision products that are sold globally. Operating expenses as a percentage of net sales rose a 170 basis points to 28.5% from 26.8% in 2024, mostly due to a nonrecurring benefit of $11,200,000 from legal payments received last year and increased personnel and other costs including ongoing brand investment. Operating earnings before financial services of $259,100,000 in the quarter compared to $280,300,000 in 2024. As a percentage of net sales, operating margin before financial services of 22% compared to 23.8% reported last year which included a benefit of 100 basis points from the legal payments.

Financial services revenue of $101,700,000 in the second quarter, compared to $100,500,000 last year, while operating earnings of $68,200,000 compared to $70,200,000 in 2024. Consolidated operating earnings of $327,300,000 compared to $350,500,000 last year. As a percentage of revenues, the operating earnings margin of 25.5% compared 27.4% in 2024 Again, including a benefit from the legal bans. Our second quarter effective income tax rate twenty two point six percent was 22.5% in 2025 and in 2024. Net earnings of $250,300,000 compared to $271,200,000 in 2024. And net earnings per diluted share of $4.72 in the quarter compared to $5.7 per diluted share last year.

When comparing the quarter's earnings per share with the second quarter of the prior year, there is 25¢ per share of headwinds on a year over year basis. In the second quarter of twenty five, diluted earnings per share included approximately $09 per share of increased year over year nonservice and net periodic pension expenses. Primarily from higher amortization of actuarial losses. While the 2024 included 16¢ per share benefit from the legal payments. Now let's turn to our segment results for the quarter. Starting with C and I Group on Slide seven, Sales of $347,800,000 compared to $372,000,000 last year, reflecting a 7.6% organic sales decline. Partially offset by $4,500,000 of favorable foreign currency translation.

The organic reduction includes double digit decreases in the segment's Asia Pacific and European based hand tool businesses, and a mid single digit decline in activity with customers in critical industries. Partially offset by a high single digit rise in the specialty torque operation. Overall, the sales decline reflects a reduction in certain cross border sourcing activities and the current trade situation. And the slowdown of projects by our customers in some industries and geographies including US aviation and the military. With respect to critical industries, demand was challenged in April, but improved as we moved through the quarter. Gross margin of 40% in the second quarter compared to 41.7% in 2024.

This decline was primarily due to lower sales volumes, and 50 basis points of unfavorable foreign currency effects. Partially offset by savings from RCI initiatives. Operating expenses as a percentage of sales of 26.5% in the quarter compared to 25% largely reflecting the impact of reduced sales volumes well as increased personnel and other costs. Operating earnings for the C and I segment of $46,900,000 compared to $62,200,000 last year. The operating margin of 13.5% compared to 16.7% in 2024. Turning now to slide eight. Sales in the Snap on Tools Group of $491,000,000 compared to $482,000,000 a year ago. Reflecting a 1.6% organic gain and a $1,200,000 of favorable foreign currency translation.

The organic increase reflects a low single digit rise in United States business, activity in our international operations was essentially flat. During the quarter, we believe our ongoing pivot to shorter payback items was successful in overcoming the continuing uncertainty of technician customers in the current environment. Gross margin declined 50 basis points to 48.3% in the quarter from 48.8% last year. Mostly due to 40 basis points of unfavorable foreign currency effects. Operating expenses as a percentage of sales improved 50 basis points to 24.5% the quarter from 25% in 2024. Largely reflecting the higher sales volume. Operating earnings for the Snap on Tools Group of a $116,700,000 compared to $114,800,000 last year.

The operating margin of 23.8% was unchanged from 2024. Turning to the RS and I group. Shown on slide nine. Sales of $468,600,000 compared to $454,800,000 in 2024. Reflecting a 2.3% organic sales increase and $3,100,000 of favorable foreign currency translation. The organic gain includes a double digit increase in activity with OEM dealerships, and a high single digit gain in sales of diagnostics and repair information products to independent repair shop owners and managers. These gains more than offset a high single digit decline in sales of undercar equipment, including collision repair products. Gross margin improved a 130 basis points to 46.8% from 45.5% last year, primarily reflecting increased sales of higher gross margin brides.

And benefits from RCI initiatives. Partially offset by higher material freight and other costs as well as 40 basis points of unfavorable foreign currency effects. Operating expenses as a percentage of sales rose 70 basis points 21.220.5% in 2024, largely due to increased personnel and other costs. Operating earnings for the RS and I group of a $119,800,000 compared to $113,600,000 last year. Operating margin improved 60 basis points to 25.6% from 25% reported in 2024. Now turning to slide 10. Revenue from financial services of $101,700,000 reflected an increase of $1,200,000 from $100,500,000 last year. Financial services operating earnings of $68,200,000 compared to $70,200,000 in 2024. Financial services expenses of $33,500,000, compared to $30,300,000 last year.

The increase is primarily due to $1,500,000 higher provisions for credit losses. As well as a rise in personnel and other costs. As a percentage of the average financial services portfolio, expenses were 1.3%. The second quarter of twenty five. And 1.2% in 2024. In the 2025 and 2024, the respective average yields on finance receivables were 17.517.7%. While the average yields on contract receivables were 9.18.9%, respectively. Total loan originations of $293,000,000 in the second quarter represented a decrease of $15,100,000 or 4.9% from 2024 levels including a 5% decline in extended credit origination.

The reduction in extended credit originations mostly reflects lower sales of discretionary big ticket items such as tool storage, partially offset by higher originations associated with the successful launch of the new 11. Our quarter end balance sheet includes approximately $2,500,000,000 of gross financing receivables and $2,200,000,000 from our US operation. For extended credit or finance receivables, The US sixty day plus delinquency rate of 1.8% is up 20 basis points from the second quarter of twenty four, but down 20 basis points from the rate reported last quarter. Trailing twelve month net losses for the overall extended credit portfolio of $69,500,000 represented 3.4% of outstanding at quarter end.

We believe these portfolio performance metrics remain relatively balanced considering the current environment. Now turning to slide 12. Cash provided by operating activities of $237,200,000 in the quarter compared to $301,100,000 last year. The lower cash flow generation as compared to the 2024 largely reflects higher year over year increases in working investment and lower net earnings. Net cash used by investing activities of $46,000,000 mostly reflected net additions to finance receivables of $26,400,000 and capital expenditures of $19,700,000. Net cash used by financing activities of a $170,900,000 included cash dividends of $111,800,000, and the repurchase of 250,000 shares of common stock for $79,000,000 under our existing share repurchase program.

As of quarter end, we had remaining availability to repurchase up to an additional $357,900,000 of common stock under our existing authorization. Turning to Slide 13. Trade and other accounts receivable represented an increase of $26,800,000 from 2024 year end. The day sales outstanding of sixty five days were down one day sequentially from last quarter, and compared to sixty two days at year end 2024. Inventories increased by $54,300,000 from 2024 year end primarily due to $37,400,000 of currency translation and some investment intended to mitigate supply chain uncertainty. On a trailing twelve month basis, inventory turns of 2.4 were the same as year end 2024.

Our quarter end cash position of $1,000,000,458,300,000 compared to $1,000,000,360,500,000 at year end 2024. In addition to our existing cash, and expected cash flow from operations, we have more than $900,000,000 available under our credit facility. There were no amounts borrowed or outstanding under the credit facilities during the year, nor was any commercial paper issued or outstanding in the year. That concludes my remarks on our second quarter performance. I'll now review a few outlook items the balance of the year. With respect to corporate costs. We currently believe that expenses for the remainder of 2025 will approximate $27,000,000 per quarter.

Additionally, during 2025, as previously shared, we recognize and expect to continue to incur approximately $6,000,000 pretax per quarter of increased nonservice pension costs largely due to higher of actuarial loss. These noncash costs are recorded below operating earnings as part of other income and expense net. On our statement of earnings, and we'll have about a 9¢ per diluted share quarterly negative effect on EPS. For the balance of 2025. Expect that capital expenditures will approximate $100,000,000 and we currently anticipate that our full year 2025 effective income tax rate will be in a range of 22 to 23%. Our expected range, which factors in The US tax bill that was recently passed, is unchanged from previous estimates.

Finally, in 2025, our fiscal year will contain fifty three weeks of operating results with an additional week occurring at the end of the fourth quarter. This occurs every five or six years, and historically, it has not had a significant effect on our full year or fourth quarter total revenues or net earnings. I'll turn the call back to Nick for his closing thoughts. Nick? Thanks, Aldo.

Nick Pinchuk: Snap-on second quarter. Results marked by resilience. Portfolio balance, shock accommodation, and progress. C and I. International markets and critical industries disrupted by Liberation Day. The shock giving way to accommodation and accommodation in the storm. Or to the storm. 1.6% organically. US up. International flat. Return to positive. OI margins, 23.8% flat to last year. But among the group's strongest ever. RS and I, continuing strength. Sales up 2.3% organically. Opco OI margin of 25.6%, up 60 basis points. Rising again. And it all came together for an overall demonstration of performance against turbulence. Sales of the for the corporation were $1,179,400,000, essentially flat in the difficulty.

Opco OI margin, 22%, down 80 basis points adjusting for last year's legal benefit, with the gap driven primarily by spending to re to maintain full strength preserving advantage for when the turbulence abates. An EPS $4.72, against, you know, comparisons against 25% 25¢ a headwind. We believe the we believe that these results demonstrate our overall strength. They also highlight our relative advantage in the turbulence of the volatile trade policy. Strengths rooted in our strategy of making in the markets where we sell, and in our solid structure of broadly based facilities. 36 factories, 15 in The US, and in a considerable distributed know-how.

We make a version of our products in almost every region, but especially in The US. We believe this advantage is clearly on display in our quarter's gross margin. Of 50.5%, down 10 basis points from last year. But a shortfall more than explained by 50 basis points of unfavorable currency that was offset by RCI. You see, we said we believe we're resistant to tariffs. And we meant it. And we further believe that as we move forward, we have we have momentum as the shock recedes. And we have advantage rooted deeply in our products, continually matching the increases in complexity of work making it much easier.

Advantage in our brand that really does mark the professional and displays personal and collective pride and dignity, And, of course, advantage in our people, dedicated, capable, battle-tested, and wielding the Sapphire Valley creation processes to improve every day as they demonstrated in the quarter. So we believe that as we move forward using those strengths inherent in our enterprise, we'll prevail against the difficulty execute on our abundant opportunities, and move positively through the last half of 2025 and well beyond. Before I turn the call over to the operator, I'll speak directly to our associates and franchisees. I know many are listening. My friends, I know that the encouraging results we just discussed was created by your efforts.

Past and present. For your progress against the turbulence, you have my congratulations. For the energy you bring to our enterprise every day you have my admiration. And for your confident and unwavering commitment to our future, you have my thanks. Now I'll turn the call over to the operator. Operator?

Operator: Thank you. We will now begin the question and answer session. To ask a question, you may press star then 1 on your touch-tone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed, and you would like to withdraw your question, please press star then 2. And at this time, we'll pause momentarily to assemble our roster. And the first question will come from Luke Junk with Baird. Please go ahead, sir. Good morning. Thanks for taking the questions. Nick, I wanna start just with the big shift we're seeing in tools group one q into two q.

I guess with the benefit of hindsight, is there anything that sticks out to you as, I guess, what I'd say, less normal in the first quarter in the tools group or maybe particular areas where you may have gotten caught a little bit flat-footed in this environment. Guess, thinking through the lens of two q, now that feels a lot more normal. In terms of the company's ability to navigate this turbulence. Just you know, what was, you think, the most important area of internal execution this quarter? And should we think you can lean into that even more into the back half of the year?

Nick Pinchuk: Well, the part of it was, I think I think the technicians, I think, you saw I think there was some evidence that the technicians had more uncertainty accelerating uncertainty in the first quarter versus prior quarter. You saw consumer sentiment drop from December to January by I think it was 20 basis point 20 points. The lowest since '22 since the last peak. You know, problem with supply chain. And it's still down, but it's rebounded a little bit. I would say that the early days of the administration spooked the grassroots. And so our pivoting was going. Better.

Know, which has been going, but that spooking, that 20 basis I reflected in the 20 basis points, and I don't mean to tie it exactly to that. Really outran the pivot. But it kinda stabilized. They aren't affected so much by tariffs. You know, liberation day didn't affect them so much. So they're more sitting there, and then not much happens, really. And the way that, I guess, the bombing of Iran happened, but not so much. And we started to gain ground on that. That's what happened.

I guess the one learning we learned in the first quarter that we applied in the second quarter you might remember that I talked in the first quarter about I think we can nibble into the lower end of the big ticket items like the solace in the first quarter with salute to solace was pretty successful. And we sold some heavy-duty cards in the first quarter that were economical. And so we did some more of that in the second quarter. I talked about it on the call that classic series with, you know, box that gives you know, cheaper than, you know, the other series. And holds a ton of tools. And has these eye-popping colors.

That was pretty popular. So I think we learned we can add to the pivoting to what the obvious things are, like hand tools, power tools, and other stuff like that. Sort of eating at the bottom end of the big line and focusing on that. And I think that's one of the things we did. Not sure that keeps working because you always have to do some different things. But I think the pivot is now working pretty well. And I think we have moment. I've said this in this thing we exited the quarter stronger than when we entered.

Luke Junk: What about the origination side things, Nick? And just generating demand for new credit? You mentioned in your script the you know, the benefit of diagnostic units that we're, you know, we're seeing in that originations decline moderating sequentially, but do you think there's an opportunity to get franchisees to lean into credit a little bit more as we go through the back half of the year?

Nick Pinchuk: No. Your guess is good as mine. I don't know. You know you know what I mean? Look. I think I think this. Originations were better. You know? Like, know, for government work, they're like, we're down half as much That sound that's a tip-top statement. We're down half as much as we were in the first quarter. I think we're down more This quarter, we're down 4.8%, 4.9% originations, and you know, certainly, that would have been the originations were somewhat plumped up by the launch of the Triton. So tool storage is probably down more than that would indicate, but I do I don't know how that goes forward.

I think it's gonna take a while for customers to kinda accommodate. But as we saw in the pandemic, which is really I'm kinda talking about that with the with the CNI shock question. It's kinda like a pandemic event. Everybody got shocked. I think the, you know, the technicians have been shocked for a while. I think sooner or later, nothing new happens, they start to accommodate. And they start to realize, well, you know, I'm worried, but nothing's really happened to me. You know, my wages keep going up, and I start to say I can take a few I can myself to more normal situations. So I would expect that to get better as we go forward.

Plus, I do think we're better at the pivot We're getting better and better and better and better and better. So that works for us. I don't know if the I don't know if I need the originations to come back right away. But I do think that eventually people if nothing big happens, they start stabilize even more, and people start to come back with a rejection. But I'm not predicting anything like, for the next quarter. As you know, Luke, I'm gonna say this again because I said it at every third quarter. The third quarter is always squirrely.

Harder to predict than any because the SFC is during that quarter, and that creates a kind of turbulence that you can never predict. So we'll see how it goes. But I like the way things are going. I'll tell you that.

Luke Junk: You can see it in the numbers. Maybe for a turn it back, Aldo, could you just give us maybe a feel for some of the key end market trends within Critical Industries and C and I. And it's mentioned that momentum was much better exiting the quarter relative to, you know, this more COVID like shock. Can you just give us a feel for, you know, where that run rate was directionally? Relative to getting close to the plan?

Aldo Pagliari: Broadly speaking, Luke, April was much slower than what the full quarter turned out to be. So as I said, they've improved as quarter moved out. And we saw the biggest changes, I'd say, would be in the aviation and military-related non-defense sector, things of that nature. But general industry also started to improve. So again, well down yet in the quarter. Started to see some signs of improvement.

Luke Junk: Got it. I'll leave it there. Thank you.

Sara Verbsky: The next question will come from Gary Prestopino with Barrington Research. Please go ahead.

Gary Prestopino: Good morning, all.

Aldo Pagliari: Morning.

Gary Prestopino: Did you call out what the FX impact on earnings per share was for the quarter? In your narrative?

Nick Pinchuk: I did not.

Gary Prestopino: Would you like to know?

Nick Pinchuk: Yes. I would.

Gary Prestopino: Okay. 6¢. Okay. 6¢ negative. Okay. Great. Thank you. Then a couple of questions here. The RSNI growth was pretty strong, and you mentioned something about our new Triton platform.

Nick Pinchuk: Yeah. Could you could you maybe elaborate on that? And, you know, what the price points are and what are the differences with this versus what you had in the market before?

Gary Prestopino: Sure. Look. I Gary, I don't know if I can say the price point on this. Yeah. Okay. Let's say $4,500. Ballpark. Ballpark. $4,500. Might be I don't know how we can afford to sell it for that number, but okay. Around that number. Know, it depends. There's a lot of factors. You know? What is what's on promotion? What isn't? But let's say know, 4,500 to 5,000, something like that. It's in the it's in it's in the middle of the intelligent diagnostic range. Right in below Zeus and above Apollo. And the difference is the differences are is that it's wireless rather than wired.

And the big the big deal here is that our wired units were you know, their hallmark was they were like lightning. You plug them in. You started them up, and they really rolled up. This one comes up right away. So and it's wireless. So it gives you both the flexibility of wireless and the and the speed, you know, the instant on of wired, and that's that's a cool thing. And then the then you have the other thing that we have a Zoom feature on the know, these things have two channel scopes. So what you do is you put the scope on a car and you watch a waveform here.

But the thing is, sometimes the problems in the car are very intermittent, very quick. They only happen for a little while, and you can't really see them on the way to them quick. Carefully until you zoom right in and look at small glitches. And the zoom feature allows you to freeze it and move it in. You know, the waveform's a dynamic thing at first. So then you record it, freeze it, zoom in, and check catch the glitches. That's a big help. And then it has it has a eight-hour battery life, which is pretty long and, you know, you get makes it quite usable.

The other thing I think that's that's different is that's four times the memory. The four times memory means you can store a whole lot of stuff, you know, like a lot of waveforms, a lot of procedures in it, a lot of data from other things. And it helps a lot. Technicians really like it. I, you know, I just was out with franchisees in Connecticut and in Atlanta. Having dinner with a bunch of these guys. And then, you know, they're all franchisees are pretty positive, and they love this one. They love selling it. And the techs seem to like it too. So we feel pretty good about it.

So pretty well for, you know, for the launch look was baffle. So we'll see how it goes. We like it, though. I mean, it's it's having an impact.

Gary Prestopino: Yeah. That's good to hear. And then just lastly, in the C and I group, I think you called out that the international operations, you know, were sluggish. Did The US kinda mimic that You know, I'm not sure how many how much you do in US and C and I, but I wanna get an idea.

Nick Pinchuk: Yeah. C and I C and I roughly. For government work, Gary, C and I is fifty. 50 in North America, 50 outside The United States. Mhmm. You know? Europe, tops. Asia, you know, are well, you know, Asia we ourselves said, we're not importing anything from China. The thing is a 170 a 170% tariffs. Remember when they were a 170%? We just said, no. So Asia is very, very discombobulated in this situation. Not to mention you got the you got some other markets disturbed, you know, like South Korea, they just arrested the old president, you know, and everybody's moaning. And then in Thailand, they just declared the former the new prime minister a traitor.

And took her out of office So things are pretty turbulent in Asia. We I was just there. And the markets are pretty bad. You look at Europe, I mean, Europe is again a cross border position. They've got they've got GDP in UK was point 1%. GDP in Germany point 3%. GDP in Spain, point 5%. Europe has got problems. I think, least for us, we're seeing that. And then in The United States, really, what happened is that's like the, you know, European businesses and the Asian business. A lion's share of which is in c and I. Then you've got the industrial businesses. You know?

Industrial's got pick and ship businesses, which quick, you know, it's off the shelf, like, little bit like the tools field. One then it's got project business, which is a big slug of their business. And these things you think about Okay. Liberation day happens. We're gonna have tariffs. Well, the tariffs changed three times for China in the month of April. And then and then nobody they come out with 46% for Vietnam. And then they say, oh, never mind. It's gonna go to 10% until July 9. And then July 9, they come out and say, well, it's 4020%, but we're not sure.

Because the 20% is for is for direct you know, the standard stuff, and 40% of you have transshipment. So people are sitting there saying, it's a very interesting phenomenon. It's a little bit like the pandemic, I would say. It's kinda it's kinda not congruent to the pandemic, but it's similar. You know, if you have projects and you're thinking about doing things, you're saying, I'm not gonna commit to very much. Because I don't know where the world's gonna be. And I kinda have a feeling that there's a pretty close horizon, and it's gonna resolve itself. So that means that put people back, particularly in the early parts of the of the quarter. You know?

And people just said, jeez, I don't wanna commit. I look like a fool if I make a mistake. And you saw some of that working through the working through the system. Especially in a project. Now all of this our orders kept getting stronger. People just didn't pull the trigger for delivery. And so we like the order book. It's just that people have to figure out how they're gonna accommodate the tariffs, and people are gradually come as they did with the pandemic. That's what happened to the pandemic. At first, people panicked. You know? Yeah. Everything started to work out just so you can see in the pandemic. K. K. Okay.

Gary Prestopino: You very much for that.

Nick Pinchuk: The next question will come from Christopher Glynn.

Operator: With Oppenheimer. Please go ahead.

Christopher Glynn: Thanks. Yeah. A lot of a lot on that last topic, but just maybe a little follow-up. You know, description of upward motion through the quarter, seemed to center a little bit on critical industries in US project timing, but I think you said it really spanned APAC and Europe. So just wanted to clarify if that motion really spanned all those categories.

Nick Pinchuk: No. I no. What I was talking about maybe a little bit in Europe. You know? Asia is kind of a different deal. Asia is gonna take a lot longer to deal with. Isaac. Because, you know, you got those just what I said. I mean, you know, they got the political turbulences and a bunch different places. And you got China, which is a basket case. China's really screwed up. And so you got all that stuff in Asia. And on top of which, you got the cross border flows, which everybody's trying to figure out what to do, including us.

You know, we're not taking tariffs, but we gotta figure out what to do with our clients in China. You know, if we don't wanna use them in The United States. And we sell in Asia. You know? So we gotta just you know, help them a little bit. But I don't think that gets just by the liberation day situation. Europe is more like that. But I really was talking about mostly just in our last you know, discussion, really about the critical industries business and their project-based business. That's what I was talking about.

When we talk about Chris, when we say that the that we exited the quarter stronger than when we entered, we kinda mean the tools group as well. You know, we mean and if I could do me the tools So we're we're actually talking about C and I and the tools group. But at C and I, it's most pronounced. In the industrial business, which by the way, is the big Kahuna engine in the C and I business.

Christopher Glynn: Perfect. Thanks. Very clear. And then just wondering about capital. You got a nice net cash position here. Any comments on state of the acquisition pipeline and update on types of focus that inorganic business development efforts are taking lately?

Nick Pinchuk: Sure. We got we got a we got a bunch of stuff looking at. I mean, you know, I think you can you know, it's no secret that we have a we have a pretty large landscape or you know, a landscape of acquisitions that we look at every you know, constantly, And, you know, generally, there's not much to acquire around the tool group. Probably, you don't look so much at Asia these days because who the heck knows what's gonna happen there. You know? And so you're talking about the expanding the repair shop owners and managers or the critical industry.

Those are the areas you look in, more or less, And we're looking at, you know, several places. You know? Sometimes as we peel the onion, it looks like, hey. These guys are only 20 or 30% off, and we don't like the other stuff. Sometimes And in this situation, of course, you wanna be pretty careful. You know? Don't wanna acquire something and then wake up and figure out woah. You know, the tariffs aren't looking so good for these guys. You know? So you wanna be more careful in due diligence. I'm not saying I'm not giving you any future view of that. That's just a little color.

In this situation, I think, you might be able to get that bargain but you're worried about what you might buy. You know? You wanna be very careful in due diligence. And we are. We take care of our money.

Christopher Glynn: Great. And then, SOT. So sounds like the sentiment moved off the bottom, a little reconciliation in the mindsets. There. And escalating of your pivot work going well. Just wanted to see if any other factors layered in, you know, what sell in versus sell through and you know, was there any restock or maybe price related pull forward that came to bear?

Nick Pinchuk: I don't think there's any of that. Actually, our prices were pretty normal. You know, we might have had a little more pricing in Canada than normal. Maybe, you know, because of the situation there. We can always price if we get if we have tariff problems and, you know, so but, generally, we're resistant to that stuff. You might see some of that in Canada, but and Canada actually was okay in a quarter. So that wasn't afflicted. I don't think I don't I think you saw it. I mean, I think the international business kinda mixed. And so that was flat. Think the big news is US up. And that was driven by the pivot.

The hand tools were pretty successful. And the diagnostics business is pretty successful. So those two things made hay in the situation, and we like that idea. And I think you know, we felt you know, if you look at the structure of the quarter for the tools group, we exited stronger That's complete it. That's no prediction. I've already said that the third quarter is squirrelly. You know? But generally, I like the direction we're going there. It seems like and I think it's simple as this. We've been pivoting. We're getting better at it. But the but the uncertainty has kinda stabilized. So if the uncertainty stabilizes, every month, we gain ground on it. With the pivot.

Every month. Great.

Christopher Glynn: Sure. Thanks for all that.

Operator: The next question will come from Scott Stember with Roth. Please go ahead.

Scott Stember: Good morning, and thanks for taking my questions as well. Just to clarify, I guess there was a question about maybe selling versus sell through. If I thought I heard correctly. But could you talk about tools I know there's a lot of new products that are out, sell into the channel versus sell off the van in the quarter?

Nick Pinchuk: Yeah. Look. I think they're about the same. I think the sales the sales off the van were a little bit lower. You know, but that would be expected when you have the kinda you know, I've described to you exiting stronger than when you entered, So that would mean it takes time for stuff to get through the van and to so, therefore, you would have that kind of an effect naturally. Generally, we haven't seen turbulence We haven't seen in all this turbulence really much variation for you know, if you look at bigger periods. A quarter is a kind of blip in that kind of view. You know what I mean? It depends on what's launched.

When it's launched, when it hits our bands, and then when it you know? And so it's a lot of things like that. So I think they're pretty much in balance this time. Yeah. As I said, the actual numbers are a little lower, but that would be natural expectation given how we've described how the quarter went.

Scott Stember: Got it. And then you talked about some of these. Higher ticket items or less expensive higher ticket category. Sales that you're seeing. Were the Yeah. We're out I'm I'm running out of the experience. That's right. You was diagnostics, the leader, in tools in the quarter?

Nick Pinchuk: No. Hand tools was the leader.

Scott Stember: Okay.

Nick Pinchuk: Hand tools was the leader. But hand tools hand tools and that's why I spent so much time talking about hand tools because the hand tools are great. That's those pliers are great. The pull forged pliers. Unbelievable. You know, the strength of those things. And Milwaukee is probably one of the only places in the world that can do that. So we really like that kind of thing. And I see it doesn't mean much to you know, if you're like us, you know, like me anyway, who pushes a pencil all the time. But it's a lot it's important to the techs, and they're they're liking some of the stuff we're bringing out. Now diagnostics did pretty well.

Don't don't get me wrong. The Triton was stupendous. But tool storage is down, you know, and stuff like that. We it every quarter, there's a new story about the products. I think, generally, though, the big thing is the overall number. And I don't wanna, you know, I don't wanna pull off the call without reemphasizing what we think is the bellwether number. And that is 50.5% gross margin. Down only 10 basis points against 50 basis points of negative currency transaction. Think about that one for a minute. And you see that, boy, that just lays out what we did what we're doing. We're doing okay.

We're winning the battle at the at the at the point of sale. And we're bought since sales are a little you know, aren't are flattish, still spending more because we wanna keep building our advantage in product and brand new people. We're hiring a lot. Hired more engineers than ours and I. No kidding. Their margins are about 12 of their past 13 quarters.

Scott Stember: And just last question on tariffs. Nice job on essentially mitigating everything in the quarter. But could you dimensionalize what the headwind was? And as more tariffs start flowing through, you know, how much bigger that can get in the back half of the year?

Nick Pinchuk: I'm not you know, I swore I was not gonna do that. Because I think no. I'm not gonna do that. It's you know, it's hard for me. You know, we can make changes every day and mitigate. And the thing is every day, something new comes up. I got I got somebody who's got who every day writes a paper on what comes out of Washington, and we have to review it. Because the tariffs are always changing. Your guess is as good as mine. So we have we have to move with alacrity against it. So it's impossible to predict. And all I can tell you is I like our position versus any of that stuff.

Our position is pretty good. We make in the markets where we sell. Now we do have some exposures. We got to resist We know how to make everything almost everywhere. Got it.

Scott Stember: That's all I have. Thanks again.

Nick Pinchuk: Yep.

Operator: The next question will come from David MacGregor. With Longbow Research. Please go ahead. Hey. Good morning, everyone. Congrats on the progress, Nick.

David MacGregor: Thanks. Hey. Good morning. I guess just on the C and I business, you talked about the project delays and how the led to some order backlog. Just talk about the timing of that realizations there. Are those projects that now that people maybe are feeling a little don't know how much more confident, but maybe a little more confident that we see those projects fulfill here in the second half, or is this just kind of an indefinite push out?

Nick Pinchuk: No. No. Look. I look. I think this I think that, you know, it's hard to get everything in, all the nuances. But in reality, I was talking about delays. You know, people didn't pull trigger. And I'm also talking about the orders impacting us. Kept going and doing us order. So they didn't pull back on ordering so much as they pulled, you know, on delays and projects we expect to go. I still I don't know about that. I think it's I do think things we exited the business stronger than when we entered. And that's an important factor.

It's hard for me to predict the structure or, I guess, the slope of that curve You know, it's hard for me to but what happens is what happens in the pandemic I think this is very similar, You know, thinking people start to look at it, and they start to be comfortable with the environment. And they start to figure out how to just deal with it. It's sorta like it's sorta like all of us in business. Like, you know, you know, things start to happen and you know, the waves are going up and down, and you figure out how to navigate the waves after a while.

First, you get seasick, and then you get used to it, and you figure out how to do it. And so I think that's what's gonna happen. I think we're sanguine about it. But I can't predict. You know, anything like that. I do think I do think that business is strong, though. Anyway.

David MacGregor: Yeah.

Nick Pinchuk: Even Sounds like it. The numbers. Type the numbers this quarter.

David MacGregor: Let me ask you about the tools business. You know? Yeah.

Nick Pinchuk: Obviously been a lot of moving parts. There's a lot of tumult in that space. But there was a time when you thought that tools was a 4% grower. A long-term basis. Is that a number that you're starting to feel a little comfortable with is achievable on a sustained basis, or is that still something I mean, I look.

Nick Pinchuk: I think I think if you look at our numbers over twenty years, you'll find that the kind of what we've done, you know, and the profitability. But the profitability is going up regularly. That's really been the secret to snap on. We've been growing in the range we said. Over quite a long period of time. You know, there's ups and downs. And our profitability is moving upwards. And so I do think the tools business sees that kind of thing. This was kind of a little unusual because you had this uncertainty go.

I think there was good reasons for it, though, if you looked at the environment, particularly now, And so I'm pretty confident about the tool system. Business. I think you know, when I talk to the franchisees, they seem pretty When I talk to the customers, they seem to like our product. You know? And I do think our product is stronger than ever so I feel okay. I think you know, we have to keep executing. We have to keep working. Think we're good at it, but we have to keep getting better at it. And Yep. But I have no doubt that it's gonna go upwards.

David MacGregor: Let me just go back to a previous question about you know, cash and capital allocation, and you talked about the M and A funnel look good. But historically, you've been I mean, you've done smaller transactions. You've you've snap on and stayed away from large acquisitions. I mean, you've got a net cash balance sheet, strong free cash flow prospects, maybe $1,000,000,000 annually. You know, you just completed a large capacity build-out program. You're not a particularly large share repurchase, sir, although maybe that changes here going forward. Would you consider a special dividend or a tender offer for shares, or is there a possibility of a few larger acquisitions? How do put the cash to work, Nick?

Nick Pinchuk: Look. I think well, I still think we're not in a certain environment. And so I mind having cash. You know, I don't mind having it. I mean, I do think I have confidence in the future, but I still don't and I do believe. I know you we do believe we, at one of these points, will find a big acquisition. We just think it's a matter of time. Now I've been here a long time. We haven't found one because everything we looked at been a little bit flawed, and we but we are not afraid to acquire anything big. Our management team is quite capable.

The only thing is I'm telling you, we won't acquire anything that's transformative. We'll acquire things that's consistent with our coherent growth model. And we do think there are things out there as they became available. Just haven't been available.

David MacGregor: Yeah.

Nick Pinchuk: So I don't I don't see anything. Now having said that, we always review on a periodic basis and, you know, more than once a year, you know, regularly. We review the capital, you know, allegation process. But right now, I don't see us contemplating any of those things. But we'll see. You never know.

David MacGregor: Good. That's it for me. Thanks very much.

Sara Verbsky: Okay.

Operator: The next question will come from Bret Jordan with Jefferies. Please go ahead.

Bret Jordan: Morning. On the collision segment, I think you sort of called out that it remains weak. Is that a structural problem? Or is that a cyclical problem? Is there lower demand for repair with ADAS?

Nick Pinchuk: No. Look. I don't know. You know? Look. I'm not sure. I think so that collision might come under the group of, you know, a lot of it is the you know, as you're mister collision, you know this probably better than I do. You know? But the thing is you got a lot of those big multi-store operators. That have been building up And our view of the world is they got a little spooked lately. And for maybe a variety of reasons, they're not investing as much as they used to. That's our view of the world. And so that may be true or not, but that's what that's what our grassroots kinda says. You know?

And so we kinda believe that's a factor. I think that's in collision. That's the big factor. I think that's changing that collision, making it a little more tepid. Now it has been incandescent. A long time as you probably know. There was a lot of movement, and maybe you're talking about people not so much spooked. They're saying, okay. I'm gonna I'm gonna consolidate. I'm gonna, you know, consolidate my gains for a while, and then start to move on. I don't know. We'll see what happens.

Bret Jordan: Okay. And then a question, I guess, as far as the franchise event outlook. I mean, obviously, slightly harder comparison on Q3 against a pretty strong franchise event last year. You know, any color as far as, like, what the attendance is looking like? I mean, it's coming up in a month or so.

Nick Pinchuk: I just need to I think the I think the I don't know. You know? I look. This is our two hundred and fiftieth anniversary. So two yeah. The hundred and fifth anniversary. Two hundred what am I talking about? Hundred and fifth. And I think maybe it could be a little bit bigger. I don't know. We'll see what happens. We kind of are planning for it to be slightly bigger. But it is it is it is last year was in Orlando, and year, it's in Orlando for a number of reasons. So you never know how that's gonna go over, but we expect a pretty robust you know, as robust as last year. Looking now.

You never know, Brett, until the last few weeks because a lot of the lot of the votes come in at the last few weeks. It's like waiting for, you know, like, an annual meeting. A lot of the votes come in the last day. So that kind of thing. But I do think it'll be pretty robust. Now having said that, though, the SFC you know, it's great. You know, you like that, but it's always enthusiastic. Can't go away from the SFC without feeling good about Snap-on. But the or it's only orders. You know? And so when whatever happens at the SFC, you gotta realize it's only orders.

And therefore, it has to play out real and real sales. You know, getting high orders are better than getting a stick in the, you know, in the odd wood a get a sharp stick in the eye. But they're not definitive. They're not fully definitive. They're just directional.

Bret Jordan: Alright. Great. Thank you. Appreciate it.

Nick Pinchuk: Okay.

Operator: This concludes our question and answer session. I would like to turn the conference back over to Ms. Sara Verbsky for any closing remarks. Please go ahead.

Sara Verbsky: Thank you all for joining us today. A replay of this call will be available shortly on snapon.com. As always, we appreciate your interest in Snap-on. Good day.

Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

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DATE

• Thursday, July 17, 2025, at 9 a.m. EDT

CALL PARTICIPANTS

• Chief Executive Officer — Tim Spence
• Chief Financial Officer — Bryan Preston
• Investor Relations Director — Matt Curoe
• Chief Credit Officer — Greg Schroeck

Need a quote from one of our analysts? Email [email protected]

RISKS

• The CFO said provision expense for Q2 2025 included a $34 million increase in our allowance for credit losses, driven by weaker Moody’s macroeconomic scenarios forecasting higher unemployment through 2027.
• Solar loan originations declined 72% from 2025 levels as new tax legislation eliminated certain credits, with management projecting a slower recovery.

TAKEAWAYS

• Adjusted Earnings Per Share: $0.90, excluding specified items, for Q2 2025, exceeding consensus estimates.
• Adjusted Revenue Growth: Adjusted revenues grew 6% year over year in Q2 2025, driven by 7% growth in net interest income (NII).
• Adjusted Pre-Provision Net Revenue (PPNR): Adjusted PPNR increased 10% year over year in Q2 2025.
• Positive Operating Leverage: 250 basis points of positive operating leverage in Q2 2025, marking the third consecutive quarter.
• Key Profitability Metrics: Adjusted Return on Assets was 1.2% for Q2 2025 and Adjusted Return on Tangible Common Equity reached 18% for Q2 2025.
• Efficiency Ratio: Efficiency ratio was 55.5% for Q2 2025.
• Net Charge-Offs: Net charge-offs were 45 basis points in Q2 2025, at the bottom of guidance and improved year over year.
• Nonperforming Assets (NPAs): Nonperforming assets (NPAs) declined 11% sequentially in Q2 2025, driven by an 18% reduction in commercial NPAs.
• Tangible Book Value Per Share: Tangible book value per share, inclusive of the impact of AOCI, grew 18% from the prior year and increased 5% compared to Q1 2025 in Q2 2025.
• Average Loan Growth: Average loan growth was 5% over the prior year, with increases across C&I, CRE, leasing, mortgage, home equity, auto, Provide, and Dividend platforms in Q2 2025.
• Commercial Relationship Manager Headcount: Commercial relationship manager headcount increased 11% year over year in Q2 2025.
• Home Equity Market Position: Ranked No. 2 by market share in core footprint, with first-half production growth third-best nationally.
• Net New Household Growth (Southeast Consumer Bank): Net new households in the Southeast consumer bank grew 6% over the prior year in Q2 2025.
• Average Cost of Consumer and Small Business Deposits (Southeast): Average cost of consumer and small business deposits was 191 basis points in Q2 2025.
• Loan Growth Contribution (Southeast Middle Market): More than half of total middle market loan growth over the past year was driven by the Southeast region.
• Middle Market Relationship Production (Southeast): 50% more new quality relationships year to date compared to the same period last year.
• Wealth Management AUM Growth (Southeast): Southeast markets grew assets under management 16% year over year, reaching nearly $16 billion in total AUM, with advisor headcount up 15%.
• Mobile App Recognition: Ranked No. 1 in user satisfaction among regional banks by J.D. Power.
• Embedded Payments Business (New Line): Fees increased 30% compared to the same period a year ago. Deposits attached to new line services rose to $3.7 billion, up $1.1 billion from a year ago.
• NII Outlook: Full-year NII guidance was raised to 5.5%-6.5% growth for 2025, with "record NII in 2025 even if there are zero rate cuts for the remainder of the year."
• Loan Growth Guidance: Full-year 2025 average total loans are expected to increase 5%, driven by C&I and auto lending.
• Deposit Cost Management: Interest-bearing deposit costs decreased by three basis points sequentially in Q2 2025 and declined 65 basis points over the last year.
• Branch Expansion: 10 Southeast branches added in 2025 so far, with another 40 openings projected before year-end 2025; 80% of locations for 200 new Southeast branches secured.
• LCR Compliance: Category 1 LCR was 120% for Q2 2025, and the loan-to-core deposit ratio was 76% for Q2 2025.
• Adjusted Noninterest Income: Adjusted noninterest income grew 3% year over year in Q2 2025, led by a 4% increase in Wealth fees and a 6% increase in Consumer banking fees over the prior year. Commercial payments fees declined in Q2 2025 due to lower card spend and higher earnings credits.
• Adjusted Noninterest Expense: Adjusted noninterest expense increased 4% compared to the year-ago quarter, down 4% sequentially in Q2 2025, and up 3% year over year, excluding deferred compensation, primarily for technology, branches, and personnel, in Q2 2025.
• Allowance for Credit Losses (ACL) Ratio: The allowance for credit losses (ACL) ratio increased by two basis points to 2.09% in Q2 2025 due to reserve build.
• CET1 Capital Ratio: CET1 capital ratio was 10.6%, up 13 basis points in Q2 2025; Pro forma CET1 ratio, including the AOCI impact of securities, was 8.6% at the end of Q2 2025.
• Share Repurchases: $400 million-$500 million targeted during the remainder of 2025.
• Full-Year Guidance (Key Highlights): Adjusted revenue growth is expected at 4%-4.5% for the full year 2025, Full-year PPNR growth is expected at around 7%. Adjusted noninterest income is projected to increase 1%-2% for the full year 2025, Adjusted noninterest expense is expected to rise 2%-2.5% for the full year 2025 compared to 2024, and Net charge-offs guidance was tightened to 43-47 basis points for the full year 2025.
• Third Quarter Guidance: NII up 1% sequentially, Adjusted noninterest income is expected to increase 1%-4% for Q3 2025, Third quarter adjusted noninterest expense is expected to rise 1% compared to the second quarter. Charge-offs are projected in the 45-49 basis point range for Q3 2025, and A stable CET1 ratio is targeted at 10.5% for 2025.

SUMMARY

Fifth Third Bancorp (NASDAQ:FITB) delivered notable year-over-year profit and revenue growth in Q2 2025, citing diversified loan production and continued momentum in core fee businesses as key contributors. Management highlighted durable deposit cost control, robust capital ratios, and targeted expansion in high-priority geographies such as the Southeast, all of which support forward-looking guidance despite mixed loan utilization trends. The company addressed sector-specific headwinds, including regulatory change and solar lending disruption, but signaled confidence in risk management, credit metrics, and the ability to sustain organic growth and return capital to shareholders.

• CEO Spence emphasized that "M&A is a means to achieve a strategic outcome. It shouldn't be a strategy under itself." reiterating organic growth and density remain primary capital allocation priorities.
• CFO Preston stated, regarding the impact of tax credit changes, "we believe that the dividend net charge-offs have peaked in the second quarter" and anticipate further improvement in subsequent periods.
• Management explained Southeast de novo branches built during 2022-2024 are averaging over $25 million in deposit balances within the first twelve months after opening. noting the branch strategy outpaced expectations.
• Spence described stablecoins as a potential growth area—especially for cross-border payments—while minimizing risk to domestic deposit flows and in-person payments, suggesting increased activity benefits FITB's payments and banking infrastructure role.
• Greg Schroeck reported NPA reductions align with prior visibility, stating that Inflows of NPAs dropped 77% from the previous quarter. reflecting improved credit portfolio performance.
• Preston clarified that credit spreads remained stable, with only occasional "irrational" pricing to defend legacy client accounts.

INDUSTRY GLOSSARY

• Provide: FITB's fintech lending platform focused on healthcare practice finance for medical, dental, and veterinary professionals.
• Dividend: FITB's home improvement and solar lending fintech platform, now adapting product mix in response to federal tax credit changes.
• De novo branches: Newly established bank branches, as opposed to acquired locations, typically in growth markets.
• New Line: FITB's embedded payments business, facilitating instant payments infrastructure for commercial clients.

Full Conference Call Transcript

Tim Spence: Thanks, Matt, and good morning, everyone. At Fifth Third, we believe great banks distinguish themselves not by how they perform in benign environments, but rather by how they navigate uncertain ones. In a period of tariff negotiations, cross currents in interest rates, and significant regulatory change, Fifth Third continues to deliver excellent profitability, strong credit trends, and accelerating revenue growth. This morning, we reported earnings per share of $0.88 or $0.90, excluding certain items outlined on Page two of the release. Exceeding consensus estimates, adjusted revenues grew by 6% year over year, led by 7% growth in NII. Adjusted PPNR increased 10%. We delivered 250 basis points of positive operating leverage, our third consecutive quarter of positive operating leverage.

Our key profitability metrics continue to be very strong, and among the best of all peers who have reported thus far. Our adjusted return on assets was 1.2%. Our adjusted return on tangible common equity was 18%. And our efficiency ratio was 55.5%. Our credit metrics were strong and improved as we said they would. At 45 basis points, net charge-offs were at the bottom of our guidance range and improved over the prior year. NPAs declined 11% sequentially, led by an 18% decline in commercial NPAs. Early-stage delinquencies declined again and are near historical lows.

As a result of our strong financial performance, and the positioning of our balance sheet, tangible book value per share increased by 18% over the prior year and by 5% sequentially. The strategic investments we have made over the past several years drove our results in the quarter. In a quarter where uneven C&I loan demand and a soft housing market made loan growth tepid for the industry, our diversified loan origination platforms produced average loan growth of 5% over the prior year. We grew loans in the C&I, CRE, leasing, mortgage, home equity, auto, and both our Provide and Dividend fintech platforms. Investments we have made should continue to support strong loan growth in future quarters.

Commercial relationship manager headcount increased by 11% year over year, and Provide had record production in the first half of the year. In our home equity business, we were number two market share in our footprint, and first-half production growth was third best in the country. Both Provide and Home Equity are examples of the benefits we have achieved from digitally enabled lending channels combined with OneBank collaboration. Our investments in the Southeast also continue to produce strong results across business lines. Our consumer bank grew net new households by 6% over the prior year in the Southeast.

The granular deposit growth those households provide has provided flexibility to continue to manage deposit costs even as the Fed paused on rate cuts. In the second quarter, our average cost of consumer and small business deposits in the Southeast was 191 basis points. A 250 basis points plus spread to Fed funds. We have added 10 branches year to date in the Southeast, and we'll open another 40 before year-end. Bringing us to nearly 400 branches across all our Southeast markets. In commercial banking, our Southeast regions have contributed more than half of total middle market loan growth over the past year. With North Carolina, South Carolina, Georgia, and Alabama producing the strongest results.

New middle market relationship production has also accelerated across Southeast where our teams have added 50% more new quality relationships year to date than they did over the same period last year. In wealth management, our Southeast markets grew assets under management by 16% year over year, to nearly $16 billion in total AUM. Advisor headcount is up about 15% in the same markets, which should support future growth. We also continue to see benefits from our investments in innovative, tech-enabled products. In consumer, J.D.

Power recently recognized the Fifth Third mobile app as number one in user satisfaction among regional banks and we also launched an initiative to provide free wills to every Fifth Third customer through an exclusive partnership with FinTech Trust and Will. We will begin to embed AI-enabled functionality into our mobile app in the 30% revenue growth compared to last year, and an increase of more than $1 billion in commercial deposits connected to NewLine services. We continue to win more business from existing clients and to see transaction migration from legacy ACH to modern instant payments rails. During the quarter, Rippling selected NewLine to be their payments infrastructure provider. Joining our existing roster of blue-chip fintech customers.

In my annual letter to shareholders this year, I reminded readers that the global economy is a complex adaptive system, and the complex systems react to change in unexpected ways. These days, we are witnessing a lot of change in a short window of time. While we continue to be hopeful about the prospects for the second half of the year, we are also positioned to perform well in a broad range of environments. Our business mix is naturally resilient, our balance sheet is defensively positioned. And we have the flexibility to react quickly as conditions change.

Bryan will provide more detail on our outlook, but I want to emphasize that we do not need a change in the interest rate environment or a material change in market activity to continue to produce strong profitability and organic growth. We are raising our full-year guidance on NII, given the strong first-half performance. We remain very confident in achieving record NII in 2025, even if there are zero rate cuts for the remainder of the year. We will deliver a 150 to 200 basis points of full-year positive operating leverage even if the capital markets do not recover. Given the strong first-half performance and the expense levers we have at our disposal.

We will resume share repurchases in the third quarter. Our capital priorities continue to be funding organic growth, paying a strong dividend, and share repurchases in that order. Our operating priorities will also remain unchanged. Stability, profitability, and growth in that order. Before I hand it over to Bryan, I want to say thank you to our employees for your dedication to your clients. Your commitment to getting 1% better every day is why Fifth Third was recently recognized by USA Today as a top workplace and by Forbes as best employers for new grads. And I love being part of your team.

With that, Bryan will provide more detail on the quarter and our outlook for the second half of the year.

Bryan Preston: Thanks, Tim. Thank you to everyone joining us today. Our second quarter results again reflect the strength and momentum of our company. On an adjusted basis, revenue increased 6% year over year and 5% on a sequential basis. Our stable and growing NII remains a strong contributor to our performance. We continue to realize the benefits of our diversified balance sheet and business mix, through sustained loan growth, fixed-rate asset repricing, and the flexibility to execute proactive liability management. Our revenue performance combined with our ongoing expense discipline resulted in a 10% increase in pre-provision net revenue and 250 basis points of positive operating leverage on an adjusted basis compared to the second quarter of last year.

Tangible book value per share, inclusive of the impact of AOCI, grew 18% from the prior year. And 5% versus the first quarter. Our investment portfolio philosophy, to focus on bullet and locked-out securities in order to have certainty of cash flows continues to pay off. The unrealized loss in our AFS portfolio improved 6% sequentially. Despite the ten-year treasury rate being a few basis points higher than the prior quarter end. The AFS burn down will continue to benefit tangible book value per share growth as these positions pull to par. Now diving further into the income statement, Net interest income grew 7% from the prior year, and 4% sequentially.

Net interest margin expanded nine basis points sequentially, Broad-based loan growth continued, repricing benefits and deposit cost improvements all contributed to this performance. NII was also favorably impacted by the payoff of the nonperforming loan. Which contributed $14 million to NII. And three basis points to NIM in the quarter. Excluding that payoff impact, NII still grew by 6% from the prior year and 3% sequentially. Which is at the high end of our guided range. This interest realization is an example of our proactive credit management working with our clients to achieve loss minimization through the workout process. As Tim highlighted, our diversified lending platforms continue to support strong balance sheet performance.

Average portfolio loans grew 1% sequentially, while period-end loans were stable. Despite a decrease in commercial utilization. Consumer loans were up 3% on a period-end basis, and 2% on an average basis from the prior quarter. On a period-end basis, we saw growth in every major consumer lending category. Led by continued strength in our secured lending products, such as auto, and home equity lending. Commercial loans increased 1% on an average basis and declined 1% on a period-end basis. As I highlighted in early June, line utilization peaked around April month-end at 37.5%. Post April, have seen a gradual decrease to 36.5% as of June 30.

Approximately 40% of the decrease in line utilization was driven by growth and commitments. In addition to the utilization trend, period-end loans were impacted by a $400 million sequential decrease in commercial construction balances as projects were refinanced into the permanent market. Economic uncertainty impacted client confidence, and resulted in the lowest quarter of commercial loan production over the last year. There were some bright spots, with continued strong production in Chicago, the Carolinas, Georgia, and Alabama. While utilization has impacted balances, commitments continue to grow. Middle market pipelines have also rebounded during the quarter, as our third quarter pipeline is up almost 50% from the prior quarter. Shifting to deposits.

Average core deposits were stable sequentially, as an increase in demand deposits was largely offset by a decrease in interest checking. Our strong liquidity profile continues to provide us with the flexibility to actively manage our overall funding costs while executing tactics to grow granular insured deposits. As a result of these efforts, interest-bearing deposit costs were down three basis points sequentially and 65 basis points over the last year, while we have continued to grow consumer and small business deposits. Which are up 1% versus the prior year. Compared to the first quarter, demand deposit balances were up 3% on an average and end-of-period basis.

This strong core deposit performance has allowed us to pay down over $4 billion of higher-cost non-relationship brokered time deposits over the last two years. We will continue to prioritize high-quality, low-cost retail deposits, particularly in the Southeast with our de novo investments. The most recent vintages of de novos are significantly outperforming expectations. Branches built between 2022 and 2024 are averaging over $25 million in deposit balances within the first twelve months after opening. Significantly outpacing our original expectations. We remain on pace to open 50 branches this year, with 10 opened in the first half. We have now secured approximately 80% of the locations for the additional 200 Southeast branches that we announced in November.

Our deposit success, along with investment portfolio positioning, has allowed us to maintain strong balance sheet liquidity while growing loans and managing deposit costs. We ended the quarter with full category one LCR compliance at a 120% and our loan-to-core-deposit ratio was 76%. Up 1% from the prior quarter. Moving on to fees. Reported noninterest income, was up 8% year over year. These results were impacted by security gains, and the impact of certain items detailed on page four of the release. Excluding the impact of the security gains and the other items, adjusted noninterest income for the quarter increased 3% compared to the same quarter last year.

Led by growth in wealth fees, which grew 4% over the prior year due to AUM growth of $8 billion and consumer banking fees, which were up 6%. Commercial payments fees decreased $2 million due to lower commercial card spend activity and higher earnings credits from increased demand deposit balances. Offsetting the increase in gross fee equivalent. Our embedded payments business, New Line, continued its strong growth with fees up 30%. Deposits attached to new line services increased to $3.7 billion. Up $1.1 billion compared to a year ago period. Capital markets fees were down 3% from the prior year. Primarily due to the continued slowdown in M&A advisory revenue. Bond underwriting and loan syndication activity was strong during June.

And client appetite for transactional activity during stable market periods remains robust. The security gains of $16 million were from the mark-to-market impact of our non-qualified preferred compensation plan, which is offset in compensation expense. Moving to expenses. Adjusted noninterest expense was up 4% compared to the year ago quarter. And decreased 4% sequentially. The sequential comparison is impacted by seasonal items in the first quarter associated with the timing of compensation awards, and payroll taxes. The previously mentioned deferred compensation mark to market increased expenses by $16 million for the quarter. Excluding the impact of the deferred comp mark to market in the quarter and in prior periods, expenses were down 5% sequentially.

And increased 3% compared to the prior year. The year-over-year increase in expense is due to continued investments in technology, branches, and sales personnel partially being offset by the ongoing savings generated by our value stream efficiency programs. Shifting to credit. The net charge-off ratio was 45 basis points at the lower end of our expectations for the quarter. And down one basis point sequentially. Commercial charge-offs were 38 basis points, up three basis points sequentially. Consumer charge-offs were 56 basis points, down seven basis points, primarily due to seasonal improvement in credit performance in auto and credit card. Our NPAs declined 11% sequentially as expected led by an 18% decrease in commercial nonperformers.

The NPA ratio decreased nine basis points sequentially to 72 points. Broad-based credit trends remain stable across industries and geographies, despite the market and economic volatility. Our provision expense for the quarter included a $34 million bill in our allowance for credit losses. This bill was primarily attributable to the deterioration the Moody's macroeconomic scenarios. Which now project a half a percent increase their baseline unemployment rate projections. Which is up to 4.7% by 2027. The scenario-driven increases were partially offset by improvement in the overall risk profile of the portfolio as indicated by the reduction in NPAs.

This increase in reserve build was slightly less than we expected in early June, as utilization trends and commercial construction pay downs impacted period-end loan balances. The reserve build increased our ACL coverage ratio, by two basis points to 2.09%, We made no changes to our scenario weightings during the quarter. Moving to capital. We ended the quarter with a CET1 ratio of 10.6% an increase of 13 basis points consistent with our near term target of 10.5%. Our pro forma CET1 ratio including the AOCI impact of securities, is 8.6% up 60 basis points year over year.

We anticipate continued improvement in the unrealized losses in our securities portfolio given that approximately 63% of the fixed rate securities in our AFS portfolio are in bullet or locked out structures. Which provides a high degree of certainty to our principal cash flow expectations. Moving to our current outlook. With the continued momentum from the second quarter, we remain confident in our ability to achieve record NII and full year positive operating leverage approaching 2%. We now expect full year NII to increase to 5.5% to 6.5% up from our earlier guide. This outlook uses the forward curve at the July which assumed 25 basis point rate cuts in September, and December.

Due to the resiliency of our balance sheet, we expect to achieve record NII, and our updated full year guide with no further loan growth and no rate cuts. Full year average total loans are expected to be up 5% compared to 2024, with the increase primarily driven by C&I and auto lending production. Our cash position, securities portfolio, and commercial line utilization should remain relatively stable throughout the remainder of 2025. Full year adjusted noninterest income is expected to be up one to 2% as the muted capital market trends are offset by continued growth in other fee categories.

We now expect full year adjusted noninterest expense to be up two to two and a half percent compared to 2024. We will continue to execute our growth plan. With Southeast branch bills and Salesforce additions in middle market, commercial payments, and wealth. In total, our guide implies full year adjusted revenue, to be up 4% to 4.5% and PPNR to grow around 7%. Moving to credit. We are tightening the range for full year net charge offs, to 43 to 47 basis points. The timing of charge offs for individual credit may impact a particular quarter, but the midpoint of our full year expectation remains consistent with our beginning of the year guide.

Moving to our outlook for the third quarter. We expect NII to be up 1% from the second quarter due to the benefits from fixed rate asset repricing and day count. We expect average total loan balances to be stable to up 1% due to strengthening C&I pipelines, and continued broad based momentum in consumer loans. Excluding the impact of the security gains, we expect adjusted noninterest income to be up one to 4%. Third quarter adjusted noninterest expense is expected to be up 1% compared to the second quarter as we continue to invest. We expect third quarter charge offs to again be in the 45 to 49 basis point range. Turning to capital.

We will continue to target our CET1 ratio, at 10.5% Based on our current projections for balance sheet growth, we expect to repurchase 4 to $500 million of stock during the remainder of 2025. We continue to prioritize organic loan growth over share repurchases, in order to deliver the best long term returns for our shareholders. In summary, we expect to maintain our momentum in the second half of the year. And achieve record NII, positive operating leverage, and strong returns in an uncertain environment. All while continuing to invest for the long term. With that, let me turn it over to Matt to open up the call for Q&A.

Matt Curoe: Thanks, Bryan. Before we start Q&A, given the time we have this morning, we ask that you limit yourself to one question and one follow-up. And then return to the queue if you have additional questions. Operator? Please open the call for Q&A.

Operator: Press star. Then the number one on your telephone keypad. To withdraw your question, your first question comes from Ebrahim Poonawala with Bank of America. Please go ahead.

Ebrahim Poonawala: Hey. Good morning. Morning. I guess maybe Tim just thinking about capital allocation. So her Bryan talk about the buyback appetite for the back half of the year. But just talk to us around how you're thinking about deployment of capital. Clearly, we saw one of your competitors announce a bank deal earlier this week. Like, any sense of, like, strategically, even if we think about and bank M&A picking up, are there characteristics, be it size, be it market of a bank that we should be thinking about as shareholders of what we could buy? I mean, any perspective would be helpful. Thank you.

Tim Spence: Yeah. Great. Great question. So you know, I think from my point of view, the capital priorities of the bank are always gonna be organic growth first because a, organic growth is completely within our control. And b, the thing that makes you a good acquirer is the ability to run your core business effectively.

So the priority here is always gonna be to run the company to gain share on an organic basis and to make sure that there's adequate capital available to that in addition to that we provide that stable and over time growing dividend and that we're able to support the you know, the capital return to investors in periods where we have excess capital through share repurchases. I wasn't surprised to see the announcement earlier this week. I think I've said for a while that there was going to be more consolidation, like the I think the banking sector in The US is the least consolidated industry. And our banking sector is the least consolidated banking sector in the world.

So there is gonna continue to be more of that. What I know to be true though is that M&A is a means to achieve a strategic outcome. It shouldn't be a strategy under itself. There is an industrial logic to scale that I think holds in all sectors. But it's not just any kind of scale. Like, know, if you imagine us as being a in a military conflict where we had to fight an enemy that was 10 times our size. Would never march out into an open field. Single file, and try to face a larger army. You would pick your spots, You would try to use the terrain to your advantage. You'd get dense.

And you'd obviate the scale advantages that the competitor has. And if you think about the structure of the banking system in The US, I think that is the way to think about how you win. You know. We're gonna be way more successful building 350 branches in a single region in The US. We would be if we built three or four branches in the 100 largest cities. In The US. So the focus for us is always gonna be on density, It's gonna be on the ability to drive organic growth by spreading the cost of customer acquisition across multiple product lines.

So the relationship value that you get from the ability to deliver a broad range of products and services to customers is really important, to us. And it's always gonna be focused on ensuring that you have a sort of continuity in, people say, culture, but really in the mode of how you your business because there just are a lot of things out there that operate very differently than we do. So I think appetite's the same. We wouldn't have much conviction if one deal announcement changed. Our outlook on all on how to deploy capital. But the focus is gonna be on delivering our strategy in the mode that is most effective for shareholders.

Ebrahim Poonawala: That's good color. Thank you. And I guess maybe just a separate question. As we think about, you know, obviously, your charge off range narrowed, but as we think about the impact of the tax bill on the solar residential solar panel industry, Just give us how you are handicapping any potential risk tied to your exposure. And the business strategy from here going forward? At dividend? Thank you.

Bryan Preston: Yes. Ebrahim, it's Bryan. Thanks for the question. I guess, first, to just recap what's happened. The tax bill eliminated the tax credits on the residential solar lending business, starting in January. Now so what does that mean for us? First, this has no impact on our existing solar portfolio. Our customers have already earned their tax credits, so no impact on them. From a credit perspective, we believe that the dividend net charge offs have peaked in the second quarter. And as you can see from our NPA and delinquency trends in the first half of the year, the risk profile of the solar portfolio continues to improve.

All the enhancements we've done to this business that we've made to our platform from the installer management program, installer biller coverage, joint borrower, collections enhancements. It's all helped to drive this credit improvement. We expect net solar charge offs to decrease 15% to 20% in the third quarter from the second quarter level and decrease again in 2026 by another 15 to 20%. Next, the tax bill will impact future originations. As the tax credit associated with the residential solar leasing product was extended, to the end of 2027. This will create an uneven playing field in the solar finance industry for about two years. We expect the leased panel volume to increase solar loans will decrease significantly.

As a result, we think that our 2026 solar originations are probably down 70 to percent from 2025 levels. While we were hopeful to have a level playing field in 2020 where both products were treated equally, we'll at least see that occur in 2028. Now how are we responding? We've been innovating to create a home equity product that we expect to launch in the 2026 on the Dividend platform. While this product will not have a tax credit, it'll allow borrowers to own their solar panels and generate tax deductible interest. Which should matter to some homeowners. Home equity product will also improve Fifth Third's collateral position from a UCC to a second lien.

This product should also be appealing for other home improvement projects. So while we believe the solar originations will be down in 2026, with the new home equity product combined with other enhancements we've made to in our dividend home improvement lending platform, we expect continued growth of our dividend loans in the low single digits next year.

Tim Spence: Yeah. Just to put a point on one of the things Bryan said strategically. Ebrahim, The interest we had in home improvement as a category predates the by several years. It's since it's always been a home equity bank. But we also did the partnership with GreenSky back in 2015 or 2016. I remember when it was. And I think what we learned as we spent time in home improvement is that the place that banks can play uniquely is in relative to fincos and nonbank lenders. Is in the larger more complex home improvement programs, things that are require multiple draws or that involve a prime and a series of subs.

And that what the fintechs can do in those markets is to finance the windows or the doors They can't finance the whole kitchen. Right? Like, a full renovation. And so what we like about Dividend, in addition to believing in the importance of distributed power generation and storage, which by the way, we still believe is an important part of the way that gonna solve the energy demand that we have in The US. The fact that solar is one of the most complex home improvement installations between the need for their reinforced of the roofing, the installation of the panels, the high voltage electrical. And then working with the power companies to get permission to operate.

It's gonna provide a really nice exoskeleton. That's always been the dream to be able to deliver home equity to a broader range of projects. And in fact, today, even prior to the sort of expected reduction in solar volumes that Bryan mentioned, like, five, 30% of new originations are home improvement, non solar related. So there is a good core business. What is gonna happen is the origination volumes are gonna fall. So I think our view is the dividends probably are gonna grow in line with the balance sheet as opposed to growing at a faster rate on a go forward basis. Meaning, call it low to mid single digits. As a point of focus for us.

But as Bryan said, the credit trends are incredibly encouraging. And I think they underline the comments that we've been making about focusing on the best quality installers and on super prime credit. So we're just not seeing the deterioration that, you know, folks who were full spectrum lenders have had to struggle with.

Ebrahim Poonawala: Very comprehensive. Thank you both.

Operator: Your next question comes from Scott Siefers with Piper Sandler. Please go ahead.

Scott Siefers: Good morning, guys. Thanks for taking the question. Bryan, wanted to ask on the margin improvement. You know, even if we adjust for the benefit of the NPA that you discussed in your prepared remarks, Much better than you had articulated might be the case earlier this year. So, you know, I think we can see on slide five kinda what's what's happening between quarters. But I guess just in your view, what's coming in better than you might have anticipated earlier this year, and what are we thinking about the pace of, improvement opportunity going ahead or looking ahead?

And then I guess the follow ups, I was hoping you might be able in your response, to sort of address what you see as competitive dynamics on both the loan and deposit sides, you know, rational, irrational, etcetera.

Bryan Preston: Yeah. Thanks, Scott. Great question. You know, I would tell you the big thing that I think was the out performance item outside of the NPA payoff was the DDA performance we've seen. You know, we were expecting to be able to transition back the growth mode on DDA now that the interest rate environment has been stable for a period of time. But we saw really strong performance this quarter. That certainly was a big driver of our success. We continue to feel really good about our ability to have gotten cost out of our deposit book while continuing to improve the composition.

I think that's probably an underappreciated thing about what we've been able to do over the last year, just how much we've been able to strengthen the deposit base especially with growth in the consumer small business sector. From a NIM perspective, continue to feel like we did earlier this year, which is, you know, two to three basis points of NIM improvement each quarter driven by fixed rate asset repricing continuing as well as loan growth. It's really just gonna be kind of the core blocking and tackling and improvement of the business over time. So nothing, nothing dramatic there.

And you said, if we adjust for the three bps from the interest recovery, we'd be more in line with the three o. The three zero nine NIM. And that three bps a quarter puts right where we expected to be at the end of the year in that kind of mid teens range. Of three fifteen ish feels right still very achievable. So feel very good about the trajectory from here. From a competitive landscape perspective, you know, our industry is always very competitive. I don't think I would actually really call out much that we're seeing on either the loan or the deposit side at this point.

Spreads look in line with what we've been seeing over the last six to twelve months across almost every asset class on the lending side. Mhmm. And deposit competition has been very, very rational, and we've seen great success in continuing to be able to find growth in the right pockets and improving the deposit base. Perfect.

Scott Siefers: Alright. Good. Thank you very much, Bryan.

Operator: Next question comes from Ryan Nash with Goldman Sachs.

Ryan Nash: Good morning, everyone.

Tim Spence: Hey. Long time listener, first time caller. Is this sports radio talk? I wish.

Ryan Nash: Tim, maybe outside of the movement in utilization, you know, we're obviously seeing signs of loan growth improving. You talked about know, investments to support loan growth. Lenders up 11%, outlook sounds upbeat. So maybe just talk more specifically about your expectations for loan growth. And as you're out to corporates, do you feel they've gotten confident enough to start making big investment decisions and borrowing more? Thank you. And I have a follow-up.

Tim Spence: Yeah. Yeah. Great question. So let me take it by category. I think on the consumer side of the equation, the thing that gives us confidence is the diversity of the loan origination platforms. We've got. Right?

You know, we have long been believers that while residential mortgage is really important, product for us to offer to consumers, it wasn't a great balance sheet asset, and the byproduct of that is between we're able to do in home improvement, what will be continued expansion in home equity, which has been an important driver of our growth, and the fact that the risk adjusted spreads in the auto business are great, right now I we just feel very confident in our ability to continue to generate what will be broad based know, market plus a point or two sort of growth out of the consumer side. Of the business.

And that provides a lot of ballast for us as you look at the uncertainty that exist in the corporate. I mean, the positives when you talk to customers, on the commercial side of the equation at the moment, are one, there is a sort of general belief that as we continue to now uncertainty around trade and the tariff levels, that there's a value to them in running with a little bit extra inventory and that supports utilization. We're not seeing the big buys that we saw in the first quarter that drove up utilization.

For us, but we do hear from clients that they, at the moment, are preferring to run long balance with a little bit more inventory than they otherwise would carried just to compensate for any short term disruptions and supply chain. Second, the bonus the accelerated depreciation schedule on capital equipment. It is in some pockets in our customer base generating real interest in replacing equipment. It felt last year and the second half of the year in particular, like The US was underinvested a little bit in capital equipment purchases.

We heard from clients who had rental businesses, like yellow metal rental businesses, and otherwise, that there had been a big boom in rental demand as people tried to buy time. To ensure that they got the benefit of the taxes. So I think that is a positive catalyst You know, the element that just hasn't come through, and that's reflected in middle M&A activity everywhere is the M&A driven demand. And at some point, there should be a little bit of a capitulation where either the sellers accept that with higher interest rates being maybe a more permanent phenomenon that they need to accede to, you know, buyer pricing expectations.

Or you have buyers who have been patient who conclude that this is the time to go. Know? But that's really the third leg of the stool. Between the capital purchases, the inventories. And then eventually some M&A.

Ryan Nash: Got it. And given your comments from before, you know, you talked about identifying 80% of the locations in the Southeast, 150 to 200 basis points of operating leverage. Guess, given the success that you're seeing in your business plus the success in the Southeast, does it make sense to accelerate your efforts here from an organic perspective? And just how are you thinking about the pacing of your growth initiatives from here? Thank you.

Tim Spence: Yeah. Think somewhere Jamie Leonard is grinning like a Cheshire. Cat right now because we have been running, like, what the years that I was the head of the consumer many years ago, the best we were ever able to do was to open 25 or 30 branches in any individual year. And they're running at a pace of 50 to a year. At this stage. So we have doubled the effort there. The other thing that we've invested in, we haven't spent a lot of time talking about.

Is a big boost in the sophistication of our direct capabilities, which then support that there's a way that we bootstrap the de novos and, you know, get a lot of early growth in terms of households and deposit balances. So we are accelerating the investments in those markets to the that we find a way to build 65 a year, I would love it. It's just what we have been unwilling to do is to compromise on the quality of the locations. And there then is nothing that we can do as it relates to the pacing on getting through local zoning jurisdictions.

And otherwise, So if, you know, if we have the ability to get 60 done a year, we're gonna get 60 done a year for certain.

Ryan Nash: It. Thanks for taking the question. Yep.

Operator: Your next question comes from the line of Gerard Cassidy. Please go ahead.

Thomas Leddy: Hi. Good morning. This is Thomas Leddy standing in for Gerard.

Tim Spence: Hey,

Thomas Leddy: Given all the recent headlines, can you just give us your thoughts on stablecoins and how broader adoption could impact both your payments business and deposit level

Tim Spence: Yep. Yep. Happy, happy to do that. I'm I happen to be pretty excited about the prospects. For stablecoins. But maybe not in the same places that are getting a lot of the headlines these days. We have a little bit of an advantage here in that we've banked a couple of the largest infrastructure providers to the crypto and the stable coin sector for a few years now. And we've been able to watch the use cases that have evolved on those platforms and get a sense for it. We also have a kind of an interesting asset that a lot of the other banks don't have.

In the Newline platform, which is really well architected to be able to support both the sort of payments and the intraday liquidity act to make stable coins work as you know, both stores of value and payment rails. Our interest are one where there are companies that have the compliance infrastructure and the operational robustness. To bank them. And there are things that we that we will do there, whether it relates to reserve accounts or payment rails. And otherwise, then secondarily, as a user of stable coins, I think in particular and some of the cross border payments and then cross platform settlement. Applications that are out there.

Banks like us, who are US domestic banks have been outsourcing that sort of cross border payment activity to correspondent banks. That's a greenfield, and anything that we can do even if it's disruptive in terms of the margins. Is a net positive. For us. So I'm I'm I'm quite excited about that as a potential use case for our clients. I think the thing that's gotten a lot of the attention that I just don't believe in is the risk that stablecoins pose or don't pose to point of sale payments and to domestic payments in general.

And I think the reason that the media has been wrong on this one is that there's been such a focus on the cost of the credit card acceptance. When cash checks, ACH, and debit are all already price competitive and all already basically universally you know, accepted. So the reason that people accept credit cards is because consumers wanna use credit cards. And the reason consumers wanna use credit cards is because they either need the liquidity that the credit line provides or because they want the rewards. And the stable coin rails today don't offer either of those features.

And if they get added, gonna have to increase the cost of acceptance, you know, in order to offset the cost of providing the liquidity. Or the, you know, the cash back rewards or otherwise, So, you know, stable coins in markets with unstable central banks are not a broad based banking system. You know, absolutely an interesting application internationally. Stable going stable coins for cross border payment, or for collateral on different exchanges. Interesting use case. Domestic payments, you know, I think there's probably more smoke than fire on that one right now.

Thomas Leddy: Mhmm. Okay. Thank you. That's helpful color. And then just lastly, it appears, you know, expected regulatory relief for the industry will potentially have a pretty big impact on at least the money center banks evidenced by the recent stress test results and their resulting stress capital buffers. You just share your thoughts on the potential benefits specifically for Fifth Third from the expected regulatory relief, you know, we might see over the next year or so?

Tim Spence: Yeah. Absolutely. I, think if you asked the Tim Spence from 2023 or 2024, If I would regret not voluntarily submitting to an additional stress test, I would have thought that you were crazy. But I at the at the moment, I wish that all banks had undergone the stress test this last time around because it probably would've helped you all to understand the benefits that will accrete to regional banks. In addition to the big money center. Guys, the stress testing relief is gonna be for everybody. The opacity of that process and the models that were used are just not helpful, and we're believers that transparency is a good thing.

And I think you saw that you know, potential upside that the regional banks will get in the form of capital from, you know, more rational scenarios and better tuned models and otherwise. And I expect us to see a benefit from that. We obviously will benefit from the a step away from gold plating on Basel three, from you know, a sort of a more risk based view of the liquidity rules that were originally proposed. And I have been quite encouraged by governor Bowman's speeches. As it relates to the evolutions in the super supervisory approach. Across the bank regulators.

And then lastly, you already mentioned it earlier, but that was an encouraging sign that one of our peers announced the M&A transaction and expected a six month approval and close. Like, that's evidence of a you know, well oiled regulatory review process. All that said, just want everybody to remember that there's another side to this, which is not just the banks that are seeing regulatory relief. There are a lot of nonbanks. Competitors who also have a lot of influence in Washington. Some of whom is a category gave 10 times. In this last election cycle, what all banks in total gave and who as a result you know, are influential in policy making circles.

And they wanna do a lot of the things that either banks have traditionally done or to have access to things that you know, banks have traditionally only had access to without being banks. So there's a lot of work that we are continuing to try to do on Washington just to make sure that there's a balanced view on what a level playing field looks like. I'm I would love to see more de novo charters approved because that would mean that the competitors that we have to face in the in the field every day are playing by the same set of rules.

That we are But that, you know, it we that there is gonna be a balance. There's gonna be relief for us and increased competition.

Thomas Leddy: Okay. Great. Thank you for the color, and thank you for taking my questions.

Operator: Your next question comes from Erika Najarian with UBS. Please go ahead.

Erika Najarian: Hi. Good morning. Good morning. Brad, had a few questions just on you know, balance sheet mix from here, and I'm looking at sort of the period end data, the period end data looked a little bit soft for commercial and very strong for consumer. Given, Tim, and your comments about commercial clients and activity levels for the second half of the year, should we expect that mix of growth to change? Or is there a dynamic where you can continue to see strong consumer growth in the back half of the year in addition to a pickup in C&I growth.

Bryan Preston: No. I would expect I would act actually expect to see a pretty balanced growth in the second half of the year, Erika. Certainly, the utilization trends which we had a very strong fourth quarter and first quarter, and it was one of the things that I think we've talked about previously, which was you know, hey, there is a risk that you could see a little bit of a pullback. We do think that we continue to hear that inventory builds was a significant theme for the utilization pickup, and that has certainly reversed some. But we still feel good about growth from here. It's part the reason why we actually increased our full year average balance loan guide.

Because of the strength that we're seeing. I mentioned in prepared remarks that pipelines in commercial were up 50%. They're actually pipelines are now in line where pipelines were a year ago, and that led to a pretty strong, end of the year last year. So even though that little bit of a pullback in utilization as well as the couple pay downs that we saw in commercial construction. We feel we still feel pretty positive that we're gonna be able to see some nice commercial growth in the second half to supplement what we think is gonna be continued broad based growth from a consumer perspective.

Erika Najarian: Okay. And to that end, if the consumer is still solid and you're seeing that acceleration based on the pipeline. I'm wondering about your deposit strategy or funding strategy in the second half of the year. I mean, clearly, your demand deposit momentum is strong. Total deposits were down a smidge or flat I guess, like, you know, as we think about the second half of the year, how are you balancing optimizing your mix versus gathering more deposits for funding Or do you have enough cash? I think it's $13 billion at period end that could help fund that incremental loan growth And sorry for the compound question.

Would it be then for deposit costs in the second half of the year?

Bryan Preston: Yeah. We're we're at this point, we're we feel very good about our balance. Sheet positioning, and we are going to be focused on continuing to be core deposit funded. We've done what we've needed to do from a rate cut perspective. We do think that while our forecast based off of forward rates assumes three cuts, know, we are somewhat in a higher for longer camp right now, and are definitely more focused on balanced growth. And probably cost stabilization, if not maybe a big point or two higher as we grow. From a from a funding cost perspective, But it's always gonna be dependent on overall what the balance sheet needs.

So we are we do plan to be in a more balance growth mode at this point as long as it's constructive from an NII perspective.

Erika Najarian: Got it. Thank you.

Operator: Your next question comes from Mike Mayo with Wells Fargo. Please go ahead.

Mike Mayo: Hey. I'm gonna stick with the, the metaverse, analogy here, and this it's a little bit different. But I'm not really sure which camp you're in. I hear what you're saying, but is commercial loan growth back? To the industry, or is it not back? And I'll let you choose column a or column b here.

Tim Spence: It's back. If you look at the biggest banks, it's back. That's more capital markets.

Mike Mayo: You guide 5% loan growth for the year. That's pretty high. The middle market pipeline's up 50%, as you said. But on the not back column, we've talked about the less commercial loan growth in the second quarter. Others talked about being temporary due to tariffs, that it's relationship banking is muted. Just in time borrowing, you mentioned the utilization down, I guess, 50 basis points core. Extra growth in commitment. And you know, if you're your guide for the year does not imply much growth left. So yeah, you're talking like, hey. Things are back, but then your guide, you're kind of all close to that guide so your flown stone probe much more.

So is loan growth back, or is it not? Or is it still TBD? Thanks.

Tim Spence: Yeah. I appreciate you holding up the mirror, Mike, because if I did say all those things in sequence, I can understand why you're confused. The I think that you hit on a really important point at the beginning there that I just wanna emphasize, and then I'm gonna answer your is it back or is it not back question, which is it depends a little bit on the universe. That you're in. Right? We don't play in the, you know, upper end of the markets businesses. Right? You see activity at the money center banks, at the investment banks, that just doesn't exist in our that's a different universe. Our universe is Main Street, banking.

It's principally privately owned businesses. Or businesses that were privately owned and are now owned by sponsors. And I think in that universe, loan growth is back. It just may not be back at the level that when people said loan growth was gonna be back that everybody thought about. The amount of uncertainty you have to navigate if you are a manufacturer or materials provider is massive in this environment. Like, having spent a lot of time out with clients this quarter, It just I every time I walk away from one of these manufacturing ecosystems, I think to my no way to understand the complexity unless you're involved in it.

Like, a some time with you know, a supplier to apply to the major appliance manufacturers. It's like there's eight or 10 components in any sort of household compliance. There's an assembly and there's a casing. Like, every one of those components is you know, five to 25 parts, whether it's the control panel or the pump or the circuit board or whatever. And something like three quarters of those parts and most appliances are made overseas today. So there's, like, some domestic alternatives in some cases. And where there are domestic alternatives, some have enough capacity like the sheet, the steel, as I understand, as an example.

There's enough capacity to build the external casing from all the appliances that could come back. But if you are a consumer aluminum, like, if we had a 100% you know, of the capacity online for aluminum in The US, we couldn't even meet half the demand. One of our aluminum clients told me the other day, So then yeah. You know, there are places where you could add. But if you're gonna add capacity to The US, you gotta have real confidence in what the tariff levels are gonna be over time. And most of these deals have not been settled out yet.

It you know, and then another case is, like, if you need refrigerant for an HVAC unit or something like that, like, the refining processes are dirty enough that they don't comply with EPA standards, and therefore, gotta rely on China. For stuff like that. So there are good reasons to borrow, and we are seeing people exercise to borrow. But it's in the context of a big cloud with a question mark on how to think about your supply chain, whether it's or component manufacturers. And on what you can push through in, you know, in terms of prices. Because there's a tug of war going on behind the scenes.

With most of the major distribution partners right now on what percentage of any sort of a tariff needs to be absorbed, where in the supply chains. The result is you're seeing people make decisions, but it's not like a wild animal spirits risk on sort of an environment. So do I think that there's a possibility we could do better on the loan growth front? Absolutely. I also think there's a possibility where the second half of the year could be involved in all sorts of uncertainty. And we're not believers in providing guidance we're not able and it requires some market externality to achieve.

Like, we are believers in putting guidance out and putting plans together that we believe we can deliver under a broad range of scenarios. And if the market backdrops better, then it's always easier to scale up. To support more activity than it is to do an online if you are overly optimistic. And it doesn't come through.

Mike Mayo: I guess that goes to your point about you know, changes to complex systems and difficulty and predicting those.

Tim Spence: Like, I thought our world was complex, and then you sit and some of these supply chain discussions, and it's way more hard to difficult to sort of take apart than an alco meeting. It's a third Got it. Alright. Thank you so much. Thank you.

Operator: Your next question comes from Chris McGratty with KBW. Please go ahead.

Chris McGratty: Oh, great. Good morning, everybody. Hey, Chris. Maybe following up on the loan growth. I mean, any comments on credit spreads? Are you've seen a lot of peers talk a little bit more optimistically about growth in the quarter. What have you seen, if anything, on credit spreads?

Bryan Preston: Hey, Chris. It's Bryan. Credit spreads have actually been stable. You know, in general, we're seeing spreads that in line with what we've seen, honestly, for the last handful of quarters. So nothing that we would call out on that front. Mean, the only thing that we're seeing from time to time is that some folks are getting a little bit irrational on protecting house accounts. Every now and then, and it's more about defending business. Versus seeing unreasonable credit spreads as people are trying to grow.

Chris McGratty: Okay. Perfect. And then my follow-up would be on credit, you know, the improvement in classifieds and nonaccruals this quarter and tightened up the charge off guide. The back half of the year, I mean, maybe a little bit more detail on what you're seeing in the resolution process. That gives you confidence, borrower conversations, know, inflow activity, stuff like that would be great.

Greg Schroeck: Yeah. Thanks. It's Greg. So we I would put the NPA reduction that's in talked about. Kind of in the category of doing what we said. We said last quarter, we had good visibility into the resolution of 40% of our commercial NPAs. Over the next few quarters We hit 18% of that this quarter, and I feel good about our ability to hit 40% over the next couple of quarters based on what based on what we're seeing. I think to your question too, not only did we make great progress on the existing NPAs, our inflows of NPAs dropped 77% from last quarter. So we're not seeing the inflows that we that we had the prior quarter.

So it's it's a good reflection of improved overall credit performance. And just our ongoing proactive portfolio management.

Chris McGratty: Very helpful. Thanks a lot.

Operator: Your next question comes from Steve Alexopoulos with TD Cowen. Please go ahead.

Steve Alexopoulos: Hi, everybody.

Tim Spence: Hey.

Steve Alexopoulos: Tim, I wanna go wanna go back to your not on this table. Gotta ask quite a bit here is, what does it mean to Fifth Third customers? Right? Stripe, who's talking about adopting their own stable point potentially What does it mean for business Right? Do you stick it as relevant to a company like that if they have their own stable coin. Could you unpack that for us?

Tim Spence: Yeah. That the I mean, the narrow answer is for a company like a Stripe, right, or a company like a Fireblock, or some of these others that we are have been fortunate to do business with, The propagation of these technologies is a good thing, and it probably, on balance, creates more business opportunity for Fifth Third. K? Because the in order to buy a stable coin, you have to on ramp currency from fiat and we're in that business. And in order to convert a stable coin back into a dollar post transaction, you have to off ramp it and we're in that business.

And you gotta be able to hold the value on the reserve account somewhere and manage intraday and liquidity, so the minting and burning of coins throughout the day. And we're a good provider of instant payments, rails. That, you know, they that they essentially can develop directly into their existing code base. You don't have a recon process that has to get done the way that you would you know, if you were using some other infrastructure. So I think that is an encouraging.

What I will say though is if you look at the Stripe, and you look at the, you know, the Robin Hoods and some of the others who have been more vocal and active about what they would do with stable coins. A lot of the focus is still on cross border activity. Right? Stripe gets both bills and collects payments from companies all over the world, and then has to pay for hosting and a variety of services and all sorts of jurisdictions around the world.

That's the perfect sort of an ecosystem for a stable coin because you can move currency on chain and then transacting it instantaneously or near instantaneously across borders in places where there isn't interoperability in the domestic payment schemes today. So I think I'm I'm quite optimistic about what that means for us. The wild card would be if you saw people move money out of banks and into stable coins in the US, for domestic payments or domestic cash management. That feels highly unlikely to me. We have digital money that provides it you know, a yield, which stablecoins don't in the form of all of these online banks. And money market funds that already exist.

And we have low cost you know, ubiquitous and, you know, it's already embedded in the instant or near instant payment schemes that you know, if there's a sort of a good enough task that you have to run on this stuff.

Steve Alexopoulos: Got it. Okay. That was my question. Thank you.

Tim Spence: Great. I think I'm I'm go ahead. I was gonna say I understand from math that was the last of our questions. And before we wanna close it out, I just wanna give a quick shout out to our friends at Skyline Chili down the road who were just named the best regional restaurant chain in The US. Just lends more evidence to my belief that the best regional businesses bloom in Cincinnati. So congratulations, guys.

Matt Curoe: Thanks, Tim. And thanks, Tiffany. And thanks, everyone, for your interest in Fifth Third. Please contact the investor relations department if you have any follow-up questions. Tiffany, you may now disconnect the call.

Operator: Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.

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DATE

Thursday, July 17, 2025 at 10 a.m. ET

CALL PARTICIPANTS

President and Chief Executive Officer — Todd M. Schneider

Chief Operating Officer — James J. Rozakis

Chief Financial Officer — Scott D. Garula

Vice President, Corporate Development and Investor Relations — Jared S. Mattingley

Need a quote from one of our analysts? Email [email protected]

TAKEAWAYS

Total Revenue: $2.67 billion in Q4 FY2025, representing reported growth of 8% and organic growth of 9%.

Segment Organic Growth: Uniform Rental and Facility Services organic growth was 7.2%,First Aid and Safety: Organic growth was 18.5%. All Other (including fire protection service and uniform direct sale) rose 11.1% organically.

Gross Margin: Gross margin rose 9.1% to 49.7%, up from 49.2% in Q4 FY2024.

Earnings: Diluted earnings per share increased 9% to $1.09.

Full-Year Revenue: Fiscal 2025 revenue reached a record $10.34 billion, up 7.7%, with 8% organic growth.

Operating Margin: Full-year operating margin was 22.8%, compared to 21.6% in FY2024.

Full-Year Diluted EPS: $4.40 for fiscal 2025, which grew 16.1% over the prior year.

2026 Guidance: Revenue expected to be $11.00-$11.15 billion (growth of 6.4%-7.8%); diluted EPS guided to $4.71-$4.85 (growth of 7%-10.2%).

Free Cash Flow: Generated $1.6 billion of free cash flow.

Capital Deployment: Fiscal 2025 saw $408.9 million in capital expenditures (4% of revenue), $2.2329 billion for acquisitions (largest since 2017, excluding G&K), $612 million in dividend payments, $935 million in share repurchases.

Tax Rate: Effective tax rate was 22.1%, up from 21.4% in Q4 FY2024; full-year effective tax rate was 20%, down from 20.4% the prior year.

Customer Segmentation: Roughly 70% of customers are service providers and 30% are goods producers.

Retention and Pricing: Retention rates at all-time highs; pricing at historical levels.

Revenue Mix: Within Uniform Rental and Facility Services, the mix was 48% uniform rental, 19% dust, 16% hygiene, 3% shop towels, 10% linen (including microfiber, wipes, towels, aprons), and 4% catalog; consistent with prior year.

Gross Margin by Segment: Uniform Rental and Facility Services 49%,First Aid and Safety Services: Gross margin was 56.8%,Fire Protection Services: Gross margin was 49.3%,Uniform Direct Sale: Gross margin was 41.6%.

Outlook Assumptions: Fiscal 2026 guidance assumes no future acquisitions, constant foreign currency, fiscal workday parity, no share buybacks, and no significant economic disruptions.

Dividend Record: FY2025 marks forty-one consecutive years of dividend increases since going public.

SUMMARY

Cintas delivered double-digit diluted earnings per share growth for FY2025, record operating margin, and robust cash generation, supported by continued execution across its route-based businesses. Management confirmed that both operating performance and capital allocation priorities remain disciplined, with acquisitions peaking at a multi-decade high. Guidance for FY2026 reflects expectations of mid- to high-single-digit revenue growth (6.4% to 7.8%) and high-single-digit to low-double-digit diluted EPS growth (7% to 10.2%), with margin expansion underpinned by cost control, technology advances, and productivity initiatives.

Schneider said, "the start of the year is it's starting exactly the way we expected. And it's reflected in our guide."

Rozakis highlighted, "about two-thirds of our new business comes from what we call no programmers or really that as Todd described, the do-it-yourself or the folks that are purchasing from some retail or e-commerce type of solution."

Infrastructure and technology investment, including SAP and SmartTruck, were explicitly cited as productivity drivers and key elements of ongoing margin expansion strategies.

Vertical strategies in sectors such as healthcare, government, education, and hospitality are expected to perform above company average growth rates, with specific new offerings such as privacy curtain solutions and healthcare scrub dispensing expanding beyond original verticals.

Schneider stated, "expect that our rental business will be similar, and our fire and first aid businesses will be in the double-digit area for FY2026." indicating segment-level performance expectations embedded in FY2026 guidance.

First Aid and Safety organic growth in Q4 FY2025 included a discrete spike in training revenue, acknowledged as nonrecurring going forward.

Supply chain resilience was repeatedly cited, with management explaining ongoing tariff or input cost effects are already factored into current guidance and do not necessitate outsized pricing actions.

Rozakis described margin improvements tied to operational initiatives: "Margin for the Uniform Rental Facility Services segment increased 40 basis points from last year."

INDUSTRY GLOSSARY

SmartTruck: Proprietary technology platform used by Cintas to optimize delivery routes, increasing customer-facing time and driving route efficiencies.

Garment Sharing: Supply chain strategy utilizing SAP technology to enable sharing of inventory, improving asset utilization across the company’s network.

No Programmer: Industry term referring to customers managing uniforms or related products themselves—typically through direct purchase, retail, or e-commerce—rather than partnering with a rental or managed service provider.

Full Conference Call Transcript

On today's call, I'll start by sharing an overview of the quarter, the year, and our outlook for fiscal 2026. Jim will share some more detail on our segment performance and the drivers in the business, and Scott will wrap up with more detail on our financials. We are pleased to have delivered a strong fourth quarter to close out another impressive fiscal year for Cintas. We delivered robust top-line growth, maintained healthy margins and cash flow, demonstrating the strength of our value proposition. In the fourth quarter, total revenue grew 8% to $2.67 billion. Our organic growth rate, which adjusts for the impacts of acquisitions, foreign currency exchange rate fluctuations, and workday differences, was 9%.

We continue to execute at a high level across each of our businesses, including organic growth of 7.2% in the Uniform Rental and Facility Services segment, and 18.5% in our First Aid and Safety segment. All Other, which includes our fire protection services and uniform truck sale and uniform direct sale, grew organically by 11.1%. Turning to profitability, gross margin for the fourth quarter grew 9.1% over the prior year from 49.2% to 49.7%. Operating income as a percentage of revenue increased 9.1% over the prior year, and diluted EPS increased 9% to $1.09. We remain confident that the strategic investments we've made in the business position us to capitalize on future growth opportunities.

Those investments include technology that makes it easier for our employee partners to do their jobs, such as our SAP system and SmartTruck platform. Investments in our infrastructure to increase capacity and position our employee partners for success, as well as investments in management trainees in selling resources. For the full year, fiscal 2025 revenue was a record $10.34 billion, an increase of 7.7%. Organic growth was 8% for the year. Our top-line growth continues to underscore the strength of Cintas' value proposition. Operating margins for the full year were 22.8%, an increase of 14.1% and an all-time high compared to our prior year operating margin of 21.6%. Diluted earnings per share of $4.40 grew 16.1% over the prior year.

Balanced capital allocation remains a key pillar of our strategy. In the fourth quarter and throughout fiscal 2025, we continue to deploy capital across all of our strategic priorities, including reinvesting in our products, people, and technologies to ensure we are best positioned to deliver value for our customers. Looking ahead to fiscal 2026, our financial expectations reflect both the strength of the underlying business and our commitment to disciplined execution. Scott will later touch on the assumptions included in our guidance. We expect our revenue to be in the range of $11 billion to $11.15 billion, a total growth rate of 6.4% to 7.8%.

We expect diluted EPS to be in the range of $4.71 to $4.85, a growth rate of 7% to 10.2%. Our fourth quarter and full year 2025 results and 2026 outlook underscore the strength of our business model and our ability to execute in a dynamic environment. Fiscal 2025 now marks 54 years out of the last 56 years that we've grown sales and adjusted EPS. I want to thank all of our employee partners for their hard work and dedication. With our culture of continuous improvement, superior products and services, and disciplined execution, we are well-positioned for sustained growth and value creation. Lastly, we were named to the prestigious Fortune 500 for the ninth consecutive year.

It is an honor to be recognized among the most successful and respected companies. We're proud of these results and the value we continue to deliver for Cintas' shareholders. With that, I'll turn it over to Jim for additional insights.

Jim Rozakis: Thanks, Todd, good morning. We continue to grow at attractive rates by helping new customers meet their needs of image, safety, cleanliness, and compliance. We are seeing success in adding new products and new services to existing customers. Our retention rates are right at our all-time highs, and pricing continues to be at our historical levels. Turning to the fourth quarter organic growth by business, we grew 7.2% for Uniform Rental and Facility Services, 18.5% for First Aid and Safety Services, 12.1% for Fire Protection Services, and uniform direct sale was up 9%. As we've done in the past, I will share a revenue mix of the Uniform Rental and Facility Services operating segment for the fourth quarter.

Keep in mind, there can be small fluctuations in mix between quarters. Uniform rental was 48%, Dust was 19%, Hygiene was 16%, shop towels were 3%, linen which includes microfiber, wipes, towels, and aprons was 10%, and catalog revenue was 4%. These percentages are consistent with last year and demonstrate we continue to experience strong demand across all our products and services. Gross margin percentage by business was 49% for uniform rental and facility services, 56.8% for First Aid and Safety Services, 49.3% for Fire Protection Services, and 41.6% for uniform direct sale. Margin for the Uniform Rental Facility Services segment increased 40 basis points from last year.

Our progress year over year reflects the positive impacts made by our excellent supply chain team, as well as cost savings initiatives such as our garment sharing, technology enhancements like our auto sortation systems in our plants, and our proprietary Smart Truck solution that makes our routes more efficient. Gross margin for the First Aid and Safety Services segment increased 140 points from last year with strong revenue growth continuing to create leverage. A healthy revenue mix then includes growth in high margin recurring revenue products like AED Rentals, eye wash stations, and water break, as well as cost savings initiatives such as smart truck and improved sourcing.

Before I turn over to Scott, I'd like to share an example that demonstrates how we're delivering for our customers. A customer in the Southeastern part of the country has been a valued customer for over ten years. For most of that time, we provided them exclusively with facility services, products, and services. Their maintenance department uniforms were direct purchase. We would call a no programmer. Our customer approached us to see if we could help them address three key pain points. One, the initial investment and ongoing costs associated with replacing uniforms due to turnover and damage made it difficult to forecast spend and manage cash flow.

Two, employees expressed a strong preference for the convenience and professionalism of a laundered uniform program over washing their uniforms at home. Three, their managers found that overseeing uniform logistics in-house took valuable time away from focusing on their core business operations. In response, we successfully introduced our Uniform Rental program on top of our facility offering. But the story doesn't end there. We also are under trusted culinary department, onboarding those employees who had previously been with a traditional uniform competitor. The switch was driven by a premium ChefWorks exclusive attire, and the opportunity for vendor consolidation. This example underscores several points. First, we don't always have to lead with uniforms.

In this case, we had a long successful relationship with a customer built on our facility services offering. Second, we can grow in a variety of different ways. We can convert no programmers to a rental program. We can add new customers who are currently with another uniform rental provider. Offering premium products and services, and we can grow by adding new products and services to our existing customers. This example also illustrates how Cintas is more than a service provider. We are true problem solvers committed to helping our customers succeed. And by staying attuned to their feedback, we continue to strengthen our relationships and expand our footprint across industries.

And I'll turn over to Scott for additional details on capital allocation strategy and 2026 outlook.

Scott Garula: Thank you, Jim, and good morning, everyone. As Todd mentioned, we closed our fiscal year with strong financial performance. Our balance sheet remains healthy and during fiscal 2025, we generated $1.6 billion of free cash flow. In the fourth quarter, we were able to put our capital to work through capital expenditures of $114.6 million, acquisitions of $34.1 million, dividends of $157.8 million, and share repurchases of $256.7 million. Our effective tax rate for the fourth quarter was 22.1% compared to 21.4% last year. For fiscal 2025, the effective tax rate was 20% compared to 20.4% the prior year. During fiscal year 2025, we deployed significant capital across each of our capital allocation priorities.

This capital allocation strategy has been effective for many years and has served us well. We invested $408.9 million in capital expenditures which helps support investments in our technology and infrastructure. Capital expenditures were 4% of revenue which is right where we like to be. We invested $2.2329 billion in acquisitions in fiscal 2025 representing our largest year of M&A activity in almost twenty years, excluding our 2017 acquisition of G&K. These acquisitions span across each of our three route-based segments adding new customers, extending capacity, and delivering compelling synergies. By optimizing our existing route structure, we've been able to spend more time with customers while reducing time spent on the road.

Acquisitions remain an important lever for growth enabling us to broaden our offerings and deliver greater value for our stakeholders. Additionally, we returned over a billion and a half dollars to shareholders through dividends and share buybacks. Almost $612 million in dividend payments marks the forty-first consecutive year that we've increased our dividend, which is every year since going public. We also repurchased approximately $935 million of shares during fiscal year 2025. Todd provided our fiscal 2026 outlook at the start of the call, and I'd like to provide some context on a few assumptions underpinning our guidance. Please note that both fiscal 2025 and fiscal 2026 have the same number of workdays for the year, and by quarter.

Our guidance does not assume any future acquisitions. Our guidance assumes a constant foreign currency exchange rate. The fiscal 2026 interest net is expected to be approximately $98 million. The fiscal 2026 effective tax rate is expected to be 20% which is the same as fiscal 2025. And our guidance includes no future share buybacks, or significant economic disruptions or downturn. With that, I'll turn it back over to Todd for closing remarks.

Todd Schneider: Thank you, Scott. As we look ahead to fiscal 2026, our results reflect the strength of our strategy and the value we provide in helping our customers meet their image, safety, cleanliness, and compliance needs. We remain focused on delivering exceptional customer experiences while continuing to make the necessary investments in our business to sustain long-term growth and value creation. Our confidence in our ability to navigate the current environment and capitalize on future opportunities remains strong. Jared, back to you.

Jared Mattingley: Thanks, Todd, Jim, and Scott. That concludes our prepared remarks. Now we are happy to answer questions from the analysts. Please ask just one question and a single follow-up if needed. Thank you.

Operator: If you would like to ask a question, please press 1 on your telephone keypad now. Please be prepared to ask your question when prompted. You'll also be allowed to ask one follow-up question. Once again, if you would like to ask a question, please press 1 on your phone now. And our first question comes from George Tong from Goldman Sachs. Please go ahead, George.

George Tong: Hi. Thanks. Good morning. Starting at a high level, can you talk a little bit about what the overall selling environment is like, including how sales cycles are performing and how client sentiment is trending?

Todd Schneider: Good morning, George. Thanks for the question. I'll start. And then, Jim, if you want to add any color. No real change to the customer behavior, sales cycles, new business remains strong. Retention rates are still at very attractive levels. You know, ad stops really no significant change there. It is, there are certain, excuse me, clearly, there's more uncertainty in the marketplace with, you know, tariff trade, you know, tax or excuse me. Tariff slash trade taxes, which has a little bit more clarity. And interest rates. But nevertheless, our value proposition continues to resonate. And it resonates in virtually every economic cycle, hence our 54 of the last 56 years. And we expect that to continue.

And we like the position we're in. Anything else, Jim, on customer behavior that you'd like to contribute?

Jim Rozakis: I think maybe, Todd, the only color I would add on that is that the customer behavior offers an opportunity for us to add value to our customers. I was recently at an operational visit and in a routine conversation, one of our employee partners was out at a customer site. And as you can imagine, during traditional rapport building, the customer expressed concern regarding the overall uncertainty in a macro environment. Our employee partner turned out an opportunity to discuss further, Cintas' products and services. And we found out that we were able to go ahead and save this customer significant money on something as simple as disposable gloves.

So there certainly is a degree as you described of a little bit uncertainty. That uncertainty creates opportunity and the customers are looking for answers and oftentimes they'll find those answers for us.

George Tong: Very helpful. And then my follow-up, you're continuing to see and deliver operating margin expansion on a year-over-year basis. But incremental margins stepped down this quarter from what was 40, 50% before to around 25%. Can you talk a bit about what factors may be causing this narrowing rate of margin expansion?

Todd Schneider: Yeah, George. Yeah. We had another really good profit quarter. We did run 22.4% operating profit for the quarter. That brings us to 35% incrementals for the year, excluding our land sale. I will say last year, Q4 was by far our best profit quarter. So the comparables were certainly tougher. As you know, running a business isn't linear, but we like where we are. We're right in that sweet spot of 25 to 35% incrementals. And we're investing for the future. And we're doing that because we see the opportunities ahead, and we like what the opportunities look like for us. So we're investing appropriately.

George Tong: Got it. Very helpful. Thank you.

Todd Schneider: Thank you.

Operator: And our next question comes from Jasper Bibb from Truist Securities. Please go ahead, Jasper.

Jasper Bibb: Hey, good morning guys. I know you guys did pull the way down. I was just hoping you could give a little bit more color on the cadence of your '26 outlook as I imagine you're going to have a lot more difficult comps on the incremental margin front in the first half versus second half?

Todd Schneider: Jasper, thanks for the question. Yeah, on the revenue side, we just finished a very successful year where we grew 7.7%, which is right where we wanna be. The '26 revenue guide calls for 6.4 to 7.8% growth, which again is right where we like to be. And sets us up for another really good year. We're performing well, and we like the momentum that we have in the business. On the EPS side, we had a great year in FY '25, and we think we're set up for another really good year in FY '26. The guide calls for EPS growth of 7% to 10.2%, which infers margin expansion throughout the guide.

And at the midpoint of revenue EPS guide, it also represents operating margin above 23% and incrementals in the high twenties. So this is all consistent with how we guided last year. And this year, certainly the macro environment is, there's a little bit more uncertainty, but we think we're well positioned to navigate the environment and have another very successful year in '26.

Jasper Bibb: Got it. Yeah. Hoping maybe you could give some color on what you're seeing in the ad stops and how you're thinking about that trend in your fiscal twenty-six guidance.

Todd Schneider: Yeah. Jasper, good question. You know, we have an incredibly broad customer base. So we have some customers that are absolutely thriving in this environment. Some are dealing with input costs challenges. But the net-net is our customer base is still performing well, and we think that we're in a good position there. Keep in mind, 70% of our customer base are in the services providing sector. 30% in the goods producing. But we, so from an ad stop standpoint, we think we're in a good spot. We don't give out that specific number. But we like the momentum that we see in our business.

Jasper Bibb: Thank you for taking the question.

Operator: And our next question comes from Manav Patnaik from Barclays Capital. Please go ahead, Manav.

Ronan Kennedy: Hi. Good morning. This is Ronan Kennedy on for Manav. Thank you for taking my questions. You touched on this in response to Jasper's question, but if I may just look to go a little more granular. The '26 guide is the implied operating income margins of 25%, I think, are at the lower end of the mid guide at 25 to 35. And then twenty-three and twenty-seven at the low and high end is respectively. There's obviously an element of operating leverage at play in revenues.

But any further insights you can shed as to the puts and takes of the drivers of those incrementals, whether it's the positive impacts of supply chain tech initiatives, or the negative impact, say, of the SAP implementation for fire protection.

Todd Schneider: Any further insights on kind of puts and takes to those incrementals, please? Yeah. Thank you, Ronan. Yeah. We like our guide. We think the incrementals are right where we wanna be. You know, certainly, we will be continuing to invest in SAP in our fire business. That's not an inexpensive effort there. But that's all contemplated in our guide as is any input cost challenges that are thrown our way as a result of the environment, the macro environment that we're dealing with, etcetera. So we feel good about the spot we're in from an incremental margin standpoint. Again, 25% to 35%. And we're investing appropriately. You know, running a business isn't linear.

So we but we're focused on the long term and positioning our partners and customers to be incredibly successful. And we like the spot that we're in.

Ronan Kennedy: Thank you. And then for my follow-up, please. Similar question, but in relation to revenue. The range the guided revenue range is, I think, under 40 basis points. Which you understandably indicated is right where you wanna be. I also think that range is consistent with the guided range for FY '25. Can you give us any further insight as to what that contemplates from organic by department or, you know, the expected contributions from, say, price, new biz, etcetera, versus historicals? Any further insight there, please. Be greatly appreciated.

Todd Schneider: Yeah. Certainly, Ronan. Yeah. We again, we like our guide on the revenue as well. We think we're positioned there. The net for us, we want to grow our business in the mid to high single digits revenue. We certainly expect that our rental business will be similar and our fire and first aid businesses be in the double-digit area. And then in our uniform direct sale business, as we've detailed out, we're not trying to grow that as aggressively, you know, low single digits would be a good way to think about it. But it is a very strategic business because those rather large customers we sell, our route-based businesses into as well.

So that's kind of how we think about it.

Ronan Kennedy: Thank you very much. Appreciate it.

Operator: And our next question comes from Tim Mulrooney from William Blair. Please go ahead, Tim.

Tim Mulrooney: Todd, Jim, Scott, good morning.

Jim Rozakis: Good morning, Jim.

Tim Mulrooney: Thanks for taking my questions. Just the first one on the quarter. Fourth quarter result. Here. Organic growth was 9%. That was well above consensus. I was also above what was implied by your own guidance range that you provided last quarter. So I'm just curious what business lines or sectors picked up during the quarter relative beyond expectations?

Todd Schneider: Yes. Thank you, Tim. Yes, we're really proud of our fourth quarter performance. It did exceed our expectations. You know, I think underscores the momentum we have in our business. But we did have for some, I'll call it more discrete type of one-time benefits in the area of our first aid business. We were propelled by, I mean, a great performance in our training area. Which those tend to be a little bit more discreet one-time in nature. Our uniform direct sale business, you know, grew 9%. Which was a really strong close to a, what was a bumpy year. So, you know, a little bit more one-time in nature there. Performance in the close of the year.

But we're really proud of the performance and we think we're well positioned for FY '26.

Tim Mulrooney: Okay. No follow-up needed. Thanks, guys.

Todd Schneider: Thank you.

Operator: And our next question comes from Andrew Steinerman from JPMorgan. Please go ahead, Andrew.

Andrew Steinerman: Hi. The quarter ended six weeks ago, and I just wanted to get a sense of how the current quarter started, just what's already kind of behind us in June, in the first couple of weeks of July in terms of revenue growth momentum? Has it sort of been consistent with the way you, you know, you finished the quarter? And then I'll just ask my second question also. I just saw some discussion. I was just wondering if there's any recent changes to your go-to-market strategy, particularly around national accounts?

Todd Schneider: Good morning, Andrew. Thanks for the question. First off, yeah, you're right. I mean, we're because of this being our Q4 call, we are further into our quarter than normal. And the start of the year is it's starting exactly the way we expected. And it's reflected in our guide. So kind of well, I would say consistent with what we expected for the start of the year. As for our go-to-market strategy, that really hasn't changed. Websites change. And we talk about, you know, trying to position ourselves appropriately to all of our customers. But we've been in the national account business for thirty-plus years. I'd say virtually my entire career.

And the only I would call out is our vertical strategy is obviously has been different over the last five to ten years. And that has performed well. So no other change, no real change in our market strategy. We're constantly reinvesting in our products and services to make them of more value to our customers. And to position our employee partners to make it easier to take care of our customers. So there's always refreshes going on, a product here, product there. That's just part of our culture, to try to make sure we're positioned to be as successful as possible.

Andrew Steinerman: Sounds right. Thanks.

Todd Schneider: Thank you.

Operator: And our next question comes from Josh Chan from UBS. Please go ahead, Josh.

Josh Chan: Hi. Good morning, Todd, Jim, Scott. As you look into your different cost buckets kind of going into 2026, you know, material, labor, your fleet, anything to highlight in terms of the trajectory of cost changes? And maybe on the material side, could you touch on potential tariff impact and how that could have that could impact kind of the cost?

Todd Schneider: Yeah. Good morning, Josh. Yeah. Why don't I just speak a little bit about that subject? You know, we believe we're in a good position to navigate through what is clearly a very dynamic environment with challenges like tariffs and what have you. We think it gives us an opportunity to flex our strength, which is our people and our culture, which in all this is reflected in our guide. That we contemplated some additional expense into the guide. But we have some, we think, some real advantages. First off, the nature of how we expense our goods in our largest businesses is because we amortize it. It gives us time.

You probably noticed on our balance sheet, our inventory is up. So we've anticipated and managed this appropriately. And I'd like to also say that we've navigated this very successfully in the past. You know, the past five years, whether it's been inflation or supply chain challenges, our global supply chain has shined. And as has been a competitive advantage for us in the marketplace. As a reminder, we source products all over the world. So we have great geographic diversity. And we also have 90% or so of our products we have two or more sources. Put that together with our buying power, all that gives us options and leverage. So we think that positions us well.

And you put on top of that our corporate culture traits of positive discontent, competitive urgency, it fuels us to look at process improvements, and finding ways to extract inefficiencies out of our business. So that we can be more efficient. We don't take the approach that, well, if a tariff is going to raise a cost, then we just got to eat that and pass along to our customer. That's not how we run our business. And it's not how we've run it in the past, and it's not how we're gonna run it in the future. We think it gives us an opportunity to shine.

Jim Rozakis: Josh, if I might add to that, I think Todd did a great job describing the supply chain. We also talked about some of the work we're doing to remove inefficiencies. We have several initiatives ongoing, some were mentioned in our prepared remarks. That are all in play and again contemplated in next year's expectations. But garment sharing would be one that I think would be worth highlighting here. We continue to leverage the SAP platform to be able to share goods that we have in inventory across our entire network. And that's been quite effective, and we think we've got some room to go on that one. Automating within our plants and deploying auto rotation technology in our plants.

We have about 50% of our plants have some degree of auto sortation, and we're in the middle of trying to deploy more of that. In the past, it's been challenging due to our plants being all different shapes and sizes, but we believe that we develop technology to overcome that and limit the disruption. So those are in motion, and we expect those to continue to deploy this year. Todd mentioned operational excellence. Operational excellence is us really the assets specifically in our rental business. Around the plant.

That allows us to continue to defer capital and it also allows us to run those plants more efficiently allowing us to wash fewer loads, you know, consume less energy, less chemistry, and water within our facilities. And then maybe last, that I would be mentioning would be our smart truck initiative that's been ongoing now for several years. That allows us to incrementally route our fleets more efficiently, get them more time in front of the customer. But, certainly, route growth is significantly less than what our revenue growth is, and we're gonna continue that in this next fiscal.

Josh Chan: That's great color. Yeah. I appreciate the context there. Really helpful. And then, I guess, for my follow-up, I think, Scott, you highlighted the M&A spend this past year. I just wonder if you could comment on the prospects of M&A kind of going forward and how the pipeline of the bolt-ons look at the moment? Thanks.

Todd Schneider: Why don't I start a little bit on pipeline, and then Scott can talk about capital allocation. M&A is tough to predict, but it's very important to us. You know, these relationships that we have, you know, we've had for decades. And trying to figure out when a business is going to be interested in selling is, I mean, it's not random, but it is certainly tough to predict. We had a great year, and we leverage those relationships that we've had for decades. And but we're in the business of buying really good businesses. And when you buy really good businesses, you get a lot of things, but you get customers and you get employee partners.

And those are the most important areas. In certain cases, we get capacity and if we don't get capacity, we get really good synergy. So we'll continue to work our pipeline. But nevertheless, we can't time it, but we're highly active. So that when somebody is interested, we're well-positioned for that. If you wanna talk a little bit about capital allocation.

Scott Garula: Yeah, thanks, Todd. As I mentioned in our prepared remarks, our approach to a balanced capital allocation strategy has served us well for many years. You know, I've been part of that in my prior roles. And I really don't see a change in that in the future. And continue not only to invest in M&A activity, we'll continue to reinvest back in the business via capital expenditures. And, you know, continue to invest in both dividends and be opportunistic with share buybacks.

Josh Chan: Great. Thank you for your time, and congrats on a good quarter.

Todd Schneider: Thank you. Thank you.

Operator: And our next question comes from Jason Haas from Wells Fargo. Please go ahead, Jason.

Jason Haas: I'm curious if you expect the industry to pass on higher price increases in fiscal 2026 given the tariff-driven inflation if that's something that you've baked into your guidance assuming you could take more price as well, or if that could represent upside.

Todd Schneider: Thank you for the question, Jason. Our pricing strategy is we're back at historical levels on pricing. We certainly don't control how our competitors price things. But we expect to be at historical levels of pricing. What we know of the environment today, we think we're well-positioned. It's contemplated in our guide. And as I mentioned earlier, we don't just run our business in a manner where, well, if a tariff comes through and there is some cost increase, first off, we don't just accept that. And then secondly, we find ways to run our business more efficiently because, you know, we operate in a competitive environment, competitive marketplace.

And as a result, we want to make sure that we're being great fiduciaries for not only our shareholders and our partners but our customers. So our guide contemplates historical pricing and that's how we would plan to manage the business.

Jason Haas: Okay. Thank you. That's helpful. And then as a follow-up, I was curious in this environment if you're seeing more competitive wins particularly from some of your larger competitors that are out there since it seems like your growth rates are quite elevated, versus what we've seen from others?

Todd Schneider: Yeah. So again, thanks for the question. No real change in the marketplace. I'd say, from a competitive landscape. It's been competitive my entire career, and I'm sure it will be, you know, into the future as well. That being said, we don't look at it as a finite pie. You know, we have a little over a million business customers. There's 16 to 17 million businesses in the US and Canada. So we look at it as an opportunity to go and sell more to those customers who are not buying from us today. And then we have this incredible opportunity to sell more products and services to our current customers.

So, you know, how someone else in our direct competitor might be growing is that's not of interest to us. More focused on how can we provide more value to our customers, how can we position our employee partners to be more successful? We want to be easier to do business with. We want to be easier for our partners to sell, and easier for our customers for them to do business with us.

Jason Haas: Got it. Thank you. That's very helpful.

Operator: And our next question comes from Ashish Sabadra from RBC. Please go ahead, Ashish.

Ashish Sabadra: Thanks for taking my question. I just wanted to focus on the four strategic verticals. Healthcare, government, education, and hospitality. I was wondering if you could provide any update on those fronts and any big initiative as we go into 2026. Thanks.

Todd Schneider: Good morning, Ashish. Thanks for the question. I'll start and then Jim, feel free to chime in. We like all our verticals. We think we've chosen them really well. As a reminder, we don't just sell into those verticals. We organize around them. And from a business standpoint to make sure that we can service them appropriately and provide better value. But we think we've chosen them quite well and we expect them all to perform above our average growth rates. Jim, anything specific on verticals you'd like to call out?

Jim Rozakis: I guess I would just add that, you know, by organizing around the verticals allows us to gain intimate knowledge and really understand the industries well. Therefore, we're able to collaborate, innovate, solutions that we bring to the marketplace that not only allow us to have solid growth within those verticals, but oftentimes, those solutions could expand outside of those verticals. And one we've discussed in the past has been our healthcare journey and, you know, our journey with really what initiated scrub dispensing. That scrub dispensing service now is out beyond just healthcare, and we see lots of applications for that.

We've gone on a recent journey in healthcare to really innovate and change how we go to market for privacy curtains. And we believe that those are indicative of the types of solutions that you're able to bring to the marketplace when you get that involved and invested in particular verticals. And we want to continue to do that moving forward.

Todd Schneider: Ashish, we hear from our customers, as Jim mentioned, when you organize around them and you spend that much time with them, you hear where they need help. And where they're struggling for whether it's cleanliness or compliance or image or safety. And Jim just walked through the privacy curtains, and it's a great example where customers really struggle with that with the compliance, which affects cleanliness. And we didn't just roll out privacy curtains. We invested in technology around that and also in improving how they function. And as a result of that, have patents around that. And we've got a lot of customers that have been really excited and happy about what we're doing there.

Ashish Sabadra: That's great color. And maybe just on the follow-up, we've seen some material acceleration in the first aid business. I was just it seems like based on the prepared remark that it was broad-based across products, but I was just curious if there is incremental traction that you're getting for certain products or just improving penetration. Any color there will be helpful. Thanks.

Todd Schneider: Yeah. Great question. We love the first aid business, and it's performing at a very exciting clip. And the value that they provide to the customers is, it's reflecting. Jim talked a little bit about that we've got some good momentum around certain products and services, AEDs, have been in great demand. That's been good. Our water break, our eyewash stations, those recurring revenue type products are really good for us. But our cabinet business is attractive. So we've invested appropriately there and we're seeing the benefits of that. That being said, we did benefit from a spike in training during the quarter. Which we don't expect to continue at those levels.

But nevertheless, we think we're well-positioned to be successful in the marketplace in the first aid business.

Ashish Sabadra: That's great color. Thank you.

Todd Schneider: Thank you.

Operator: And our next question comes from Shlomo Rosenbaum from Stifel Nicolaus. Please go ahead, Shlomo.

Shlomo Rosenbaum: Hi, thank you for taking my questions. I want to piggyback a little on Ashish's question. In that first aid business, how much of that revenue would you say is more kind of recurring? And how much of that business is usually training into other areas that might be more one-time-ish?

Todd Schneider: Yeah. Good morning, Shlomo. Yeah. We don't give out the exact percentages as far as revenue that's reoccurring versus more on consumption. But nevertheless, we're constantly reinvesting in that business. To try to come up with products and services that are of real value to the customers. And we're seeing the benefits there. So that's part of our culture. Is that reinvestment and we'll continue down that path. And we think, again, we're well-positioned to be successful in that market. And demand is showing. And we expect that business will grow in the low double digits moving forward. And we like the spot we're there.

Shlomo Rosenbaum: Okay. Thank you. And just for the follow-up, could you comment a little on the spike up in Uniform sales? Is that and usually, I know you expect it to grow in the low single digits. And was there something that will carry forward into the next quarter or two? Or was it really just kind of a one-quarter kind of fulfillment or something?

Todd Schneider: Yeah. Good question, Shlomo. Yeah. In the uniform direct sale business, we do expect that to grow in the low single digits. It was a bumpy year for them, and they had a really strong close. But I would not expect that would continue into the fiscal year. We plan for that business to grow in the low single digits. And because of the nature of it with rollouts, it can be a little bit of a lumpiness to that. And Q4 was a really strong close to the year.

Shlomo Rosenbaum: Thank you.

Todd Schneider: Thank you.

Operator: And our next question comes from Stephanie Moore from Jefferies. Please go ahead, Stephanie.

Stephanie Moore: Great. Good morning. Thank you. I was hoping you could talk a little bit about some of your end market exposure, if you're seeing any kind of weakness or strength in particular end markets. You know, maybe the manufacturing sector, for example, has been kind of weak across the board here in the US, but any areas of weakness or areas of strength that you could call out. Thank you.

Todd Schneider: Yep. Good morning, Stephanie. You know, in general, again, we have an incredibly broad customer base. Whether it's by a business type, NAIC code, and also geographically. And so no real weakness that we're seeing whatsoever in the marketplace. Certainly, the goods producing, you know, customers have been under more pressure the last few years. The services providing customers are trying to fulfill demand. So, you know, the net-net of it is no real weakness that we're seeing there. We would be encouraged to see more production coming back into the US from the goods producing sector.

And we are hoping for more certainty as far as what the trade looks like, which will allow business people to invest appropriately, and we are hopeful that will come in the near future.

Stephanie Moore: Got it. And then really just any kind of I guess, just one follow-up here. You know, as you think about your M&A opportunity, obviously, you've given some color today on kind of your continued focus on M&A. But are there any areas or that you would look at expanding in M&A outside of kind of the core uniform area?

Todd Schneider: Yeah. Thanks for the question, Stephanie. First off, we were acquisitive in each of our route-based businesses. And that's a key component of our strategy. We love when we make an acquisition. I talked about synergies. I talked about capacity. But it does give us an opportunity to go to those customers with a broader breadth of products and services that we can help them with. So that's an important function. But, yeah, we're acquisitive in each of our route-based businesses. And we're always, you know, various people bring us opportunities outside of those. And we don't need to. We don't need to go outside of those. The opportunity in our business is significant.

As I mentioned, you know, a little over a million business customers, whether 16, 17 million businesses in the US and Canada. So the opportunity, looking forward is very encouraging and we're staying disciplined while being aware of opportunities that are out there. But all three route-based businesses are we're trying to make deals.

Stephanie Moore: Thank you. Appreciate it.

Todd Schneider: Yes, ma'am. Thank you.

Operator: And our next question comes from Scott Schneeberger from Oppenheimer. Please go ahead, Scott.

Scott Schneeberger: Thanks very much. Todd, I believe you mentioned progress relating to SmartTruck and improved sourcing. Could you please elaborate on that? And then my follow-up, I'll ask upfront for Scott. Just curious, it sounds like we should be expecting 4% of revenue CapEx again in fiscal 2026. I'm just curious digging in, from the one big beautiful act, bill act, anything to expect there impacting cash flow in '26 or any other aspects of the business? Thanks, guys.

Todd Schneider: Well, thank you for the question, Scott. Yeah. As I mentioned, and I think Jim expanded upon it, SmartTruck has been a great investment for us. It's technology that allows us to spend more time with the customer and less time driving. And, as we like to say around here, we don't generate any revenue when the wheels are turning. We only generate revenue when the wheels stop. So and that technology has allowed us to improve upon that. Jim mentioned that we're adding routes at a certainly a slower pace than we're adding revenue. And that speaks to just what I mentioned. From a sourcing standpoint, we're constantly working on improving sourcing.

We have seen benefits over the past few years. With our centralized purchasing, with our first aid distribution center. But our sourcing organization is working overtime right now. And because of the environment with tariffs being uncertain there. But we're encouraged by what they do. How they do it. And we again, we think this will give them an opportunity to shine. Scott, if you want to talk a little bit about CapEx and cash flow?

Scott Garula: Yeah. Thanks, Todd. Thanks for the question, Scott. Regarding CapEx, you know, it came in at 4% of revenue in fiscal year 2025. And we expect to be in that, you know, 3.5% to 4% going forward. As we know, I mean, investments can fluctuate from quarter to quarter and year to year, but we like to be in that three and a half to 4% range as a percent of sales. I believe your second question was related to the tax bill. And we are not, you know, based on the strength of our balance sheet and financials, we're not expecting any material impact from the tax bill on our tax rate, cash flow, or the business in general.

Scott Schneeberger: Great. Thanks, guys.

Todd Schneider: Thank you.

Operator: And our next question comes from Tony Kaplan from Morgan Stanley. Please go ahead, Tony.

Yehuda Silverman: Hi. Good morning. This is Yehuda Silverman on the line for Tony Kaplan. So I had a quick question about new sales. So typically, what's the main driver for a customer to switch providers? Is there a certain product or area that's more or most attractive to customers?

Todd Schneider: Yeah, thank you for the question, Yehuda. There is we don't care where the customers start doing business with us. Whether it's uniforms or FS, as Jim spoke about earlier, with his example in this prepared remarks, first aid, fire uniform direct sale. We just want to start doing business with them. And then as we do business, we think that makes it easier because they historically have a very good experience and then it leads to, well, what else can you help us with?

And when you have eyes and ears and minds in your customer's place of business on a frequent basis, it breeds confidence and it breeds the opportunity as they look out and say, you know, what else can we help you with? Jim mentioned a little bit about really, varies based upon where we get started, but also the impetus for a customer to switch. Because of the white space out there where there's so many businesses that are self-serve, that's where we really focus our time. And they're all spending money to some degree on meaning they're all where their people are wearing clothes, their people are getting disposables from somewhere.

It might be an e-commerce or it might be a brick and mortar retail store. So it really doesn't it varies based upon where the customer is, where their business is at that point. They may be dealing with an environment where they don't have as many people. But the work still needs to be done. Or they're struggling to keep up with demand, and you can help me with this. Take this off my plate. Be happy to, free to do that. Jim, anything else you'd like to add there?

Jim Rozakis: The only thing I would say is, the new business wins converting from traditional competitor over to us, they happen for a variety of different reasons. And we believe we have a lot of differentiators from the product line to the service to the technology offerings for the customers. But just as a maybe a level setting is that about two-thirds of our new business comes from what we call no programmers or really that as Todd described, the do-it-yourself or the folks that are purchasing from some retail or e-commerce type of solution. And that's where we focus a lot of our time, and that's where we have the most success.

That's been a strategy for years and will continue to be a strategy, and we know that resonates well in the market.

Yehuda Silverman: Great. Thank you.

Operator: And our next question comes from Kartik Mehta from North Coast Research. Please go ahead, Kartik.

Kartik Mehta: Hey. Good morning. Todd, maybe on the first aid business, and I know that you're able to get pricing on the uniform side just because of the service level you're providing. And I'm wondering, as you look at the first aid business and that double-digit growth, what component is price and what's your ability to get price increases?

Todd Schneider: Good morning, Kartik. Great question. The First Aid business from a pricing strategy is the same as how we run our other businesses. And they're back to historical levels. And so the vast majority of our growth in that business is volume growth. We're not growing our business because of or any of our businesses because of pricing being the major strategy. We're growing it because we're providing more value, more products, services to customers. So that volume is growing. That's the same in each of our businesses. And that's an important component of our strategy. So, yeah, can we get some price? Yes. But it's at historical levels.

And we're excited about the value that we're providing the customers in the first aid, but all of our businesses.

Kartik Mehta: And just to follow-up, but different topic. Just use of AI kind of where you are in Cintas more from, you know, is it today more of a cost? Is it a benefit, or is it neutral?

Todd Schneider: Great question, Kartik. I appreciate that. We've been investing in technology for years, and we will be doing so, you know, I'm sure, in perpetuity. I'll start with our investment in our, what I call our rock-solid foundation of SAP. And then moving on to started investing in data analytics. Once we had that ability, of accessing the data. And then algorithms. And now machine learning and artificial intelligence is certainly in the early innings for us. But we see opportunity there. So, yeah, we're making investments. And we're doing so because we're excited about where we think we can take this technology.

And for it to be easier for our employee partners to do their job, and make it easier for customers to do business with us. You know, an example of that is when we talked about with SmartTruck technology. That's not artificial intelligence. But it is certainly is that has been important to us. And the learnings that we've had there we're making it better and better. Garment sharing applications, as Jim mentioned, similar. You know, we're getting efficiencies out of our most critical assets. And all this makes it for our employee partners to be more successful and productive and to take administrative time out of their day.

We also see opportunities too with technology and machine learning to direct them where to spend their time. So we think that's important. All this will show up, Kartik, in I'll say, incremental improvements over many years. But important investments for us to make so that we can get those incremental investments and benefits for many years to come.

Kartik Mehta: Thank you. I appreciate it.

Todd Schneider: Thank you.

Operator: Great. And we have run out of time for our question and answer session. So I will turn the call back over to Jared for closing remarks.

Jared Mattingley: Thank you, Ross, and thank you for joining us this morning. We will issue our 2026 financial results in September. We look forward to speaking with you again at that time. Thank you.

Operator: This concludes today's conference call. Thank you for your participation. You may now disconnect.

Host: The host has ended this call. Goodbye.

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DATE

Thursday, July 17, 2025 at 9:30 a.m. ET

CALL PARTICIPANTS

Chairman and Chief Executive Officer — Alan Schnitzer

Chief Financial Officer — Dan Frey

President, Business Insurance — Greg Toczydlowski

President, Bond & Specialty Insurance — Jeffrey Klenk

President, Personal Insurance — Michael Klein

Senior Vice President, Investor Relations — Abbe Goldstein

Need a quote from one of our analysts? Email [email protected]

TAKEAWAYS

Core Income: Core income of $1.5 billion, or $6.51 per diluted share, for Q2 2025, supported by underwriting and investment results.

Core Return on Equity: Core return on equity was 18.8% for the quarter and 17.1% for the trailing twelve months.

Reported Combined Ratio: Reported combined ratio improved nearly 10 points to 90.3% for the quarter, driven by lower catastrophe losses, stronger underlying results, and positive prior year reserve development.

Underlying Underwriting Income: Underlying underwriting income was $1.6 billion pretax for Q2 2025, up 35% year-over-year in underlying underwriting income (pretax), driven by 7% growth in net earned premiums and a 3-point improvement in the underlying combined ratio to 84.7%.

Net Written Premiums: Up 5% in Business Insurance to $5.8 billion, up 4% in Bond & Specialty Insurance to $1.1 billion, and up 3% in Personal Insurance to $4.7 billion.

Capital Returned to Shareholders: Over $800 million of capital was returned to shareholders, with $557 million in share repurchases and $252 million in dividends.

Adjusted Book Value Per Share: Adjusted book value per share was $144.57 at quarter end, up 4% from year-end and 14% from a year ago.

Net Investment Income: Net investment income was $774 million after tax for the quarter, a 6% increase from the prior year quarter, with fixed maturity investment income the primary driver.

Catastrophe Losses: $927 million pretax catastrophe losses, or 8.5 combined ratio points, nearly four points lower than prior plans.

Favorable Prior Year Reserve Development: Total net favorable development of $315 million pretax.

Reinsurance Program Update: Renewed Northeast property catastrophe XOL treaty for $1 billion above $2.75 billion, and Replaced personal insurance coastal hurricane XOL with a broader $1 billion all-perils treaty attaching at $1 billion, effective with July 1, 2025 reinsurance placements.

Canadian Business Divestiture: Announced sale of most Canadian operations to Definity for $2.4 billion in May 2025. Projected to be "slightly accretive" to EPS for several years, beginning in 2026.

Business Insurance Middle Market Premiums: Growth of 10% in core middle market business. Renewal premium change of 8.6% in our core middle market business for the quarter. Renewal rate change at 7.1%, and Retention at 89%.

Personal Insurance Combined Ratio: Improved by 20 points to 88.4%, driven by a near-14-point decrease in catastrophe losses and a seven-point improvement in the underlying combined ratio.

Investment Portfolio Milestone: Invested assets exceeded $100 billion for the first time, excluding net unrealized losses.

SUMMARY

The Travelers Companies (NYSE:TRV) reported core income of $1.5 billion and a 7% increase in net earned premiums to $10.9 billion, highlighting broad-based segment contributions. The company indicated that growth was led by new business records in Business Insurance and double-digit renewal premium change in key areas. Reinsurance placement changes, including the adoption of a countrywide all-perils treaty, indicate a shift toward broader catastrophe coverage. Management described the Canadian business sale as a targeted, non-strategic move, emphasizing disciplined capital reallocation without broader geographic repositioning. Net investment income guidance was raised for Q3 and Q4 2025, with expected after-tax net investment income of $770 million in Q3 2025 and $805 million in Q4 2025. The company stated there has been no material impact from tariffs, Medicaid, or the OBB legislation thus far, and confirmed ongoing strategic focus on optimizing the mix between auto and property in the Personal segment. The expense ratio improved to 28.6%, with Full-year expense ratio expectations maintained at 28% to 28.5%.

Dan Frey said, "This marks our twenty-first consecutive quarter with operating cash flows of more than $1 billion, totaling more than $40 billion over that time frame."

Alan Schnitzer stated, "Tort inflation is alive and well. Appears the whole market's pricing for it."

On cyber insurance, Jeffrey Klenk said, "Cyber is one of those that we believe the loss environment is not fully reflected in the pricing in the marketplace."

The company reported $4.3 billion of remaining share repurchase capacity authorized by its Board of Directors.

INDUSTRY GLOSSARY

Combined Ratio: A measure of underwriting profitability calculated as the sum of incurred losses and expenses divided by earned premiums; a ratio below 100% signals underwriting profit.

Catastrophe Losses (Cat Losses): Claims arising from significant, usually weather-related, events considered major in scale and impact to insured portfolios.

Prior Year Reserve Development (PYD): Adjustments made in the current period to reserves originally established in prior periods for estimated ultimate cost of claims.

Reinsurance XOL Treaty: Excess of loss reinsurance contract providing coverage above a designated attachment point; used to protect insurers from large losses on a per-occurrence basis.

Renewal Premium Change: The percentage change in premium resulting from policy renewals, including rate changes and changes in policy exposures.

Retention: The percentage of expiring premium renewed with existing policyholders.

Personal Insurance PIF: Policies in force; refers to the total number of active insurance policies at a given time.

Full Conference Call Transcript

Alan Schnitzer, Chairman and CEO; Dan Frey, CFO; and our three segment presidents, Greg Toczydlowski of Business Insurance, Jeffrey Klenk of Bond and Specialty Insurance, and Michael Klein of Personal Insurance. They will discuss the financial results of our business and the current market environment. They will refer to the webcast presentation as they go through prepared remarks, and then we will take your questions. Before I turn the call over to Alan, I'd like to draw your attention to the explanatory note included at the end of the webcast presentation. Our presentation today includes forward-looking statements. The company cautions investors that any forward-looking statement involves risks and uncertainties and is not a guarantee of future performance.

Actual results may differ materially from those expressed or implied in the forward-looking statements due to a variety of factors. These factors are described under forward-looking statements in our earnings press release and in our most recent 10-Q and 10-Ks filed with the SEC. We do not undertake any obligation to update forward-looking statements. Also, in our remarks or responses to questions, we may use some non-GAAP financial measures. Reconciliations are included in our recent earnings press release, financial supplement, and other materials available in the Investors section on our website. Now I'd like to turn the call over to Alan Schnitzer.

Alan Schnitzer: Thank you, Abbe. Good morning, everyone, and thank you for joining us today. We are pleased to report exceptional second quarter results, driven by excellent underwriting and investment performance. We earned core income of $1.5 billion or $6.51 per diluted share. Core return on equity for the quarter was 18.8%, bringing our core return on equity for the trailing twelve months to 17.1%. Underwriting income reflects strong net earned premiums and a reported combined ratio that improved almost 10 points to 90.3%. The improvement in the combined ratio benefited from strength across the board, as lower catastrophe losses, higher underlying underwriting results, and favorable prior year reserve development all contributed.

Underlying underwriting income of $1.6 billion pretax was up 35% over the prior year quarter, driven by 7% growth in net earned premiums to $10.9 billion and an underlying combined ratio that improved three points to an excellent 84.7%. All three segments contributed to these terrific results with strong net earned premiums and excellent reported and underlying profitability. Underlying combined ratio in Business Insurance improved by almost one point to an excellent 88.3%. The underlying combined ratio in our Bond and Specialty business was a very strong 87.8%. And the underlying combined ratio in Personal Insurance improved by seven points to a terrific 79.3%.

Our high-quality investment portfolio also continued to perform well, generating after-tax net investment income of $774 million for the quarter, driven by reliable returns from our growing fixed income portfolio. Our underwriting and investment results, together with our strong balance sheet, enabled us to return more than $800 million of capital to shareholders during the quarter, including $557 million of share repurchases. At the same time, we continue to make strategic investments in our business. Even after this deployment of capital, adjusted book value per share was up by more than 14% as compared to a year ago.

Turning to the top line, through skilled execution by our field organization, we grew net written premiums to $11.5 billion in the quarter, with growth in all three segments. In Business Insurance, we grew net written premiums by 5% to $5.8 billion. Renewal premium change remained strong at 7.7%, with renewal premium change of 8.6% in our core middle market business, and 10.7% in our small commercial select business. Those two markets make up 70% of the net written premiums in Business Insurance. Given the high quality of the book, we were very pleased with strong retention of 85% in this segment.

New business was a record $744 million, a reflection of the relationships we've built with customers and distribution partners by delivering valued products, services, and experiences. In Bond and Specialty Insurance, we grew net written premiums by 4% to $1.1 billion, with retention of 87% in our high-quality management liability business. In our industry-leading surety business, we grew net written premiums by 5%, from a particularly strong result in the prior year quarter. In Personal Insurance, we grew net written premiums by 3% to $4.7 billion, driven by strong renewal premium change in our homeowners business. You'll hear more shortly from Greg, Jeff, and Michael about our segment results.

In May, we announced an agreement to sell most of our Canadian business to Definity for $2.4 billion or 1.8 times book value, excluding excess local capital. As we noted at the time, the transaction does not include our premier surety business. We also shared that we expect to allocate about $700 million of the net cash proceeds for additional share repurchases in 2026 and that we expect the transaction to be slightly accretive to earnings per share in each of the next several years. While it's a relatively small transaction for us, it's noteworthy in reflecting an important point. We are relentless in our commitment to disciplined capital allocation and value creation.

Taking a step back, the Canadian marketplace has evolved over the last decade or so in a few significant ways. First, a small number of insurers have built significant scale and market influence, in part through vertical integration with distribution. There were no compelling inorganic opportunities for us to close the market share gap, and we didn't see vertical integration as a realistic opportunity for us. Also, the regulatory environment has become more challenging. While we were confident that we could continue to manage successfully in Canada, the outlook for our Canadian business relative to our other businesses, combined with a very attractive offer from a strategic buyer, made reallocating the capital the better decision.

Disciplined capital management isn't only about deciding how to deploy the marginal dollar. It's also about continually and rigorously reassessing the capital we have already deployed and whether it's still delivering the best long-term value. I want to thank our outstanding team in Canada and recognize the value they created over many years. I'm confident that they and our Canadian customers and brokers will benefit from being part of one of the country's leading and fully integrated property casualty insurers. I also want to reaffirm our commitment to our ongoing international businesses. This deal is not part of a broader geographic repositioning; it's simply a smart transaction. The transaction speaks volumes about the way we think about our business.

At The Travelers Companies, Inc., we're optimizers, relentlessly focused on ensuring that both our capital and our retention are invested where we can generate attractive returns, profitable growth, and the greatest long-term value for our shareholders. To sum things up, our results for the first half of the year reflect exceptional underwriting performance, record operating cash flow, and steadily rising investment returns in our growing fixed income portfolio. We're building on the strong momentum through continued discipline of our proven strategy.

With our diversified business operating from a position of strength, our outlook for continued premium growth with attractive underwriting margins, orderly conditions generally in our target markets, and a positive trajectory for investment income, we remain highly confident in the outlook for our business. And with that, I'm pleased to turn the call over to Dan.

Dan Frey: Thank you, Alan. We're very pleased with our financial results this quarter, both overall and by segment. We generated higher earned premiums and meaningfully improved both the reported and underlying combined ratios compared to the prior year quarter. At 84.7%, the underlying combined ratio marked its third consecutive quarter below 85. The combination of higher premiums and the excellent underlying combined ratio led to our fourth consecutive quarter with after-tax underlying underwriting income of more than $1 billion, up $339 million or 36% from the prior year quarter. The expense ratio for the second quarter was 28.6%, 20 basis points better than last year's second quarter and in line with our expectations.

That brings the year-to-date expense ratio to 28.4%, and we continue to expect a full-year expense ratio of 28% to 28.5%. As we've discussed previously, the second quarter is historically our most active cat period. This year, however, our pretax cat losses of $927 million or 8.5 combined ratio points, while significant, were nearly four points less than the second quarter cat plan we shared with you during our year-end earnings call in January. Turning to prior year reserve development, we had total net favorable development of $315 million pretax.

In Business Insurance, net favorable PYD of $79 million pretax was driven by better-than-expected loss experience in workers' comp, partially offset by reserve additions in our runoff book related to environmental, abuse, and other long-tail exposures, with no single adjustment being particularly noteworthy. In Bond and Specialty, net favorable PYD was $81 million pretax, with favorability in Fidelity and surety. Personal Insurance had net favorable PYD of $155 million pretax, driven by recent accident years in both auto and home. After-tax net investment income of $774 million increased by 6% from the prior year quarter. As expected, fixed maturity NII was again higher than the prior year quarter, reflecting both the benefit of higher invested assets and higher average yields.

Returns in the non-fixed income portfolio were positive but not as strong as in the prior year quarter. Notably, for the first time, total invested assets surpassed $100 billion, excluding the net unrealized loss. Our outlook for fixed income NII, including earnings from short-term securities, has increased from the outlook we provided a quarter ago. We now expect approximately $770 million after tax in the third quarter, and $805 million after tax in the fourth quarter. New money rates as of June 30 are more than 100 basis points above the yield embedded in the portfolio.

Fixed income NII should continue to increase beyond 2025 as the portfolio continues to grow and gradually turns over, with higher yields replacing maturing yields. Turning to capital management, operating cash flows for the quarter of $2.3 billion were again very strong, and we ended the quarter with holding company liquidity of approximately $2 billion. This marks our twenty-first consecutive quarter with operating cash flows of more than $1 billion, totaling more than $40 billion over that time frame. Interest rates decreased during the quarter; as a result, our net unrealized investment loss decreased from $3.3 billion after tax at March 31 to $3 billion after tax at June 30.

Adjusted book value per share, which excludes net unrealized investment gains and losses, was $144.57 at quarter end, up 4% from year-end and up 14% from a year ago. We returned $809 million of capital to our shareholders this quarter, comprising share repurchases of $557 million and dividends of $252 million. And we have approximately $4.3 billion of capacity remaining under the share repurchase authorization from our Board of Directors. Turning to reinsurance, page 18 of the webcast presentation shows a summary of our July 1 reinsurance placements. We renewed our Northeast property cat XOL treaty, which continues to provide $1 billion of occurrence coverage above the attachment point of $2.75 billion.

We also replaced our personal insurance coastal hurricane cat XOL treaty with an all-perils countrywide personal insurance treaty that provides 50% occurrence coverage for the $1 billion layer above an attachment point of $1 billion. You may recall that last year's treaty had an attachment point of $2 billion. While in a modeled year, we wouldn't expect this to have much of an impact given the prospect of continued weather volatility, we were pleased to obtain broader coverage at a reasonable cost. Recapping our results, Q2 was another quarter of continued premium growth in all three segments. The quarter also featured excellent underwriting profitability, both on an underlying and as-reported basis, and rising net investment income.

These strong fundamentals delivered core return on equity of 18.8% for the quarter, and 17.1% on a trailing twelve-month basis, and position us very well to continue delivering strong returns in the future. And now for a discussion of results in Business Insurance, I'll turn the call over to Greg.

Greg Toczydlowski: Thanks, Dan. Business Insurance had a very strong second quarter, delivering segment income of $813 million, up nearly 25% from the prior year quarter, driven by higher net earned premiums and a combined ratio that improved 2.5 points from the prior year quarter to a terrific 93.6%. The improvement was broad-based, reflecting higher underlying underwriting income, higher favorable prior year reserve development, higher net investment income, and lower catastrophes. We're extremely pleased with our underlying combined ratio of 88.3%, which improved from the prior year by almost a point, driven by the benefit of earned pricing.

Moving to the top line, our net written premiums increased 5% to an all-time quarterly high of $5.8 billion, led by strong growth of 10% in our core middle market business. This was partially offset by a 3% decline in net written premiums in National Property and Other, reflecting our disciplined underwriting. As for production across the segment, pricing remains strong with renewal premium change of nearly 8%, driven by renewal rate change of 5.3%. Renewal rate change and renewal premium change in every line other than CMP and property were about the same or higher compared to the first quarter. Renewal premium change in both umbrella and auto were both well into double digits.

Renewal premium change in CMP was a little lower but remained in the double digits. The decline in renewal premium change in property was driven by national property, reflecting the outlook for continued attractive returns after several years of compounding price increases and improvements in terms and conditions. Renewal premium change in the property line outside of national property was down some but remained solid. Retention across the segment remained excellent at 85%. Retention in middle market was strong, while retention in our national property business was a bit lower as we ceded some large accounts to the subscription market on terms and pricing that we weren't willing to accept.

Lastly, new business of $744 million was a new quarterly record. We're pleased with these production results and particularly our field segmented execution. Our proven strategy focuses on managing our business in a granular manner, balancing retaining our high-quality book of business while obtaining appropriate pricing. Our rate and retention results this quarter reflect excellent execution, aligning rates, terms, and conditions with environmental trends for each line. Our continued high retention levels are an indication of a rational marketplace. We believe our execution is differentiating. It's the best people in the business powered by the best analytics and tools at the point of sale that deliver these segmented production results, ultimately producing these strong returns across Business Insurance.

As for the individual businesses, in Select, renewal premium change remains strong at nearly 11%, marking the seventh quarter in a row of double-digit renewal premium change. Renewal rate change of 5.3% was in line with the prior year level. As we expected, retention was stable at 80%, reflecting our targeted CMP risk-return optimization efforts, which will begin to wind down next quarter. New business of $148 million continues to benefit from our industry-leading product offerings, including Bot 2.0, and our new commercial auto product, which is now live in 42 states. In our core middle market business, renewal premium change also remained strong at almost 9%.

Renewal rate change of 7.1% was up a bit from the second quarter of last year, while retention remained excellent at 89%. New business of $430 million was a second-quarter record. To sum up, Business Insurance had another outstanding quarter. We continue to grow our quality book of business while investing in differentiating capabilities that position us for long-term profitable growth. With that, I'll turn the call over to Jeff.

Jeffrey Klenk: Thanks, Greg. Bond and Specialty posted another very strong quarter on both the top and bottom lines. We generated segment income of $244 million and an outstanding combined ratio of 80.3% in the quarter. The underlying combined ratio was strong at 87.8%, up modestly driven by the impact of earned price on our management liability business. Turning to the top line, we're pleased that we grew net written premiums by 4% in the quarter. In our high-quality domestic management liability business, renewal premium change improved to 3.2% while retention remained strong at 87%. These results reflect our intentional and segmented initiatives to improve pricing given the loss environment. As expected, new business was lower than the second quarter of 2024.

As a reminder, Corbus production was reflected as new business in the prior year quarter and is now mostly reflected as renewal premium. Comparisons to prior year new business levels will be similarly impacted for the remainder of the year. Turning to our market-leading surety business, we grew net written premiums by 5% from a very strong level in the prior year quarter, reflecting continued robust demand for our surety products and services. So we're pleased to have once again delivered strong top and bottom line results this quarter, driven by our continued underwriting and risk management diligence, excellent execution by our field organization, and the benefits of our value-added approach and market-leading competitive advantages.

And with that, I'll turn the call over to Michael.

Michael Klein: Thanks, Jeff. Good morning, everyone. I'm very pleased to share that Personal Insurance delivered segment income of $534 million for the second quarter of 2025. Significantly improved underlying underwriting income and favorable prior year development contributed to this excellent bottom line result. The combined ratio of 88.4% improved 20 points relative to the prior year quarter, driven by a decrease in catastrophe losses of nearly 14 points and a seven-point improvement in the underlying combined ratio. The underlying combined ratio was 79.3%, reflecting the benefit of the actions we've taken to improve the fundamentals of our business in both auto and homeowners. Net written premiums grew 3% in the quarter, driven by higher renewal premium change in homeowners.

In automobile, the second quarter combined ratio was 85.3% and included a five-point benefit from favorable prior year development. The underlying combined ratio of 89% improved 6.2 points compared to the second quarter of the prior year. This improvement was driven by favorable loss experience across both bodily injury and vehicle coverages, and to a lesser extent, the benefit of higher earned pricing. In homeowners and other, the second quarter combined ratio of 91.3% was a significant improvement compared to the prior year, reflecting lower catastrophes and strong underlying underwriting income. The underlying combined ratio of 70.3% improved over seven points compared to the second quarter of 2024.

This year-over-year improvement was driven by both favorable non-catastrophic weather losses and the continued benefit of earned pricing. Turning to production, our results reflect further progress toward positioning our diversified portfolio to deliver long-term profitable growth. In domestic automobile, retention of 82% remained consistent with recent periods. Renewal premium change continues to moderate as intended, reflecting improved profitability and our focus on returning to profitable growth in auto. We're pleased to note that auto new business premium increased 12%. In addition, for the first time in more than a year, we wrote more new business policies than in the prior year quarter. The new business momentum was primarily driven by our continued efforts to improve auto growth.

The relaxing of some of our property restrictions also contributed to the new business momentum in auto. In domestic homeowners and other, retention remained relatively consistent. Renewal premium change of 19.3% reflects our continued actions to align insured values with rising replacement costs and secure rate increases in geographies where we have the need. The decline in homeowners policies in force continues to be a result of our deliberate actions to manage exposures in high-cat-risk geographies. We're pleased with the progress we've made. While we will maintain restrictions on property capacity where we can't achieve appropriate risk-reward, we expect to relax many of our rate and non-rate actions in most markets by the end of 2025.

To sum it up, this was a great quarter. We delivered strong segment income as our team continued to improve the fundamentals of our business while further positioning our portfolio for long-term profitable growth. With that, I'll turn the call back over to Abbe.

Abbe Goldstein: Great. Thanks, Michael. We are ready to open up for Q&A. If you would like to ask a question, please press the number one on your telephone keypad. We respectfully ask that you limit yourself to one question and one follow-up. We will pause for just a moment to compile the Q&A roster. Our first question comes from the line of Gregory Peters with Raymond James. Please go ahead.

Gregory Peters: Good morning, everyone. So I think for the first question, I'll zero in on business insurance and pricing. Looking at the renewal premium change both in business insurance ex-national accounts and select accounts in middle market, I feel like pricing's holding up pretty good. Maybe there's some pockets of weakness that you're seeing or some pressure. But Greg, in your comments, you talked about in the large national account market, losing some accounts to the subscription market. When you talk about the pricing environment, how much of the select or middle market business has exposure to potential market price competition? And, you know, just some additional color on where you're seeing pricing pressure in the middle markets business.

Greg Toczydlowski: Yes. Good morning, Greg. Yes. First of all, it wasn't cash. It was national property that I referenced. And so, yeah, typically, you would see, you know, a shared in layer a large property schedule be built into a tower and definitely seeing that some of the softer element of the property business, in those larger schedules. That would leak a little bit into the top end of middle market, but not much and not be relevant for Select. Greg, just to come back and paint a picture here. And I think Greg laid out a lot of detail in his answer, but just to create the context again, I think as he shared, price in national property was lower.

Workers' comp pricing was about the same, but price change in every other line including the component of property that's outside of the national property business, was actually quite strong. And in that context, I would also point to retention which we've always shared as a real indicator of market stability. So you know, we are quite comfortable with the very, very strong execution.

Gregory Peters: Oh, that's apparent in slide seven on your ROE slide. Can I pivot to the personal lines business? And I think Michael, you said in your comments, you're gonna relax some restrictions by the end of the year? Can you sort of foreshadow what that looks like in terms of premium production or how that might affect either your renewal, your retention rates, or your policy count growth?

Michael Klein: Sure, Greg. Thanks for the question. I think, you know, the reason I made the comments around the plans to relax some of our restrictions in property by year-end was just to give you a little bit of a feel for the progress that we're making. As I mentioned, we're pleased with our progress there. And we continue to see progress in our ability to improve profitability and manage volatility in the property line. The other reason I mentioned it is as we've talked about in the past, those property actions have been a headwind to auto production.

And so while most of our progress this quarter in auto really was a direct result of our efforts to grow auto, some of the states we've begun to relax have also shown signs of progress in auto growth. So the point there on the property side is we've got a game plan in terms of the places we need to reduce exposure to manage volatility. We've got a game plan in terms of pricing, in terms of conditions we need to make changes to improve profitability. And we're making good progress in executing that plan and most of those actions should be completed by the end of 2025.

Operator: Our next question comes from the line of David Motemaden with Evercore. Please go ahead.

David Motemaden: Hey. Good morning. Alan, I had a follow-up question just on the property side. So hear you loud and clear, renewal premium change in property outside of national property was down a little bit, but I guess obviously, positive still. How concerned are you about the durability of that? And if some of that weakness that you're seeing in large account, national account property starts to trickle down more into middle market and even further down?

Alan Schnitzer: Yes. David, I think it's sort of missing the forest for the trees. I mean, the overall landscape is very positive and really consistent with what we're seeing in terms of returns. Now you know, we would expect the overall property market to sort of move in a direction. But historically, the property outside of national property has just performed differently as you'd expect.

David Motemaden: Got it. Thank you. And then maybe, just a follow-up question for Greg. So on the business insurance underlying loss ratio, very strong at the 58.4%. I think in 2Q last year, there was about one point of light non-cat weather. Any of that happen again this year in the second quarter that may have flattered the results a little bit? Or is this sort of a cleaner number?

Dan Frey: David, it's Dan. I'll take that. So you're right in remembering that we did point out a little bit of favorability in last year's quarter. We saw a little bit of favorability again in this year's quarter. I don't know if it's a new normal, but we've now seen several quarters where we've had a little bit of favorability there. Again, it wasn't a big component last year. So, yes, we see, you know, a little bit of favorability again this year, but plus or minus a point, the combined ratio is still outstanding in business insurance.

Operator: Our next question comes from the line of Brian Meredith with UBS. Please go ahead.

Brian Meredith: Yeah. Thanks. A couple. Just back on the underlying loss ratios in BI. How do you think about kind of the effect of tort inflation and kind of what that's doing with your underlying kind of loss picks? I appreciate you're seeing improvement, but I would've thought just what we're hearing about all the, you know, problems with tort inflation out there, you know, may not that much improvement in underlying loss ratios at this point because of some conservatism there.

Alan Schnitzer: Yeah. Brian, the tort inflation is alive and well. Hasn't gone anywhere and continues to show up in the numbers. I would say, you know, we've got an expectation for it. We're pricing for it. Appears the whole market's pricing for it. If you look at what pricing's doing, and so, you know, all the social inflation we see is inside the numbers that you're looking at.

Brian Meredith: Great. So you're pricing for it is not having much effect on margins. Okay. Second one, Michael, I'm just curious. I appreciate the comments about what's going on with personal auto. Do you expect kind of retention to kind of trend back towards, call it, the mid-eighties? It's kind of, I think, where personal auto has been. Is that kind of where we should think about things heading?

Michael Klein: Yeah, Brian. I think it's a great question. Certainly, you're right to recall that historically in auto, we've would have run more, say, an 84 retention versus an 82. I would tell you that, you know, coming into 2025, our expectation was we would have seen retention recover as pricing moderated. Clearly, you haven't seen that in the numbers. I think that's reflective of the overall competitive environment in auto. But we continue to focus on both new business production and retention improvement as we see margins in auto continue to improve. So again, our focus is on returning auto to growth and we've got a number of efforts underway to drive that.

But we are still a couple of points off the historical run rate of retention in auto.

Brian Meredith: Appreciate it. Thank you.

Operator: Our next question comes from the line of Meyer Shields with KBW. Please go ahead.

Meyer Shields: Thanks. So two questions. First, Michael, if I can follow-up on that, if you're growing on a new, well, let me ask you differently. How confident are you that there's no maybe telematics-related adverse selection if you're growing a new business, but retention hasn't yet come back to where you expected?

Michael Klein: I think it's a good question, Meyer. I would tell you that, you know, underneath the production levels that we're generating, you know, we look at retained business. We look at new business. We look at the profile underneath it. We don't see any signs of adverse selection in our profile metrics for either the business we're retaining or the new business we're writing. So we really don't see any evidence of that.

Meyer Shields: Okay. Excellent. And then I guess, Roland, and on the commercial side, is there any sense that when lines of business soften in sort of the current cycle, and I know it's very line of business specific, does it seem to be softening faster than we've seen after past hard markets? I know right now we're focused on property and, you know, a couple of years ago, but I'm wondering whether there's a theme there of this sort of rapid softening that we hadn't seen.

Alan Schnitzer: I'm not sure I get the question, Meyer, but I don't think so. What's your hypothesis? That it's softening faster because of what?

Meyer Shields: So I'm not sure what the because of it would be. But in the past, you'd have, like, very sudden and abrupt rate increases when the market got hard, and then it would totally soften. And the problem was that it softened for too many years at a moderate level. And I'm wondering whether for the lines of business that are seeing softening now, whether it's moving faster than it had in the past. I have no good suggestion in terms of why that would be happening. I'm just wondering if it's happening.

Alan Schnitzer: Yeah. I think the bigger trends here, if you look back over a very long period of time, the amplitude of the pricing cycle, I think, is shrinking. You know, the last time we made a bottom, we didn't really go below zero and price has been positive for years now in most lines. The other dynamic you see really is dispersion of pricing by line as a function of rate adequacy and returns. And so that's really what I think we're seeing. I think it's less of some market dynamics and big shifts up or down. I think it's pretty rational relative to what we're seeing in terms of returns.

Meyer Shields: Okay. Perfect. That's very helpful. Appreciate it.

Operator: Our next question comes from the line of Robert Cox with Goldman Sachs. Please go ahead.

Robert Cox: Hey. Thanks. For the first question, I just wanted to revisit the tariff discussion that you all provided us with helpful thoughts on last quarter. How are you considering tariffs within the pricing and margins today?

Alan Schnitzer: Yeah. We really haven't seen really any impact of tariffs across any of our businesses, certainly not in any meaningful way. And, you know, we do have some expectation that there could be an impact. I think we said last quarter that we would expect it in the back half of this year. To the extent we do expect it, we'll put it into our, you know, our loss picks and that'll make its way through to our pricing indication. But so far, no impact really.

Robert Cox: Okay. Great. And then a question on distribution. Just curious how you all are thinking about this continued consolidation of insurance brokers and how that might impact Travelers. You know, you guys all obviously have some great relationships. Is that a tailwind?

Alan Schnitzer: Yeah. You know, this is now become a pretty long-term trend, you know, we've been evaluating it really probably over more than a decade now. And I think for the most part, it has been a tailwind and no reason to expect that wouldn't continue. We've got great relationships with those on the acquiring side, so we tend to be a net beneficiary of that process.

Operator: Our next question comes from the line of Alex Scott with Barclays. Please go ahead.

Alex Scott: Good morning. First one I have is just on sort of casualty versus property and mix shift. I, you know, I think for the whole industry, you know, some of the growth in property over the last couple of years has been pretty helpful for underlying margins at least. Even overall margins. Would you expect over the next twelve months just given what's going on with property and that being a little bit more pressure in terms of price, would you expect any reversal in that? Any help you can provide us in just making sure we're capturing that dynamic over the next twelve months?

Dan Frey: Yeah, Alex. It's Dan. So, you know, we give you every quarter written premium by product in business insurance. And we did make the comment maybe a year, maybe a year and a half ago or so when property was growing faster than the rest of the book largely because of significant price increases that were occurring, but we're also taking some new business that had a modest benefit to margin and mix. And maybe a quarter or two ago, we got a question of, you know, has that sort of gone away as the level of price increase in national property has moderated? To which the answer was yes.

And if you look at property growth now, it is no longer outsized relative to business insurance overall. So the short answer is it doesn't have much of an impact in terms of mix change. It was never big enough that we actually called it on any meaningful way, but it was a slight good guy maybe a year and a half ago, and that's sort of gone away. But that's inside of the terrific results we just posted this quarter.

Alex Scott: Got it. Helpful. Second one I have is on workers' comp. I was just interested if you're seeing any impact from some of the heightened claim environment in California, I think, related to cumulative trauma claims and so forth. And also maybe just broadly, if some of the medical cost pressures that we're hearing from the health insurers talking about are finding their way into workers' comp loss concern at all?

Greg Toczydlowski: Hey, Alex. Yeah, this is Greg. Regarding cumulative trauma, yeah, clearly, we're seeing that in California, and it's not a new quarterly trend. It's something we've been seeing for a few years now. We've been very responsive with underwriting and claim strategies to make sure we're managing that dynamic. I think if you look at the overall rate indications of the bureau in the state that are just been approved, the cumulative trauma is definitely a dynamic underneath that. So I think it's just a good exemplar where, again, you know, our evidence-based culture and our collaboration has us in a really well-positioned position right now.

Dan Frey: Alex, the thing I got generally on workers' comp is loss trend continues to come in favorable to our expectations. And consistent with, you know, the trends we've been seeing, you know, really over a couple of years.

Operator: Our next question comes from the line of Wes Carmichael with Autonomous Research. Please go ahead.

Wes Carmichael: Hey. Good morning. Just wanted to come back to business and insurance, in particular, market. Pretty strong premium growth there at 10% in the quarter. Seems like rate change is pretty stable. But I just want to get any additional color on if you think you can sustain that type of premium growth rate in middle market or what's driving a relatively stronger growth there in your view?

Greg Toczydlowski: Yeah. Good morning, Wes. Yeah. We're not gonna give you an outlook in terms of where, you know, middle market pricing is going to go. I'll just give you some color underneath that, Ken. You pointed out the two, well, the three dynamics. We have strong rate exposure change that's driving good premium change. And then retention continues to be near historical highs on that business, which I think just demonstrates the strong value that we're bringing out into the marketplace. And new business. Our underwriters have been incredibly active in the marketplace, and you put those three into action in the quarter, and you get a terrific number like 10%.

Wes Carmichael: Thanks. Fair enough. And maybe just coming back on social inflation and loss cost. For Travelers, is this as pronounced in middle and small accounts as it is for national? And I guess if there is a discrepancy, is there any way to think about it in terms of rule of thumb and differences in loss cost trend?

Greg Toczydlowski: Yeah. I do think that you probably see it maybe a little bit more pronounced in larger business where there are larger limits involved and it's a more potentially attractive target for the plaintiff's bar. But we pretty well see it across the entire book.

Operator: Our next question comes from the line of Ryan Tunis with Cantor Fitzgerald. Please go ahead.

Ryan Tunis: Thanks. Good morning. I guess first question, just trying to think about where your business might be impacted by the macro. I guess, in business insurance, there's like a small tick down in exposure. Is it kind of safe to say that tells the whole story? Or is there something else you'd point to underneath that might say something else?

Greg Toczydlowski: Hey, Ryan. This is Greg. Yeah. Clearly, when you look at the exposure trend in business insurance, it's aligned with economic activity. And that shouldn't be surprising where inflation trends have been coming down also. So I think it's more linear with the longer-term economy than anything short-term right now.

Ryan Tunis: And I guess just one for Dan. On the sale of the Canada business, should we think about that as having any type of formal impact on the combined expense ratio, the underlying loss, or these other figures?

Dan Frey: Yeah. Not much of an impact, Ryan. So for two reasons. One is just a very small component of the overall mix of our business. So, you know, the inclusion or exclusion of those results is we don't expect to have a significant impact on margin really one way or the other. Which is one of the reasons that, you know, we said when we announced the deal, we expect it to have a favorable but modestly favorable impact on EPS going forward.

Operator: Our next question comes from the line of Elyse Greenspan with Wells Fargo. Please go ahead.

Elyse Greenspan: Hi, thanks. Good morning. I guess my first question is going to be a follow-up to some of the Canadian sale. You guys marked part of the proceeds, right, to be used for buyback, but that leaves some extra capital. So is that being, you know, set aside for growth or for M&A? And regardless of whether you pick the M&A bucket, maybe, Alan, you can just, you know, kind of give us, you know, a current update on just views surrounding M&A.

Alan Schnitzer: So you can just think about that capital as being reallocated to our other capital needs of supporting our business, supporting our growth, supporting other capital objectives that we have. It's not really big enough to change our view towards M&A one way or the other, frankly. So I don't think it makes M&A either more or less likely. But we continue to be very active in looking for things that would meet our objectives. And as we've been pretty consistent about for a long time, we would be interested in opportunities that would improve our return profile, improve volatility, or provide us with other strategic capabilities. So there's really no change to our M&A strategy or approach.

Elyse Greenspan: Thanks. And then my follow-up, you know, is kind of coming back to just, you know, medical inflation. Now are there any considerations from the OBB legislation? And then obviously, we've seen combined with just the fact that we've seen some companies already point to higher utilization stemming, you know, from some changes in Medicaid availability.

Alan Schnitzer: We really haven't seen any nor would we expect any significant or even meaningful impact from Medicaid at all. Typically, workers' comp claims tend to come from people that are employed and aren't on Medicaid. So that wouldn't be an issue. And even if you have somebody who was both employed and on Medicaid, they almost always default to workers' comp anyway because it's a better healthcare alternative for them. So there's really nothing in OBB or in the Medicaid world generally that we think is impacting workers' comp.

Greg Toczydlowski: And the one thing I'll add, Elyse, there was a change to the Medicare fee schedule, but that was within expectations and historical norms, so no surprises for that either.

Elyse Greenspan: Thank you.

Operator: Our next question comes from the line of Kaveh Monteseri with Deutsche Bank. Please go ahead.

Kaveh Monteseri: Thank you. My first question is on the elevated amount of share repurchases in the quarter. Was that mainly linked to market volatility in April and the proceeds that you had from Canada? Or should we think of that level as being kind of a new baseline going forward?

Dan Frey: Hey. It's Dan. So a couple of things on that. So one, we don't have proceeds from the Canada transaction. We said we'd expect that transaction to close in the early part of 2026. So that's when you'd see the incremental $700 million for share repurchases sort of start to become available. Second, we don't really forecast a level of share repurchases. What we're doing is rightsizing capital. And so also related to the first part of your question, we're really not market timing in terms of what the stock price is at any given moment.

We have a long-term view of stock price, intrinsic value, likely growth in book value, our view of what stock price is likely to be, and is when we reach a point where we have excess capital, because we continue to generate excess capital. As Alan just said, we'll look for opportunities to deploy it either to grow the business organically, to look for inorganic opportunities, and make new strategic investments. When we've exhausted all those opportunities, it's not our capital, it's investors', and we're going to return it to shareholders.

But that's really what we're doing, and we're not leaning in or leaning out based on stock price at any particular moment as long as we're comfortable that the value relative to our view of long-term is still there.

Kaveh Monteseri: Okay. And then if I could pivot to personal lines, you did mention relaxing some restrictions on the property side and did say it's going to have an impact on rates and non-rate actions by year-end. But does that also include relaxing the ratio of how much business you write in property versus auto? I think you did mention in the past that you would like them to move in line just to keep a pretty good balance in your portfolio between the two. Is that changing as well? Would you be more likely to write more auto even if you can't write as much on the property side? Or that's no change to that view.

Michael Klein: Yes. So this is Michael. Thanks for the question. I think when we've talked about shifting the mix of business in the past and the mix of the portfolio in the past, our focus really has been shifting it more toward auto to get the portfolio back in balance between auto and property. When you look at the PIF changes over time, you see progress in that regard. Right? While we do still see a reduction in auto PIF, it's about 25% of the reduction in property. So that demonstrates progress in mixing toward property. As we, sorry, I'm making towards auto.

As we relax the restrictions in property, our goal would be to deploy that property capacity in support of writing package business, which is our primary strategy in personal insurance. And so we would expect that the relaxing of some of the property restrictions to bring with it both property and auto opportunities as we look forward.

Operator: We have time for one more question, and that question comes from the line of Vikram Gandhi with HSBC. Please go ahead.

Vikram Gandhi: Hi. Morning, everybody. My question relates to cyber. If you guys are seeing any signs of more moderation in the rate reductions for cyber? Whether any of the recent losses might help down the sentiment for the better.

Jeffrey Klenk: Hi. Good morning. This is Jeff Klenk. I'd say that cyber remains a competitive price environment from a market perspective. As I pointed out in my prepared remarks, inside our management liability business, we've been taking some segmented and disciplined focus on a couple of specific lines of business. Cyber is one of those that we believe the loss environment is not fully reflected in the pricing in the marketplace. So that's our perspective on it. What it means for the future of that market, I wouldn't forecast.

Vikram Gandhi: Okay. Thank you. And my follow-up is related to the investment book. So in terms of the ratings mix for the investment portfolio, I see a notable downward movement from the triple-A bucket to double-A. I'm assuming that would have been driven by the Moody's action on the US. Could you confirm if that was indeed the case? And what does that do to your capital model and the capital requirements on your internal model?

Dan Frey: Yeah. It's Dan. So that's correct. That's the driver. Both levels of credit quality are still super strong. We're very comfortable with the overall mix of the portfolio and the overall credit rating of the portfolio. We're well within our internal guidelines and really don't view the US government credits as necessarily any less likely to be collected than they were previously. So it's moved down one notch. You're correct. That's the driver. And not really a level of concern for us.

Vikram Gandhi: Thank you.

Operator: I will now turn the call back over to Ms. Abbe Goldstein for closing remarks.

Abbe Goldstein: Thank you very much. We appreciate everyone joining us today. And as always, if there's any follow-up, please reach out to Investor Relations. Have a good day.

Operator: Thank you again for joining us today. This does conclude today's presentation. You may now disconnect.

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DATE

Tuesday, July 15, 2025 at 5 p.m. ET

CALL PARTICIPANTS

President — Shelley Simpson

Executive Vice President and Chief Financial Officer — John Kulow

Executive Vice President of People and Chief Commercial Officer — Spencer Frazier

Executive Vice President and President of Highway Services — Nick Hobbs

Executive Vice President and President of Intermodal — Darren Field

Executive Vice President of Finance and Investor Relations — Brad Delco

Executive Vice President and President of Dedicated Contract Services — Brad Hicks

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RISKS

John Kulow stated, "Inflationary pressures—primarily in wages, insurance (both casualty and medical), and equipment costs—more than offset those efforts and weighed on margins compared to the prior-year period."

Final Mile segment continues to see "muted" demand for big and bulky products, with Nick Hobbs noting, "we believe recent market conditions will persist through at least year-end, driving our second-half performance to look similar to our first-half performance"

Darren Field said, "we didn't get the pricing that we would have liked to have achieved given cost pressures that every entity is facing."

Brad Hicks clarified, "the timing and magnitude of our net adds could impact our prior expectations for modest growth in operating income this year compared to 2024."

TAKEAWAYS

Revenue: GAAP revenue was flat compared to the prior-year quarter.

Operating Income: Decreased 4% year over year on a consolidated GAAP basis due to increased inflationary cost pressures.

Diluted EPS: Declined less than 1% on a consolidated GAAP basis, aided by a 5% lower average diluted share count.

Free Cash Flow: Generated over $225 million of free cash flow.

Cost Initiatives: $100 million in annual cost reductions identified across efficiency, asset utilization, and engineered process improvements, with most benefits impacting 2026 and beyond.

Net Capital Expenditures: Net capital expenditures are expected to be $550 million–$650 million in 2025, narrowed from the previous $500 million–$700 million estimate due to prefunded capacity needs.

Stock Repurchase: Repurchased $319 million of stock, a company record for a single quarter.

Tax Rate Expectation: Forecast for the expected tax rate remains at 24%–25%, likely at the higher end.

Intermodal Volumes: Up 6% year over year—April up 11%, May up 3%, and June up 4%.

Intermodal Mix: TransCon volumes down 1%; Eastern volumes up 15%.

Dedicated Segment Sales: Sold approximately 275 trucks in new deals, with a net sales target of 800–1,000 trucks annually.

ICS Operating Income: Operating expenses down more than $3 million year over year.

Customer Retention Rates: Reported as near record levels, with the ICS segment specifically called out.

Growth in ICS Small/Mid-Sized Business: Small to mid-sized customer growth up 25% year over year.

Peak Season Surcharges: Programs started earlier due to customer volatility and uncertainty in forecasting demand.

Balance Sheet: Maintains leverage near one times trailing EBITDA, supporting ongoing capital allocation and stability.

Quantum Intermodal Service: Launched in Mexico, aligning with the fastest-growing channel at J.B. Hunt Transport Services, Inc.

SUMMARY

J.B. Hunt Transport Services, Inc. (NASDAQ:JBHT) reported flat revenue, decreased operating income, and marginally lower diluted EPS on a consolidated GAAP basis amidst inflationary pressures, while generating over $225 million of free cash flow and executing a record $319 million stock repurchase. The company clearly signaled that most benefits from its $100 million cost-reduction program will materialize in 2026 and beyond, with segment-level benefits weighted by spend. Intermodal volumes increased 6% year over year, driven primarily by 15% growth in the Eastern network while TransCon declined 1%, signaling meaningful mix shifts with implications for network balance and margin. Dedicated segment fleet losses are largely behind, positioning the business for net fleet growth in the second half of 2025, though startup costs will affect the timing of operating income growth. Customer volatility and forecasting uncertainty are driving earlier peak surcharge implementation across services, as management emphasizes readiness to adapt to shifting demand.

Brad Delco explained, "Our revenue per load, or yield, fell both sequentially and year over year." but demonstrated 30 basis points of sequential margin improvement in intermodal with relatively similar volumes versus the first quarter, highlighting the impact of cost and productivity initiatives distinct from pricing.

Management emphasized that margin repair will require equal contributions from growth, cost efficiencies, and pricing, not just rate improvement.

Positive headhaul pricing in the intermodal bid cycle was partially offset by backhaul pressure; management described core pricing as "modestly higher" year over year.

Customer retention and satisfaction, measured by awards and survey results, are at some of the highest levels in the last five years and form the basis for multi-segment growth opportunities.

INDUSTRY GLOSSARY

TransCon: J.B. Hunt Transport Services, Inc. term referring to transcontinental intermodal freight traffic, typically spanning the U.S. West Coast to East Coast.

Backhaul: Return trip of a transport vehicle, often with lower rates compared to headhaul; relevant to intermodal pricing and network balance.

Headhaul: Primary, demand-driven direction in a transport lane, usually commanding higher pricing than the backhaul direction.

Bid Season: The period when transportation providers negotiate contract rates and volumes with shippers for the upcoming year.

Drayage: Short-haul transport activity, especially for moving containers between ports/rail yards and distribution centers, crucial to intermodal operations.

Quantum: Branded service offering from J.B. Hunt Transport Services, Inc., recently expanded into Mexico, targeting time-sensitive and service-sensitive intermodal freight.

Full Conference Call Transcript

Shelley Simpson: Thank you, Brad, and good afternoon. Members of the leadership team are here to dive into their areas, but I want to start by recognizing the entire organization for their hard work and ability to adapt to this dynamic market. I remain highly confident that our work is building a stronger company, capable of capitalizing on meaningful growth opportunities ahead. We set out to accomplish this by staying true to our values, mission, and vision and maintaining our focus on operational excellence, scaling into our investments in our people, technology, and capacity, and continuing to repair our margins and drive stronger financial performance, which remains a top priority.

Service levels across our businesses are excellent, and customers have recognized us in both internal and external surveys. Our brand is strong in the market. Our excellent service is supporting our growth with both new and existing customers, which will help us scale into our investments. Investments in our people have resulted in back-to-back years of record safety performance for the company and some of the lowest turnover metrics on record for our drivers. We have invested in technology to drive efficiencies in our business, and I have challenged the organization to think differently about our workflows and processes to drive even more.

Finally, we have prefunded our trailing capacity needs in intermodal and are prepared to support our customers' future growth. These investments set us up well for our future. While we are preparing for future growth, we remain focused in the near term on repairing our margins and improving our financial performance. We expect the returns on our investments to match the strong and unique value we create for our customers. As you've heard me say, we remain focused on controlling what we can with our expenses in the near term, without sacrificing our long-term opportunity. Or said differently, preserving our future earnings power potential. Last quarter, we mentioned more work in the area of cost actions.

Across the company, we launched an initiative to lower our cost to serve. John Kulow will have more details on this work, but at a high level, this effort is centered around doing more with less, to support our future growth and get us back to our long-term margin targets. I have confidence in this team to lower our cost to serve and to leverage our brand and our scroll of services in the market. We completed Intermodal bid season with positive pricing for the first time in two years and continue to gain market share with capacity to grow more.

Our dedicated business remains resilient, and with the fleet losses subsiding, we're excited to return to fleet growth in this business. We have a solid model in JBT and FMS with significant growth opportunities we are going after. Our brokerage business still has work to do, but progress is being made to further right-size the cost structure while growing with the right customers and freight. Market dynamics remain uncertain, but we will stay disciplined in our actions and maintain a position of strength. We have exceptional service levels, a rock-solid balance sheet with minimal leverage, and available capacity at the ready for future growth.

We will continue to focus on the long term while taking steps in the near term to improve the return profiles of our business, all with the same mission, to drive long-term value for our people, customers, and shareholders. With that, I'd like to turn the call over to our CFO, John Kulow.

John Kulow: Thank you, Shelley, and good afternoon, everyone. I will review the second quarter, provide some details on the lowering our cost to serve initiative, and give an update on our capital allocation. As a general overview and consistent with recent quarters, our results for the quarter highlight the strength and resiliency of our business in the face of a challenging and unpredictable environment, generating over $225 million of free cash flow in the quarter. While we continue to focus on operational excellence, driving productivity, and managing our costs, inflationary pressures, primarily in wages, insurance, both casualty and medical, and equipment costs more than offset those efforts and weighed on margins versus the prior year period.

Starting with second quarter results, on a consolidated GAAP basis, revenue was flat, operating income decreased 4%, and diluted earnings per share was less than 1% below the prior year quarter. The declines were primarily driven by inflationary cost pressures across the business, notably in casualty and group medical claims expense, and higher professional driver wages and equipment-related costs. These were partially offset by productivity and cost initiatives and a 5% lower average diluted share count versus the prior year period. While the recent tax bill remains under review, we continue to expect our tax rate to be between 24-25% and likely towards the higher end of that range.

Regarding costs, we have been managing costs aggressively since the freight downturn began over three years ago. We've managed headcounts through attrition and performance management, driven productivity in our operations, and eliminated discretionary spending that ultimately wouldn't jeopardize our future earnings power nor our ability to capitalize on growth opportunities. Earlier this year, we challenged ourselves to do more, in an effort to accelerate improvement in our financial performance, create greater operating leverage for the company when market dynamics turn, and help support our future growth. Each executive focused on one or two of a total of 14 different areas across the business to identify opportunities to lower our cost to serve.

The results of this initiative resulted in $100 million of identified annual cost to eliminate. These costs fall across three main areas: efficiency and productivity, asset utilization and technology, and engineered process improvements. And we are not done. We continue to expand on these initiatives and will provide updates on our progress in the quarters to come. While some of these benefits will be realized this year, most will impact 2026 and beyond. I'll wrap up with a quick update on our capital allocation and priorities. For 2025, we are now expecting net capital expenditures to fall between $550 million and $650 million, effectively tightening the range compared to our prior view of $500 million to $700 million.

As previously discussed, we have prefunded much of our future growth and capacity needs, so our capital spend this year is primarily for replacement and what success-based needs we have in our dedicated segment. Our balance sheet remains strong, in line with our targeted leverage of one times trailing EBITDA, and we continue to generate strong cash flow and expect this to continue. The primary use of cash has been managing our leverage, returning value to shareholders through our dividend, and repurchasing stock. We remain focused on deploying capital to generate the highest returns for our shareholders. During the second quarter, we repurchased $319 million of stock, which is a quarterly record for the company.

This concludes my remarks, and I'll now turn it over to Spencer.

Spencer Frazier: Thank you, John, and good afternoon. I'll provide an update on our view of the market and some feedback we are hearing from our customers. During the quarter, overall customer demand trended modestly below normal seasonality. As customers adapted to changes in global trade policy, the timing and direction of freight flows were impacted. That said, demand for our intermodal service remains strong. We continue to see customers convert more freight to intermodal from the highway as our commitment to operational excellence, keeping freight secure, and our strong safety record differentiates us from the competition. In our brokerage and truck segments, demand followed more normal seasonal patterns, including some market tightness in May around the annual road check event.

However, the market tightness was relatively short-lived, and truckload spot rates remain soft, suggesting the truckload market, while close to equilibrium, continues to experience some excess capacity. This leads me into some feedback we are hearing from customers around their capacity and service. Customers recognize this cycle is long and ultimately will change. Their conversations with us focus on how to dynamically optimize their supply chain and capacity plans to meet their service needs and budgetary requirements. Customizing our school of services in changing markets has positioned us to be their go-to transportation provider that can deliver differentiating value. Regarding service, all of our businesses and most importantly, our people have been recognized with multiple service awards from our customers.

This translates to realizing some of our highest customer retention numbers in the last five years, more strategic discussions during the bid process, and opportunities for additional freight after bid implementation. I'll close with some comments on trade policy demand and peak. When we meet with customers, how they are adapting to trade policy remains top of mind. However, accurately forecasting demand is their biggest challenge. Our customer base is diverse, both in terms of size and industry, and each customer continuously adjusts their supply chains to meet their unique needs. Recent examples are some customers have pulled freight forward, some continue to execute demand-driven strategies, and others are making changes to their country of origin and manufacturing plans.

This added complexity, lack of accurate forecasts, and potential for volatility is why our peak season surcharge programs are starting earlier this year. Regardless of customer strategy and the shape of peak season, we will be ready to meet their demand when it occurs. I would now like to turn the call over to Nick.

Nick Hobbs: Thanks, Spencer, and good afternoon. I'll provide an update on our areas of focus across our operations, followed by an update on our final mile, truckload, and brokerage businesses. I'll start on our safety performance. A key portion of our company's focus on operational excellence and driving out costs is our safety performance, which is core to our culture. We are coming off of two consecutive years of record performance measured by DOT preventable accidents per million miles. Our safety results are performing in line with these record performances.

We continue to focus on driving improvements in our performance through proper training and technology to improve safety for our people and the motoring public while we effort to lower our cost. There has been a lot of recent discussion in the industry around some trucking regulations such as English language proficiency, the improper use of B1 visas to haul freight in the US or cabotage, and the new FMCSA biometric ID verification for trucking authorizations. We could only guess the impact this might have on industry capacity. For J.B. Hunt Transport Services, Inc., we do not expect to see material impact. Moving to the business, I'll start with Final Mile.

The end markets in this business remain challenged with demand for big and bulky products still muted with soft demand for furniture, exercise equipment, and appliances. Demand in our fulfillment network was positive again this quarter, driven by off-price retail. Going forward, our focus remains on continuing to attract new customers to grow this business. That said, we believe recent market conditions will persist through at least year-end, driving our second-half performance to look similar to our first-half performance prior to any consideration for lowering our cost to serve initiatives. We remain focused on providing the highest levels of service, being safe and secure, and ensuring that the value we provide in the market is realized to drive appropriate returns.

Moving to JBT, our focus in this business hasn't changed. We are working to methodically grow this while remaining disciplined on network balance to drive the best utilization of our trailing assets. Pit season was competitive this year, as it always is, but we are pleased with our success retaining our business, getting modest rate increases, and winning new business with both new and existing customers, as evidenced by our highest second-quarter volume in over a decade. Going forward, we like the progress and direction of this business and the improvements we continue to make.

That said, meaningful improvements in our profitability in this business will be driven by execution on lowering our cost to serve initiatives, rate improvement, and overall demand for truckload drop trailing solutions. I'll close with ICS. During the second quarter, we saw fairly stable volumes and seasonality. The truckload market tightened around road check and felt like it remained tight a little longer than usual, which compressed our margins in May. That said, spot rates did soften, and we saw margins expand again in June. We are over halfway through the bid season and are pleased with the awards so far, with rates up low to mid-single digits and winning volume with new customers.

Our focus here remains on profitable growth, targeting the right customers where we can differentiate ourselves with service while also diversifying our customer base. Compared to the second quarter last year, we've seen our small to mid-sized customer growth up 25%, which remains a focus. Our customer retention rate is near record levels. Going forward, we will remain focused on scaling into our investments while continuing to make improvements on our cost structure and our productivity. With that, now I'd like to turn the call over to Darren.

Darren Field: Thank you, Nick, and thank you to everyone for joining us this afternoon. I'll review the performance of the Intermodal business and give an update on the market and our areas of focus. I'll start with Intermodal's performance. Overall demand for our Intermodal service was strong, and the business proved to be quite resilient in the face of a lot of uncertainties presented at the end of the first quarter. Volumes in the quarter were up 6% year over year and by month were up 11% in April, up 3% in May, and up 4% in June. As it pertains to mix, our transcon volumes decreased 1% during the quarter, and Eastern volume grew 15%.

We want to continue to highlight the strength of our Eastern network volume growth. We compete more directly with truck in this market, and yet with low truck rates and lower fuel prices, continue to see customers convert highway freight to intermodal. This is a result of our combined strong service levels with our rail providers and how that translates into an attractive and valuable cost-saving alternative to truck for our customers. As we wrap up our 2025 bid season, I will remind you of our three-pronged strategy and provide some feedback on our performance. First, we wanted to focus on balancing our network, eliminating the cost to move empties, and more efficiently utilize our trailing capacity.

I believe we were most successful in this area of our strategy. Second, we wanted to grow with both new and existing customers. This growth is not just volume on an absolute basis, but share of wallet in converting customer freight from the highway to intermodal. I believe we were also quite successful on this strategy while remaining disciplined with our pricing. Finally, we needed to get rate to help repair our margins and cover our inflationary costs. To be fair, I don't know that we ever get as much as we want, but I would say we underperformed our expectations in this area.

To be clear, we believe our overall book of business did price modestly higher year over year as we did achieve increases in our at-haul lanes, partially offset by pressure in the backhaul lanes. We believe the results of this bid season combined with our lowering our cost to serve initiatives can stabilize our margin performance and can be supportive of modest improvements going forward. As a reminder, Q3 is typically the first full quarter that reflects the collective work of our bid season and will be with us through the first half of 2026. During the second quarter, we announced the launch of our Quantum service in Mexico.

We have been growing this service-sensitive offering in the United States and are excited to bring this product to Mexico with our rail providers. Mexico has been the fastest-growing channel at J.B. Hunt Transport Services, Inc., and we continue to see a long runway for growth in this market for many years to come. In closing, we remain very confident in our intermodal franchise and the value we provide for our customers. Our service levels are high, customers trust us, and we have both the capacity and capability to grow well into the future. We believe our performance continues to lead the industry while maintaining a heavy investment in capacity to support our future growth.

I'd now like to turn the call over to Brad.

Brad Hicks: Thank you, Darren, and good afternoon, everybody. I'll provide an update on our dedicated results. Starting with the quarter, at a high level, I believe our second-quarter results were very strong, particularly in light of the prolonged challenging freight environment. We believe this is a testament to the strength and diversification of our model, the value we create for our customers, and how we drive accountability at each site and customer location. As a result, we continue to see good demand for our professional outsourced private fleet solutions. During the second quarter, we sold approximately 275 trucks of new deals.

As a reminder, our annual net sales target is for 800 to 1,000 new trucks per year, and through the first half of the year, we would be on pace with this target absent the known losses we disclosed almost two years ago. Encouragingly, our sales pipeline remains strong as our value proposition in the market remains differentiated. As I just mentioned, we have had visibility to some fleet losses that we anticipated to wrap up during the second quarter. That has largely played out as expected, except the timing of the actual account closure rolled into early July. This positively impacted our 2Q 2025 truck count by about 85 trucks versus our expectations we shared with you last quarter.

Given our strong sales pipeline, we continue to expect to see net fleet growth in the second half of the year. As is always the case, we remain disciplined on the type of deals we underwrite without sacrificing our return targets and remain pleased with the activity and recent overall momentum. We believe the performance in our dedicated business during the downturn has been a standout for our company and the industry and highlights the unique strength and resiliency of our model. We have a diverse customer base both by industry and geography with managers on-site with our customers executing their outsourced private fleet solution.

We have great visibility into the financial performance of each account, which provides a high level of accountability at each location. Going forward, we continue to expect to see some modest fleet growth in 2025, but the timing and magnitude of our net adds could impact our prior expectations for modest growth in operating income this year compared to 2024. This is a result of us typically incurring some startup costs when we onboard new business. We view this favorably, and this sets us up well to continue on our growth trajectory into 2026 and beyond.

Our business model and value proposition are differentiated and continue to attract new customers despite the challenging market, and we are very confident in our ability to compound our growth over many years to further penetrate our large addressable market. With that, I'd like to turn it back to the operator to open the call for questions.

Operator: We will now begin the question and answer session. And your first question today will come from John Chappell with Evercore ISI. Please go ahead.

John Chappell: Thank you. Good afternoon, everyone. Darren, when I tie together a lot of your comments, mostly on the last part on the bid season, underperformed expectations in this area, but still up modestly year over year. What you've done in the East and the share gain you've had there, and then the mix offset there. Think about the revenue per load cadence for the next four quarters. Like the cake is baked in the mid-26. Does the rest of the year and early next year look like 2Q, or is there anything that can really change the dynamic of that driver?

Darren Field: Well, certainly mix can play a big role, and there's a lot happening mid with mix right now when you heard the result in the second quarter being negative 1% in TransCon, but positive 15% in East. I don't consider that a seasonally normal kind of mix result. I don't even consider that really the result in the bid cycle. It's as much of a reflection of some customer noise around tariffs and imports and all things affecting what's happening now. Core pricing being slightly positive. I mean, that is essentially the result of what I will call the 2025 pricing cycle.

We will begin preparing for pricing discussions and plans for 2026 capacity with our customers as the remainder of the year goes on. And we will be closely watching the highway market and trying to adapt. Traditionally, intermodal has been a little bit of a laggard to the truck market. We're going to be watching closely as we get through the end of this year and into next year for signs that the highway market is changing. Intermodal is going to want to keep up faster. We'll remain to be seen if we can do that, but that will certainly be an effort we would want to undergo.

Brad Delco: Hey, John, this is Brad Delco. I'll add a little bit to that. I think you and hopefully the rest of the audience heard us speak during the quarter at conferences. You know, we were talking about mix changes and the impact that would have on yield and revenue per load. And I think for the first time, we were very transparent with our expectations on where this bid season would land and sort of hinted we thought flat to big slightly up, and we landed slightly up with kind of pure price. You did see in the quarter our revenue per load or yield fall both sequentially and year over year.

And on, let's call it, relatively similar volumes versus first quarter, we saw 30 basis points of sequential margin improvement in intermodal. I think the point I'm trying to make here is you know, we have been obviously working very hard on cost initiatives and productivity and efficiency. But I think that there's this idea out there that revenue per load is the end all be all and that there are other drivers of margin performance. And I think we just at least put some evidence behind that in the quarter. So hopefully that helps.

John Chappell: Appreciate it. Thank you.

Operator: And your next question today will come from Chris Wetherbee with Wells Fargo. Please go ahead.

Chris Wetherbee: Hey, thanks. Good afternoon. I wanted to ask about the $100 million of cost that you guys have talked about. I guess maybe first question, is that separate than the $60 million I think you guys have talked about in the past in terms of capacity opportunities? And then as you think about the breakdown within the segments or maybe the cadence of that dropping through, can you sort of give us a little bit more detail on how you see that playing out maybe through the rest of 2025 and beyond?

John Kulow: Yes, sure. Hey, Chris, appreciate the question. As far as what we've communicated, what we had talked about is that the realization of what the excess equipment that we have in our segments is what that pressure is on our margins. And so the $100 million is really a continuation of that work. We are going to some of the items that we've identified in the $100 million that we've quantified will help address some of that issue. So there is, as we mentioned, asset utilization is a big part of that. As far as providing more detail on the so we're not going to give how these numbers play out within the segments.

I think it'd be it's logical for you and the others to assume that these savings, these cost reductions will be proportionate to the level of spend that we see within those segments. And then you would give some weight to how each individual segment is progressing towards their margin targets. So dedicated is a little closer to the stated margin target, but they also have a large area spend in the organization, and so they're going to share in a fair proportion of the $100 million that we've identified today.

Operator: And your next question will come from Dan Moore with R.W. Baird. Please go ahead. Welcome back, Dan.

Dan Moore: Dan, your line may be muted. Sorry, guys. A little rusty. So good to be back. Thank you for the question. I'll be brief for a change. I was hoping we could talk a little bit about cost improvement initiatives but specific to ICS. I know you guys don't really wanna drill down at a division level with specific numbers. That being said, I think we all realize you're very focused on pulling levers you can control. So any color around ICS and just how you're approaching your efforts there would be most appreciated. Thank you.

Nick Hobbs: Alright. Again, welcome back, Dan. Good to hear from you. I would just say we've been working to take cost out of Intermodal for the past few quarters and been successful and continue to and ICS. Sorry. ICS. So it had to correct me there on that. But in ICS. And so when I look at it, we're doing a lot of levers, but I would say a lot of it is what we're working on is span of control. Really trying to get more efficient with our people. And I think you see that if you look at our operating expense in Q2 of last year versus Q2 of this year.

You can clearly see $3 million or more that's come out of that expense, and that's a lot around expanding control and people and doing things much more efficiently. But I'd also say we're focused on every penny looking under every rock and crevice that we can get to drive that. And I think that if you just look at ICS right now, we are really close to getting the ship turned around and excited where we're at. But that's just one example of many things that we're doing to really drive cost out. On the ICS side.

Brad Delco: Yeah. Maybe just one cleanup item, Dan. I think and for the audience, you know, year over year, gross profit dollars were effectively similar. I think we were up $300,000, but we saw nearly a $10 million improvement in operating income. And really, that's $10 million OpEx that came out of the business versus the prior quarter. And as you probably remember, when you were sitting in your other seat, you know, we talked about $35 million of cost that we incurred in 2024 that wouldn't repeat in 2025. And I think at least so far through the first two quarters of this year, you've certainly seen a good step down in OpEx year over year in ICS.

That doesn't mean that there's still not opportunity there. But it's probably one area we've done already the most amount of work. And I think as heard in Nick's prepared comments, you know, scaling and growing is a big focus while also looking at other areas to drive out cost.

Dan Moore: Thanks for the color. Good luck, guys.

Operator: And your next question today will come from Brian Ossenbeck with JPMorgan. Please go ahead.

Brian Ossenbeck: Hey everybody, afternoon. Thanks for taking the question. So I want to come back to the cost savings target. Maybe, John, can you give us a little bit more description on that? How much of this is volume dependent, of any bigger buckets that you can kind of point to from a headcount perspective? And in the past, you even said there might be some container rentals or other utilization. So is that also considered in this program? So any other details you can provide there, including the cadence, would be helpful. Thank you.

John Kulow: Yes. Hey, Brian. Appreciate the question. So really, we've identified and tried to go through is really looking at cost dollars and where we can find opportunities there. This was across the board, as I said in our opening remarks. We had each executive kind of assigned to an area, and that was salaries and wages, that was benefits, that was equipment utilization. Really across the board. And so, of it will be volume improvement. Will be certainly will help drive cost out. But a lot of these are structural changes to costs that we've been incurring to date that we have line of sight that we can remove from the system.

And so that's kind of where our focus is and what's driving that initiative.

Brad Hicks: Yeah. Maybe it's helpful too. I mean, Brad or Darren, I'll put you on the spot if you think there are areas that you wanna just highlight that you're looking into.

Darren Field: Yeah. I'll just mention, you know, we continue to see advancements in technology. And so as we think about artificial intelligence and the use of agents, it allows us to complete our work more efficiently and therefore lower cost. Shelley mentioned it, I think it's one of my favorite sayings, and that's just do more with less. And that's really the mantra that we've been on. And we've been on that fight for three years now. It's a grind, but still not where we need to be. And so we're pushing harder and farther. And really, that's what it comes down to.

There's a lot of great ideas that are in flight that will help us become more productive, leverage our equipment, investments better in the future than we have in the past, through collaboration and sharing of resources, not only within dedicated example, but also across divisions with intermodal and dedicated and final mile, working closer together. And so those are just some of the areas that I see.

Shelley Simpson: And might just add to something you said, Brad, is I think about artificial intelligence. If you seek from our people perspective, one of the things we really done over the last three years was to mention that our people knew that we wouldn't be doing mass layoffs because we think our people that is our culture. And so as we've started having these conversations, really introducing them to these concepts, our people have a level of safety that allows them to really bring these best ideas of how we can eliminate work, that is not meaningful to them.

And so we want to point our people from doing work that we think we can automate and become more efficient into growing our business. And so that's a big part of our plan as well. I don't think we've identified everything there yet, the $100 million, and so that's part of what John Kulow talked about. That's our first $100 million. We'll have updates from there. But I think that's an important note because when you have people understanding the strategy of the company, making sure that we've invested in our people, technology, and capacity, and that when we come through this, their good ideas will help us move forward and progress more quickly than had we not.

Darren Field: So I'll in here, Brian. You asked some questions about the equipment utilization and how that might play a role. Certainly, we've talked about having the excess capacity for some time now. We're working on a host of creative ways to put that equipment to work. It can be replacing at least trailer in the dedicated business unit as an example or even in JBT or even Final Mile? Can we put some of the containers to work in places where maybe in the past we had trailers leased? Heck, have we talked to outside entities about potential leases? That's certainly a topic out there. I don't have anything to share.

There isn't one of those currently going on, but it's certainly a topic. And then certainly, we've been engaged with BNSF in a meaningful way to talk about the cost to store the equipment facilities we both own, how can we minimize the cost together, and they are a partner with us in that. And we look forward to seeing the benefits of that. I'm not gonna tell you that the second quarter had a lot of benefits in those kinds of areas. But as we move through the rest of the year, we think we can have a meaningful impact on some cost areas certainly around the assets and the trailing equipment.

Brian Ossenbeck: Alright. Thanks very much, everybody. Appreciate it.

Operator: Thanks, Brian. And your next question today will come from Scott Group with Wolfe Research. Please go ahead.

Scott Group: Hey, thanks. Afternoon. So Darren, you had a comment that you think we're at a point where intermodal margins will be stable to modest improved? And I guess I just want to understand that a little bit more. Is that a sequential comment? Is that a year over year comment? I guess ultimately what I'm trying to understand is, you know, doing something with cost, sounds like price maybe just getting a little bit better. Earlier peak surcharges. Like, do you think are we at a point now where year over year intermodal margins can start improving or at least being flat or we're not saying that yet?

Darren Field: Well, I think that what we're suggesting is that we've stabilized where they're at. I believe strongly in our cost initiatives and efforts we have underway to help us moving forward. I want to highlight that, you know, we didn't get the pricing that we would have liked to have achieved given cost pressures that we've that every entity is facing. That's driver wage, it's the cost of maintenance equipment, it's the cost of insurance. It's all the things that are factors in our results. And so pricing hasn't kept up with that necessarily. What that did do though in the bid cycle is it created an environment where we're talking to customers about our challenges.

And I think together we have found not in every instance, but in some instances, we found where customers are working with us to find new ways to flow new flexibility into our drayage operations. To where we can drive better driver productivity, certainly drive out empty miles from time to time. I mean, these are all ways that we're attacking our margin. And I just want to make sure that the investor group doesn't believe that the only path to margin improvement at J.B. Hunt Transport Services, Inc. is from price. It is a necessary factor to fully repair our margin. But growth and cost control are also big factors that can help us.

And I would probably take growth, cost takeouts or cost efficiencies, and then price as kind of equal parts of our mission back to at least the 10 margin. And that's an important element for our investors to watch. And we believe as we move forward, we can achieve sequential improvements in what's going on in our margin.

Scott Group: So just if I can, because I want to make sure I'm understanding, are you suggesting we don't need to wait until the back half of next year and another year pricing to get margin improvement? We can get there before then. Is that ultimately what you're trying to say?

Brad Delco: Hey, Scott, I'll take a stab at this. I think we were very intentional with what we put in our prepared comments as we are each and every year. I think it is an important and also a pretty big statement for us to say, hey, we think we've seen stabilization in our margins in intermodal based upon our executing on our cost to serve initiatives and based upon what we're able to achieve in the bid process. And I think we've been clear and transparent there, particularly with, hey. We have gotten we have sorry.

We have seen rate improvement in our headhaul lanes, and we've also tried to explain why there's a lot of value in balancing the network. And we talked about, hey, seeing some improved balance, can move margin tens of basis points. We've been facing headwinds on price for two years, and I think our margins have held up well. We are finally at a point where we have just a very, very small tailwind to price.

Not nearly enough to compare where inflationary costs are, but if you take what we've shared on what we think we could achieve on lowering our cost to serve plus a little bit of help on rate, yeah, we said we think we can stabilize our intermodal margins. And this can be supportive of some modest improvements. And I would say that's from where we are today.

Operator: Thank you. And your next question today will come from Daniel Imbro with Stephens. Please go ahead.

Daniel Imbro: Yes. Hey, evening, everybody. Thanks for taking our question. I'll ask a non-intermodal one here. I guess Brad, you mentioned in your prepared script the dedicated customer loss trickled here into July. I guess that helps fleet count in 2Q. Was there any benefit on margin in 2Q as we think about maybe you maintained that higher margin business longer than you anticipated? And then I think in the script, you mentioned startup are going to affect your ability to maybe hit your operating income growth. Any more color you could share there?

Is there anything anomalous about these startup costs or how long they should maybe be a drag on margin before you see that recovery from this new business and fleet growth? Thanks.

Brad Hicks: Daniel. I'll start with the back half of your question. We get deeper in the year, the comment was really just a reminder that as we have growth in Q4, that always is a drag for us. We have that growth in the first half of the year, we can outrun the startup cost and investment by getting to profitability. Typically, talk about that being in the third or fourth operating month. And so just based on the way this year's played out and the way we see our growth getting back to the net growth in the back half, it likely will have some degree of drag on it.

As it relates to the smaller carryover, on the known losses, did that have a positive or material impact on our Q2 profitability? I would say I would not be able to say that it had any material impact on our profitability. That business was in line with what our operating results were. So I guess maybe having that revenue a little bit longer than we anticipated have contributed to some OI, but I wouldn't say that it influenced positively or negatively our operating ratio.

Brad Delco: Yeah. Hey, Daniel. This is Brad. I mean, I would say we and we tried to make this clear in the prepared comments. You know, we thought our fleet count would be relatively flat Q1 to Q2. We outperformed it. We're effectively saying, you know, kind of like you know, just the timing of literally a couple days is the difference of we reported in terms of ending truck count versus maybe what it looks like today. And so literally just a couple days extra with that account on the books, made that made that number just look a little bit off from what we shared with you guys three months ago.

Daniel Imbro: Great. Appreciate the detail.

Operator: And your next question today will come from Jordan Alliger with Goldman Sachs. Please go ahead.

Jordan Alliger: Yes. Hi. I know customer uncertainty around forecasting demand in the second half is still a challenge, but peak season is coming pretty quickly. So given the on again, off again tariffs and your own relatively tough second half volume comps, can you maybe drill down a little bit deeper on how you think peak seasonal develop? Can you get positive volume growth? And do you see more mix shifts around that Transcon versus East Coast? Thanks.

Spencer Frazier: Yes. Hey, Jordan, this is Spencer. Thanks for the question. As I mentioned in my remarks, every one of our customers is unique. And specifically in how they have adjusted to changes in trade policy. Some stayed the course, some paused certain items. Some pulled inventory forward, and really, of them longer term are considering their sourcing strategies. And that makes for a very dynamic forecasting challenge for them and for us. And so, you know, to your question, your size, the shape, the duration of peak, you know, that's gonna be different for every customer. And that's also really why we implemented our surcharge early this year.

There are quite a few unknowns as to how that's gonna manifest itself over the next couple of months. Specifically, some customers have said they're going to have a similar in shape and size. Others have said it might be extended. Or also uneven. So that presents a very large challenge for them. And also for us as we're staring at the next couple quarters, but it's also why we wanted to be in a position to make sure that we were going to be ready with our people as well as our equipment that whenever that demand does occur over the next few months that we can serve them.

And so we're very confident in that part and focusing in on our operation. And so whatever the volatility is, we're going to be ready to take care of that business when it comes in.

Jordan Alliger: Thank you.

Operator: You bet. And your next question today will come from Bascome Majors with Susquehanna. Please go ahead.

Bascome Majors: Last year, you repurchased $550 million worth of shares. That's the most you had done since 2007, I believe. And this year halfway through, you're at roughly the same rate you did last year. Can you talk a little bit about the opportunism and just access to cash with CapEx falling down, the opportunism and we see long-term value in our stock where it's trading today and or know, is there maybe a structural rethinking about how to use cash with the buyback versus other uses longer term? Thank you.

John Kulow: Hey, Bascome. This is John. And there really hasn't been any change in our the way we approach our capital deployment. Obviously, want to reinvest in our core businesses and traditionally that is through our revenue equipment purchases. As we've talked about, we have pre-funded a lot of those investments, and so we're the current environment we do have, as I mentioned, strong free cash flow. And we have used that to repurchase our shares mostly from an opportunistic just looking at the value of our stock multiple relative to S&P, RSI. I mean, we look at all those factors when we think about how we repurchase. But bottom line is we want to continue to maintain our dividend.

We want to maintain our leverage. What we're targeting right now is that one time's EBITDA. And so when to the extent we have free cash flow, we will again take a look at opportunistic possibilities for repurchasing stock. One thing I would say is we did earlier this year we renewed some of our senior notes. We do have some coming up early next year. So we're looking at that and really feel like we're in a healthy spot with respect to our cash flows. We don't see deterioration in cash flows from operations. And so we're going to continue to use that methodology on how we think about when we repurchase.

Operator: Thank you. And your next question will come from Ken Hoexter with Bank of America. Please go ahead.

Ken Hoexter: Hey, great. Good afternoon. So you talked about not seeing pre-shipping the last couple of quarters and now TransCon volumes are declining. 1% with the pause in shipping. Eastern volumes up 15%. But now you're ending the 7% down comps from a year ago. So maybe can you describe the market backdrop now? And I guess in that vein, noted peak season surcharge programs are starting earlier this year. So thoughts on how that flows through yields versus normal seasonality?

Darren Field: Yes, sure Ken. This is Darren. So, look, I think that over the last several quarters when a lot of the commentary was about a pull forward of inventory. We just we didn't have a lot of customers telling us that's what they were doing. You know, we continue to look to our customers for as much forecasting and feedback as we could get about what to expect, what to anticipate. I think our customers did the best they could and gave us the information available. I don't think anybody hiding anything. It just was it was difficult for our customers to see. And we were able to execute on their behalf.

As the second quarter went on, we did see some changes in the way the transcon volumes were flowing. And so, I mean, I would think you all can see some of that. And IANA data and you'll begin to see that. I would anticipate in the industry. And so there began to be a lot of dialogue about, well, there's going to be a surge coming. And maybe it will come earlier. We did have a handful of customers that said, hey. I might have extra business in July. I might we had many customers say, I'm gonna have the same peak I had last year, for example.

And so you began to hear a host of different thoughts about that. And we just wanted to build a plan not because caught by surprise. And frankly not be forced to take on cost. That was essentially a peak like event that we just we our shareholders don't deserve to take on that cost. And we built a program for our customers. Now obviously, if they don't search, they won't pay for excess capacity. And that's how we've shared that. And so we're trying to be prepared. We're trying to highlight our capabilities. We're trying to organize our own teams with our capacity and be ready.

The last thing our industry can do is fail this shipping community at a time when the when demand upticks. And BNSF and J.B. Hunt Transport Services, Inc. are jointly aligned and being prepared for the next uptick in demand. And I think that's what we're trying to highlight that we're out there ready to do. So as we move forward, I don't know what to tell you in terms of forecasting transcon volumes, certainly. We can all see. Ocean vessels are bringing more cargo in through California today than they were several weeks ago. Traditionally, that translates into domestic intermodal at some point.

And so we'll have to wait and see, but we're prepared to help our customers whenever they need it.

Operator: And your next today will come from Brandon Oglenski with Barclays. Please go ahead.

Brandon Oglenski: Hey, thanks for taking the question. Maybe as a follow-up to that answer, how does growth in the East relative to flat loads or downloads in TransCon help with the lane balance strategy and the cost efficiency, you know, outlook for Intermodal segment? If you don't mind?

Darren Field: Well, look, Eastern network growth has its own kind of balanced challenges that are different than what the transcon balance looks like. Certainly, the length of haul is much shorter and thus the cost to reposition empty equipment is also lower. You're just moving shorter distances. The mix of business that grows in the East is very similar throughout the year. And so there's not what I would call surges in the need for empty flows. And so the cost process to consider with pricing, all of that is considered. And so as we look to grow our Eastern business just as fast as the customers want to convert that highway business, and we'll continue to do that.

It certainly just doesn't put the pressure on the empty repositioning cost in the same weight as what TransCon can.

Operator: And your next question today will come from Ravi Shanker with Morgan Stanley. Please go ahead.

Ravi Shanker: Great. Thanks for taking the question. Maybe just to gears a little bit and a little bit of a bigger picture question here. Intermodal and dedicated, EBIT have kind of converged a little bit and probably are the closest they've been maybe ever right now. Is this cyclical or structural in your view? And kind of how do we think about the trajectory of EBIT for both segments into the up cycle? Do you think Intermodal probably has more operating leverage and torque as up cycle comes back? Or do you think both of them track pretty closely?

Brad Delco: Hey, Ravi. This is Brad Delco. I'll take a shot at that and let Brad or Darren maybe chime in if they wanted to add more. But it is a good observation. I think the financial just say, income of those segments are as close as they've been in maybe ever. And I think it's really a function of you know, probably more the cycle and where we are. I mean, clearly, dedicated margins are you know, they're off from the publicly stated margin target range of 12 to 14. But not that far off. Clearly, we're a little bit further off from our the low end of our margin target range in JBI.

So I think there's some more cyclical dynamics there. I think there's something very strong secular trends in dedicated, and I think you've seen consistent performance there. We've highlighted why we think our model is strong, resilient, and also unique. In terms of how we think about Dedicated versus how we think the broader market talks about their dedicated business. And so good observation. Obviously, we like both of these I'll let Brad and Darren add anything more that they would like to add.

Darren Field: Well, I'll just start with intermodal. Certainly, we have we prefunded capacity for growth that we haven't achieved. Yet. It is absolutely our expectation and our plan to continue to grow into the Intermodal excess capacity that we have today. Brad and I have known each other for a really long time, and I've always said the race between dedicated and intermodal is gonna be fun. I don't know that I ever think that there's a winner or a loser in that. We enjoy kind of the internal competition of that, and I'm well aware that dedicated is right on our heels.

Brad Hicks: I'd just say to Darren's comment, we do have some fun with the competitive nature that we have here at J.B. Hunt Transport Services, Inc., but we want to win all across the board. And so, yeah, I'm closer to my target ranges, but I'm not there yet. So I'm driven. And all of the initiative work that John Kulow mentioned earlier I think that we can get back in our range in the near term. We're that close. I'm really proud of the team. Their results that we have, operational excellence, whether it's safety, driver retention, our entry rates. Yes, we've touched on some inflationary costs. Predominantly in the buckets of insurance that we're trying to outrun.

With efficiency gains and with productivity improvements. But really proud of my team. But no, we want to win across the board at J.B. Hunt Transport Services, Inc. And so if Darren's at his target range and I'm at my target range, then yeah, we'll arm wrestle to see who can be the biggest when the music stops.

Ravi Shanker: Good luck. We're the best segment, Ben.

Operator: And your final question today will come from Tom Wadewitz with UBS. Please go ahead.

Tom Wadewitz: Yes, good afternoon. So I know you've had quite a bit in the cost side, but I wanted to ask one more. I just I guess to people think about the cost initiatives as sometimes being a gross initiative, you take that out, but you're going to have to offset inflation. I understand you have significant moving parts that drive operating income, you know, how much price you get, where you can add volume. But at a high level, should we think about this $100 million program in 2026 as being a net impact to EBIT?

Should we you think you'll look back at this and say, look, you know, this really gave us another $100 million on top in terms of EBIT? Or is it more appropriate to say, hey. This is a gross thing, and there are a lot of moving parts. That, you know, might be tougher to kinda see that clearly in the numbers we look back. Thank you.

Brad Delco: Well, I mean, I think Tom, hopefully, we would like the audience to take into consideration. You know, hunt typically doesn't step out on a limb and throw out numbers. You know, we have been very thoughtful, put a lot of work into this, and we've said over and over again, this is a safety culture. I mean, we said the $100 million is the star. These are things that we've identified. Does that mean over the next twelve months, we don't anticipate seeing inflationary cost pressures at you know, some of this work. Won't help us in overcoming those inflationary cost pressures. I mean, I actually think you see a lot of that in the results of Q2.

I mean, everyone can see that our revenues were effectively flat year over year. I think, you know, we are off $500,000. And our operating expense was up $8 million year over year. And if you look at insurance and claims and I'll go ahead and share group medical. You know, we're up $21 million just in those two areas. And so with good growth in JBT and good growth in intermodal, we're doing more and excluding those two items, our operating expenses are actually down year over year. So I think the organizations that a really good job managing cost.

Do I have a perfect crystal ball as to what inflationary cost pressures are gonna look like over the next twelve months? No. I don't. But I do know that we feel very strongly about on a $100 million of cost that we feel like we can take out. And my hope is that it will be very noticeable to our shareholders that they'll see improved performance because of the additional efforts that we put at identifying and going out and tackling these costs moving forward. Kulow, I don't know if you want to add anything.

John Kulow: Yeah. I think you said it great. You know, we as Brad mentioned, you know, our number is actually higher than the $100 million. But we want to maintain our credibility with investors. And when we say we're going to do something, we want to have high conviction that we can have success in achieving that. And so it's not simply taking the $100 million and removing it from our OpEx, and you can forecast what next year's operating expenses will be. But we have identified $100 million as we sit today and more work to come. Of costs that we can remove from the system.

There is going to be continued inflationary pressures in probably all of our cost items. But what we are doing is working on the cost that we can control, and we've identified areas where we feel highly confident that we can be on a better path to improving our margins.

Operator: This concludes our question and answer session. I would like to turn the conference back over to Ms. Shelley Simpson for any closing remarks.

Shelley Simpson: Thank you. We've been in a prolonged challenging environment for the last three years. And you heard us talk about in the last earnings call that we were really being fluid but also adapting to what we believe this environment looks like that allow us to focus on short-term things that we could work on that wouldn't jeopardize our long-term opportunity. I'm proud of our people in this environment. We've been operationally excellent and we're set for growth. We do really well in a growth environment. And that's because we keep focused on our customers, and we keep creating more value, and they keep asking us to grow. And all of our segments are set for growth.

And so as you think about where we're positioning for the second half of the year and end of 2026, have a large addressable market of $600 billion. We're at the highest level of service and customer sentiment across all five of our segments. And we have the people, technology, and capacity for the inflection occurs. Meanwhile, we've identified our first $100 million in cost to target. We are highly motivated, we're ready to grow while we lower our cost to serve. And that puts us on the right path of repairing our margins and growing our earnings. Thank you for your interest, and we look forward to talking to you next quarter.

Operator: Conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

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DATE

Tuesday, July 15, 2025 at 4:30 p.m. ET

CALL PARTICIPANTS

Chairman and Chief Executive Officer — John Wren

Chief Technology Officer — Paulo Juveienko

Chief Financial Officer — Phil Angelastro

Need a quote from one of our analysts? Email [email protected]

RISKS

Public Relations Revenue Decline: Non-GAAP adjusted results show public relations organic revenue decreased 9% in Q2 2025, primarily in the U.S, attributed partly to decreased national election spend and weaker global network performance.

Branding and Retail Commerce Pressure: Organic revenue in branding and retail commerce fell 17% in Q2 2025, citing "continued pressure from uncertain market conditions" slow M&A, and reduced new brand launch and rebranding activity.

Healthcare Revenue Decline: Organic revenue in healthcare dropped 5% in Q2 2025, as the segment cycled through a "large prior period client loss" and projects winding down as brands near patent expiration.

Income Tax Rate Impact: The reported income tax rate rose to 30.2% in Q2 2025, up from 26.4% a year earlier, mainly due to the non-deductibility of certain 2025 acquisition-related costs, resulting in lower net income and free cash flow.

TAKEAWAYS

Organic Growth: Organic revenue growth reached 3% in Q2 2025, in line with company expectations.

Non-GAAP Adjusted EBITDA Margin: Non-GAAP adjusted EBITDA margin was 15.3% in Q2 2025, flat year-over-year, with non-GAAP adjusted EBITDA growing 3.7% to $613.8 million.

Non-GAAP Adjusted Diluted EPS: Non-GAAP adjusted diluted EPS increased 5.1% to $2.05, compared to Q2 2024, reflecting operating performance excluding acquisition-related and repositioning costs.

Share Repurchases: $223 million of shares were repurchased in the first half of 2025; the company remains "on track to repurchase $600 million of shares in 2025"

Organic Growth Guidance: Omnicom Group Inc. maintained full-year organic growth guidance of 2.5%-4.5% for 2025.

Adjusted EBITDA Margin Guidance: Guidance calls for a 10 basis point improvement in non-GAAP adjusted EBITDA margin over the 15.5% margin achieved in 2024.

Acquisition Synergies: Management reiterated confidence in achieving a $750 million synergy run rate following the Interpublic Group acquisition, with ongoing identification of further opportunities.

Antitrust Approvals: The company received antitrust approval for the Interpublic transaction in the United States, bringing approvals to 13 of 18 necessary jurisdictions.

Media and Advertising Growth: This discipline delivered 8% organic growth in Q2 2025, with "solid growth in most geographies" and strongest performance in the media segment.

Precision Marketing Growth: Precision marketing grew 5% in Q2 2025, driven by U.S. results partially offset by mixed performance internationally.

Foreign Exchange Benefit: Reported revenue benefited from a 1.1% positive impact from foreign currency translation in Q2 2025. The company expects this benefit to continue over the next two quarters, totaling approximately 1% for the full year 2025.

Acquisition-Related and Repositioning Costs: Acquisition-related costs totaled $66 million and repositioning costs were $89 million in Q2 2025. These were noted as elevated due to regulatory and integration planning for Interpublic and organizational adjustments.

Free Cash Flow: Year-over-year, free cash flow declined for the first six months of 2025, mainly due to increased acquisition-related and repositioning expenses compared to the same period in 2024, while the change in operating capital improved by about $250 million.

Financial Strength: Omnicom Group Inc. held $3.3 billion in cash equivalents and short-term investments at the end of Q2 2025, with $6.3 billion in outstanding debt and no 2025 maturities.

Return Metrics: Return on invested capital was 18%, and return on equity was 34% for the twelve months ended June 30, 2025.

Technology Platform Reorganization: Effective July 1, the company reorganized Omni, OmniAI, Artbot, and Flywheel Commerce Cloud into a single end-to-end platform organization led by Duncan Painter.

Cultural and Creative Recognition: OMD Worldwide won Media Network of the Year and DDB Worldwide won Network of the Year at the Cannes Lion Festival; Omnicom Group Inc. was recognized as the most effective holding company by the 2024 EFI Index.

SUMMARY

Omnicom Group Inc. provided detailed operational and strategic updates as it maintained organic growth, safeguarded margins, and prepared for the transformative Interpublic acquisition. Management disclosed that 13 of 18 required antitrust jurisdictions have been secured for the transaction, with closure targeted for the second half of 2025. Q2 2025 demonstrated discipline-level divergence in demand, with media and advertising posting notable growth, while public relations, healthcare, and branding experienced explicit revenue declines. The company executed further integration and technology restructuring, with a leadership appointment for its new platform, and reaffirmed guidance for both top-line growth and margin improvement.

Chief Financial Officer Angelastro said, "SG&A expenses increased primarily due to $66 million of IPG acquisition-related costs in the second quarter of 2025. Excluding these costs, reported SG&A expenses declined by 6%."

John Wren explained the cap on share repurchases is an "arbitrary decision" linked to merger terms with Interpublic, with further flexibility anticipated after deal closure.

The company underscored early adoption and current deployment of generative AI, with Chief Technology Officer Juveienko outlining its application for agentic frameworks across creative and strategy teams to increase both productivity and innovation.

Management highlighted that continued investment in data and technology is central to maintaining competitiveness, and repositioning efforts are being executed independently of merger synergy targets.

Despite the backdrop of macroeconomic and regulatory uncertainty, Omnicom Group Inc. leadership expressed confidence in the resilience of long-term client relationships and in achieving outlined financial targets.

INDUSTRY GLOSSARY

Agentic Framework: An AI-based system composed of multiple collaborative agents automating complex multistage marketing workflows.

Flywheel Commerce Cloud: Omnicom Group Inc.'s integrated commerce platform supporting data-driven marketing and technology services.

Synergy Run Rate: The annualized cost savings or efficiencies expected after integration of an acquired business; management targets $750 million following the Interpublic combination.

Omnicom Advertising Group (OAG): An internal division focused on unified advertising business operations following organizational restructuring.

OmniAI: The proprietary artificial intelligence-powered analytics platform used across Omnicom Group Inc. to drive marketing insights.

Full Conference Call Transcript

John Wren: Thank you, Greg. Good afternoon, everyone, and thank you for joining us today. We are pleased to share our second quarter results. Organic growth was a solid 3% for the quarter, in line with our expectations. Non-GAAP adjusted EBITDA margin was 15.3% for the quarter and flat to last year. Non-GAAP adjusted net income per share, which excludes the after-tax effect of the amortization of acquired and strategic platform intangibles, repositioning costs, and acquisitions costs, was $2.05. Up 5.1% versus the amount in Q2 2024. Our cash flow continues to support our primary uses of cash: dividends, acquisitions, and share repurchases, and our liquidity and balance sheet remained very strong.

During the first half, we used $223 million in cash to repurchase shares and are on track to repurchase $600 million in shares in Q2 2025. After a solid 2025, organic growth is expected to be 2.5% to 4.5% and adjusted EBITDA guidance to be 10 basis points higher than the 15.5% we achieved in Q2 2024. Turning now to our key initiatives, I'd like to begin with an update on our proposed acquisition of Interpublic. In June, we reached a major milestone when we received antitrust approval to close the transaction in the United States, bringing the total number of approved jurisdictions to 13 out of the 18 required for closing.

We remain fully on track to complete the transaction in the second half of this year. As we progress through the regulatory approval process, Phil and I have continued to speak with our clients and our people. The response has been overwhelmingly positive. There's a genuine sense of anticipation and excitement about the opportunities our combined company will create that has only intensified as we approach the closing. By combining our complementary strengths, the new Omnicom Group Inc. will be equipped with industry-leading resources to drive a bold era of growth for our people, delivering superior outcomes for our clients, and generating significant long-term value for our shareholders.

Omnicom Group Inc. and IPG have dedicated teams at both corporate levels, working closely with our merger consultants, leading the process to ensure a seamless and successful closing. Contrary to the early speculation that the transaction might distract our professional staff, our agencies remain fully focused on delivering exceptional service to our clients and securing new business. Recent wins include Under Armour, Bimbo Global, and ASDA, just to name a few. We continue to refine our analysis and identification of synergies to achieve our $750 million run rate target following the closing.

We are highly confident that we will achieve this level of synergies and we continue to identify further opportunities beyond our target as we move forward with the evaluation. We've also taken steps to align our existing portfolio, ensuring that we can immediately deliver the benefits of the combined company to our clients, particularly in relation to our operating platform strategy. To that end, effective July 1, Omnicom Group Inc. reorganized our most advanced data and technology assets: Omni, OmniAI, Artbot, and the Flywheel Commerce Cloud into an end-to-end platform organization to drive our strategy forward. This move is designed to directly support our clients' marketing and commercial ambition while accelerating our own growth trajectory.

With the proposed acquisition of IPG, our new platform will be significantly enhanced by the addition of Kinesso and Acxiom, recognized as the world's highest fidelity data platform, as well as Real ID, the most comprehensive customer identity solution available. These assets will enable us to deliver even greater value and innovation to our clients. The new platform organization will be led by Duncan Painter, whose experience in building well-established tech platforms across Flywheel, EDS, Experian, and Sky makes him uniquely suited for this role. Our long-standing strategy has always been rooted in the belief that data and technology supercharge creativity. In today's world, especially with the rise of generative AI, breakthrough creativity is more valuable than ever.

I'm proud to share that our agencies returned from this year's Cannes Lion Festival of Creativity with two of the industry's highest honors. OMD Worldwide won Media Network of the Year, and DDB Worldwide won Network of the Year. Our ability to excel in both creative and media underscores the strength of Omnicom Group Inc.'s end-to-end capabilities and the outstanding work we deliver for our clients. The recognition also follows Omnicom Group Inc. being named the most effective holding company for the second consecutive year by the 2024 EFI Index, demonstrating that our people and agencies continue to stay ahead of the curve, consistently delivering work that drives real business impact.

Lastly, I want to highlight a key addition to our leadership team. In May, we welcomed Susan Catalano, our new Chief People Officer in the United States. Susan brings a wealth of experience in organizational redesign, talent operations, and management, and has successfully guided global organizations through transformational changes. Susan will play a key role in bringing Omnicom Group Inc. and Interpublic together, creating a world-class HR organization that attracts and develops the industry's best talent. In closing, we're pleased with our first-half financial results, our progress on key strategic initiatives, and the integration planning underway for Interpublic. As we look to the second half of the year, we remain confident in achieving our full-year organic growth and margin targets.

Our focus will remain on delivering for our clients and successfully completing the Interpublic transaction. Now I want to introduce and turn the call over to Paulo Uvianco, our Chief Technology Officer, who's joining us today to explain how we are making generative AI accessible to all our colleagues and clients across the organization. Paulo,

Paulo Juveienko: Thanks, John. I want to now spend a few minutes on what we think is one of our most significant competitive differentiators. We're deploying generative AI and agentic capabilities through our Omni platform and data assets to fundamentally reshape how we create value for clients. Back in 2022, we made the strategic decision to be an early adopter of generative AI, recognizing the transformative potential ahead of many of our competitors and clients. Initially, our focus was on the obvious applications, using generative AI for ideation and content creation and copy generation, as well as distilling insights from audiences. These delivered immediate productivity gains, but they represented only the first phase of our AI strategy.

What is driving the latest phase of our continuous transformation has been the development and deployment of our agentic framework. Over the last year, we have been aggressively and systematically rolling out AI agents throughout our workflows, where we can deploy multiple AI agents that collaborate seamlessly to deliver comprehensive solutions. Rather than isolated AI tools addressing individual tasks, we can now orchestrate intelligent agents across campaign life cycles, simultaneously analyzing data, optimizing strategies, and refining creative elements. This capability is powered by proprietary data and institutional knowledge, democratizing access to our industry-leading consumer intelligence, encompassing behaviors, demographics, cultural insights, and transactions.

Additionally, we are fine-tuning and grounding the market-leading foundational and frontier models, effectively encoding our strategic expertise into our scalable AI system. Most importantly, we are orchestrating complex multistage workflows that previously required extensive human resources. Examples of this cover the entire spectrum of our workforce. For instance, our strategy and creative teams across all our agencies are incorporating synthetic audience agents that are grounded in the Omni datasets, allowing teams to conduct synthetic focus groups for ideation, personalized content creation, and prelaunch testing and scoring of campaigns and assets.

In our health group, the teams have been able to create a multi-agent reasoning engine that helps in recalibrating campaigns and assets at significantly greater speed when the market conditions change by simulating market scenarios, modeling stakeholder responses, and synthesizing existing signals. Within our digital commerce group, the teams have crafted numerous agents that assist in new product launches, helping to optimize strategies by surfacing actionable insights from sales trends, market data, and competitor analysis. This all represents far more than operational efficiency, though those benefits are significant. We are building differentiated capabilities through our data and technology stack. This positions Omnicom Group Inc. to capture value as the industry evolves and strengthens our long-term competitive positioning.

Now I'm going to hand it back to John. But I'll be available for our Q&A session later on the call.

John Wren: Thanks, Paulo. I hope that gives you a better sense of how we are embedding generative AI across the enterprise. I'll now turn the call over to Phil for a closer look at our financial results. Phil?

Phil Angelastro: Thanks, John. In an uncertain market, our performance through the first half was solid, with organic revenue growth near the midpoint of our annual guidance and our adjusted EBITDA margin levels flat. As we begin the second half, less uncertainty in the macro environment may allow marketers to normalize spending levels, although it is still too early to say that the uncertainty in the macro environment has been eliminated. The larger parts of our business continue to perform very well, and we continue to invest in our technology platforms and tools that differentiate us in the marketplace.

And at the corporate level, as John said, we are focused on planning for the integration of IPG so we can hit the ground running. Let's now review our results in more detail, beginning with changes in revenue, on slide three. Organic growth in the quarter was 3%. The impact on revenue from foreign currency translation increased reported revenue by 1.1% as the U.S. Dollar weakened relative to most currencies throughout the quarter. If rates stay where they are, we estimate the impact of foreign currency translation on revenue will approximate positive 1% for Q3 and positive 2% in Q4, which would result in a benefit from foreign exchange of approximately 1% for the full year 2025.

The net impact of acquisitions and dispositions on reported revenue was positive 0.1%. At this time, we expect the impact of acquisitions and dispositions completed to date will be minimal for the full year 2025. Let's now turn to slide four for a summary of our income statement. This table shows our reported numbers on the left, and non-GAAP adjusted numbers on the right. Adjusting for acquisition-related expenses and repositioning costs, our Q2 2025 non-GAAP adjusted EBITDA grew 3.7% to $613.8 million with a margin of 15.3%. And our non-GAAP adjusted diluted EPS grew 5.1% to $2.05.

To highlight the two adjustments made to operating expenses, the first is an increase in Q2 of acquisition-related expenses related to both regulatory approval work and an acceleration in our integration planning work. The second relates to repositioning actions, primarily severance, we took to optimize Omnicom Advertising Group and Omnicom Production Group, as well as to align our businesses and markets more broadly to recent changes in market conditions and client demand related to the challenging macro environment. Please turn to slide five for a reconciliation of these items in detail. Acquisition-related costs of $66 million in Q2 2025 increased from the $34 million we incurred in Q1 of 2025. And repositioning costs were $89 million during Q2 of 2025.

We continue to expect our non-GAAP adjusted EBITDA margin for the year to be 10 basis points higher than our 2024 results of 15.5%. As we get closer to closing the acquisition of IPG, we'll be evaluating ways to accelerate savings opportunities prior to the closing date. We continue to expect to achieve our cost savings target of $750 million. Let's now turn to slide eight and review organic revenue growth in more detail, beginning with our disciplines. Media and advertising was up 8%, with solid growth in most geographies. Overall results were driven by strong growth in our media business and mixed performance in advertising.

Precision marketing grew 5%, including strong performance in our digital, CRM, and experienced design agencies in the U.S., offset by mixed performance internationally. Public relations declined 9%, primarily in the U.S., due largely to weaker performance in our global networks and some reduction relative to the benefit in 2024 from national election spend. We expect to see a difficult comp for the rest of 2025. Healthcare revenues were down 5%, and this includes our having now cycled through a large prior period client loss, as well as work winding down on brands that are close to loss of patent protection. We continue to expect improved performance as the year progresses. Branding and retail commerce was down 17%.

Branding experienced continued pressure from uncertain market conditions impacting both new brand launches and rebranding projects, as well as continued slow M&A activity, while retail commerce in the quarter slowed. Experiential grew 3%, driven by good performance in the U.S., offset by a challenging comparison to last year with the Olympics, as well as declines in the Middle East and China. Lastly, execution and support increased 1%, driven by strong growth in the U.S., offset by negative performance in the UK and Continental Europe. Turning to organic revenue growth by geography, on slide nine. We saw growth across all of our regions with the exception of the UK, where strength in media and advertising was offset by other disciplines.

Our largest market, the U.S., organic growth of 3%. And Asia Pacific also posted solid growth, as well as Continental Europe, although mixed by market. Slide 10 is our revenue by industry sector. Year to date relative to 2024, there are various small changes in the categories we track. The auto category increased year over year, reflecting new business wins, which were offset by some client spend reductions. Now let's move down the income statement and look at our expenses on slide 11. In the quarter, salary-related service costs, our largest expense, were down on a reported basis and as a percentage of revenue, driven by our continued efficiency initiatives and ongoing changes in our global employee mix.

Third-party service costs grew in connection with the growth in revenue, primarily in the media and advertising discipline. Third-party incidental costs are out-of-pocket costs billed back to clients at our cost, also grew in connection with revenue growth. Occupancy and other costs increased just under 4%, but decreased as a percentage of revenue. These include office rent, other occupancy, and general office expenses, as well as technology expenses. SG&A expenses increased primarily due to $66 million of IPG acquisition-related costs in the second quarter of 2025. Excluding these costs, reported SG&A expenses declined by 6%.

Turning to slide 12, you can see a presentation of our income statement that adjusts for the items that are not part of our normal course operations. As I mentioned earlier, when excluding both the acquisition-related and repositioning costs from the second quarter of 2025, non-GAAP adjusted EBITDA grew 4.1% and the related margin was flat at 15.3%. Net interest expense in 2025 was flat, reflecting a decrease of $1 million to $40.7 million. We estimate that net interest expense will increase by approximately $4 million in Q3 and by $5 million in Q4. Our reported income tax rate was 30.2% in Q2 of 2025, compared to 26.4% in the prior year.

The increased rate is primarily due to the non-deductibility of certain acquisition-related costs in 2025. On an adjusted basis, our Q2 2025 rate was 26.5%, up slightly from 2024, which was 26.3%. For full year 2025, we expect the rate on an adjusted basis to be between 26.5% and 27%. Average diluted shares outstanding were down 1% in Q2 2024, due to net repurchase activity. While reported diluted earnings per share were down 21%, on an adjusted non-GAAP basis, as discussed, it increased 5% to $2.05 per share. Now please turn to slide 12 for a look at year-to-date free cash flow.

Year-over-year decline was driven primarily by the reduction in net income resulting from the impact of both the acquisition-related costs and the repositioning costs. As you know, our free cash flow definition excludes changes in operating capital. As you can see in the appendix on slide 18, we had an improvement of approximately $250 million in the use of operating capital in the first six months of 2025 compared to last year. It's worth noting that on a twelve-month basis, our change in operating capital is once again positive.

Regarding our primary uses of free cash flow, for the six months ended June 30, we used $277 million of cash to pay for dividends to common shareholders and another $34 million for dividends to non-controlling interest shareholders. Our capital expenditures were $72 million. As we've discussed, they are a bit higher than our historical average due to ongoing investments in our strategic technology platform initiatives. Total acquisition payments were $48 million, including earn-out payments and the acquisition of additional non-controlling interests. This is down significantly from last year, which included the acquisition of Flywheel, net of cash acquired. Finally, our share repurchase activity was $223 million, excluding proceeds from stock plans of $13 million.

This included share repurchases of $142 million in Q2 and $81 million in Q1. We still expect repurchase activity of approximately $600 million in total for the year. Slide 13 is a summary of our credit, liquidity, and debt maturities. At the end of Q2 2025, the book value of our outstanding debt was $6.3 billion, flat with the same prior year period. We have no maturities in 2025. However, you will note that our $1.4 billion April 2026 maturities are now classified as current on our balance sheet. We will address these in due course. Our cash equivalents and short-term investments at the end of the quarter were $3.3 billion.

We continue to maintain an undrawn $2.5 billion revolving credit facility, which backstops our $2 billion US commercial paper program. Slide 14 presents our historical returns on two important performance metrics. For the twelve months ended June 30, 2025, Omnicom Group Inc.'s return on invested capital was 18% and our return on equity was 34%, both of which reflect our strong performance and strong balance sheet. Year-over-year change is driven by the IPG-related acquisition costs and the repositioning costs incurred in the twelve months ended June 30, 2025. I will now ask the operator to please open the lines up for questions and answers. Thank you.

Operator: Thank you. If you would like to ask a question, please press 1 on your telephone keypad. If you would like to withdraw your question, simply press 1 again. Please ensure you are not on speakerphone and that your phone is not on mute when called upon. Thank you. Your first question comes from David Karnovsky with JPMorgan. Your line is open.

David Karnovsky: Thank you. John, you noted the ongoing macro uncertainty in your remarks. Can you speak to the progression of things since you last updated in April, just given one of your competitors had noted a worsening trend in June? And then should we view the low end of the guide? And what's your thinking to maintain that in the context of the over 3% growth in the first half?

John Wren: Sure. Other than some specific client traffic issues, with them being more impacted by proposed tariffs than not, in general, I don't think the environment's changed all that much since the last time we spoke. I think the Trump administration hasn't issued final guidelines nor conclusions about some key markets that our clients operate in. And so I think it's business as usual for the most part. I think on all of our major clients, and they'll be even more significant to us after this transaction closes, they're long-term partners of ours. And so to the extent that there's a little bump in the road someplace, it's nothing more than just that.

And we will collectively get through it together in a very constructive way. So yeah, there are macro concerns. I would imagine there are macro concerns of different slots almost every year. But these seem to be controlled by decisions coming out of Washington for the most part. And I think they're gonna settle down as we get through the balance of the year. And you know, if you have more something specific you wanna know, I'm happy to answer you, David.

David Karnovsky: No. Just any more thinking, John, on the low end of the range, maintaining Yeah. No. On the in the complex No. No. No. No. No. What we did is with the uncertainty, we made our comments earlier in the year. We're still operating well within that range. And we have no reason at this point to think it's gonna be any lower for any circumstance. And so everything should be upside from the bottom, but until we get further and further into these decisions that are being made by third parties, we really can't measure that impact. Okay. Just one more if I can.

Your third-party principal cost increases in the quarter would indicate continued strong contribution from principal trading. Just for this offering, how do we think about the sustainability and growth here and kinda maintaining that strong performance overall for media and advertising.

John Wren: Sure. I mean, media is probably the strongest area within the industry. And our third-party, what you referred to as third-party cost, didn't see from our disclosures that you can't see from any of our competitors it's a product we have. It's a product we've had for a long time. It's a product that continues to grow. And I can see very clearly that it's gonna continue to grow into the future. So it isn't as unicorn by any standard other than the fact that everybody else that you speak to in the industry doesn't tell you the truth. So it is what it is. It continues to grow. It is a product.

The reason it's revenue is for all sorts of accounting reasons that Phil can probably better explain. But it's a product that our clients opt into. We plan with them, and then we execute against it. And the client gets a better deal, and we get incremental revenue with an incremental margin.

David Karnovsky: Thank you, John.

Operator: The next question comes from Steven Cahall with Wells Fargo. Your line is open.

Steven Cahall: Thanks. I want to follow-up on David's question, but focusing on the creative side within media and advertising. And Phil, I think last quarter you said creative was flattish in Q1 and might pick up during the year. So I'm just curious if you've seen any pickup on the creative side of things. And then relatedly, you know, as David mentioned, the media business is growing strong. John, you said that you think that'll continue to the future. Is there any margin mix benefit or shift that we should think about as media becomes kind of this longer-term tailwind and becomes a bigger and bigger piece of revenue ahead?

John Wren: Well, let me deal with the second part, and Phil can talk to the first part. Sure. Media is a very, very strong area which continues to grow. I think our increased size will benefit us as we move forward and complete the transaction. Also, the unique attributes of what's in our platform of that we gather information, which allows us to gain insights to help target how clients spend their money and how to optimize that spend, improves every single day. Paulo spoke to generative AI and the benefits it has to the tools that we're providing both our creative people and our media people that continues to happen at breakneck pace.

And he's available, by the way, to answer more specific questions because I'm a generalist. And, yeah, there are increasing opportunities that are being developed in terms of different products, different opportunities to increase margin, different ways to process media transactions. So to me, that is very op I'm very optimistic about that, and it's continued growth. I know some you know, I think if you objectively look at the industry, at least for the last two years, out of the people who we consider competitive in the set, two of us continue to win. And the others continue to suffer at one pace or another.

By the way, those are the same two that I tried to merge with a decade ago. So I wasn't wrong then. It probably won't be wrong this time. You wanna hit Greg? Yeah. On your first question, Steve, the creative business was basically flat to slightly down in the quarter. Performance was stronger outside the U.S. in many international markets, not every international market, but many. Relative to the U.S. So performance was okay. It's been better in the past, but not that difficult. I think some of the macro probably had a little more of an impact on the creative business this quarter.

It's certainly easier to move from quarter to quarter or from month to month than some of the media commitments that you have to make if you're, you know, standing at 20,000 feet and dissecting our business.

Steven Cahall: Thank you.

John Wren: Sure.

Operator: The next question comes from Cameron McVeigh with Morgan Stanley. Your line is open.

Cameron McVeigh: Hi. Thanks. I wanted to ask about the AI agents and where you expect to see, you know, the biggest immediate value adds and then long term how you may expect that to evolve. And then secondly, on that point, how you expect that to impact your financials? Do you see this more enabling share gains and cross-selling, so more of a top-line growth driver? Or is this more for an operational efficiency standpoint and, yeah, the help with margins? Maybe both. Thanks.

John Wren: I'm gonna let Paulo take a lead on the question, and then I have some opinions. I don't think they're more than that. On what the impacts of it is gonna be financially. But, Paulo, sure.

Paulo Juveienko: So as John articulated earlier, we believe that we sit on effectively the most elite dataset in the industry. And our generative AI strategy is grounded in this notion of an agentic framework. And what those agents are allowing us to do is to effectively infuse the intelligence of our elite datasets into every facet of the marketing workflow. So every discipline, all the teams across Omnicom Group Inc. now have the capability to drive deeper intelligence and a deeper understanding into every part of the work that they're doing for clients. This not only connects our capabilities but also drives a better understanding of consumers at every touchpoint.

John Wren: In terms of the financial impacts, there's a book yet to be written. The immediate benefit that we get is we're putting tools in the hands of our employees and colleagues all over the world in just about every practice area that we function in. What adoption of that is gonna be dependent upon, you know, widespread use of many of these tools by large enterprise clients, which happen to be the clients that we serve, will happen at a slightly different pace than, say, the smaller self-service clients that somebody like Facebook looks to.

Now what hasn't been factored into this future state as you get more productive and possibly need fewer people, there's gonna be a cost which hasn't been fully loaded in by these people developing all these breakthrough wonderful technologies, the cost to compute, the cost to store, all those things haven't hit the headlines yet. So they haven't been into the decision-making process at a client level as to it's better to use the most the fanciest product that's on the market or to do it in a more traditional fashion. That's all it's that's gonna play out over the course, I think, in the next twenty-four to thirty-six months.

What's key to us is to make sure that we have all the tools. We make all those tools available to the incredible group of over 100,000 professionals that we have around the world, who's still gonna help us invent new things and to do things in ways that sitting here and you know, corporate headquarters, we can't yet imagine. Which I think is gonna be a great benefit. And we'll figure out ways to efficiently deliver these services to a client. In a way that they're gonna get a return on investment they're gonna optimize the dollars that they spend in media earned and unearned. Did that quite do it for you, or I can expand?

Cameron McVeigh: That's helpful. Thank you.

John Wren: You're living in interesting times. As we all are. So it is it's wonderful because I'm very optimistic about it.

Operator: The next question comes from Adam Berlin with UBS. Your line is open.

Adam Berlin: Yeah. Good evening. I've got three questions. The first question is if macro conditions remain the same for the rest of the year as we've seen in H1, is it reasonable to assume growth improves in H2 because of the ramp-up of the Amazon revenues from the win last year? That's the first question.

John Wren: Do I ask all three of them, or you want me to answer them one at a time? Yeah. I can. Whatever you do. I'll ask the others then. The second question is Yeah. Why, please? The repositioning costs that you talked about in Q2, the $89 million, when do we see the benefit of those? Is that in H2, or is that more 2026? And is that already in the 10 bps of guidance? You've given for margin improvement this year? And the third question is, can you tell us how Flywheel performed in Q2?

John Wren: I'll take a shot at it and tell back me up with facts. Know, hypothetical macro conditions, you know, tough for me to project. What I do know is I do know that have a very long history within Omnicom Group Inc. That we're quite flexible and agile in adjusting to what the conditions are. And never lose sight that we're not doing things simply transactionally, we're entering into longer-term relationships trying to grow clients' brands. So a blip of, you know, small numbers in a particular quarter or a particular moment in time are really irrelevant to the long-term health and continued growth of our business.

So I'm not we're we're very as we said earlier, we're very comfortable with the guidance that we previously given you, and we're sticking with it. We don't see we don't plan based upon you know, wonderful macro conditions suddenly changing overnight. We think there's still gonna be some challenges as we go forward. I think Washington will bring a lot of clarity to this over the over the rest of this quarter, and then we'll be able to plan better as we move into the fourth quarter and into the future. So that's how I respond to the first one. Phil can talk a little bit more about re repossession.

I'll pass but I just have one comment before he does. Many of the changes that we've made or we've insisted on making almost since July starting with production then OAG, then a few and then now the delivery platform was that Duncan's gonna going to continue to build out for us. Required some anticipated reorganization so the host being Omnicom Group Inc. is ready when this closes in just a few months to absorb those activities in a very productive way, which allows us to achieve and possibly exceed the 750 we discussed at the time we announced the merger. So we're not standing still during this period of time. We're planning the integration.

Where we have to reorganize ourselves to make it easier to ingest our new colleagues that's what we're doing. Now Phil can have more specific answers on the repositioning cost, but that's the reason behind why we're incurring.

Phil Angelastro: Sure. As far as the actions we took in the quarter, Adam, you know, couple clarifications. They weren't they certainly weren't part of the actions we expect to take to meet our $750 million synergy target. That we talked about post-close. We continue to expect to achieve the $750 million synergy target we're certainly working on plans to exceed it as well, as John had mentioned in his prepared remarks. We took we took the actions in the second quarter as we said, to optimize OAG and Omnicom Production units. Which will help us certainly in the IPG integration process.

And as I said in my prepared remarks, you know, all of this has been considered in our 10 basis point improvement for the year. As we reiterate our guidance. As far as Flywheel goes, you know, we haven't and aren't gonna provide individual numbers for individual or specific numbers for individual businesses. But Flywheel business continues to perform well, especially in the U.S. And it certainly continues to enhance our broader portfolio, including the Omni platform and our AI and data strategies. And, you know, Duncan's been invaluable both in integrating Flywheel into our business as well as the additional role that he's gonna take that take on that John, referred to in his prepared remarks.

So I think I think that addresses it, but happy to clarify any Yeah. Any follow-up items. And one other positive thing about Flywheel if you look historically at the portfolios of Omnicom Group Inc. and Interpublic, Interpublic had has deeper relationships with many CPG companies. Companies. That haven't been traditionally part of our growth and portfolio. That's gonna introduce Flywheel to even more opportunities to provide service.

Adam Berlin: Alright. Thank you very much.

Operator: Your next question comes from Adrien de Saint Hilaire with Bank of America. Your line is open.

Adrien de Saint Hilaire: Thank you very much, John, Phil, for the questions, please. So I've got a few of them. One of your competitors was talking about a smaller pipeline. Smaller opportunities right now. I was just wondering what your thoughts were around this. Secondly, maybe a housekeeping question, but how much repositioning and acquisition-related costs should we model for the year? And sticking to that topic, is there some pull forward in that number the $150 million of cost savings that you've planned from the IPG combination? Or are those these actions in '25 come on top of that number?

Phil Angelastro: I'll take the latter first, and then we can go back to your first question. On the repositioning charges, they were not I said earlier, they were not part of the $750 million synergy target. We continue to expect to achieve the $750 million and beyond. But those charges were not part of the $750 million. And you know, I think it's safe to say we don't intend to take any further repositioning charges in the third quarter. I think there are some actions we're gonna be taking in connection with when the deal closes. We don't have a precise date, but we expect and believe it'll continue to close in the second half.

And when it does, certainly, to achieve the $750 million, there are gonna be some actions that we need to take that are gonna result in charges. Which I think we've made clear prior. But yeah, when we get there, we'll certainly provide some more information and disclosure around that.

John Wren: And on your first question, I typically read and follow very much what my competitors are saying. I don't recall that particular quote referring to smaller opportunities, so maybe you can provide some clarity. Maybe I just don't fully understand the question. I do think that because of some of the uncertainties that are out there, that some decision processes have gotten delayed or a little slower than what we might have expected in prior years. But, again, that's a temporary phenomenon from my perspective. I mean, could you give me a little bit more clarity? Maybe I can be a bit more help.

Adrien de Saint Hilaire: Yeah. In terms of search question. Sure. Sure. Sure. I think they were specifically calling out the fact that there isn't a lot of basically going on at the minutes. In media specifically.

John Wren: Yeah. That I don't know if that's true or not. I mean, it's certainly inconsistent with all the projections everybody was making about all the disruption I was gonna have in my business. When I announced the deal because that hasn't occurred. So but we can we continue along with at least one competitor to be invited to, I think, every single pitch of any size because clients are curious about how our services differ from those of maybe one other in the group. You know, primarily. So it's business as usual, I think. And, also, there are some active features going on during the summer.

That I find somewhat unusual because people typically delay some of those decisions until the autumn. So there is I wouldn't say quantity a lot, but there's a few big opportunities that we're currently in the process of having conversations with clients about.

Adrien de Saint Hilaire: Thank you very much.

John Wren: Thank you. Thank you.

Operator: The next question comes from Jason Bazinet with Citi. Your line is open.

Jason Bazinet: Can I just ask a quick question about your philosophy regarding buybacks? The reason I ask is that the $600 million that you called out for the year seems, you know, very consistent with what you've done in terms of buybacks over the last ten years. With a few exceptions. But your multiple seems as low today, you know, anytime, maybe x the GFC, back in '08 and maybe ex COVID in 2020. So why I guess inference of the $600 million is you don't really think about buying back more stock if your stock is cheap and less if you think it's expensive. It's just a pretty consistent sort of capital return independent of the price of your stock.

Is that a fair characterization?

John Wren: No. It wouldn't be. And the reason is back on December 8, as we were announcing the transaction to purchase Interpublic, we were acquiring them and we had to come up with a decision as to how much we would permit them to buy back during until the transaction close? And since we were insisting that they would be limited, they very respectfully asked us to define what we would do. And at the time, again, remember we were coming off COVID last year, we were coming off of having purchased Flywheel.

And so we agreed arbitrarily to two numbers, a number for them, which I'll allow them to tell you what it is on their call, and $600 million for us. By all means, if it weren't for this agreement, we would probably be a lot more active in the market than we are currently. But we are respectful of the, you know, of the merger agreement that we signed. The good news is I expect that to be completed sometime in the next four months. At which point will be a lot more flexible and free to react to whatever the conditions are. But that's an arbitrary decision that was taken seven, eight months ago that we were honoring.

It understood. Business as usual, and it's not because we don't see the same opportunities that you just mentioned.

Jason Bazinet: Thank you. That's very helpful.

Operator: The next question comes from Michael Nathanson with MoffettNathanson. Your line is open.

Michael Nathanson: Thanks. John, I have two. Firstly, I want to ask you about RFK Junior and potentially changes in healthcare advertising. I know Interpublic's got a very good, and you do as well, healthcare business. How are you thinking about potentially the risks to any changes in marketing regulations? And then secondly, I just wanted to ask I guess, Paulo on, you know, we've seen VO3 launch from Google. It looks pretty good. And Sora's out there as well. I guess, the chief concern about those products is it allows people to create great content at the click of a switch. In more efficient, more messaging, more efficiently, less people.

So I think the inherent risks for people is, like, it looks like it's actually cannibalistic. To have people get paid in the agency world. So help us square the circle why these tools that create great efficiency and great content accretive to the business model versus being dilutive.

John Wren: Yeah. There's a lot there's a lot there to impact. First was RFK. Right? Yep. I think what you've heard is the third episode of a reality TV show as opposed to anything substantive. Seems to be a lot of complexity in conversation. And very little change or action going on. Okay. And many of the things that are being suggested don't seem to have I mean, anything's possible, but don't seem to have caught much traction. In terms of the way behavior is occurring. With pharmaceutical companies and with just the general public. Seeking better information about therapeutic answers to problems that they might individually have. So the medium possibly could change in which that information gets relayed.

But the need to get that information to the consumer that only gets more complex every day. And that benefits us. So that's on RFK. Wish that he only does the right thing for the American people. In terms of your other question, I have I think we need you to repeat it. I need I'm sorry. If you don't mind. If you mind.

Michael Nathanson: The question is just more broadly as to Paul too is, like, when you look at the, you know, the next generation, you know, video products being launched by the likes of Google, like VO3, or Soro, like, the quality as far as the quality of AGI is getting better and better for video.

John Wren: So we all worry that because of just the efficiency of what they're producing, it actually eatens your business and does not accretive. It's dilutive. Just it effectively allows people to make more and more messaging or create messages at less and less amount of time. Right? So it looks like it's a dilutive set of tools to businesses that are based on, you know, doing hours on creative. So that's the circle we need to square. Like, these tool sets are getting better, it feels like creating content is getting more efficient. Isn't that a problem for businesses that are billing based on, you know, time spent creating messaging?

John Wren: Well, I'm gonna let Paulo answer the question more specifically, but I just have two things to add to it. Just so you kinda understand. Is we're not caught in time incapable of changing our compensation models as the tools improve and our efficiency improves, and the ROI to our clients improve. And we've you know, historically, it's happened quite a bit over my career. But the biggest seismic move, I guess, you know, in the industry is when we move from getting paid on media commissions to getting paid in another fashion. It will increasingly our compensation models will increasingly shift I think, to outcomes. However defined.

And that's a big word, and we don't have enough time to do it. That's number one. And number two, Paulo can talk to just unbelievable capabilities that are being released every day. But I'll give you one example of something that nobody would have thought of. And it's very small user of a Google product wouldn't care about but a big company did. We created an advertisement which we were able to create in minutes and it included an animal. And that animal, as it was depicted in the content, had a hat on it.

And as a result, the attorneys from that very large enterprise company wouldn't allow us to use the tools because it's illegal to put a hat on a cat. And I'm not Dr. Seuss. But Paulo can now talk to the technical part of.

Paulo Juveienko: Yeah. I think so, Michael, the first thing to note is that we incorporate all those major models, including VO3. We get early access to all these models, and we've integrated them into our agentic framework for use across all the workflows for all of our teams. So that's the first thing. So we partner very closely with those model providers. The other thing to note is that it is not just about driving efficiency. And as I said earlier, it's absolutely driving a certain degree of efficiency as it relates to content creation. John noted a specific example for one of our clients where we're able to realize those efficiencies very quickly.

But what we see, at least today and for the future, is that it's allowing our creative teams to explore really more and more creative territories, uncharted creative territories. And that is really expanding the aperture of our creativity that we already believe that we have an unfair share of within Omnicom Group Inc. So, you know, remuneration models aside, I think that all of the advancements in this technology is supercharging our capabilities. And actually adding greater value to what we deliver for our clients, which are on a regular basis.

Michael Nathanson: Okay. Thanks, Paulo.

Operator: The next question comes from Craig Huber with Huber Research Partners. Your line is open.

Craig Huber: Great. Thank you. Just a follow-up on those questions there on AI. So the potential cost savings using AI and generative AI on behalf of your clients, those cost savings for your clients, where do you think those dollars go? Do they get plowed back into activities through an Omnicom Group Inc.? Or they come outside of the ecosystem? You actually lose the dollars. Anything that plays out here.

John Wren: Well, I think initially, any I think it makes us more efficient. Right? And it allows us to be more creative because we can test more ideas to find out whether or they're really great ideas or not such great ideas. So it's been my experience that anytime that we can become more efficient, clients typically will reinvest that money in the brand itself. And I think you know, if you were to do a survey as I probably have, I won't use the client's names. Industries like the auto industry, which is currently in all sorts of chaos because of tariffs because of electric cars versus non-electric cars.

But when you cut through all those tactical noise, and companies adjust, one of the things I think most major brands have realized is that with the savings and the improvement that they saw in their businesses during COVID, which declined or challenged a little bit post-COVID, what they forgot to do is they were enjoying those savings, was to continue to invest in the brand. And that awareness which you might think is obvious, really hasn't really occurred to people until very recently. Increasingly, more and more of my conversations have to do with how are you gonna project this brand that you've invested in over the last fifty or a hundred years.

And isn't that what differentiates your automobile in my example you know, from the next guy. So it passed this precedent at all, any savings that we get will get reinvested in the brand itself. Or in tactics which will drive sales. As a general statement. I believe that could be true. You know? And Paulo will then talk to the tools. But, again, you know, Microsoft's investing in 3 Mile Island for a reason. Right? Because somebody's gonna need electricity. To power all this great stuff when it starts to get into a wide use. Right?

I think, generally speaking, that, you know, with every technological revolution, the expectations of consumers typically moving faster than brands can keep up with. And the only way that brands can keep up is to create more personalized content that can deliver on what they're trying to ultimately sell. So with that, there's more and more content that needs to be created and generated. So it's not necessarily about creating the same content for cheaper. It's about being able to create more content to drive true mass personalization at scale.

Craig Huber: So what you're suggesting then is if hypothetically, you save say, customer saves 10% because they're using AI tools through your company, a lot more than an extra 10% savings are gonna plow those dollars back into marketing advertising. And, therefore, you as your company are gonna see the same dollars. You're not gonna lose out. Is that what you're suggesting?

John Wren: In general terms, yes, for the reasons that Paulo expressed, plus our media products get more and more sophisticated every single day. And we're able to optimize them better and better. And we're able to identify the audience that we should be talking to with this content. People will reinvest in if I ask you to spend a dollar, but I kinda can prove to you that you're gonna $2.20 back for it, you're gonna reinvest that money. And the more of those scenarios there are where he can prove the return, the more comfortable clients are gonna be spending more to generate that return.

Craig Huber: Okay. Then my next question I wanna ask you on the tariffs. You touched on this a little bit here. But, I mean, three months ago, everybody's waking out about tariffs and so forth. How are your clients feeling right now? About the tariff potential impact out there on their business in the macro side of things?

John Wren: Phil can speak to the first 3,500 clients of ours. I'll speak to the balance. Right. I'm only joking. Go ahead.

Phil Angelastro: I think there's a lot of there's a lot of variables in terms of how clients feel about it. You know, it depends on what industry they're in. It depends on what you know, what they're trying to sell, what their goals are, etcetera. Some of them certainly probably paused a little bit when the first round of tariffs came out in early April. And reassessed the landscape. Some of them, though, at the same time, decided to pull forward some investment spend, you know, depending on what their objectives were. So it really runs the gamut and, I think it also it also, you know, there's a bunch of different answers depending on what geographies they're operating in.

And what they're what their tactics really are. So I think I think you've had a number of broad responses based on a lot of different facts and circumstances, and it's hard to say you know, here's the answer as it applies to a broad contingent of clients. But I'll give you one real life very important observation. And other people in the room with me, Greg who you know was there too. At Conn this year. And there were approximately 37,000 people making up professionals in the industry, making up clients, and making up an awesome of platinum people from tech and from media. I didn't hear, and I was shocked. For the whole week.

I didn't hear the word tariff once. People were looking past this current situation to the future and to running their business and the implications of how we go about doing it. Mean, it was so noticeable that it wasn't a word that was being vented around. It was kind of refreshing. So I take some optimism and we will get through this phase with whatever industries are currently being impacted. And that the 37,000 people I was with three weeks ago in the South Of France were probably a better indication of the future than today's headlines.

Craig Huber: And then thank you for that. My final question, real quick. You said 13 out of 18 jurisdictions or countries around the world have been approved your acquisition merger with IPG. Who are the remaining five just around the same page?

John Wren: I have passports to all of them. No. Go ahead. Failure on. They'll they'll the largest one is certainly the EU. I think yeah. Other than other than that, we're not gonna name names. I you know, I think I think each one is a little different, and is a little you know, at a little different phase of the review process, but we certainly expect to close in the second half of the year. We don't see any issues that would change that conclusion, and we're gonna do our best to get through the rest of these reviews.

John Wren: Great. Thanks. I was just I was just echo that with the confidence that I mentioned before. We can we're it's summertime, so we expect we don't expect as much activity in July and August as we had prior to this. You know, as people go on holiday, but we're pretty damn we are confident that we're well along in the process with all of these remaining operations. Getting through The United States, was probably the biggest hurdle. Not hurdle, but question. And I think a lot of these remaining governments look to see The US has improved it. Before they finalize whatever their decisions are. But

Craig Huber: Great. Thanks, Phil. Thanks, Sean.

John Wren: Sure. Great. Thank you. Thank you.

Operator: That is all the time we have for questions. This concludes today's conference call. Thank you for joining. You may now disconnect.

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DATE

Tuesday, July 15, 2025 at 7:30 a.m. ET

CALL PARTICIPANTS

Chairman and Chief Executive Officer — Laurence D. Fink

Chief Financial Officer — Martin Small

Need a quote from one of our analysts? Email [email protected]

TAKEAWAYS

Assets Under Management: Record $12.5 trillion in AUM at the end of Q2 2025, marking a new high for the firm.

Net Inflows: $68 billion in total net inflows in Q2 2025, $116 billion of net inflows in Q2 2025, excluding institutional index outflows; The institutional index saw $48 billion in net outflows in Q2 2025, primarily due to a $52 billion single-client redemption in fixed income in Q2 2025 (The institutional channel delivered 3% organic base fee growth in Q2 2025).

Organic Base Fee Growth: 6% organic base fee growth in Q2 2025, Marking four consecutive quarters of at least 5% organic base fee growth (as-adjusted, organic, Q2 2025); 7% organic base fee growth over the 12 months ended June 30, 2025.

Revenue: $5.4 billion in revenue in Q2 2025, up 13% year-over-year, driven by organic growth, higher markets, base fees from the GIP transaction, and increased technology revenue.

Operating Income: $2.1 billion in operating income in Q2 2025, an increase of 12% year-over-year driven by higher revenues.

Earnings per Share: $12.05 earnings per share in Q2 2025, up 16% year-over-year, reflecting higher nonoperating income, a higher tax rate, and increased share count in as-adjusted Q2 2025 results.

Net Investment Gains: $433 million, primarily from noncash mark-to-market gains on minority investments in Circle and co-investment portfolios in Q2 2025; BlackRock holds approximately 2.3 million shares of Circle common stock.

Base Fee and Securities Lending Revenue: $4.5 billion, rising 15% year-over-year in Q2 2025, including approximately $240 million contributed by GIP in Q2 2025.

Effective Fee Rate: Annualized, down 0.4 basis points in Q2 2025 compared to Q1 2025 due to $36 million lower catch-up base fees from private markets fundraising and equity market declines in April.

Estimated Base Fee Run Rate: The entry rate to Q3 2025 is approximately 5% higher than total Q2 2025 base fees, excluding the HPS impact; with HPS, the jump is around 10%.

HPS Acquisition Details: Added $165 billion in client AUM and $118 billion in fee-paying AUM as of July 1; expected to contribute approximately $450 million to Q3 2025 revenue, including $225 million in management fees, and to boost the effective fee rate by 0.6 basis points in Q3 2025.

Performance Fees: $94 million in performance fees in Q2 2025, declining year-over-year due to lower private markets, liquid alternatives, and long-only product performance revenue.

Technology and Subscription Revenue: Technology services and subscription revenue rose 26% year-over-year in Q2 2025, driven by growth in Aladdin and the Preqin acquisition, which contributed approximately $60 million in revenue in Q2 2025.

Annual Contract Value (ACV): Increased 32% year-over-year in Q2 2025, including the Preqin acquisition, 16% organic ACV growth including currency effects in Q2 2025.

Total Expense: Total expense increased 14% year-over-year in Q2 2025, reflecting 12% higher compensation tied to acquisitions and operating income in Q2 2025, and 16% higher general and administrative expense year-over-year in Q2 2025, primarily due to GIP and Preqin.

Direct Fund Expense: Direct fund expense rose 23% year-over-year in Q2 2025, largely due to higher ETF AUM and net inflows.

As-Adjusted Operating Margin: 43.3% as-adjusted operating margin in Q2 2025, down 80 basis points year-over-year, mainly due to reduced performance fees and lower performance-related compensation.

Share Repurchase: $375 million of common shares were repurchased in Q2 2025; with plans to continue at least $375 million per quarter in share repurchases for the remainder of 2025 based on current expectations.

Dividend Target: Dividend payout ratio targeted between 40%-50% of GAAP net income, with a historical average of 50% of GAAP net income over the last 5 years; dividend per share has grown at over a 15% CAGR since 2003 (based on GAAP dividends).

Private Markets Fundraising: GIP V closed at $25.2 billion, exceeding its $25 billion target for GIP V in Q2 2025 and marking the largest infrastructure fundraise in BlackRock and GIP history; SLS II secondary fund closed at over $2.5 billion in Q2 2025.

Private Markets Fundraising Target: $400 billion in gross private markets fundraising targeted from 2025 to 2030, with expectations of higher run rates in later years.

ElmTree Acquisition: Agreement announced to acquire ElmTree Funds with $7.3 billion in client AUM ($3.1 billion fee-paying); the transaction is expected to close in Q3 2025; closing expected in Q3 2025 pending regulatory approval.

ETF Net Inflows: $85 billion in ETF net inflows in Q2 2025, diversified by channel, with over one third from European clients using local ranges; fixed income ETFs led with $44 billion in net inflows in Q2 2025, active ETFs drew $11 billion in net inflows in Q2 2025, digital asset ETPs added $14 billion in net inflows in Q2 2025.

Cash AUM: Cash AUM increased 25% year-over-year for the 12 months ended June 30, 2025; $22 billion in net inflows in Q2 2025, bringing total cash AUM to nearly $1 trillion as of Q2 2025.

Aladdin and Technology Platform: Technology ACV growth reached 16% year-over-year in Q2 2025, driven by ongoing adoption.

IBIT (iShares Bitcoin Trust): Surpassed $75 billion in AUM at the end of Q2 2025 and reached $80 billion in AUM as of the morning of the Q2 2025 earnings call.

Tokenized Liquidity Fund: Now holds $3 billion in AUM as of Q2 2025; manages more than $50 billion for Circle stablecoin cash reserves as of Q2 2025.

SUMMARY

BlackRock, Inc. (NYSE:BLK) reported record levels in AUM, and sustained as-adjusted organic base fee expansion above its 5% target in Q2 2025. New business momentum was reinforced by strong technology and subscription revenues, up 26% year-over-year in Q2 2025 (as-adjusted)—with the Preqin and HPS acquisitions contributing significant incremental growth to AUM, revenues, and client offerings in Q2 2025, and expected to further increase revenue and AUM in Q3 2025. Fundraising successes in private markets, including the landmark $25.2 billion close for GIP V in Q2 2025 and rising digital asset flows, demonstrate expanding capabilities across asset classes and geographies.

Laurence Fink said, "Momentum is only accelerating, and many of our recent milestones have not yet reflected in our results." underscoring anticipated further gains from the recent acquisitions.

Leading ETF inflows, particularly in fixed income, active, and digital asset strategies, reinforce BlackRock's positioning in global capital markets and evolving investor preferences.

Management indicated that the institutional, retirement, and insurance channels continue to drive organic growth opportunities, especially with expanded access to private markets and technology solutions.

The announced dividend policy targets payments in line with sustained earnings growth, while disciplined capital deployment balances reinvestment with consistent share buybacks and targeted M&A.

Discussions of stablecoin reserve opportunities and tokenized asset management suggest potential for new client inflows and strategies aligned with regulatory and technological evolution.

INDUSTRY GLOSSARY

GIP: Global Infrastructure Partners, a leading private infrastructure investment platform acquired by BlackRock.

HPS: HPS Investment Partners, a global investment firm specializing in private credit, acquired by BlackRock.

Preqin: A provider of data, analytics, and insights on the alternative assets industry, recently acquired by BlackRock.

Aladdin: BlackRock's integrated investment management and risk analytics platform.

iShares: BlackRock's brand for its exchange-traded fund (ETF) family.

ACV: Annual Contract Value, a measure of recurring revenue from technology services and subscriptions.

IBIT: iShares Bitcoin Trust, BlackRock's spot Bitcoin ETF product.

DCIO: Defined Contribution Investment-Only; refers to investment services provided exclusively for defined contribution plans.

ETF: Exchange-Traded Fund, traded on exchanges and composed of a basket of securities.

SLS II: Secondary and Liquidity Strategies II, BlackRock’s secondaries private markets fund.

SMAs: Separately Managed Accounts; customized investment portfolios managed for individual clients.

BPIIF: BlackRock Private Investment Fund, used for private equity exposures in glidepath solutions.

SubCo Units: BlackRock Subordinate Company units, issued as equity compensation during acquisitions and exchangeable for BlackRock common stock.

Full Conference Call Transcript

Martin Small: Thanks, Chris. Good morning, everyone. It's my pleasure to present results for the second quarter of 2025. Before I turn it over to Larry, I'll review our financial performance and business results. Our earnings release discloses both GAAP and as-adjusted financial results. I'll be focusing primarily on our as-adjusted results. At our Investor Day last month, we communicated our ambitions for BlackRock in 2030. Our leadership team and our employees have seen and contributed to that vision over the last 2 years. We anticipated where our clients and markets were going. We've established strength at the foundation of our platform in ETFs, Aladdin, whole portfolio, fixed income, cash management.

They're the strong foundations to serve clients and deliver on our organic growth objectives. We executed on organic business builds in structural growth categories, including digital assets, active ETFs, model portfolios and systematic equities, and we've executed on 3 major acquisitions. We've built a premier investment and technology platform across public and private markets, one that's only at the beginning of a durable long-term runway for growth. Building on our record results in 2024, we continue to see the proof points of the success of our strategy into 2025. We generated 7% organic base fee growth and over $650 billion of net inflows over the last 12 months.

This success has been built on multiyear sustained growth in iShares, fixed income, systematic tax-managed strategies in Aladdin and now expansions in private markets. We believe these engines will enable us to more consistently rise above 5% organic base fee growth. We posted 6% organic base fee growth in the second quarter for our fourth consecutive quarter of 5% or higher organic base fee growth. We finished the second quarter with record AUM, record units of trust of $12.5 trillion. We once again delivered double-digit year-over-year growth in revenue, operating income and earnings per share. GIP V closed above its $25 billion target, making it the largest private market fund raise in the histories of both BlackRock and GIP.

We took early commercial steps to bring a first-of-its-kind public-private target date solution to retirees with Great Gray, a leading collective investment trust platform. And earlier this month, we closed our acquisition of HPS Investment Partners, a major milestone as we evolve towards our ambitions of 30% revenue contribution from private markets and technology by 2030. Second quarter net inflows of $68 billion were impacted by low fee institutional index redemptions, which saw $48 billion of net outflows. Excluding that activity, BlackRock delivered approximately $116 billion of net inflows in the quarter. Turning to financial results.

Second quarter revenue of $5.4 billion was 13% higher year-over-year, driven by the impact of organic growth and higher markets on average AUM, base fee is consolidated in the GIP transaction and higher technology services and subscription revenue, which includes the onboarding of Preqin. Operating income of $2.1 billion was up 12%, and earnings per share of $12.05 was 16% higher versus a year ago. EPS also reflected higher nonoperating income, a higher tax rate and a higher share count in the current quarter. Nonoperating results for the quarter included $433 million of net investment gains driven by mark-to-market noncash gains on minority investments, including Circle and in our co-invest portfolio.

We own approximately 2.3 million shares of Circle common stock, which will continue to be marked through investment income going forward. Our as-adjusted tax rate for the second quarter was approximately 25%, and we continue to estimate that 25% is a reasonable projected tax run rate for the remainder of 2025. The actual effective tax rate may differ because of nonrecurring or discrete items or potential changes in tax legislation. Second quarter base fee and securities lending revenue of $4.5 billion was up 15% year-over-year, driven by the positive impact of market beta on average AUM, organic base fee growth and approximately $240 million in base fees from GIP.

On an equivalent day count basis, our annualized effective fee rate was down 0.4 basis point compared to the first quarter. This was partially due to the impact of catch-up base fees associated with private markets fundraising, which were $36 million lower relative to the first quarter. Significant intra-month equity market declines in April were also a contributing factor. As a result of market and FX movements into the end of the quarter, we entered the third quarter with an estimated base fee run rate approximately 5% higher than our total base fees for the second quarter. That's excluding the impact of HPS.

The closing of HPS added $165 billion of client AUM and $118 billion of fee-paying AUM on July 1. We expect HPS to add approximately $450 million of revenue, including $225 million in management fees in the third quarter of 2025. We expect HPS to positively impact BlackRock's overall effective fee rate by approximately 0.6 of a basis point. Performance fees of $94 million decreased from a year ago, reflecting lower performance revenue from private markets, liquid alternatives and long-only products. Quarterly technology services revenue and subscription revenue was up 26% compared to a year ago. Growth reflects sustained demand for our full range of Aladdin technology offerings and the impact of the Preqin transaction, which closed on March 3.

Preqin added approximately $60 million to second quarter revenue. Annual contract value, or ACV, increased 32% year-over-year, including the Preqin acquisition. ACV growth increased 16% organically, also including the impact of currency exchange tailwinds. Total expense increased 14% year-over-year, reflecting higher compensation, sales asset and account expense and higher G&A. Employee compensation and benefit expense was up 12%, reflecting higher head count associated with the onboarding of GIP and Preqin employees and higher incentive compensation linked to higher operating income. G&A expense increased 16%, primarily driven by the GIP and Preqin acquisitions and higher technology spend. Sales, asset and account expense increased 14% compared to a year ago, primarily driven by higher direct fund expense and distribution costs.

Direct fund expense was up 23% year-over-year, mainly due to higher average ETF AUM and net inflows. Our second quarter as-adjusted operating margin of 43.3% was down 80 basis points from a year ago, partially due to the impact of lower performance fees. We'll continue to execute on our financial framework of aligning organic growth with controllable expenses. This approach has yielded profitable growth and operating leverage in good markets, and we believe it adds more resilience to our operating margin when markets contract. We welcomed approximately 800 new colleagues to BlackRock following the close of the HPS transaction.

Inclusive of the HPS acquisition impact at present, we would expect a low teens percentage increase in 2025 core G&A expense with the onboarding of GIP, Preqin and HPS as the main driver of the year-over-year core G&A increase. In addition, we'd expect our adjusted compensation to net revenue ratio to be modestly higher due to compensation associated with performance-related revenues from HPS. Our capital management strategy remains, first, to invest in our business to either scale strategic growth initiatives or drive operational efficiency and then to return excess cash to shareholders through a combination of dividends and share repurchases. At times, we may make inorganic investments where we see an opportunity to accelerate growth and support our strategic initiatives.

At the closing of the HPS transaction, we issued and delivered approximately 8.5 million BlackRock SubCo units subject to 2- to 3-year lockup periods. SubCo Units are exchangeable on a one-for-one basis with BlackRock common stock. We also issued approximately 1 million BlackRock restricted stock units, primarily for retention of HPS employees. Additional SubCo Units may be issued in approximately 5 years, subject to achievement of certain post-closing conditions and financial performance milestones. If all contingent consideration is achieved, all SubCo Units are exchanged for shares of common stock and all RSUs vest and are settled as common stock, we do not expect to issue more than approximately 13.8 million additional shares of common stock in aggregate.

SubCo Units issued will be included in our as-adjusted diluted shares outstanding and will be captured in our as-adjusted results going forward. We repurchased $375 million worth of common shares in the second quarter. At present, based on our capital spending plans for the year and subject to market and other conditions, we still anticipate repurchasing at least 375 million of shares per quarter for the balance of the year, consistent with our January guidance. In May, we made a minority investment and established a strategic alliance with Generation Life with the goal of developing investment solutions for Australian retirees.

Last week, we announced our agreement to acquire ElmTree Funds, a real estate investment firm with $7.3 billion in client AUM, of which $3.1 billion is fee paying. The transaction is expected to close in the third quarter of 2025, subject to regulatory approvals and customary closing conditions. In the second quarter, BlackRock generated total net inflows of $68 billion. Excluding low-fee institutional index outflows, BlackRock's net inflows were $116 billion. ETF net inflows of $85 billion were diversified by channel, and over 1/3 were driven by our clients in Europe using local ranges. Fixed income ETFs led inflows with $44 billion and active ETFs and digital asset ETPs added $11 billion and $14 billion, respectively.

Retail net inflows of $2 billion reflected continued strength in Aperio and our systematic liquid alternatives funds. Institutional active net inflows of $7 billion were driven by insurance client fixed income mandates and strength in infrastructure, private credit and liquid alternatives. Institutional index net outflows of $48 billion were impacted by a single client redemption of $52 billion, primarily from fixed income. Our institutional channel delivered 3% long-term organic base fee growth in the quarter, benefiting from client demand for active and alternatives. Finally, our scale and our active approach with clients around liquidity management are driving sustained growth in our cash platform.

Cash AUM is up 25% over the last year, and we generated $22 billion of net inflows in the second quarter. The BlackRock platform is powered by foundational growth businesses linked to long-term growth in capital markets and fast-growing client and product channels. By combining BlackRock's capabilities with GIP, Preqin and HPS, we've laid the groundwork for an exciting future. We're already steadily delivering above 5% organic base fee growth and our new colleagues from HPS are only going to help us build from here. There is a bright future ahead to grow with clients, build great careers for our employees and deliver profitable growth for our shareholders. I'll turn it over to Larry.

Laurence Fink: Thank you, Martin. Good morning, everyone, and thank you for joining the call. Over many years, BlackRock has worked to serve the ambitions of each and every client around the world from the largest asset owners to individuals, just getting -- with a start with investing. We design and deliver strategies and products that fit their unique long-term needs and aspirations. We delivered in a way that best serves each client, whether it's through whole portfolio solutions, opportunistic investments or customized models and SMAs. Throughout BlackRock's history, we've been relentless and anticipating the future needs of our clients and taking strategic actions to evolve for them. Our sustained multiyear growth has been powered by our whole portfolio approach.

We were the first provider to blend active and index at scale through our acquisition of BGI and iShares. Our integration of active and index investing propelled the next 15 years of success for our clients and shareholders. iShares AUM was about $300 billion when we announced our acquisition. And today, it's approaching $5 trillion. And now we're building on our fundamental -- our foundational platform to redefine the whole portfolio again by bringing together public and private markets across both asset management and technology. That foundational platform has powered performance for clients and sustained organic base fee growth through cycles. We believe our expansions can drive even higher growth.

Our trust and comprehensive relationships we have with clients across our core businesses like Aladdin, ETFs, fixed income and retirement are now driving even a broader -- with even a broader opportunity set. We're seeing secular demand for capabilities we developed in recent years like digital assets, active ETFs, systematic strategies and customized SMAs through Aperio and SpiderRock. The strength of BlackRock platform is also expanding the growth potential of GIP and HPS. They're both premier firms in their own right, but they recognize how our client relationships and the completeness of our platform could help us all achieve new heights together.

BlackRock's ethos of change, the integration of firms and the best parts of their culture, that's what allows us to be more adaptive with our clients. Our history of integration is very different, and it sets us apart from any other public or private markets firm in the industry. BlackRock's breadth and scale has differentiated us with our clients of all sizes worldwide. We're delivering an integrated approach to help our clients across all aspects of public and private markets investing. We enable a seamless view into investment management into technology and data on one single platform.

We remain steadfast in our One BlackRock culture, making sure clients have access to all of BlackRock in a comprehensive, consistent way in every region with every client. Our long-standing relationships and history of reinvention are resulting in a higher, more diversified organic base fee growth. We're now generating 6% organic base fee growth for the second quarter and the first half of 2025 and 7% over the last 12 months. Revenues, operating income and earnings per share each grew double digit. Total inflows were $116 billion, excluding the index activity, Martin mentioned. Growth is being powered by both our largest core businesses and newer initiatives. iShares ETFs have had a record first half inflows.

Our technology ACV growth reached a fresh high of 16%. These strong fundamentals alongside client demand for private markets, digital assets, Aperio and systematic strategies propel another consecutive quarter above target organic growth and a record AUM of $12.5 trillion. Our global reach delivers diversification and upside to our platform with gains in international currencies lifting AUM by over $170 billion in the quarter. We manage $4.5 trillion for -- in AUM for clients outside the United States. Many of our largest growth opportunities are outside our home market, including our work in India and the Middle East alongside our established presence in Europe and Asia.

BlackRock is executing on a deepening set of opportunities across technology and data in public and private markets. Momentum is only accelerating, and many of our recent milestones have not yet reflected in our results. Two weeks ago, we closed our acquisition of HPS Investment Partners. We're excited to welcome Scott, Scott and Mike and the entire HPS team to BlackRock. We see immense growth ahead for our combined franchise. Together, we'll be able to serve investors and borrowers across all of the private financing needs. Client feedback has been extremely positive as we integrate GIP, HPS and Preqin. For many companies, periods of M&A contribute to a pause in client engagement. We're seeing the opposite.

Clients are eager to put more capital to work with BlackRock. They appreciate our reputation as long-term investors and partners were not transactional. We're helping them invest in compelling long-term growth themes like the global needs of new infrastructure investments in the fast-evolving debt financing landscape. These are creating differentiated private market opportunities for our clients. At the end of June, we marked the major milestone with a final close of GIP V's flagship infrastructure strategy. It surpassed its target raising $25.2 billion. That's a validation of how clients are embracing the logic of the BlackRock GIP combination. Many would expect a change in ownership to dampen fundraising.

In our case, it ultimately ended up driving an even higher fundraising ability. GIP V represents the largest ever client capital raise in a private infrastructure fund, and our AI partnership continues to attract significant capital interest, including the recent additions of Kuwait Investment Authority and Temasek. The diversification benefits and potential for higher returns offered by private markets also make them an attractive investment for retirement accounts, a space where BlackRock has been a leader. We were recently selected by the great, great trust company to provide a custom target date fund glidepath that strategically allocates across public and private markets.

We have a wealth of expertise in the defined contribution space, and we're looking to expand across to private markets across a variety of retirement solutions. Retirement is core to BlackRock. In the United States and internationally, we are a trusted expert in advising clients, advising governments and policymakers on how they can help their constituents achieve a more secure futures and retire with dignity. Demographic shifts and financial pressures are driving governments and corporations to rethink their retirement plans and the retirement systems, putting significant money in motion. In the Netherlands, for example, I transitioned from defined benefits to a hybrid form of defined contribution is well underway.

BlackRock is working with clients to manage this transition and improve investment outcomes for plan members. We had a related $30 billion outsourcing mandate with a Dutch client fund in early July. We take a blended approach of being deeply local and powered by our global platform. We deploy capital in a public and private markets in every country in which we operate and beyond. And we are consistently studying what's driving capital flows both within each country and within each region. Our ability to execute at scale at the local levels differentiates our international business.

We're bringing a global framework to India through our Jio BlackRock offering in partnership with JFS and Reliance, who already serves hundreds of millions of individuals across India. There are huge advancements taking place through the digitization of currency and identification, but India remains a country of savers, not investors. Our joint venture, Jio BlackRock recently launched its first funds, raising over $2 billion with over 67,000 customers. We look forward to helping more and more people participate in the growth of local and global capital markets and global connections. Our acquisition of Preqin will be a key to enabling more transparency and clarity in private markets.

In just the first few months since our closing of the Preqin acquisition, we've seen strong early demand from both GPs and LPs as they are looking to better analyze and benchmark their private market allocations. It's through better analytics, standardized benchmarks and more widely available performance data, we can close the information gap and enable even more future growth in private markets investing. In the public markets, our iShares business continues to be a powerful growth engine and a key driver of industry innovation. After nearly 30 years in approaching $5 trillion in assets, innovation remains at the heart of our franchise.

Our newest investments and product launches from just over the last few years are driving outsized growth, contributing to record flows in the first half of 2025 and 12% organic base fee growth in ETFs this quarter. Our active ETFs delivered $11 billion of net inflows, and our digital asset products continue to set new records. IBIT, at quarter end, crossed over $75 billion in AUM with another $12 billion of net inflows. As of this morning, it crossed over $80 billion. iShares ETPs are bridging the traditional capital markets with fast-growing cryptocurrency markets. They're also bringing new investors to the iShares brand.

Nearly 1/3 of the investors who first came to BlackRock for IBIT have gone on to purchase other iShares products. It's this type of capability expansion that drives durable growth and new client opportunities for our business. From category innovation and iShares to new ventures across the world, the investments we made across our platform are paying off. Many of the categories that are leading our growth barely existed 2 years ago, categories like active ETFs, digital assets and our scaled private markets franchise. Just as importantly, BlackRock's core businesses like ETFs, Aladdin and cash management continue to be a growth engine for the firm and are cornerstones of many client relationships.

A lot of firms got out of the cash business after the financial crisis when fee waivers were in place during a sustained period of low rates. But we recognize a simple thing. Every client needs to hold cash. Cash management has been the first entry point for many of our clients, who have gone on to build large mandates with BlackRock. Our cash AUM is nearly $1 trillion, and I think it's remarkable considering we're not a direct retail business or a DTC bank. At BlackRock, we think of cash as another avenue for innovation.

We see a great untapped opportunity for cash and liquidity, where people want to use the technologies of digital assets to access traditional instruments, like treasuries. Our tokenized liquidity fund now has $3 billion in AUM and what started as a small corporate investment and asset management relationship with Circle in 2022 has grown meaningfully. We delivered a significant gain to shareholders this quarter in connection with the IPO and subsequent trading activity, and we now manage more than $50 billion for Circle stablecoin cash reserves. We're entering our seasonally strongest back half of the year with considerable momentum and a robust pipeline. Our recent closing of HPS will help us offer even more to clients.

We believe our clients and shareholders will be beneficiaries as GIP, HPS and Preqin are now all coming together in a shared BlackRock story. We are intentionally organizing to bring clients under one unified firm, not a collection of enterprises, and we have aligned our cultures and aligned each and everybody's interest. The opportunity to deliver the full reach of BlackRock's capabilities to more individuals, to more companies and governments and regions is greater today than ever before. Our comprehensive platform is deeply connected to our clients to the capital market and to the future trends that are driving portfolios. These are just the early days in our next phase of growth at BlackRock.

Operator, let's open it up for questions.

Operator: [Operator Instructions] We'll take our first question from Michael Cyprys with Morgan Stanley.

Michael Cyprys: With the number of acquisitions closed over the last year now under your belt, I was hoping you could talk about the progress that you're making here, bringing HPS, in particular, and GIP together with BlackRock, how the conversation is progressing in particular with insurance clients, to what extent you're seeing new mandate wins or expanded relationships there? And then can you just update us on the traction in the wealth and retirement channels as it relates to private market and multiliquid strategies and talk about some of the steps you're looking to take over the next 12 months?

Laurence Fink: Great question. Thank you, Michael. Well, I think as we showed in the closing of the second quarter, the client feedback has been extremely strong. I actually was in Asia this past week, and the opportunities we have with insurance companies with wealth management across Asia and every other region is stronger than we ever imagined. As we said, GIP V closed above our target of 25.2%. Our AIP fund will have a lot of positive announcements in the coming quarters. So we announced in the past quarter that we added Temasek and Kuwait Investment Authority as a part of our investment team.

And we are confident that we'll be able to raise the full $30 billion that we announced in equity. And once we then begin those projects, we'll have to raise another $100 billion in associated debt to finance those type of projects. And we're working with the hyperscalers as we speak right now on this, and we have some really great opportunities ahead of us in that. Those are just 2 examples the opportunities we see with GIP.

There is no question in my mind that with rising deficits with more and more governments, the conversations we're having, whether it's in Europe or the United States or Japan that the role of public-private financing and the role of infrastructure financing is going to grow dramatically. And so we see some huge, huge opportunities. Another big opportunity that GIP just closed was purchasing all the Malaysian airports. It's just another example of the opportunity. And we are still progressing with the proposed announcement of our ports transaction with Hutchison. So all of that is just a good example of some of the growth opportunities we see. But the resiliency and the conversations have never been greater.

Related to private credit and HPS, we're just at the beginning. But we could -- we'll have a lot to discuss in the third quarter, but the flow opportunities of HPS during the period of time of announcement and closing did not abate at all. So we are seeing across the board a very large acceptance of the industrial logic of the combination of HPS, GIP and BlackRock. And I would say that was quite a big difference than when we did the BGI transaction in 2009.

Today, clients are looking at the merits of what BlackRock can do, our history of integration, our history of bringing one culture together, bringing the best of all the acquired organizations to be part of us to build a new foundational structure around BlackRock. On insurance, with having $700 billion of AUM with insurance companies, and that is continuing to grow, we are continuing to see more and more opportunities where we could be driving private markets with the insurance companies that we already manage. In wealth, very, very exciting. If there is a change in the opportunity related to the 5 contributions, it is only going to accelerate the opportunities we have in the private market space with retirement.

50% of our assets that we manage is in retirement. And so the relationships we have with plans is enormous. If you look at our success in LifePath, if you look at our success in our target date products, if you look at our success in what we're trying to do now a LifePath Paycheck where now we have over $500 billion in that alone, our relationships with these supply contribution plans is as strong as ever. We're innovating, we're creating opportunity.

Now if you overlay the opportunity for wealth worldwide, whether it's wealth in Japan, wealth in the United States, wealth in any region, the need, especially here in the United States because you have a much higher threshold related to fiduciary responsibility is going to be analytics and data. And if that moves forward, if there's that opportunity, the need for analytics and data will more than ever create huge opportunities for Preqin and the future opportunity of growth with Preqin eFront. And so we believe all these changes, the integration of -- and blending of both public markets and private markets is going to all be centered around having a base of great analytics and data.

And I am more certain than ever, the acquisition of Preqin alongside eFront is going to be generating much more opportunity for BlackRock. And I believe we are well positioned, whether it's well positioned because of the product profile we have with HPS and GIP and what -- but with the foundational position we're in, in the retirement space in the defined contribution space, overlaying all the analytics data that we have under Aladdin now puts us in a position that we could have broader, deeper conversations with our clients, and I'm very much looking forward to having those deep conversations with each and every client.

Operator: Your next question comes from Craig Siegenthaler with Bank of America.

Craig Siegenthaler: So I actually want to continue with that retirement commentary to Mike's question. So our question is on the potential migration of privates into target funds in the U.S. 40(k) channel. We did see the Great Gray win news in late June. That was a positive sign. But I think BlackRock may be getting ready to launch its own target date fund with private allocation. So I was hoping you could update us on your strategy time line. And also, what are you willing to see from the Department of Labor, the SEC or Congress before you launch your own target date fund with private allocations?

Laurence Fink: Thank you. Martin?

Martin Small: Thanks so much for the question. As Larry mentioned, Craig, more than half the $12 trillion of assets plus that we manage at BlackRock related to retirement. And so building better portfolios retirees is at the heart of what we do. I think we have real ambitions also to bring the same tried and true portfolio construction characteristics that built the DB market. So defined benefit has long been allocating to both public and private markets. If you think of the largest public plans across corporate and across the public sector, they've always been private market investors. That opportunity should be there for individuals and their long-term tax-advantaged accounts as well. We're the #1 DCIO, the defined contribution investment-only firm.

We're a top 5 private markets manager following our recent acquisitions. So we think we have all the building blocks here. As I said on the last call, and I think Larry alluded to, for the opportunity, I think, to be most tangible in larger plans, we'll likely need to see litigation reform or at least some advice reform in the U.S. to add private markets exposure into DC plans. What I would say relative to the call last quarter is we're really encouraged by the recent dialogue with policymakers on these topics and some of the activity by trade associations that I think has been helpful in really building a fact base and consensus around this.

There's still significant work to do, but we feel positive momentum is certainly building. We're really proud of our recent announcement with Great Gray to build and power the glidepath for their public-private target date solution. As I mentioned on the call, I think the real advantage that BlackRock brings here is that we've been doing glidepath technology across target date funds for 30-plus years. We feel that this is a place that we have particular strength and can add a lot of value rather than just rote allocations of X percent to public markets and Y percent to private markets.

That glidepath is so important as you go from the accumulation to the end of the target date and ultimately to a decumulation phase. So with Great Gray, we're going to provide the underlying index equity as well as fixed income exposures as well as our private equity exposures through our product, BlackRock Private Investment Fund, BPIF. We're ultimately working on other products, and we would expect to launch a proprietary LifePath with privates target date fund, I believe, sometime in 2026. So we're excited about that as a way of continuing to bring public-private whole portfolio investing to the retirement market.

Laurence Fink: Let me just add one thing, just the industrial logic and why this is so imperative. If through broadening the investment profile of what could be included in a defined contribution plan, if you believe over a 30-year horizon, you could add 50 basis points, which is not an unrealistic target. It adds 18% to the corpus 30 years later. That should be compelling enough. Now the reality is, though, there is a lot of litigation risk. There's a lot of issues related to the defined contribution business. And this is why the analytics and data are going to be so imperative way beyond just the inclusion. And so this is one thing that we are very certain on.

As this moves forward, the need for analytics and data and the role of Preqin, eFront, Aladdin is only going to be a larger set of opportunities for BlackRock in this space.

Operator: We'll go next to Alex Blostein with Goldman Sachs.

Alexander Blostein: I wanted to ask you guys around profitability. You've made a number of acquisitions, obviously, now they're kind of coming into the run rate. As you think about the adjusted operating margin for the back half, curious to get your thoughts. But also as you pointed out at the Investor Day, the 45% plus adjusted operating margin, obviously, is quite healthy. So maybe help us sort of think through the cadence and scaling of the business as these 2 acquisitions kind of come into the full run rate and you continue to grow some of your faster-growing areas of the business.

Martin Small: Great. Thanks, Alex, for the question. I'll take that one. So we talked about the strategy at Investor Day in terms of growing the business. BlackRock continues to deliver industry-leading margin. The margin in the second quarter of 43.3% was about 80 bps lower year-over-year. That's really partially due to the impact of lower performance fees. Over the cycle, we see a very clear path to continue to target a 45% or greater margin profile. About 75% of that second quarter margin decline is really due to lower performance fees as well as the lower performance-related compensation in the quarter. Just as a reminder, we defer a portion of compensation that's linked to performance fees for talent retention.

So in years where we see higher performance fees, we also see higher deferrals, which impact comp expense in future years. The remainder is really just a margin impact from higher expense offset by acquisitions. So what I'd say is with the HPS acquisition now closed on July 1, as I mentioned in my remarks, we expect low teens percentage increase in our 2025 core G&A. That's primarily driven by the onboarding of our 3 acquisitions. Ex HPS, G&A would remain in our mid- to high single-digit percentage increase range. And at Investor Day, I talked a lot about how we've executed on our financial framework by keeping controllable expenses with inorganic growth since 2023.

That's really driven profitable growth and margin expansion. And we aim to continue to align organic revenue growth and controllable expenses. That's compensation -- that's compensation across base salaries and benefits as well as G&A, right? We think of controllable expenses, traveling together, comp and base salaries and benefits as well as G&A. For the second quarter, our controllable expenses, excluding acquisitions, are in line with our last 12 months of organic revenue growth of 7%. On a go-forward basis, I'd say we're in a period now where expense consolidation from recent acquisitions, it's coloring obviously, the comparisons. And next year will really be a full year where we get the impact of HPS and Preqin.

Those acquisitions are essentially self-funding, and GIP, HPS and Preqin, they've all been double-digit FRE and ACV growers. So once we're through this period of consolidation in the back half of the year, we expect you'll continue to see controllable expense in line with organic base fee growth. That's what we've delivered since we introduced this framework in '23 and over the last 12 months. And so as we start to see that really strong FRE and ACV growth, overall organic growth, I think you can expect us to continue to be able to drive towards our 45% or greater margin profile.

The last thing I'd say is just we have a really strong entry rate, as I mentioned, into Q3. Our entry rate is 5% higher going into Q3. That's pre-HPS. With HPS, it's more like 10% higher in terms of the base fee jumping off point. So I think we have a really sound entry point into the back half of the year, even though we get some more consolidated expenses from bringing these acquisitions together. It's really important to bring people together. We've got a lot of energy about co-locating people on real estate. We know we need to do events where we bring people together. We have to go see our clients.

All of those things in the long term are both growth and revenue accretive for BlackRock.

Operator: We'll go next to Dan Fannon with Jefferies.

Daniel Fannon: I was hoping just on HPS now closed, Larry, you mentioned the growth there has been strong. I was hoping you could put some numbers around recent flow trends there. And as we think about the second half of the year, what products are in market and how we should think about organic growth or fundraising for that part of the business for the remainder of the year?

Laurence Fink: Good. I want to turn that to Martin. .

Martin Small: So thanks for the question. Definitely, an exciting time at BlackRock and for our clients in private markets. I think we talked a fair amount about this at Investor Day, but I'll give a little bit more color. We're obviously looking to scale private markets fundraising through a systematic approach to our clients. Now integrating GIP and HPS, we have a really robust and I think exciting road map for '25 as well as the out years, which includes the next vintage of several strategies and thematic products. Let me just give you sort of a list of the things that are out in the marketplace today. We have fundraising going on across mid-cap and emerging markets infrastructure equity.

We have investment grade, high-yield and credit-sensitive infrastructure debt, direct lending and junior capital, private equity secondaries, real estate debt and some more targeted strategies in Europe and Asia on real estate equity. As Larry and I both mentioned on the call, we successfully closed GIP V, surpassing its $25 billion fundraising target. We also closed our secondary and liquidity strategies II, SLS II, the next of our secondaries fund at over $2.5 billion. At Investor Day, we talked about targeting $400 billion in gross private markets fundraising through -- from 2025 to 2030. We believe that will be led again by our infrastructure and private financing solutions platforms. We're really building on very strong absolute and relative performance.

I think very strong DPIs on the platform relative to the peer group, this power of vintage, LP re-ups and track record, we really feel we're in the best position that we've ever been in there to get closer to clients. I wouldn't expect that $400 billion to be a straight line average for 5 years. So don't just take this last 6 months and average it. We'd expect more of a ramp-up to higher fundraising levels in the later years, call that 2028 through 2030. And again, as Scott Kapnick said, as Adebayo said, as Larry said, as Raj said, consistent investment performance is the license to grow.

So all of our teams are going to be blisteringly focused on delivering for clients as the key input to our fundraising goals. So I think between now and the end of the year, we'll continue to execute on those targets, bringing us towards our $400 billion in gross fundraising out to 2030.

Operator: We'll go next to Ben Budish with Barclays.

Benjamin Budish: Maybe just another follow-up on the private markets strategy. So you announced the acquisition of ElmTree, a smaller tuck-in, but just curious, how are you thinking about inorganic opportunities? Is this sort of an acquisition that had been on your radar? Is it something that's sort of that you had been seeking or came across your desk? How does it kind of fit in? And should this be indicative of maybe future M&A? Or do you feel pretty good about the assets that you have today as they are?

Martin Small: Thanks so much for the question. So our main focus right now is fully integrating our acquisitions and realizing the planned synergies. It's about delivering great integration experiences for all of our clients that are seamless and our employees. I think as we've shown in our results, we don't need M&A to meet or exceed our organic growth targets. We were doing that before M&A. And now we're running on the trailing 12 months at 7% organic base fee growth. So these capabilities are helping us lift through our targets. So we're going to continue, I think, to be very prudent, selective, tactical with our capital and financial position and in how we look at M&A.

We've made several smaller tactical acquisitions to bolster certain areas of the business. The planned acquisition of ElmTree, which we're very excited about, which brings triple net lease, the intersection of real estate and credit, which we think is very germane to our insurance clients and our wealth clients. And also previous acquisitions like Kreos in growth-oriented lending and SpiderRock, which helps extend our capabilities and SMAs. We also announced a minority investment in Viridium earlier this year, which also, I think, is accretive to private credit and alternatives. So these acquisitions alongside with our minority investments, they bring incremental capabilities to better serve clients and generate attractive shareholder returns.

And so as I said at Investor Day, I think because of large-scale M&A in the near to intermediate term, we've rounded out that agenda. We're going to continue to look at things that we think are complementary in terms of capabilities across private markets and technology.

Laurence Fink: I would just add a few other things that we've been building, but organically, and the opportunities we see, we believe fundamentally that every country in the world is going to be attempting to build out their own capital markets. They see the success of the United States, one of the great reasons of the U.S. position in the world today is having a strong banking system and a strong capital market system. We talked about this at an Investor Day. But the -- what we saw in India and what we're trying to do and bring out and expand its retirement system platform there is a good example of the expansion of the global capital markets.

Yesterday, we had a conversation with another very big organization and a strong position in a growing developing country with huge opportunity to do the same thing we're doing with Reliance and Jio BlackRock. We've already announced what we are trying to do in the Middle East and Saudi Arabia related to expansion of a mortgage-backed securities market. So we are not just looking at tuck-in acquisitions, but the opportunity we have to expand our position as more and more countries are expanding their capital markets and playing a bigger role in that.

And I think India is just the beginning where we believe we're going to build out a very large-scale asset management platform in India itself is going to be -- these are the seeds that we are doing that are probably being obscured by all the inorganic things we are doing. But I want to just give you that color that we see the expansion of the global capital markets as a primary driver of future success for BlackRock over the next 5 years.

And having our global footprint being in 100 different countries, just gives us a unique opportunity to be working with more and more governments worldwide, helping them think about how they expand their capital markets and how do they expand their own Pillar 3 retirement system as a leader in retirement. This is a conversation we're having with everybody. And I mentioned in my -- in one of the prior questions related to what's going on in Netherlands, moving from DB to a hybrid DC. These are all big changes, but they present huge and unique opportunities for BlackRock.

And so inorganic opportunities are still going to be -- if they're compelling, we will still be doing those types of transactions, especially tuck-in areas in private markets or tuck-in technology. But the opportunity to grow organically as the capital markets grows worldwide is something that we are very excited about over the next 5 years.

Operator: We'll go next to Bill Katz with TD Cowen.

William Katz: So maybe switching gears a little bit. Just thinking through from here. In a world of consolidating the recent transactions and being "more prudent" going forward. How do you think about capital returns? It seems like you're going to be generating a ton of free cash flow over the next several years. Just trying to think through the interplay between dividend and buyback and maybe the total payout ratio?

Laurence Fink: Martin should be taking.

Martin Small: Bill, thanks so much. I appreciate the question. Hope you're having a great summer. As I mentioned at Investor Day and again a little bit today, our capital management strategy continues to be to invest first in the business and then return cash to shareholders through dividends and share repurchases. We repurchased 375 million worth of common shares in the second quarter and expect to purchase at least 1.5 billion worth of shares for full year 2025, subject to market and other conditions. Our share repurchases, again, they're an output of rather than an input to our capital management strategy. We invest first and whatever falls out is the shareholder return.

I'd say on dividends, we recognize very much that dividend income and growth is an important part of many of our investors' portfolios. We continue to target a dividend payout ratio between 40% to 50%. And over the last 5 years, we paid an average of 50% of our GAAP net income and dividends. We steadily increased the dividend since we started in 2003. And over this time, our dividend per share has grown at a CAGR of over 15%.

Over the last 5 years, we paid on average 50% of our GAAP net income and dividends and our dividend payout ratio is intended to ensure that the growth in operating and net income under our 2030 strategy that we talked about at Investor Day, will translate into commensurate dividend growth at high single to low double-digit rates. And as I mentioned at Investor Day, and I'll say it here again to avoid the payout ratio impact from the noncash amortization of acquisition-related intangibles, we'll adjust this amortization in calibrating our dividend to the payout ratio.

But again, we think that the 2030 strategy that we discussed at Investor Day should translate into dividend growth at high single to low double-digit rates.

Operator: We'll go next to Brian Bedell with Deutsche Bank.

Brian Bedell: Just if I can maybe switch gears a little bit to iShares in Europe and fixed income in particular. If you can just talk about how you're continuing to see -- you're continuing to see strong organic growth in the fixed income, iShares franchise. Maybe if you can talk about where you see yourselves on the long-term development of substitution of fixed income securities for iShares ETP? And then especially in Europe, I think you talked about this at Investor Day. You see pretty strong growth potential as Europe sort of democratizes their retail investor base. How do you see that progressing here coming into the second half?

And you see that more just on the equity side or the alternative iShares or also on the fixed income iShares side?

Unknown Executive: So thanks for the question. More growth, more people using iShares ETFs along the active side of the world, alongside of active using the wrapper for hedging purposes, just more and more and more use cases that we're seeing, and it is really caught on in Europe now as a primary wrapper end market to be involved in. So we continue to show industry-leading results. We have the #1 share of global ETF flows year-to-date as the iShares and ETF become the vehicle choice, and we're the industry leader and probably have the most diversified offering of anyone.

That diversification is reflected in our organic revenue, which is nearly 3x the next largest issuer and inflows where 38 iShares products had over $1 billion of net inflows this quarter. So that diversification is working for us. We're seeing outsized strength from our highest conviction growth areas like fixed income, active, now digital assets and European listed ETFs. And Martin mentioned before, bond ETFs led the way at $44 billion, followed by digital assets, $14 billion, active ETFs, $1.1 billion and precision and other at $1.8 billion. Europe, as you highlighted, saw $29 billion of net inflows.

So we will continue to evolve our ETF business and increase access to all kinds of markets more efficiently, more transparently and conveniently. So this is a business that we continue to capture the flag globally and also help our clients expand the use of that product to areas that we didn't think of that we're responding with solutions to our clients with this wrapper.

Laurence Fink: Let me just add a few more things. As the European markets evolve and change and as regulation really focused on the remunerations, the beginnings of the access to ETFs in Europe is only just beginning. Europe is 5, 6 years behind the United States in terms of access. It's just all evolving now. iShares is about $1 trillion in Europe, 40% market share, and we are in a position now, especially in like countries, as we said, changing away from defined benefit to defined contributions in Europe, you're going to see more and more the financial advisory organizations of Europe. You're going to see more and more of the digital organizations in Europe, adapting more and more ETF-based strategies.

Similarly, as we've seen in the United States. So we believe Europe is just starting to launch the same type of growth rates that we saw in the United States in terms of the adaptation of ETFs. And if you now intersect the role of digital ETFs, to me, that is creating more and more enthusiasm, more access to ETFs, more interest in ETFs. And as I said in my prepared remarks, we are seeing more and more clients, who first started using ETFs or IBIT are now looking at ETFs and iShares as a vehicle to expand way beyond their first entry into a digital platform. So we're very well positioned.

And I look at the opportunities in Europe similarly to the type of growth rates we saw in the U.S. over the last 5 years.

Operator: We'll go next to Patrick Davitt with Autonomous Research.

Patrick Davitt: You touched on this briefly, but stablecoin is obviously top of mind for many investors on the back of Circle's IPO, and you're managing that money has been a strong boost to those flows for you. So through that lens, could you speak to how you see what looks like a fairly significant emerging opportunity for asset managers to manage these reserves? Is there a pipeline of other potential mandates, like the Circle 1? And then finally, within that, maybe some color on why these platforms can't or don't want to just invest the treasuries directly versus using your money funds or other people's money funds?

Laurence Fink: Yes, in my world tour, working with central banks and regulators, conversation about stablecoin is vibrant right now. And so what we are going to see is more competitive type of stablecoins. They may have some role in diversifying away from dollar as we digitize more and more currency. But the opportunity for BlackRock in our world in both stablecoin or all the entire role of tokenization of financial assets, tokenization of real assets like real estate is going to be the future. And we believe more than ever before that we are as well positioned as any organization in the world to be part of the conversations as stable coins are going to be growing and developing.

Related to buying money market funds or buying -- having a role, playing a role as a manager, those conversations are broad. But if you're going to show that a stablecoin truly is a substitute for a currency, it must be invested in those currencies bonds. And so I would hope that, that will remain as a consistent feature of each and every stable coin. And I believe that is going to be one of the big issues. There is questions remaining with some other stablecoins as to what is the collateral backing some of that.

And if we're going to put our name associated with it, we believe each and every stable coin should be invested in short-term government bonds that backs that stablecoin. We want to make sure it's legitimatized, but it's also safe and it's a great digital substitution for each and every country's cash as a cash substitute. And I think that is going to be moving very rapidly, but it is surprising even to me, the dialogues that we're having with central banks and how they are looking to now use their own digitized currency or using stablecoins to digitize their currency.

And so we believe this is just the beginning, and we will be playing a significant role as stablecoins are developed in each and every country. They believe it will fit the needs of their own monetary policy, and there are policies related to their capital markets.

Operator: Ladies and gentlemen, we have reached the allotted time for questions. Mr. Fink, do you have any closing remarks?

Laurence Fink: Yes. Thank you, operator. I want to thank all of you for joining us this morning and for your continued interest in BlackRock. Our second quarter results demonstrated the strength of our global relationships and how our platform is powering the portfolios of the future. We're so excited to welcome our new colleagues from HPS to our global offices in the coming months, and we're working closely together to better serve our clients across all their investment needs, which in turn should drive stronger and more durable results as we did in this quarter for you, our shareholders. Everyone, thank you. Have a good summer. Enjoy the quarter. Bye-bye.

Operator: This concludes today's teleconference. You may now disconnect.

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DATE

Tuesday, July 15, 2025 at 4:30 p.m. ET

CALL PARTICIPANTS

Chief Executive Officer — John M. Hairston

Chief Financial Officer — Michael M. Achary

Chief Credit Officer — Chris Ziluca

Need a quote from one of our analysts? Email [email protected]

TAKEAWAYS

Net Interest Margin (NIM): NIM expanded six basis points compared to the prior quarter in Q2 2025.

Adjusted Return on Assets (ROA): Adjusted ROA was 1.37% for the second quarter of 2025, reflecting Sable Trust Company transaction expenses.

Adjusted Net Income: Adjusted net income was $118 million, or $1.37 per share, for the second quarter of 2025, down from $120 million, or $1.38 per share, in the first quarter of 2025.

Pre-Provision Net Revenue (PPNR): Increased $5 million, or 3% sequentially, reaching 1.95% of assets.

Net Interest Income (NII): Rose $7 million, or 2% quarter-over-quarter.

Fee Income: Increased $4 million, or 4% sequentially; trust fees were the primary driver due to contributions from Sable Trust.

Expenses: Up $5 million, or 2%, after adjusting for one-time items; Sable Trust acquisition accounted for $2.5 million of this increase.

Efficiency Ratio: Improved to 54.91% in the second quarter of 2025 from 55.22% in the first quarter of 2025.

Loans: Grew $364 million, representing 6% annualized linked-quarter growth, with guidance unchanged for low single-digit annual growth.

Deposit Balances: Down $148 million, attributed primarily to certificate of deposit (CD) run-off and reduced public funds; DDA and interest-bearing transaction balances both increased.

DDA Mix: Rose to 37%, with management guiding 37%-38% by year-end 2025.

CD Repricing: $2.5 billion in maturities repriced from 3.85% to 3.59%, with an 86% renewal rate; an additional $3.6 billion will mature in the second half of 2025, expected to reprice near 3.5%.

Cost of Funds: Decreased two basis points to 1.57%, driven by lower deposit costs.

Loan Yield: Up two basis points to 5.86% overall; fixed rate loan yields increased thirteen basis points to 5.17%.

Bond Portfolio Yield: Rose eight basis points to 2.86%, aided by reinvestments and fair value hedge contributions.

Capital Ratios: Tangible common equity (TCE) at 9.84% and common equity Tier 1 at 14.03% post-acquisition.

Allowance for Credit Losses (ACL): Maintained at 1.45% of loans, down four basis points from last quarter.

Net Charge-Offs: Net charge offs increased to 31 basis points; full-year 2025 guidance unchanged at 15-25 basis points.

Criticized Commercial Loans: Declined 4% to $594 million; nonaccrual loans fell 9% to $95 million.

Share Repurchases: 750,000 shares repurchased, exceeding the previous level, with approximately $40 million spent and intent to sustain this capital return pace.

Organic Growth Initiatives: Added ten new bankers and finalized five new Dallas-area financial center sites, with three openings slated for late 2025 and the remainder in the first half of 2026.

SUMMARY

Management maintained full-year loan growth targets and predicts modest NIM expansion in the second half of 2025, with NII growth guidance of 3%-4%. Fee income strength is expected to persist in Q3 and Q4 2025, driven by full-period contributions from Sable Trust and continued improvement in treasury and card-related revenues. Expense guidance remains unchanged, with Sable Trust integration contributing $2.5 million to expense increases. Management reinforced capital deployment priorities, specifying an expected common equity Tier 1 operating level of 11%-11.5% and a TCE comfort zone near 8%, as discussed during the Q2 2025 earnings call. Portfolio credit quality remains favorable, with no specific sector or geographic weaknesses identified, and inflows into criticized loans described as limited.

Mike Achary stated, "The difference is less than a million dollars on NII, and it's about one basis point on NIM for the second half of 2025." NIM guidance is positioned as relatively resilient to changes in Fed action during the second half of 2025.

Leadership clarified share repurchases will target a dollar level rather than a fixed share count, dependent on market valuation.

John Hairston emphasized, "The bigger driver is simply gonna be net new loans to net new clients." Construction and development is the only segment not growing and related headwinds are expected to ease by early 2026.

Management expects continued CD repricing at lower rates, forecasting at least an 81% renewal rate in the second half of 2025, along with more favorable deposit cost trends as CDs mature.

The organic hiring plan targets a compounded 10% increase in bankers annually, with management open to exceeding this if high-quality talent becomes available.

INDUSTRY GLOSSARY

DDA (Demand Deposit Account): Non-interest-bearing deposit account used primarily for transactions and business operations.

NIM (Net Interest Margin): Ratio expressing the difference between interest income generated and interest paid out, measured as a percentage of average earning assets.

PPNR (Pre-Provision Net Revenue): Earnings prior to accounting for credit loss provisions, useful for assessing core profitability trends.

CD (Certificate of Deposit): Fixed-term deposit product that generally pays higher interest in exchange for leaving funds on deposit for a specified period.

ACL (Allowance for Credit Losses): Reserve on the balance sheet reflecting management's estimate of potential credit losses in the loan portfolio.

SNC (Shared National Credit): Large syndicated loans shared among multiple financial institutions, typically reviewed by regulators jointly.

Full Conference Call Transcript

John Hairston: Thank you all for joining us on a busy reporting day. The February was another strong quarter. The results reflect our continued focus on profitability, efficiency, and meaningful progress in our multiyear growth plan. NIM expanded six basis points, and we achieved an ROA of 1.37% after adjusting for expenses related to our transaction with Sable Trust Company, which closed on May 2. As expected, loans grew $364 million or 6% annualized due to stronger demand, increased line utilization, and lower payoffs. We remain focused on more granular, full relationship loans with the goal of achieving more favorable loan yields and relationship revenue. Our guidance on loan growth remains unchanged.

We expect low single-digit growth for the year 2025, which infers mid-single-digit growth for the February. Deposits were down $148 million, reflecting a decrease in CDs due to maturity concentration and promotional rate reductions in the quarter, along with a decrease in public funds. However, interest-bearing transaction balances and DDA balances were up in the quarter, and DDA mix actually increased 37%. NIM continued to expand as our average earning assets grew at higher yields and we continued to reduce deposit cost. Our fee income grew again this year, with trust fees driving most of the growth, thanks to the additional team and client book from Sable.

Expenses remain controlled and in line with our expectations, reflecting investments we are making in new revenue producers technology efforts to improve efficiency and client experience. During the quarter, we continued to return capital to investors by repurchasing 750,000 shares of common. We also deployed capital through the execution of our acquisition of Sable Trust. Capital ratios, despite all that, remained very solid with TCE of 9.84% and common equity tier one ratio of 14.03%. We made meaningful progress on our organic growth plan this quarter. We added 10 net new bankers to the team during the quarter, and have solidified the location of five new financial center locations for the Dallas market.

Expect three of these financial centers to open in the back half of 2025 and the remaining two will open in the first half of 2026. We will provide additional guidance on new offices and bankers on the January call. We remain very optimistic for our growth prospects for the rest of the year. The macroeconomic environment remains dynamic. But our ample liquidity, solid allowance for credit losses at 1.45%, and strong capital keep us well-positioned to navigate challenges and support our clients in any economy. Before we continue the call, I want to take a moment to acknowledge the devastating floods that have impacted communities across Texas. Our thoughts are with all those affected.

We are no strangers to the hardships that natural disasters can bring, and we are committed to supporting recovery efforts across the region. As always, we stand ready to serve our communities with the same strength and resilience that define both our company and the people we are proud to serve. With that, I'll invite Mike to add additional comments.

Mike Achary: Thanks, John. Good afternoon, everyone. As John mentioned, our results reflect another quarter of outstanding performance. Our adjusted net income for the quarter was $118 million or $1.37 per share, compared to $120 million or $1.38 per share in the first quarter. Second quarter results included $6 million of supplemental disclosure items related to our acquisition of Sable Trust Company in May of this year. PPNR was up $5 million or 3% from last quarter, and was a peer-leading 1.95% of assets. Our NIM again expanded this quarter but by six basis points and NII was up $7 million or 2%.

Fee income was up $4 million or 4%, and expenses adjusted for one-time items remain well controlled, and were up $5 million or just 2%. Our efficiency ratio improved to 54.91% this quarter compared to 55.22% last quarter. The NIM expansion was driven by higher average earning asset volumes and yields, and lower deposit costs, which were only partially offset by an unfavorable mix related to other borrowed funds. That's all shown on slide 15 of the investor deck. Bond yields were up eight basis points to 2.86%. We had $233 million of principal cash flow at 3.15%, while we reinvested $359 million into the bond portfolio at 4.71%.

Additionally, another $40 million of our fair value hedges became effective this quarter and contributed three basis points to the overall yield pickup. Next quarter, we expect about $102 million of principal cash flow at 3.11% that will be reinvested at higher yields. We expect the portfolio yield should continue to increase as we reinvest principal cash flows at higher rates. Our loan yield for the quarter was up two basis points to 5.86%. Yields on fixed rate loans were up 13 basis points to 5.17%, while yields on variable rate loans were down only two basis points. With no rate cuts expected in the third quarter of 2025, we expect the overall loan yield to again be largely flat.

Our overall cost of funds was down two basis points to 1.57% due to a lower cost of deposits and less favorable borrowing mix, as other borrowings increased compared to the prior quarter. The downward trend in our cost of deposits continued, with a decrease of five basis points to 1.65% in the second quarter. The drivers here were CD maturities and renewals at lower rates. We expect the cost of deposits will be down marginally in the third quarter with an additional reduction in the fourth quarter assuming the Fed cuts rates in September. For the quarter, we had $2.5 billion of CD maturities that matured at 3.85% and were repriced at 3.59%, with a strong 86% renewal rate.

Additionally, our DDA balances increased again this quarter up $24 million. Our NID mix was also up this quarter to 37%. CDs will continue to reprice lower for the rest of 2025 given maturity volume and anticipated rate cuts. Total end of period deposits were down $148 million mostly reflecting the impact of this quarter's CD repricing and other aspects of seasonality. We updated our guidance to reflect our current assumption of two rate cuts of 25 basis points in September and December, but with minimal impact. We expect modest NIM expansion in the second half of 2025 and NII growth of between 3-4% for the year. There's no change to our PPNR or efficiency ratio guidance.

Our criticized commercial loans decreased 4% to $594 million and nonaccrual loans decreased 9% to $95 million. Net charge offs were up this quarter and came in at 31 basis points. Our loan portfolio is diverse, and we see no significant weakening in any specific portfolio sector or geography. Our loan reserves are solid again at 1.45% loans, down four basis points from last quarter. We expect net charge offs to average loans will come in at between fifteen and twenty five basis points for the full year 2025. Lastly, a comment on capital. Our capital ratios remain remarkably strong. We deployed capital this quarter through our acquisition of Sable Trust Company, and a higher level of share repurchases.

We more than doubled the buyback this quarter and bought back 750,000 shares. We expect share repurchases will continue at this level for the foreseeable future. Changes in the growth dynamics of our balance sheet, economic conditions, and share valuation, could impact that view. I will now turn the call back to John.

John Hairston: Thanks, Mike. Let's open the call for questions.

Operator: At this time, I would like to remind everyone in order to wrap the question, please press star then the number one on your telephone keypad. Our first question comes from the line of Michael Rose with Raymond James. Your line is open.

Michael Rose: Hey. Good afternoon, everyone. Thanks for taking my call, my questions. May we can just start on the last topic on buybacks. Mike, you know, just given some of the deregulatory efforts that we've seen here recently, I know you mentioned that buybacks would kind of continue at this pace. But do you have a target CET1 ratio that you think you can you know, kind of operate on, you know, kind of through the cycle just assuming some of the deregulatory effort and the fact that they're likely to, you know, come downhill over time? Thanks.

Mike Achary: Yeah, Michael. Great question. And as we think about capital, the two ratios, obviously, that we probably pay a little bit more attention to is TCE And that's down a little bit because it's stable, but still, you know, very close to 10%. And in the tier one common, that still exceeds 14% even with the acquisition of Sable. So if we think about where those capital levels or where the company is kind of comfortable operating at, I would suggest it's somewhere between eleven and eleven and a half. For tier one common. And then certainly, anyone who knows our company knows that for TCE, it's in the neighborhood of 8%.

Michael Rose: Okay. So as I think about your CSOs, going out to the end of 2027, you know, it looks like the TCE would be around 8%. So would that kind of you know, should we use that as a guide, basically, as we're thinking about buybacks, you know, you know, beyond this year and into '26 and into '27. Is that fair?

Mike Achary: Yeah. Yeah. I think so. And certainly, you know, those levels, again, reiterate that those are levels we feel comfortable operating the company at. Our Board feels comfortable. But they're not necessarily hard lines. So just depending on circumstances, we certainly could go below those levels or operate the company above those levels. As we're doing now.

Michael Rose: Understood. And maybe just as a one follow-up question. Just as it relates to loan growth and kind of the outlook, just give us a general update on kind of the health of borrowers? It does seem know, if you listen to some of the larger guys today that I think we're at a point where even though there's still some uncertainty around tariffs and things like that, I think there's just a comfort level and borrowers are starting to move off the sidelines a little bit. I understand your guidance, but would just, you know, like to appreciate more, you know, what the drivers could be in the near term.

You know, I know utilization rates tick a little bit higher, so maybe that's a trend that could continue. But what's kind of the upper you know, what would drive you to the upper end versus the lower end of your of your guidance? Thanks.

John Hairston: Sure. Yes, Michael, good question. This is John. If Chris or Mike wanna weigh in, they can. Generally speaking, we're really not relying on line utilization to drive the upper end of the range. Certainly, it would help, utilization continues to increase. And it's only going up marginally each quarter, so we're glad to have it. The bigger driver is simply gonna be net new loans to net new clients. And we've had a really good quarter, and I would expect that we'll continue to having good quarters the foreseeable future barring any kind of macroeconomic changes that would cause clients to become more chill.

I will suggest, you know, a quarter ago when we had this call, Michael, you know, there was clearly a disturbance in the force, if you will, people not really knowing how to make, a sense of Liberation Day and how it may impact their own business. I think over the last three months, people, at least in our market areas from Texas to Florida and up in Tennessee, have largely become desensitized to those headlines. And I don't know if I would call it coming off the sidelines as much as think they're just not as, as sensitive to the headline of the day.

And they're back to relying more on whatever the facts may be that they're gonna use to make a decision of what to buy, expand, enter new markets, build a building, what have you. So, I think that's important to note. Since you asked the question about the upper range, I guess I would also call out, you know, the only sector that we didn't enjoy growth this quarter was in, the construction development book. And if you note in the deck on, I got I think that's page nine. Everything's in the green. Health care is a little bit of a push, and c and d was down a little under a million.

The year to date commitments in that sector are actually up a little under $200 million. But as we've talked about in prior calls, it takes a few quarters for a client to burn through their equity in the, in the project. Before they get to our line of credit. So we would anticipate a sustainable, growing c and d book to be somewhere towards the back half of the first quarter of 2026. Or, or the or the following quarter sustainably. So that headwind will dissipate as we move through the year. And if it does, that would eventually lead more to the upper end of the range. All other things being equal.

Michael Rose: Great. So inflection point that you guys are about. Alright. Thanks, guys, for all the color. I'll step back.

John Hairston: You bet. Thanks, Michael, for the question.

Operator: Our next question comes from the line of Catherine Mealor with KBW. Thanks. Good afternoon.

Catherine Mealor: Hi, Catherine. Could you just give us a little bit more of a color around your NIM outlook? I know you've continued to say that you think there's kind of upward NIM trajectory in the back half of the year really, I guess, regardless of what rates do. But, yeah, we've pushed back rate cuts. We now only have two in the in your numbers. And so just kinda help us think through where you think kinda NIM can go for in a stable rate environment and then sensitivity to this cuts in the back half of the year?

Mike Achary: Sure, Catherine. This is Mike, and I'm happy to share some thoughts and color around that. So I think first off, and we did disclose this, I believe, on slide 15 of the deck, For us, for the second half of the year, there really is not anywhere near a material difference between the impact on NII or our NIM If we look at one if we look at zero rate cuts or two rate cuts in the back half the year. The difference is less than a million dollars on NII. And it's about one basis point on NIM. So, certainly, the dynamics are a little bit different in terms of how we get there.

But what we do have baked into our guidance is the two cuts, the one at the midpoint of September and then one in December, both 25 basis points. So assuming those two cuts do occur, the things that, I think are really gonna be the drivers of our ability to continue to expand our NIM in the second half of the year are gonna be largely the things that we experienced in the first half of the year with the addition of, obviously, loan growth. So we're looking at a stable DDA mix. We're at 37% now. We're guiding for that mix to be between 37-38% by the end of this year.

Feel really good about our ability to grow that mix to those levels. Especially given where we are now. We'll continue to reduce our cost of deposits But certainly, if you again, if you go back to slide 15, you can see that over the course of the second quarter, our cost of deposits did begin to level out. And we certainly expect that leveling out to kinda continue in the second half of the year. We do think that we can reduce our cost of deposits by, let's say, a couple of basis points in the third quarter and then probably a little bit more than that in the fourth quarter.

And again, that's really on the heels of an expected rate cut in September. So that is know, really very dependent upon our ability to continue to reprice our CDs lower. And so, again, we've done a pretty good job of that, I think, through this cycle. And even with our cost of deposits kinda leveling out, you know, we think we'll be able to do that in the second half of the year. So in the second half of the year, we have about $3.6 billion of CDs coming off at about 3.62 Those we think will reprice at about three and a half percent or so. So no change in any of our promotional rates right now.

Our probably our best selling CD promotional rate is our eight month at three eighty five, so that continues. Certainly, we also have the loan growth for the second half of the year. We're extremely proud of our ability to grow loans in the second quarter. The 6% linked quarter annualized. You can see in the guidance that we're expecting to kinda continue at more or less that level. For the second half of the year. And on an end of period basis, loans should come in you know, again at that low single digit level year over year. And then finally, we still have a pretty good ability to reprice cash flows coming off the bond book.

As well as repricing fixed rate loans in the maturing. In the second half of the year. So again, back to the 10 basis points the first half of the year. The expansion in the second half of the year won't be at that level. It could be at something close to half that level. But still, we believe firmly that we can expand our NIM by a couple of basis points each in the next couple of quarters. So hopefully, that answered your question. Anything else I can help you with?

Catherine Mealor: It does. No. That was very helpful. A of a lot of great data there. And then giving one follow-up just on the expense side. I know your expense guide is unchanged at the 45% and that includes Sabo coming in this quarter. Is there now that the now that deal is closed, is there any kind of additional insight you can give us into how much of the of the expense base came from that just so we can kinda think about what one more I guess, one additional month of that deal in third quarter kinda could mean versus where the expense growth is coming from some of your hires and all of that?

Just kinda think about trying to think about the cadence of the expense base over the two quarters in the back half of the year? If you look at the second quarter, and again,

Mike Achary: we closed that deal at the end I'm sorry, the very beginning May we had two months The increase in our expenses and the second quarter related to Sable was about $2.5 million or so.

Catherine Mealor: Okay. Great. Okay. Great. Thank you, Gregor.

Mike Achary: You bet. Thank you.

Operator: Our next question comes from the line of Casey Haire with Autonomous Research. Your line is open.

Casey Haire: Great. Thanks. Good afternoon, everyone. I wanted to follow-up, I guess, on the loan growth again. The CRE showed very strong for you guys. We've been hearing that's been tough slotting just given weak demand and just a little more color as to what you're seeing to drive such strong results.

John Hairston: It was a little muddled, you said, on the CRE sector? Casey. Is that right? Yeah. Yeah. Commercial. The difference yeah, the difference quarter to quarter there was a little less payoffs. Very successful owner occupied real estate campaign in the business and commercial banking sectors. And then we ended up with some bridge financing numbers that were pretty attractive out of the investor CRE group. That shows up in CRE, not C and D. Does that answer your question, or do you want a little more

Casey Haire: No. That's great. That's great. Sounds like Yeah. Payoffs. Slowing down. Okay. And then just switching to, m and a. I know you guys sound very organic. And heads down here. You did enter the year as, you know, looking to you know, being acquisitive. Just wondering is what is the m and a and market like in your markets and, you know, is active? And what would draw you back into you know, looking to be acquisitive?

Mike Achary: So, Casey, this is Mike. And I guess first off, the narrative around M and A for us is completely unchanged with the narrative that we talked about on the first quarter call, so back in April. And back then, we said, that right now, and a is just not something we're focused on. But we did caveat that by saying, you know, that may change or could change at some point down the road. If we look at our capital priorities first and foremost, is to support organic balance sheet growth and more specifically, our organic growth plan. Second is return of capital to shareholders through dividends and buybacks. And then third is M and A opportunities.

You know, that may or may not surface down the road. So I don't know that I wanna be any more specific about that other than to maybe add you know, the way we think about m and a down the road, think, is opportunistic.

Casey Haire: And

Mike Achary: you know, it's hard to put really a hard label on what that is or isn't. You know, until those circumstances arrive.

Casey Haire: Okay. Great. Thank you.

Mike Achary: Yep. Bet.

Operator: Our next question comes from the line of Ben Gerlinger with Citi. Your line is still

Ben Gerlinger: Hi. Good afternoon. Hey, Ben. I don't know if Ben's up.

Ben Gerlinger: Hi. Sorry. I didn't know if you guys said it in the prepared remarks. But I know that the SNCs are below 10%. And you guys have good core organic growth. Is it fair to think that the shared national credits are at a floor on a dollar percentage or dollar rather than percentage. Or is it usually still specs some runoff?

John Hairston: No. It's a it's about a push. If you look at the, the numbers on I've I've it what's the slide number for this next slide?

Mike Achary: Yeah. It's slide 10.

John Hairston: Yeah. We're running about nine and a half percent, and I think between nine and ten is about where that's gonna stay. And so, the book on an absolute magnitude basis, probably grows as loans grows as we maybe feel good about one particular sector. But at the end of the day, that percentage will not get above 10%.

Ben Gerlinger: Gotcha. Okay. The question was should you expect any big runoff? The answer to that is probably also no. Think where it is right now is where we're comfortable.

Ben Gerlinger: Got it. Okay. Yeah. That helps. And then whoever wants to field it either. But when you when you think about rate cuts, I know that when they first started cutting rates, it kinda seemed almost predetermined that we're gonna get 50 or potentially a 100. It's not obviously ended up with a 100 basis points for the first wave. It gave you some flexibility on deposit pricing. But if it ends up being like a fed only moves 25 bps or so, When you think about the flexibility, should we expect kind of the same relative beta despite it being, like, 25 bps? Is this something a little bit more muted considering the first 100 is the easiest 100?

On pricing on the right hand side.

Mike Achary: Yeah. Ben, this is Mike, and it's a really good question. And I would suggest that you know, if the Fed does move, let's say, 25 in September 25 in December, that, you know, we would achieve something pretty close to where our cumulative where we think our cumulative deposit data is gonna end up for the cycle. So for total deposit beta, that's 37 to 38. We're sitting at 35 now. So I think that would creep up closer to that expected level. And then on interest bearing deposits, we expect for the cycle to be at fifty seven fifty eight. We're sitting at 55 now.

So similar to the total, you would see the interest bearing deposit beta start to kinda creep up. You know, we'll we'll be very proactive in reducing our deposit costs if and when the Fed does move as we've been so far this cycle. You know, we have 70%, 72% of our loans are variable, so those will price will reprice down. And so we have to be very cognizant of that back. And then also reduce our funding costs accordingly. And I think we've done a real good job of that during this cycle. And have done that mostly through you know, repricing our CDs, and it's it's worked out pretty well.

Ben Gerlinger: Gotcha. I appreciate the color. Thanks, guys.

Operator: Our next question comes from the line of Brett Rabatin with Hovde Group. Your line is open.

Brett Rabatin: Hey, good afternoon, everyone. Wanted to ask about going back to the loan growth one more time. Wanted to ask, if we look at slide 27, it shows the new, loan rates. Impacted by the rate environment. And I noticed the two q in particular had what appeared to be some spread compression. On both variable and fixed rate. Loan originations. And so I just wanted to get some color on if that's you know, spread compassion spread compression competitively if you guys were being more aggressive and that was you know, kind of the outcome being loan growth or loan growth for the quarter, any color on the new loan originations would be helpful.

Mike Achary: Yeah. I can I can start? And I would suggest that there really is probably a combination of both those things. Certainly, the environment out there is super competitive when it comes to you know, not only securing new credit from customers, but then also pricing that credit. And I think overall, we've done a tremendous job of really restarting that growth engine as evidenced by the, you know, the 6% linked quarter annualized growth in the quarter. So the overall rate on the new loans to the sheet did compress by about 28 basis points. And I would suggest most of that is really related to pricing.

However, it's also important to understand that overall yield in our loan book is five eighty six. So, certainly, our ability to again, reprice mostly fixed rate loans higher is one of the one of the things that will certainly help us continue to expand our NIM in the second half of the year. John, any color you want to add?

John Hairston: No. I think that was very good. The only points I'd add is, I mean, you'll note the mix is a good bit different in 02/2025 than it was a year ago. And the size of the fixed rate new loan book has been tied a great deal to the degree of, aggressive calling campaigns that we've had on specifically the owner occupied real estate opportunities that come with partially or fully compensated deposit balances. So we've talked to them on the last several calls about our very aggressive desire to, have full service relationships.

And so while the loan yield may suffer a little bit on the overall benefit we're getting is on the low cost deposit on the other side. And that and that drives the NIM to a to a better view. That makes sense?

Brett Rabatin: Okay. Yeah. No. That's helpful. And then, you know, you've got I think, know, next one to three years, $2 billion repricing at $5.17. So that's helpful too. The other question I have was just around the fee income guidance. And if you know, with the trust fees continue or trust fees likely to head higher, just wanted to see the, you know, the nine to 10% growth Is that based on continued strength in trust? Or do you expect some of the other businesses that have done pretty well continue to do so?

John Hairston: Well, it's a great question. Thanks for the way you finished it because, I was gonna try to slip that good news in too. But generally speaking, the trust quarter was actually good even without say The Sable chunk of the $4.7 million increase in trust fees was only $3.6 million. For the partial quarter. Now I'll remind you, trust fees are not particularly level. Month to month inside the quarter. Some accounts are skewed to the first month, some to the to the last month of the quarter. So, you can generally prorate that to see what the number will be, but it won't be exact.

But the bottom line is trust did well, and then the $3.6 million from Sable goose the number on up to nearly $5 million up. And we would expect to see the full benefit of the Sable team and that client book We get into Q3. Aside from that, the business and consumer service deposit account charges via the treasury products also performed very well for the second quarter. And generally speaking, we can expect those fee increases to continue with the size and number of accounts added inside the book of consumer and business. So we think the second half is gonna continue seeing growth. On the fee income side, from those sectors.

Besides those, our fee categories like card revenue, treasury accounts, and merchant also doing quite well, and secondary mortgage will, will be driven by, number one, our completing the pivot to secondary loans as a predominant source of fee income. And then if rates do decline, we should see a nice benefit from, from fee income on the secondary side. Does that answer your question?

Brett Rabatin: Yeah. Candice, that's very helpful. John.

John Hairston: You bet. Thank you for asking.

Operator: Our next question comes from the line of Gary Tenner with D. A. Davidson. Your line is

Gary Tenner: Thanks. Good afternoon. I had a couple of questions. First, to go back to the buyback for a minute. I know, Mike, in your prepared remarks, you suggested that the buyback continues at the same level. But then I think in a follow-up, you kind of said depends on the pricing. So, you know, you purchased a lot more shares this quarter at $52 versus what you bought in the first quarter around

Mike Achary: 59. A lot closer to 59 right now. So just wanted to make sure I understood kind of the moving parts of your of your comment there in terms of what to expect at least in the short term.

Gary Tenner: Yeah. Great. Great. Great way to distinguish that, Gary. Appreciate that. And I think the way to think about it is if you look at the dollar amount, of shares that we repurchased during the quarter, which is a little bit under $40 million. And so the intent would be to return at least that much in terms of money to shareholders via buybacks. And certainly, the number of shares that we're able to buy back with that $40 million certainly will change a little bit from quarter to quarter depending on market conditions and where our stock price is. But I think the controlling variable there would be the $40 million or so that we'll spend.

Gary Tenner: Okay. Appreciate it. And then just to think through the dynamics of deposit growth in the back half of the year getting to that kind of low single digit expectation. I guess two parts to that. One, since the CDs are projected to reprice lower by just a small amount. Do you expect the retention of the CDs to be higher in the back half of the year than they were in the first half of the year? And then how much of the total growth for the year would you suggest is kind of driven by public funds in the fourth quarter?

Mike Achary: Again, good question. So if we about CDs in the renewal rate, I mean, again, that's been that's been one of the things that really has been kind of the star of the show, if you will, around our ability to retain that money and reprice it lower. So it was something like 86% in the second quarter. And the assumption for the back half of the year is that it'll be at least 81%, if not a little bit better.

So the other thing I would suggest when we look at not only the guidance for deposits, but also the levels that we think will come in is, because of the C and I nature of our book, you know, there's a lot of seasonality built into it. You mentioned the public funds and certainly that does drive the numbers. With a public fund book of around $3 billion or so. So typically in the second quarter, you know, we see really the last couple of months of the outflows related to public funds. And then we also see outflows related to tax payments. Both corporate as well as individual.

Typically in the third quarter, those deposit levels begin stabilize, if not grow a little bit. And then on a seasonal basis, the fourth quarter tends to be our best quarter. Again, there are typically inflows related to corporate and middle deposits. And then you have the arrival of the public fund. Inflows. And those can range between you know, as much as $200 to $300 million just depending on the primarily the sales tax collections and property tax collections. That typically happen in the fourth quarter. You bet.

Operator: Our next question comes from the line of Matt Olney with Stephens. Your line is open.

Matt Olney: Hey. Thanks, guys. Wanna ask about credit and the charge offs in the second quarter were a little bit heavier than we were expecting, but it sounds like you feel really good about charge offs The back half of year moving lower. Can you just kind of flush this out for us? Did you did you get some resolutions of some lingering credits in February or any color you can give us as far as the charge offs in February and the outlook?

Chris Ziluca: Matt, it's Chris Ziluca. Thanks for the question. Good question as well. Yeah. We feel pretty good about the guidance that we've given around the charge off range. I mean, as we've said, kind of going into, this year and even last year, you know, we expect normalization of net charge offs, kind of as the cycle winds through. And we really aren't seeing any sort of specific systemic issues in the portfolio, which really gives us comfort as kind of forward view around the remainder of the year. Yes.

We did have some accounts that were kind of in our line of sight for resolution during the quarter, and we decided, we had some reserves in place, specific reserves in place on one of them in particular that we decided that we would take down and just kind of resolve that to the best that we could. So that way, we're kinda looking forward in a little bit more of a positive view.

Matt Olney: Okay. Appreciate that. And then just as a follow-up to that, we've seen consecutive quarters of improving criticized commercial loans now. We would love to just get your feel for criticized loans as we look at the back half of the year. And what your visibility is there?

Chris Ziluca: Yeah. So, again, good follow-up question. You know, from our visibility, what we're seeing is you know, a little bit more resolution and therefore outflows than we are seeing inflows. Normally, we would expect to see in this quarter a little bit more potential inflows. But, you know, we were pleasant pleasantly surprised that we were seeing less inflows a little bit more resolution of outflows. Related to some of our longer standing credits. As I mentioned, I think, one of the earlier calls, it usually takes three to four quarters before kind of a criticized loan can get either rehabilitated or resolved or paid off, you know, what have you. Know, the whole portfolio management workout process.

So with the lesser number of inflows, we feel pretty good about where we sit. Not to say that as the quarters go through, that there aren't things that kind of, you know, catch us a little off guard. But we feel like we have a pretty robust portfolio management and workout process to deal with those.

Matt Olney: Okay. Thank you, guys.

Chris Ziluca: Thank you.

Operator: Our next question comes from the line of Stephen Scouten with Piper Center. Your line is open.

Stephen Scouten: Hey, good afternoon. Thanks, guys. I know, Mike, you gave some commentary around M and A saying that largely unchanged outlook there. But I'm kind of curious as to how you think about the future path. I mean, me, the only thing that's maybe been lacking from y'all's story has been organic loan growth. And we're seeing great signs of that already this quarter. So should we think about you guys letting that story play out profitability and efficiency continue to play out? And then you know, if your shares warrant the valuation, I'm sure you feel they should, then that when M and A might be pursued down the line. Is that a decent way to think about

Mike Achary: Yeah. That's a that's a very plausible path. And, you know, again, we're we're thrilled about our ability to restart organic loan growth. We have a very well thought through organic growth plan that we're executing on right now. We've talked a lot about our earnings efficiency being extremely high right now or high. And the only thing missing had been, you know, organic loan growth. And so you know, we're we're thrilled with where we are, and we're very anxious to continue to improve our earnings efficiency and overall profitability going forward. And that really is the focus of what we're trying to do.

Stephen Scouten: Yeah. I think that's fantastic. And then as it pertains to the plans you guys have laid out for hiring, I think it was, what, another 14 people, give or take. Slated for the rest of 2025. With the uptick in M and A kind of in and around your markets, would there be potential, you know, upside to those numbers if you could be more opportunistic given M and A in your markets? Or do you kind of want to manage the expense build and personnel build you know, throughout the rest of the year? How should we think about the potential for upsizing to that?

John Hairston: Yeah. Good question, Steven. This is John. I think our appetite for good talent that is seasoned, knows the market, knows the type of clients that we would like to add, We really don't have a ceiling in how many bankers we would add over a given term. We've set the goal at 30 to be communicated externally just to help investors understand our degree of interest in growing loans, not just this year, but have, that growth pattern flywheel up over the next several years. And get back to that 85 to maybe, higher eighties loan to deposit ratio, which is really our sweetest spot in terms of, earnings capability.

So the 30 number was essentially a 10% compounded annual number, and we would anticipate being at about 10% next year as well. Now certainly, if opportunities came up for that number to be higher, we would gladly take it. You know, our, our rate of people that don't know, survive over the long term once added is actually quite low, primarily because we try to screen very well and have potential bankers meet with people, both in, the line of business and in credit to assure that their appetite for clients matches up with us, so their potential for success is very high.

So the to the I'm sure there is a maximum somewhere where Mike will get nervous about expense. But so far, know, my attitude is, we would gladly take on that problem and be happy to explain that to investors. Because we have more offensive players on the field.

Mike Achary: Well, there's no max to the revenue. Right? So There's no max. That's right. That's the question is you know, when we should we expect the compensating revenue? And so far, know, the expectation for this year was about 15% of our total loan growth be coming from new hires, and I think we're on track to hit that. And in fact, the business bankers, we've added are probably going to exceed that. For the year, but that's really too early to call. I wouldn't wanna commit to it just yet.

Stephen Scouten: Got it. That's really great color, and congrats on a great quarter.

John Hairston: Thank you very much, Steven.

Operator: Our next question comes from the line of Christopher Marinac with Janney Montgomery Scott.

Christopher Marinac: Thanks. Good afternoon. John, it seems that history is repeating itself with some new entrants coming to Texas. I was curious on, you know, your thoughts about opportunities that could create for Hancock Whitney Corporation in the future quarters ahead.

John Hairston: I'll start, and Mike can add color if he likes. I mean, disruption is usually good for us. Think we're viewed as a safe haven for people who, for whatever reason, like to maybe raise their hand where otherwise they might not have. But I mean, that disruption happens, you know, all around the footprint. We really never know how to size it, but certainly, the, the phone lines and email inboxes are open. To, to inbound calls, and there's no secret across our footprint that we are indeed looking for good talent. And, that we are a great place for people to land, who wanna build a book, rapidly with great partnership with their credit folks across the line.

So, know, thanks for asking the question. It gives me a chance for a free commercial, but we're we're definitely hiring really in every place mean, you saw from page I think it's page seven. Is that right, Catherine, in the in the deck? You know, you see the green markets. That's where we actually have open roles that we're actively searching for now. So not every market is highlighted right there primarily because of some of those markets we added people in last year. And so, we didn't, you know, make the circles bigger or smaller to denote how many people. In those different areas. But, but it does show that we're not piling everybody into one market.

Although, I would I would allow that the largest concentration of people are in markets that we consider higher growth, for obvious benefit. But, it would not surprise me to see most of the called out markets in that, sheet populated with new hires by the time we get to the end of next And note this is a net document, not an absolute document.

Christopher Marinac: Good, John. Thanks for that. And then just a follow-up for Chris. Chris, are you seeing opportunities for some of the nondepository borrowers who are not banks but, you know, looking for credit from your spot as a company. Is that an opportunity in the commercial book?

Chris Ziluca: I mean, do definitely see that as potential opportunities for us, but it's not something that we're specifically targeting. Could those loans have a depository element to them? Over time? Yeah. I mean, they can. I mean, obviously, as they kind of you know, grow and kinda rehabilitate out of just being, you know, part of that non depository lending environment. Environment. To know, a traditional banking environment. You know, I know that I've I've seen that before. Know, the hit rate's always a little bit lower than you hope. But, but it certainly is an opportunity know, for us. And we certainly hope that some of them spin off into opportunities for direct relationships.

John Hairston: Yeah, Chris. This is John. That's the only thing I'd add here. It's not that we're necessarily averse to it, but think I would I would use the word opportunistic, just like Mike did earlier that if it makes a lot of sense for us and the client, then we certainly would explore it. But we're not designated a, a group of new hires target that. That's something we would rather have a longer relationship and understand the client before we jumped in too far.

Christopher Marinac: Got it. Thank you all for taking my questions. We appreciate it.

John Hairston: Thank you. Thank you for hanging in there on a busy day.

Operator: I will turn the call back over to John Hairston for closing remarks.

John Hairston: Thanks, Kate, for moderating the call. Thanks to everyone your attention and interest. We look forward to seeing you on the road over the next quarter.

Operator: Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.

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DATE

• Tuesday, July 15, 2025 at 11 a.m. ET

CALL PARTICIPANTS

• Chief Executive Officer — Jane Fraser
• Chief Financial Officer — Mark Mason
• Head of Investor Relations — Jennifer Landis

Need a quote from one of our analysts? Email [email protected]

TAKEAWAYS

• Net Income: $4 billion, with earnings per share of $1.96 and a return on tangible common equity (ROTCE) of 8.7% for Q2 2025.
• Total Revenues: $21.7 billion, up 8%, driven by broad growth, with record revenues in three of five businesses for Q2 2025.
• Operating Leverage: Positive at both the firmwide and business level for another quarter.
• Services Segment Performance: 23.3% ROTCE and 8% revenue growth for Q2 2025, supported by increases in both loans and deposits, as well as significant gains in cross-border activity and U.S. dollar clearing.
• Markets Revenues: Increased 16% in Q2 2025, marking the strongest second quarter since 2020, with fixed income up 20% and equities up 6% (over 35% excluding the prior Visa exchange impact); record prime balances rose approximately 27%.
• Banking Revenues: Rose 18% year-over-year, with M&A up 52% and equity capital markets up 25%, while debt capital markets declined 12% in Q2 2025; The firm advised on landmark transactions, including Boeing’s $11 billion asset sale and Nippon Steel’s $15 billion U.S. Steel acquisition during Q2 2025.
• Wealth Management Revenues: Revenues in Wealth Management were up 20% year-over-year, while noninterest revenues rose 17% in Q2 2025; Pretax margin stood at 29%, with client investment assets growing 17% and end-of-period client balances up 9% in Q2 2025.
• US Personal Banking (USPB): Revenues rose 6% in Q2 2025, driven by an 11% increase in branded cards revenue and 16% growth in retail banking, partially offset by a 5% decline in retail services; ROTCE was 11.1% for Q2 2025.
• Expenses: $13.6 billion for Q2 2025, up 2%, with increases in compensation and benefits (including severance) offset by lower tax and insurance costs and the absence of previous penalties; Firmwide year-to-date 2025 expenses were down 1%.
• Cost of Credit: $2.9 billion, primarily net credit losses in U.S. card, with a firm-wide $600 million ACL build mainly driven by Russia transfer risk and corporate portfolio changes for Q2 2025.
• Card Portfolio Reserves: 8% reserve-to-funded-loan ratio in the card portfolio as of the end of the most recent quarter; 85% of the card portfolio had FICO scores of 660 or higher as of Q2 2025; Card credit trends improved sequentially in Q2 2025.
• Deposit Base & Loans: $1.4 trillion deposit base, up 3%, and a $2.6 trillion total balance sheet, up 2% for Q2 2025; End-of-period loans rose 3% in Q2 2025, led by markets and USBB.
• CET1 Ratio: 13.5%, which is 140 basis points above the 12.1% regulatory requirement for Q2 2025; expected requirement to decrease to 11.6% following SCB reduction.
• Capital Return: Over $3 billion was returned to shareholders in Q2 2025, including $2 billion in share repurchases; $3.75 billion in year-to-date repurchases, with at least $4 billion planned for Q3 2025 as part of a $20 billion program; The quarterly dividend will rise to $0.60 per share in Q3 2025.
• 2025 Guidance: Full-year 2025 revenue is expected at the high end, around $84 billion; Net interest income excluding markets is expected to be up close to 4% for full year 2025; Expenses are guided to approximately $53.4 billion for full year 2025, with costs expected to track revenue if above target.
• Credit Loss Outlook: Branded Card net credit losses are guided to 3.5%-4% for full year 2025; Retail services net credit losses are expected to be 5.75%-6.25% for the full year 2025.
• Transformation Program: Significant investments ongoing with most programs at or near target state; transformation expenses expected to decrease in 2026 and beyond.
• Banamex/Legacy Franchise: Banamex IPO preparation remains on track for year-end 2025 but may extend into 2026; The consumer segment in Banamex posted double-digit growth, with a focus on business performance improvement, as stated during the Q2 2025 earnings call.
• Digital Assets and Innovation: Citi Token Services was operational in four key markets as of Q2 2025; processed billions in transactions; ongoing investments in trading infrastructure and partnerships for alternative investments; new proprietary card, Citi Strata Elite, launching later in the quarter.

SUMMARY

Citigroup (NYSE:C) management emphasized continued progress toward structural transformation, citing a 10%-11% ROTCE target for next year and describing it as a "waypoint." Capital optimization remains a focus, with strategic commentary on regulatory developments that may enable greater flexibility for buybacks and adjustment of the management buffer, as discussed in the context of Q2 2025. Executives highlighted the rising importance of digital asset offerings and the multi-year impact of efficiency actions -- including stranded cost reductions now down to about $1.2 billion as of Q2 2025 -- while emphasizing the firm’s ability to achieve further productivity through technological advancements such as AI. Segment-level deployment of risk-weighted assets was described as both disciplined and dynamic, reallocating to high-margin areas such as financing and Prime Services, and drawing capital from low-return segments.

• Mason confirmed total reserves at $23.7 billion and explained that the $600 million ACL build was "largely associated with having to establish the reserve for the unremittable dividends that we have" and with increases in corporate portfolio exposure for Q2 2025.
• Citi Token Services enables clients to move from physical fiat to digital and back without incurring transaction costs, allowing for instant cross-border payments.
• Explicit management commentary clarified that Banamex IPO timing will remain market- and regulatory-dependent, with ongoing improvements in business performance noted, but no formal new timetable provided as of Q2 2025.
• CFO Mason stated that expected Q3 2025 share repurchases will be "at least $4 billion," while noting that buyback plans will not feature "precise guidance" going forward as regulatory changes are finalized.

INDUSTRY GLOSSARY

• ROTCE: Return on Tangible Common Equity; a measure of profitability excluding intangible assets and goodwill, representing core shareholder return.
• ACL: Allowance for Credit Losses; reserves held against possible future loan and credit losses.
• SCB: Stress Capital Buffer; regulatory capital requirement imposed following Federal Reserve stress tests.
• TTS: Treasury and Trade Solutions; business segment offering integrated cash management and trade finance services.
• Citi Token Services: Citi's proprietary digital asset platform for secure, real-time payments and settlement transactions.
• Banamex: Citi's legacy consumer and commercial bank operation in Mexico, currently in the process of divestiture via IPO.

Full Conference Call Transcript

Jennifer Landis: Described in our earnings materials as well as in our SEC filing. And with that, I'll turn it over to Jane. Thank you, Jen. And a very good morning to everyone. This morning, we reported another very good quarter, with net income of $4 billion and earnings per share of $1.96, with an ROTCE of 8.7%. Revenues were up 8% and three of our five businesses had record second-quarter revenues. We, again, had positive operating leverage at each business and the group level. We continue to demonstrate that our strong performance is sustainable through different environments. In April, I'd said that we were ready to lean in despite the lack of clarity of the moment. And indeed, we have.

We are executing our strategy with discipline and intensity. We're improving the performance and returns of each of our businesses whilst advancing their strategic positions and share. And we are making significant progress on our transformation. Turning to our five businesses, Services continues to show why this high-returning business with 23% ROTCE for the quarter is our crown jewel. Revenue is up 8% with robust growth in both loans and deposits. Underlying fee drivers such as cross-border activity and US dollar clearing grew nicely and we grew our AUCA to over $28 trillion. Markets revenues were up 16%, the best second quarter since 2020.

In fixed income, the flows we saw in rates and current were particularly strong, backed by client momentum, including hedging activity as well as improved monetization. Equities had the best second quarter ever, as our prime balances hit a record. With sentiment improving significantly as the quarter progressed, Banking revenues were up 18%. We continue to be at the center of some of the most significant transactions including serving as the exclusive adviser to Boeing on the $11 billion sale of Jefferson and as lead adviser to Nippon Steel on their $15 billion acquisition of US Steel. Halfway through the year, we have been involved in seven of the top ten investment banking fee events.

In addition to the sustained momentum in M&A, we continue to take share in leverage finance and responses, a priority area. We also took share in equity capital markets with convertibles fueling a strong quarter. Wealth delivered a pretax margin of 29%. As revenues were up 20% with each line of business growing significant and noninterest revenue up 17%. Whilst we have had 9% organic growth over the last year in net new investment assets, we did see inflows slow this quarter as clients were cautious amid macro uncertainty. We are confident we will see a pickup here as markets have recovered.

In US PB, we grew revenues by 6% as we continue to focus on product innovation, digital capabilities, and the customer experience. We saw significant growth in branded cards, whilst retail services was pressured by lower sales activity at our partners. And we continue to feel good about the quality and the mix of our portfolio as well as our healthy level of reserves. And retail banking had a very good quarter, underpinned by improving deposit spreads. During the quarter, we returned over $3 billion in capital to our common shareholders, which includes $2 billion in share repurchases. On a year-to-date basis, we repurchased $3.75 billion of shares as part of our $20 billion repurchase plan.

Ended the quarter at a common equity tier one capital ratio of 13.5, a hundred and forty bps above our current regulatory requirement. We were pleased with the results of our recent stress test. We are well-positioned to continue to increase the return of capital to our shareholders. We as well as an increased dividend of $0.60 per share beginning in the third quarter. The results of the recent stress test also show how we have derisked the company by implementing a more focused business model, which includes divesting our international consumer businesses with Poland our last remaining sale expected to close next year. I am particularly pleased that the momentum across our franchise includes the transformation as well.

Investments we have made are improving our risk and control environment. Many of our programs are at or near target state, and we are making good progress in the remaining areas. We continue to focus on streamlining processes and platforms and driving automation to reduce manual touch points. Also increasingly deploying AI tools to support these efforts in areas such as data quality, and we remain on track with our data plan. And as all of this work progresses, we are confident that our transformation expenses will start to decrease next year. But transformation is hardly the only recipient of investment. We continue to make investments that enhance the competitiveness of our businesses.

For example, we aim to deliver the benefits of advancements in stablecoin and digital assets to our clients in a safe and sound manner by modernizing our own infrastructure and improving efficiency, transparency, and interoperability for our clients. As a leading global bank in the space, we are laser-focused on innovations which enable clients to access real-time, 24/7 payments clearing, and settlement across borders and across currencies. Citi token services, our leading digital asset solution, is now live in four major markets with more to come and has processed billions of dollars of transactions since its launch. In markets, investments in our trading platforms have allowed us to handle record volumes with ease.

In wealth, our partnership with iCapital will provide an end-to-end solution for alternative investment offerings. As you saw with the American Airlines extension and the refreshed Costco Anywhere Visa card, we're investing in our cards portfolio to deliver more value for our cardholders. And later this quarter, we will introduce a new proprietary premium credit card, Citi Strata Elite, to our rewards family of products to expand our offering for affluent customers. In terms of investing in talent, our momentum and value proposition continue to attract great leaders to the firm. As you've seen recently in banking and wealth. Just as importantly, we are giving our talent the tools and the resources to compete and to win.

Now let's turn to the environment. Well, it's proven to be more resilient than most of us anticipated. But we are dropping our guard as we begin the second half of the year. We expect to see goods prices to start picking up over the summer, as tariffs take effect, and we have seen pauses in capex and hiring amongst our client base. All of that said, the strength of the U.S. economy driven by the American entrepreneur and a healthy consumer has certainly been exceeding expectations of late. As I've been speaking to CEO, I've yet again been impressed by the adaptability of our private sector aided by the depth and breadth of the American capital market.

I believe our results over the past year will help you see why we have been so confident our trajectory. Our people have been performing with excellence in an unpredictable macro environment. And I am so proud of them. The need for what we can uniquely provide for clients remains in very high demand and we will continue to deliver for them through our OneCity approach through the second half of the year and beyond. Our wealth business is now starting to truly benefit not only our retail bank, but our global network. By aligning client coverage, and deploying credit more strategically, we're deepening relationships with asset managers and private market clients across services, markets, banking, and wealth.

Importantly, we are gaining share of mind, as well as share of wallet. We will remain relentlessly focused on execution. As I've said, next year's 10% to 11% ROTCE target is a waypoint. It's not a destination. The actions we have taken have set up Citi to succeed long term. Drive returns above that level and continue to create value for shareholders. With that, I will turn it over to Mark and then we will be happy to take your questions.

Mark Mason: Thanks, Jane, and good morning, everyone. I'm going to start with the firm-wide financial results, focusing on year-over-year comparisons unless I indicate otherwise. And then review the performance of our businesses in greater detail. On slide six, we show financial results for the full firm. This quarter, we reported net income of $4 billion, EPS of $1.96, and an ROTCE of 8.7% on $21.7 billion of revenue generating positive operating leverage for the firm and each of our five businesses. Total revenues were up 8% driven by growth in each of our businesses, partially offset by a decline in all of it.

Net interest income excluding markets you can see on the bottom left side of the slide, was up 7% driven by services, USPB, and wealth, partially offset by a decline in corporate other. Noninterest revenues excluding markets, were up 1% as better results in banking and wealth were offset by declines in legacy franchises and USBB. And total markets revenues were up 16%. Expenses of $13.6 billion were up 2%. Cost of credit was $2.9 billion primarily consisting of net credit losses in US card, as well as a firm-wide net ACL build driven by services, banking, and legacy franchise.

Looking at the firm on a year-to-date basis, total revenues were up 5% driven by growth in each of our five businesses partially offset by a decline in all other. And expenses were down 1%. As we generated positive operating leverage for the firm and each of our five businesses and reported an ROTCE of 8.9%. On slide seven, we show the expense trend over the past five quarters. The expense increase this quarter was driven by higher compensation and benefits, largely offset by lower tax and deposit insurance costs, as well as the absence of civil money penalties in the prior year.

The increase in compensation and benefits was driven by higher severance primarily related to the realignment of our technology workforce. Volume and other revenue-related expenses, and investments in transformation and technology. With productivity and stranded costs partially offsetting continued growth in the business. As we've said in the past, we are very focused on bringing down our expense base through reduction of stranded costs and productivity savings. Both of which allow us to self-fund our additional investments in transformation technology, and the businesses. On slide eight, we show key consumer and corporate credit metrics. At the end of the quarter, we had $23.7 billion in total reserves, with a reserve-to-funded-loan ratio of 2.7%.

Approximately 85% of our Card Port portfolio is to consumers with FICO scores of 660 or higher, and our reserve-to-funded-loan ratio in the card portfolio was 8%. And it's worth noting that we're seeing an improvement in our card credit trend. Looking at the right-hand side of the slide, you can see that approximately 80% of our corporate exposure is investment grade, including international exposure of which approximately 90% is either investment grade or exposure to multinationals and their subsidiaries. And on the bottom right side of the slide, you can see that our corporate nonaccrual loans increased in the quarter resulting from idiosyncratic downgrade but remain low.

We feel good about the high-quality nature of our portfolio which reflect our risk appetite framework and our focus on using the balance sheet in the context of the overall client relation. Turning to capital and balance sheet on slide nine, where I will speak to sequential variance. Our $2.6 trillion balance sheet increased 2% with growth in cash and loans partially offset by lower trading-related assets. End of period loans increased 3% primarily driven by markets and USBB. Our $1.4 trillion deposit base remains well diversified and increased 3% driven by services. We reported a 115% average LCR and maintained over $1 trillion of available liquidity resource.

We ended the quarter with a preliminary 13.5% CET1 capital ratio which incorporates a 100 basis point management buffer and is 140 basis points above our current regulatory capital requirement of 12.1%. As we announced earlier this month, under the current stress capital buffer framework for the standardized approach, we would expect our regulatory capital requirement to decrease from 12.1% to 11.6% which incorporates the expected reduction in our SCB from 4.1% to 3.6%. That being said, we await the finalization of the Federal Reserve's proposed rulemaking to reduce variability in the SDP which includes averaging results from the previous two consecutive years and modifying the annual effective date from October first to January first.

If the averaging were to be implemented as the proposal is written, we expect our STB to be 3.8%. And as a reminder, we announced an increase to our quarterly common dividend to $0.60 per share following the SCB results effective in the third quarter. Overall, we were pleased to see the improvement in our DFAS results. And the corresponding reduction in our SCB for the second consecutive year. Even with these reductions, we remain very focused on efficient utilization of both standardized and advanced RWS. Turning to the businesses. On slide ten, we show the results for service in the second quarter. Revenues were up 8% driven by growth across both TTS and security services.

NII increased 13% driven by an increase in average deposit and loan balances, as well as higher deposits spreads, partially offset by lower loan spread. NIR was down 1% as continued growth in fees was more than offset by higher lending revenue share. We continue to see strong activity and engagement with corporate clients and momentum across most underlying key drivers, including cross-border transaction, assets under custody and administration, and US dollar clearing. With total fee revenue up 6% which we've included on the bottom left side of the slide. Expenses declined 2% driven by the absence of tax and legal-related expenses in the prior year largely offset by higher compensation and benefits, including severance, as well as technology costs.

We continue to make investments in our platform and products to win new clients and deepen with existing clients. Foster credit was $353 million driven by a net ACL build of $333 million primarily related to transfer risk associated with our clients' activities in Russia. Average loans increased 15% driven by continued demand for trade loans globally, as our clients expand their operations and suppliers. Average deposits increased 7% with growth across both international and North America largely driven by an increase in operating deposit Services generated positive operating leverage for the fourth consecutive quarter and delivered net income of $1.4 billion with an ROTCE of 23.3% in the quarter and 24.7% year to date.

Turning to markets on slide eleven. Revenues were up 16% driven by growth across both fixed income and equity. Fixed income revenues increased 20% with rates in currencies up 27% reflecting increased client activity and monetization across both corporates and financial institutions. Spread products and other fixed income was up 3%, driven by higher financing activity and loan growth partially offset by lower credit trading.

Equities revenues were up 6% Excluding the impact of the Visa b Exchange offer in the prior year, equities revenues were up over 35% with solid growth across all products driven by momentum in Prime Services, with record balances up approximately 27% as well as higher client activity and volumes in cash equity and strong monetization of market activity and derivative. Expenses increased 6% largely driven by higher volume and other revenue-related expense Foster credit was $108 million driven by a net ACL build of $100 million due to changes in portfolio composition, including exposure growth. Average loans increased 14% driven by financing activity and spread product.

Markets generated positive operating leverage for the fifth consecutive quarter and delivered net income of $1.7 billion with an ROTCE of 13.8% in the quarter and 14% year to date. Turning to banking on Slide twelve. Revenues were up 18% driven by growth in corporate lending and investment banking, partially offset by the impact of mark to market on loan hedge Investment banking fees increased 13% with growth in m and a and ECM partially offset by a decline in DCM. M and A was up 52% with gains across a multitude of sectors, and with financial sponsors. ECM was up 25% with strength in convertibles and IPOs, as markets stabilized late in the quarter.

And while DCM was down 12%, as our investment grade volumes decreased versus very strong performance in the prior year, we continue to gain share and leverage finance. Corporate lending revenues, excluding mark to market on loan hedges, increased 31% primarily driven by the impact of higher lending revenue share. Expenses were up 1% as higher volume and other revenue-related expenses and continued business were primarily offset by benefit of our prior actions to rightsize the workforce and expense base. Cost of credit was $173 million, which included a net ACL build of $157 million primarily driven by changes in portfolio composition, including sequential growth in lending.

Banking generated positive operating leverage for the sixth consecutive quarter, and delivered net income of $463 million with an ROTCE of 9% in the quarter and 9.8% year to date. Turning to wealth on slide thirteen, revenues were up 20% with growth across Citi Gold, the private bank, and Wealth and Work. NII, which you can see on the bottom left side of the slide, increased 22% driven by higher deposit spread partially offset by lower mortgage spread and lower deposit balances. NIR increased 17% driven by $80 million gain on the sale of our alternatives fund platform to iCapital as well as higher investment fee revenue as we grew client investment assets by 17%.

Expenses were up 1% as higher volume and other revenue-related expenses episodic items and severance were primarily offset by benefits from continued actions to rightsize the expense base and lower deposit insurance costs. End of period client balances continued to grow up 9%. Average loans declined 1% as we continue to be strategic in deploying the balance sheet to support growth in client investment assets. Average deposits declined 3% driven by taxes and other operating to higher yielding investments on our platform, partially offset by client transfers from USPB reflecting our ability to support clients as their wealth and investment needs evolve.

Wealth had a pre-tax margin of 29% generated positive operating leverage for the fifth consecutive quarter, and delivered net income of $494 million with an ROTCE of 16.1% in the quarter and 12.8% year to date. Turning to US Personal Banking on slide fourteen. Revenues were up 6% driven by growth in branded cards and retail bank, partially offset by a decline in retail service. Branded cards revenues increased 11% driven by net interest margin expansion and growth in interest-earning balances, which were up 7%. We continue to see growth in spend volume, which was up 4%. Retail banking revenues increased 16% driven by the impact of higher deposit spread.

And retail services revenues declined 5% largely driven by higher partner payments due to lower net credit loss. Expenses were up 1% Cost of credit was $1.9 billion, driven by net credit losses in card. Average deposits declined 3% as net new deposits were more than offset by client transfers to wealth that I mentioned earlier. USPB generated positive operating leverage for the eleventh consecutive quarter and delivered net income of $649 million with an ROTCE of 11.1% in the quarter and 12% year to date. Turning to slide fifteen, where we show results for all other on a managed basis. Which includes corporate other and legacy franchises. And excludes divestiture-related item.

Revenues declined 14% with declines across both corporate other and legacy franchise. The decline in corporate other was driven by lower NII resulting from actions that we've taken over the past few quarters to reduce the asset sensitivity of the firm in a declining rate environment. Legacy franchises was driven by the impact of the Mexican peso depreciation expiration of TSAs in our closed exit market and continued reduction from our wind down markets largely offset by underlying growth in Banamax. Expenses increased 8% with growth in corporate other, which included higher severance. Largely offset by lower expenses in legacy franchise.

And cost of credit was $374 million largely consisting of net credit losses of $256 million driven by consumer loans in Banamec. Turning to the full year 2025 outlook on slide sixteen. Given the strong performance in the first half of the year, we now expect to be at the higher end of our full year revenue range. Around $84 billion with net interest income excluding markets up closer to 4%. As it relates to expenses, as a reminder, both the level of revenue and the mix of revenue inform and impact our expense base which we expect to be around $53.4 billion this year.

However, if revenues were to come in above $84 billion, we would expect expenses to come in higher as well, commensurate with the increase in revenue. And as a reminder, currency fluctuations may impact both revenue and expenses in the balance of the year but tend to be roughly neutral to earnings. In terms of credit, given the improvement that we've seen in both delinquent and net credit loss rates, in both cards portfolios we expect net credit losses to be within the range of 3.5% to 4% for Branded Card, and 5.75% to 6.25% retail service And the ACL will continue to be a function of the macroeconomic environment and business volume. Now turning to capital.

We remain committed to repurchasing shares each quarter under our $20 billion share repurchase program and expect to buy back at least $4 billion this quarter. That said, going forward, you should not expect a to provide precise buyback guidance As we take a step back, the performance in the quarter and so far this year represents significant progress towards our goal of improved firm-wide and business performance. We are proud of what we've accomplished, and we are well on our way to delivering the full power of our franchise. We remain steadfast and focused on executing on our transformation, achieving our ROTCE target of 10% to 11% next year and further improving returns over time.

And with that, Dane and I would be happy to take your questions. At this time, we'll open the floor for questions.

Operator: If you'd like to ask a question, please press star five on your telephone keypad. You may remove yourself at any time by pressing star five again. Please note, you'll be allowed one question and one follow-up question. Again, that is star five to ask a question. And we'll pause for just a moment. Okay. Our first question will come from Jim Mitchell with Seaport Global Security. Your line is now open. Please go ahead.

Jim Mitchell: Oh, hey. Hey. Good morning, Jane and Mark. So, Jane, you've Good morning. You've good morning. You've talked about next year's 10%, 11% ROTCE target as a waypoint. You've said that a few times now. So I know you're not gonna give any hard targets for 2027, but can you give us a sense of what you think the long-term return profile could look like roughly and what you see as the key drivers to higher returns beyond 2026?

Jane Fraser: Yeah. I would be delighted to do so. And you're right. I'm not gonna be giving a target at this juncture. I feel very confident about our path forward. I think you can see this quarter. The firm is firing on all cylinders. We have the confidence of the right strategy, We're uniquely positioned to support our cross-border clients. And I Mark and I both feel very pleased about how it all coming together both within and across the five businesses. Got this simpler yet diversified business model in a strong financial position, feel very good about the leadership team. And we've got those hard and strategic decisions behind us so we can be on the front foot.

So I feel confident, first of all, about the target for next year. But as I've said, the 10% to 11% target, it's this waypoint. It's not the destination. And we're managing the firm for the longer term with a good trajectory. And there are three drivers of higher long-term returns. Revenues, expenses, and capital. Mark, I'll take revenues. I'll hand to you on the expense and capital from So on the revenue growth, you know, you've seen us grow very steadily over the past few years in a, let's call them, a variety of different macro environments. This quarter is a strong continuation of that. As I'm looking forward, banking

Mark Mason: We've talked about continued share growth

Jane Fraser: We're very pleased with the M&A front. The pipeline's excellent. And the linkage between banking and markets there is particularly pleasing. With services, we'll we will just growing with new clients and with existing clients. We pointed to a very strong new client wins this quarter A lot of new suppliers we've been bringing on but also the new product innovations. I'm sure we'll talk about digital assets at some point on this call. So I feel very good about, the crown jewel continuing to deliver. In wealth, we've got great investments runway and just huge upside. You can tell the excitement from Andy and the team.

From our existing clients, the famous five trillion as well as the opportunity with the new wealth creators It's we're very much that private bank for the progress makers in the world. In markets, great quarter. But equities, I think the piece I like here is that we've now got that second leg to the strength that we have in derivatives, which is in prime. That platform is scaled. We're continuing to invest in it. It's got very high return marginal return that comes with the growth. So expect to see us continue there. Volatility is going to, I suspect, be a feature, not a bug. Of the new world order, and we will benefit from that.

Jim Mitchell: And, again, in markets the private market space has capital market evolves is an area our financing business is very well positioned. Again, strong connectivity with banking here. For us to continue to grow, take share, and help participating, not to mention FX options. And then finally, US personal banking. We've got a wonderful relationship with American Airlines We've got a very exciting, net 26 lined up You've seen us with new product innovations this year. With the Strata Elite coming out later on in the quarter. Retail banking, again, really hitting its stride now and feeding both well but also the broader NAM franchise. I feel good on the revenue side. But, Mark, let me pass to you. Yeah. So

Mark Mason: key point, obviously, revenue momentum. Another key point is continued expense discipline. And I think you've seen that through the first half and obviously the targets we've set for 2025. But that continues in 2026 and beyond. The drivers there are likely to be you know, continued reduction in severance. We talked about 2025 having a sizable severance estimate in our forecast. The transformation expenses, which are going up in 25, will trend down over time.

Jim Mitchell: The stranded costs, which have been coming down, we brought cost stranded

Mark Mason: cost down by about $3 billion. There's still about $1.2 billion left. That'll trend down over the next couple of years, and then continued productivity some of which will be enabled by AI that Jane mentioned earlier. So those are a number of the drivers that we think will

Jim Mitchell: contribute to the continued expense discipline. And I used discipline intentionally because in order to capture that revenue momentum that we've seen in the first half and that Jane outlined

Mark Mason: drivers of the forward look it's going to require continued investment. And so part of our responsibility is going to be driving efficiencies while making investments that allow for us to play for the longer term returns and better serve our clients. So revenue momentum, expense discipline, and then finally capital.

Jim Mitchell: And continuing to be efficient about how we use our risk-weighted assets and capital in you heard me mention earlier us increasing our buybacks to $4 billion at least $4 billion in the quarter.

Mark Mason: And we'll continue to be good stewards of our capital as we manage through 26 and beyond.

Jim Mitchell: Okay. Well, that's a very fulsome response. I appreciate it. You didn't have another question, Jim, did you? Well, I did have one little follow-up on the revenue forecast for this year, the guidance. I appreciate going to the higher end. But I guess if I look at first half, $43.3 billion to get to $84, you're dropping $2.5 billion in the back half. I think last year, you kinda fell half that. So is there something we should be thinking about? Is it just being cautious? There is seasonality. I know in markets, just trying to think through why the big step bet down in the second half given the momentum. Sure.

I'll I'll I'll keep it I'll keep it brief. Look, I think the we did have a very

Mark Mason: strong first half. There was obviously a great deal of uncertainty and volatility. That we managed through and helped our clients manage through.

Jim Mitchell: The second half does seasonally tend to be softer than the first half. We're certainly estimating that as we think about the $84 billion

Mark Mason: in the high end of that range that I've that we've moved you to That would include a market's second half that is down

Jim Mitchell: generally consistent with what we've seen historically versus the first half. Obviously, if there's increased volatility and

Mark Mason: repositioning that investor clients want to take on the heels of that, We'll see how that plays out, but that's an important factor that's that's playing through in the $84. And then on the NIIX markets part, we do expect to see you know, continued loan growth and operating deposit growth you know, play through in a rate environment that you know, is probably with fewer cuts than we expected originally. But the short of it is that

Jim Mitchell: we have factored in some normal seasonality in the second half juxtaposed against the first.

Mark Mason: That's driving us to the high end of the range.

Operator: Our next question will come from Eric Njarian with UBS. Line is now open. Please go ahead.

Jane Fraser: Yes. Hi. Good morning. My first question is on capital. Mark, I appreciate that you're moving away from the quarterly, you know, buyback guide. Wondering two questions. One, is thirteen one still the right level in terms of the year-end target as we think about you know, regulatory reform and SCB relief. And, additionally, you know, you're operating in a hundred forty basis point buffer You know, as we think about, a regulatory reform construct that's supposed to reduce volatility in the capital minimum, When do you think is the right time to readdress that buffer?

Mark Mason: Sure.

Jim Mitchell: So look, in terms of the

Mark Mason: in terms of the target for the end of the year, I think it's important, as I said in the prepared remarks, to acknowledge that, one, we've seen our SCB come down in the most recent DFAS results. For now a second year in a row. With that said, there's still some uncertainty as to what the will ultimately be, the reduction will be, whether depending on whether it's an average of the last two years or not. As well as the timing for it. So whether that will be the normal or historical October first date, or whether that will move to January first. And both of those factors

Jim Mitchell: impact the answer to your question in terms of

Mark Mason: whether there's you know, whether the thirteen one is still the year-end target or whether it's some so until we get clarity on that, we are continuing down the path of returning, you know, as much capital as we originally had planned for You know, when I set that target and as we get clarity, we will adjust accordingly. But I think importantly, what you see is us pulling forward buybacks as much as we can, as early as we can while obviously being responsible about it. And taking advantage of the fact that we're still trading below book value and it makes sense to do that. So that's how I think about the thirteen one.

What I will say is regardless of the outcome of averaging or the start of the new SCB level, it does afford us more flexibility. In the way of how much how much capital you know, we have to buy back or redeploy, and we'll we'll we'll continue to kind of assess that. In terms of the management buffer, we look at that on a regular basis as I've I've told you in the past. It's an internal management buffer. It's it's sized in part with how we think about volatility in RWA and AOCI. As well as variability in the SCB.

We're pleased with the direction and tone that we're hearing from DC in terms of looking at capital in a more holistic

Jim Mitchell: And as we continue to get clarity on that, we'll continue to assess how much of a management buffer is required. In the meantime, we're still running it at the at the hundred basis points. And my second question

Jane Fraser: is I know how important it is to know, work on lifting that 2020 OCC consent order. And I'm wondering as, you know, we think about you know, some of the costs associated with transformation, You know, is there a way to size you know, when if the consent when the consent order is lifted? You know, what expenses that could be freed up to reallocate to the rest of the company. Now I know you've talked about this, you know, with investors in the past. You know, and, you know, you had to another peer that had talked about freeing up expenses as consent orders were resolved. Wondering if you could give us a little bit more clarity here.

Jim Mitchell: Well, you know, first, I'd say, as

Mark Mason: Jane said in her prepared remarks, we're pleased with the progress that we're making around the transformation work and there are a number of aspects of that are at their target state, which is a I think is a very, very positive sign I think I've said before that we've spent last year, we spent about $3 billion investing in the transformation work and that I expected that we'd have a significant meaningful increase in that spend in 2025.

We are seeing that increase but I do expect that as we go into 2026 and beyond, and as programs are completed and validated and proven to be sustainable and embedded by the regulators that we will start to see that spend come down. In 26 and beyond. And we'll also start to see some of the benefits from those investments help to reduce our underlying operating cost And the final point I'd make is that know, we're not just looking at these investment dollars

Jim Mitchell: without teasing out opportunities to

Mark Mason: extract efficiencies from them. And what I mean by that is when we talk about applying AI tools to the work that we do on a day-to-day basis, That includes the work that we have to do in executing against our transformation and remediating the consent order concerns. And so there too, our efficiencies in how we go about doing that, again, all of which will help to drive down know, cost in 26 and beyond.

Jane Fraser: I just I just reemphasize. You don't need to wait for a consent order to be lifted to bring the expense down. You get the work done, You go into sustainability. You hand the work over to regulators. And then they make a determination. So don't just think this only happens when orders are lifted.

Operator: As a reminder, Our next question will come from Ebrahim Panawala with Bank of America. Your line is now open. Please go ahead.

Jane Fraser: Hey. Good morning.

Jim Mitchell: Guess just wanted to follow-up, Mark,

Jane Fraser: on the capital question. Just talk to us as we think about appreciate what you just said, but when we think about the binding

Ebrahim Poonawala: constraint from standardized to advanced, how we should think about it, and are there actions we saw in SRT trade that three I think, executed in June. Just what are the avenues to optimize the

Jane Fraser: capital stack

Ebrahim Poonawala: in a so that advance doesn't become a binding constraint for setting Any perspective would be helpful there. Thanks.

Mark Mason: Yeah. I think the first thing I'd I'd say is that, you know, today, our standardized CET one is our binding constraint. The second thing I'd point to is that you've seen us be very disciplined over the past couple years at managing our risk-weighted assets a standardized bay standardized basis and optimizing the use of them, particularly in areas like markets, to ensure that we're getting the best return for the deployment of those risk-weighted assets.

Jim Mitchell: And that is also true

Mark Mason: for how we think about advanced as the gap between the two narrows. We're equally focused on how do we ensure that we're that we're using risk-weighted assets on both a standardized and advanced basis as efficiently as we can. And so we're we're mindful of how tight they're running, Standardized is still the binding constraint. But as we look at the businesses and the activities that we do, we're making sure that we drive for that greater efficiency you know, from those two metrics. But there are multiple reasons why there's a difference between standardized and advanced RWA. They have to do with how each framework treats certain credit portfolios.

Whether it be consumer or wholesale, You know, standardized tends to be more punitive. To the mortgage book. Advanced is more punitive to

Jim Mitchell: international wholesale exposures. And so we're mindful of those things as we

Mark Mason: as we drive towards kinda the efficient use But we're also mindful that the regulatory landscape continues to evolve. And you know, who know advanced under Basel III is supposed to be

Jim Mitchell: down a path of retirement, and we wanna be thoughtful about how we

Mark Mason: manage the two metrics so that we aren't compromising the strategy for a metric that may be temporary. Again, pleased with the tone in DC in terms of looking at things holistically and looking forward to some speedy advancement as it relates to the outcome of their reviews.

Ebrahim Poonawala: Helpful. And I guess, I think Jane alluded to this On Stablecoins, There is a lot of focus on how stable coins could be used for treasury management, global liquidity management. If we could double click on that in terms of how you're already using STOKE how you're already using these internally. And do you view disruption risk to services revenues tied to increased adoption of Stablecoins? Thank you.

Jane Fraser: Yeah. Look. It's the last it's the next evolution in the broader digitization of payments, financing, and liquidity. I view it just as we were seeing a change with fintechs a few years ago. I'm Ultimately, what we care about is what our clients want. And how do we meet that need. What our client wants is multi-asset multi-bank, cross-border, always-on solutions. Providing a safe and sound manner with as many of the complexities solved for them. That's like a compliance accounting reporting, etcetera. And that's what we do. We are the global leaders enabling clients to move money cross-border and digital asset solutions complement our existing product suite. So we're well advanced in developing our digital asset capabilities.

You've heard me talk a lot about Citi token services. And a slew of other innovations. What they what they do is they let us modernize our own business where needed, They grew they grow new revenue streams for us and also allow us to acquire new clients. So when I look at the Stablecoin side, so four main areas that we're exploring reserve management for Stablecoins, the on and off ramps from cash and coin, backwards and forwards, We are looking at the issuance of a Citi stable coin. But probably most importantly is the tokenized deposit space where we're very active. And then also providing custodial solutions for crypto assets.

So this is this is a good opportunity for us.

Ebrahim Poonawala: Our next question comes from Mike Mayo with Wells Fargo.

Operator: Line is now open. Please go ahead.

Mike Mayo: Hi. Just one specific question on the transformation calls. What were they for the second quarter? Just trying to get a run rate and where those go to.

Mark Mason: Yeah. I didn't I haven't broken them out here for the second quarter, Mike. What I will say is you know, what I said already, which was we had $3 billion last year where increasing that meaningfully in the year. And we obviously saw some of that increased play through the first and second quarter and expect to see a bit more of it in the third and fourth before trending down in twenty six.

Operator: Okay. And the stranded calls, you said,

Mark Mason: you have just $1.2 billion left of those?

Mike Mayo: Yeah. The proxy, if you look at the all other page in the bottom right-hand

Mark Mason: side, it gives you a little bit of a proxy for that. The second quarter expenses look at closed or signed markets about $100 million The wind down sale and others about $200 million. Call it $300 million a quarter that we have that we're continuing to push and drive out of the place. Is probably a little bit once the a Banamax of Mexico deal is signed, but the good proxy is about $300 million that we're still working to drive out.

Operator: Alright. And then separately, I maybe this is for Jane. I guess what I'm thinking, not the consent order, but when the amended portion of the amended consent order comes off, and I know you can't answer that directly, but what is it you're trying to show to regulators to help

Mike Mayo: help

Operator: show them that the amended portion of the consent order no longer needs to be there. I mean, when you look at the substance, the org simplification is done The exits are mostly done. The modernization, you've made progress in the two decades since stuff didn't happen. The management restructuring done to five lines of business. And you said the data plan's on track. Whereas, I guess, it wasn't necessarily on track before. So what does it take to get that amended portion taken off? Or what are you trying to show regulators?

Jane Fraser: Well, I would say that we're focused on making sure that we can close the consent orders, not just the amended portion. Amended portions is a what it says, it's a resource review plan to make sure that we've got the resources that are required to for the for the progress that we're making and for the completion of the work. And I would just take the opportunity, Mike, just to reinforce that I feel very good about the progress we've made and our trajectory. We are now at or mostly at city's target state, the majority of the programs. You can see that in the school card we laid out.

You know, it the important areas like end to end risk management life cycle. Compliance risk management. You've got the new forecasting engine for the rezo requirements. Once you're in the target state, you then have to ensure the programs run sustainably they deliver the desired reduction, that takes a bit of time before we then hand them over to the regulatory review process. And on data, you know, we're we're we're early in the remediation work on a step back we took last year, but I'm very pleased with the progress This year, we're seeing good momentum, and I'm very excited about the work we're doing enhancing the controls.

Driving a lot of your automation, and AI is definitely starting to help remediate it. So, essentially, now I want to see you know, each of the different programs in target state, delivering what they meant to be delivering, and then they would then move to their closure process. But we're we're pleased with the risk reduction. We're pleased with where we're headed. So going the right way.

Operator: Our next question will come from Betsy Graseck with Morgan Stanley. Your line is now open. Please go ahead. Thanks so much.

Betsy Graseck: Just one question. On Bantamax mark. I think you mentioned

Ken Usdin: just now when Bantamax is signed, maybe we could get an update as to where things stand there.

Jim Mitchell: And you wanna Yeah. Look. I there's nothing new to update you on.

Jane Fraser: You know, we continue to be on track with the preparation for the IPO. The team is focused on finalizing the audit financial statement related this quarter. You can imagine there's a lot of regulatory filings to be done. Our goal is to do everything in our control to be in a position to IPO by the year-end, but obviously, the timing there depends on market conditions and regulatory approvals, which could well take us into 26 as I talked about. And the other very important piece, we're focused on improving Badamex's business performance. And I'm pleased that we're capturing share We're outpacing growth in the market. The consumer businesses are growing at double digits.

So all of this is headed in a good way, but there's there's no, no nothing to update you on there. It's we're focused on what we told you we would do.

Ken Usdin: And is there a bogey with regard to, like, what a market is open means?

Betsy Graseck: With regard to yeah. Go ahead.

Jane Fraser: No. No. I mean, no different to any other IPO. So no bogey there.

Mark Mason: Obviously have a valuable asset and we wanna maximize shareholder value as we think about exiting it, but there's there's no specific bugie to it. Yep.

Jane Fraser: We'll we'll do this at the right time.

Operator: Our next question comes from John McDonald with Truist. Your line is now open. Please go ahead.

Mark Mason: Hi. Good morning. Wanted to ask about credit cards. You noticed some nice improvement in the credit quality trends in cards and then a better outlook for second half losses. Could you drill down a little bit, Mark, on what you saw in terms of delinquencies and roll rates in the second quarter and whether that improvement you're talking about is that driven by macro factors or some seasoning factors

Jim Mitchell: your portfolio?

Mark Mason: Yeah. Sure. Good morning, John. Look, I think I think when you look at the performance, you know, in the quarter, we're we're very pleased, first of all, with you PB performance in aggregate, very pleased with BrandyCar. You see good purchase or spend volume kick up there. Importantly, you're seeing good average interest earning balance growth there as well. You know, payment rates are kind of in line with that expectations as are the loss rates that you can see kinda fleshed out a little bit more on page on page twenty one of the deck. And I fact, you see those kinda loss rates kinda ticking down a little bit quarter to quarter.

And you see the ninety days past due that we show ticking down as well. What I what I'd highlight is that is largely consistent with kind of pre COVID seasonality in terms of in terms of that delinquency behavior. And so that gives us some confidence on where loss are likely to trend, all things being equal. When we look at kind of the nature of you know, the spend it's in line with kind of where we would expect. We are seeing know, continued increase in spend, but it tends to be towards the more affluent customers. And, you know, we skew towards the higher FICO score It's in essentials.

There is some in dining and inter and so a discerning, you know, consumer, I think, in good health Given the uncertainty in the current environment, we are watching things in addition

Operator: to

Mark Mason: delinquencies and NCLs. We're looking at, you know, obviously, the impact of current tariffs, the path of interest rates, consumer spending, and how that's evolving, labor markets, etcetera. But net is kinda what I alluded to earlier, which is good trends in some of these key indicators giving us confidence on the NCL guidance range.

Jim Mitchell: Okay. Thanks. And just a follow-up on expenses. Appreciate the earlier comments on the cost trends and opportunities. You look into next year, Mark, are you still thinking about that kind of sub $52.6 billion as a goal for next year? And is that also a level we should view as a as a waypoint with further opportunities?

Mark Mason: Yeah. Look. I still think of that as the target. For next year, as I've said before. I would take a step back for a second and just you know, I

Jim Mitchell: I'm focused we're focused on you know, the ten to eleven percent.

Mark Mason: And then improving our returns beyond that. Right? And the expenses are obviously a key component to that, but I highlight that because what you see in the half and in the quarter is very strong momentum on the top line,

Jim Mitchell: When Jane talked about twenty six and beyond, she talked about

Mark Mason: continued momentum on that top line and I would just highlight that we're not gonna miss an opportunity for that to be sustainable. By not investing in the franchise. Right? So as we get into 2026, you know, if there are opportunities for us to be investing to drive more sustainable growth on the top line, capture more synergies across these businesses, we're gonna be doing that. And we're doing that, by the way, in 2025 too.

And funding a lot of it out of the productivity savings that we're able to generate But you're seeing that in talent we're bringing in wealth, talent we're bringing in banking, Those investments are what has allowed for us to really drive this 8% you saw in the quarter and the 5% you see year to date. So along with the way of saying, yes, that's the target. As of today about 2026. But I'm I'm really trying to make sure we get good momentum out of our returns,

Jim Mitchell: and that, as Jane says, is something that continues to improve

Mark Mason: even as we come out of 26.

Operator: Our next question comes from Glenn Shore with Evercore ISI. Your line is now open. Please go ahead.

Jim Mitchell: Thanks. It's a good segue. A question I had on

Glenn Schorr: on the progress you made in investment banking and markets. The couple of things I heard over the last couple of quarters, but definitely today are, you know, big growth in prime broke prime broker services, investments in leverage finance, progress in converts, All that is good use of balance sheet, but they do use balance sheet. I'm cool with that. So I guess I'm more asking on the go forward basis. The

Jim Mitchell: there are there are there key hires that go along with that and client wins that we don't

Glenn Schorr: get details on? And then is there an opportunity to add good return on RWA balance sheet commitment further because, you know, I think there was some pulling back over the last couple of years as you needed to. And now I hear that being let out, and I feel like sometimes that might be don't wanna call easy, but easier to drive some share gains by letting out a little bit more rope. So I was just looking to get color on that. Thanks.

Jane Fraser: Yeah. Thanks, Glenn. Look. We believe there is very good opportunity to add you know, in a number of areas, you know, what good returning RWA and further balance sheet commitments and I won't go through the answer. I gave on the first question because I was running through a lot of different areas. Because there's a multitude of it.

Ebrahim Poonawala: But we're being

Jane Fraser: I think this has put real discipline into how we look at allocating balance sheet. All of our business heads get together and they decide collectively, for example, on the deployment of the corporate loan book and where if we're leaning in on lending, making sure we get the full share of wallet, not just hitting return target from it. And that's that's been an area that's got good discipline Prime's got a lot of upside and a lot more way to go in terms of adding the volumes onto the platform

Ebrahim Poonawala: and

Jane Fraser: capital space and the financing business, another area with high marginal returns. Some of the mortgage book, not a huge growth area for us, but another one that's got good opportunity. And then, you know, we've gotta love our proprietary card business. So, you know, there's a there's a multitude of different places that we see that we expect to be deploying capital with high returns. Whilst continuing the discipline we've got which is also taking capital away from some of the areas that have been you know, either at low returns or that are commoditizing. I'm I'm, you know, very proud of the team. They've done an excellent job on that. And we'll continue doing more of the same.

Glenn Schorr: That's great. I one more follow-up. Within services, you talked about lower loan spreads, but in general, I think everybody's got a lot more capital than they thanks to earnings and derig. And so just more of a broad question across all the businesses. What are you expecting in terms of loan yields with all this excess capital? And what are would call limited demand still.

Mark Mason: Yeah. Look. We are we are seeing continued loan growth across the portfolio. So we've seen it, as you mentioned, in services, in trade loans. And, you know, those are really on the heels of our of our clients looking at

Jim Mitchell: different trading corridors and wanting to bring on additional suppliers

Mark Mason: in preparation for what could be on the other side of trade policy. So that was good loan growth in the quarter, at, I would say, at good yields, although there is some spread compression there. The USPV card portfolio had good loan growth again with average interest earning balances that's contributing to you know, improved returns. And so, you know, feel good about that. Our markets business, particularly in spreads, we expect to see continued growth particularly in private credit and that's largely driven by asset-backed financing and a bit of commercial real estate. And so we're seeing it you know, the growth we expect to see and are seeing it kind of across many of those segments.

You know, as rates continue to as rates come down, that'll obviously, you know, impact the you know, the funding cost of those assets. But we feel good about the yields that we're we're getting on them. As you know, we are, you know, we are kinda looking at the investments that we have at corporate And as those mature, we're redeploying those into higher yielding assets, whether they be loans or, frankly, even you get a better yield on some of the investments in cash. And so those are a number of the drivers that we have in place that are contributing to you know, NIM improvement, you know, as we manage through the environment that we're in.

Operator: Our next question comes from Ken Houston with Autonomous Research. Line is now open. Please go ahead.

Mark Mason: Hi. How are you? Good afternoon. Good afternoon. First question just, Mark, you talked about the good trends on the

Jim Mitchell: on the credit losses side, and you talked about, you know, at the last conference, how a few hundred million a build, and that ended up being six hundred plus. Given that you're one of the best reserve banks already, was that just more of a catch up related to the kind of post April second? And but yeah. Because you had mentioned before that, like, cost of credit could be one of the things that, you know, could inhibit a path to ten. So I just wanna understand, like, how caught up are we now and

Mark Mason: how are you thinking about that as we look ahead? Thanks. Sure. So I look. I'd break I'd break it down in couple of ways. So one, I do feel very good about our reserve levels. You know, $23.7 billion. 2.7% percent reserve to loan ratio, we look at the cost of credit in the quarter, we're looking at $2.9 billion that we booked in the quarter total cost of credit. When you break that down, you know, the NCLs is the largest part of that, and the NCLs you know, were about $2.2 billion in the quarter. That's largely related to the cards portfolios that we have.

But those loss rates, as I mentioned, are inside of the range, which is a good thing. And then we have an ACL bill that's about $600 million. And so none of the build none of the net build in the quarter is associated with the cards or consumer portfolio. The $600 million can be broken down into two buckets.

Ebrahim Poonawala: Largely.

Mark Mason: One is the transfer risk in Russia. And so think about this as being, you know, we still have reduced operations in Russia and We still have dividends that come in that we have on behalf of our clients

Operator: we're unable to pay those dividends out

Mark Mason: given US law And as such, we have to hold a reserve

Jim Mitchell: around

Mark Mason: those dividends that we have on behalf

Operator: of our clients.

Mark Mason: So as our role as custodian. So about half of what we built in the quarter was associated with largely associated with having to establish the reserve for the unremittable dividends that we have there. The other half is tied to the corporate portfolio changes. And so there, you can see both in markets where we had an increase in loans and financing and securitization. As well as in banking where we saw a quarter over quarter increase in volume.

Jim Mitchell: As well as some idiosyncratic names

Mark Mason: you know, in both were the drivers of the other portion of the ACL build. So consumer ACL flat, build largely on the corporate side related to those two drivers. But take a step back, continue to feel very good about health of the consumer at this stage, reserve levels that we have, and about the quality of our corporate book. That we that we also have in the aggregate reserve level.

Jim Mitchell: Okay. Got it. Just second question, just in the TTS business, you know, we talked about, like, Citi sitting in the middle of all the activity a smaller line, but the fees and treasury and trade were a little softer. I'm just wondering, like, just now that we know more about things that we're seeing around the world, like, any changes to just client engagement, you know, potentially for the better or if not for the worse, and just how it feels in terms of, like, global activity that flows through that business. Thanks.

Jane Fraser: Yeah. It's we've been very proactively helping clients navigate the macro and the geopolitical uncertainty And that's what's been driving the strong growth this quarter.

Operator: It

Jane Fraser: cross-border transaction value up 9% year over year. US dollar clearing volumes up 6%. You know, the only areas that have been a little softer on that front was the commercial card just being flat year over year, and that was due to lower government spend. And a little bit of the macro uncertainty. So on the fee front, I think we're feeling pretty good about this one. And if I look at, for example, the demand for trade loans, we onboarded almost two thousand new suppliers this past quarter. We grew new wins by 24% year over year as corporate have been building up inventory to limit unforeseen disruptions.

And we've also been very active in the different digital asset innovations. I was talking about earlier. So it's been busy, and the operating deposit growth I don't wanna sniff at that either because that drove some strong deposit levels. Average deposits are up 7% year over year as clients were building up cash, fast buffers and keeping more working capital on hand. So kind of firing, as I say, on all cylinders here as well as elsewhere given the environment. Mark, anything you'd add? The only thing I'd add, Kennett, you know, I appreciate the

Mark Mason: comment in terms of or the question, I should say. But if you if you look at page ten, one of the things I try to highlight is that the non-interest revenue includes the revenue sharing that occurs. And so the total fee revenue, which we break out on the left-hand side was actually up 6%. And I know services is obviously both TTS

Operator: and security services,

Mark Mason: but I can I can tell you that up 6% includes fee momentum on the TTS side as well as security services? So you know, don't don't don't be misled by the down 1% here. Or even what's in the supplement the underlying fee growth is aligned with the strength we're seeing in those key performance indicators that Jane mentioned earlier.

Operator: Our next question comes from Christopher McGrady with KeyBret and Woods. Your line is now open. Please go ahead.

Glenn Schorr: Great. Thanks for the question.

Jim Mitchell: Just going back to the buyback comment for a minute. If I could. The at least $4 billion

Mark Mason: how would you attribute that? Is that more city specific given the momentum you're you're pressing on the call today? Or

Jim Mitchell: or really greater clarity on the regulatory environment?

Mark Mason: Well, look. I mean, I am very I feel very good about the performance that we have, you know, as a firm in the quarter in the half. You can see just how much you know, net income we generate, you know, in the quarter you know, on slide nine on the left-hand side, I feel good about the prospect for continuing to generate earnings momentum in the balance of the year and that gives us confidence around, you know, about around the buyback levels that we have both in the third quarter that I referenced, but also in the $20 billion share we in earlier in the year.

And so our performance is certainly a factor and an important factor

Jim Mitchell: and

Mark Mason: in our confidence on the buybacks. Now obviously, the direction and tone, as I've said a couple of times, on what we're hearing around a holistic view and look at capital is important for us. And important for the industry. And as I mentioned earlier, the direction that the SCB is going does give will likely afford us some flexibility But this is this is the right path for us in terms of as many buybacks or as much in buybacks as we can do you know, early in the year, given where we're trading and where we feel very good about doing that.

Jane Fraser: I second that.

Operator: Thank you.

Mark Mason: And then my follow-up, the ten to eleven return on equity for next year, presumably, that had some degree of

Jim Mitchell: deregulatory benefit in there. Is what we know today versus maybe six months ago

Mark Mason: that give you, I guess, greater confidence that

Jim Mitchell: either the level or what the timing might be sooner or better than initial expectations? Thanks. The timing for sorry? Just the level of ROE or the timing to get to the ten to eleventh? Thanks.

Mark Mason: Oh, look. I think the you've heard us talk about the ten to eleven for some time now. And that really has been rooted in what we knew then, frankly, in terms of the strength of the franchise,

Jim Mitchell: and recognizing that there was uncertainty around how capital levels

Mark Mason: you know, would evolve. And so

Jim Mitchell: I can't I'm I'm

Mark Mason: I don't think they the takeaway is that the ten to eleven is supported by

Jim Mitchell: known changes in the capital regime. I think it is

Mark Mason: like I said, more aligned with you know, where we the strength we see in the underlying franchise.

Operator: Our next question comes from Gerard Cassidy with RBC Capital Markets. Your line is now open. Please go ahead.

Jim Mitchell: Hi, Jane. Hi, Mark. Hi. Hey, Pedro. Jane, you talked about the trends and

Gerard Cassidy: n I a in wealth management, the organic growth over the last twelve months. The high single digits, there was weakness in the second quarter, Did you see toward the end of the quarter as the markets came back

Jim Mitchell: were there different flow characteristics, let's say, in the month of June versus April? And I know July is only two weeks old, but any

Vivek Juneja: color on it in the first couple of weeks?

Jane Fraser: Yeah. I we saw positive momentum in May and June as clients became more proactive, and that know, underlay the comment I made that as the markets have been recovering. In some of the initial surprise that everything that was happening, you know, clients settled down. I think that they're still being conservative. There's still a sense of let's wait and see, but we're being we'll be poised to support them when they're ready to be active.

Vivek Juneja: Very good. And, Mark, maybe you can remind us when you guys allocate your capital, the tangible common equity by segment, you break it out first, I think up to Slide twenty three. Markets is at $50.4 billion versus $54 a year ago. Can you share with us again why it was low why you guys have been able to lower that allocation?

Jim Mitchell: Yeah. Again, I this is on the heels of

Mark Mason: some very good work in markets in terms of, you know, optimizing use of risk-weighted assets and generating higher revenue for use of balance sheet, and that obviously contributed to you know, more steady, solid performance in both earnings as well as returns that we've seen. And as we look at this once a year, in terms of how we disclose it. There was certainly an opportunity there to, in light of their contribution to stress losses, to bring down what we allocated to the markets business. I would highlight that if you look across that page, I think it's page nineteen in the deck, you actually see that most of the businesses had a reduction

Operator: in

Mark Mason: allocated TCE you know, on the heels of improved performance that we saw coming out of 2024. And so that's the approach that we take. Obviously, the ideal scenario is that we are bringing down the capital requirements in aggregate at the firm level through you know, returning that to shareholders or ensuring that we're earning higher returns on it. But the businesses have been performing well, and it has shown up in their allocated TCE while supporting continued growth that they expect in 2025.

Ebrahim Poonawala: Our next

Operator: question comes from Matt O'Connor with Deutsche Bank. Line is now open. Please go ahead.

Mark Mason: Hi. Just wanted to ask on expenses back half of the year. The four-year guide implies cost coming down Obviously, you had quite high severance

Glenn Schorr: this quarter. Just wanna get a sense of what you're assuming for kind of severance the rest of the year and I think you said some of the

Jim Mitchell: kind of

Erika Najarian: transformation costs are going up. Any other, puts and takes of life?

Jim Mitchell: Yeah. I think I'd in terms of your question on stranded costs, I think I given guidance that we had roughly $600 million or so in our forecast for the full year of 2025.

Mark Mason: When I look at where we are through the second quarter We're probably you know, at $500 of that $600. So you can envision in the second half, you know, a meaningful reduction in the amount of severance that we're assuming you know, in the balance of the year. And then as you would imagine, that severance was is in place for employees that are leaving. And so we would also see the benefit from reduction in compensation associated with that start to play out in the in the back of the year as well. And then, obviously, I mentioned earlier stranded cost product productivity, those are all other drivers that contribute to the downward trend.

Obviously, revenue to the extent of this year over year revenue growth, we'd expect it to be volume and revenue-related expenses associated with that. And any transformation or other hiring that we do would be the offset. But downward trajectory, though those are the drivers that get us to the full year estimate that we've been talking about at $53.4.

Erika Najarian: Okay. That's helpful. And then just in the severance, I think it had a placeholder for a few hundred million next year. But are you kind of getting after it a little bit sooner than you thought and then might be lost or still have a placeholder for a hundred million next year as of now?

Mark Mason: Yeah. I'm not changing my guidance on next year at this point, but we feel good about the path we're on for the balance of 2025 and feel good about that ten to eleven as we go into next year and we'll deal with kind of where there's opportunity to do something different as we kinda get into next year.

Operator: Our next question will come from Steven Alexopoulos Cowen. Line is now open. Please go ahead.

Jim Mitchell: Hi, everybody. This is actually for Jane. Jane, I wanna go back to your response to Ibrahim's earlier question.

Erika Najarian: Stablecoins are a good opportunity for Citi. I don't know if you caught CNBC yesterday, but Circle CEO is a newbie to comment

Jim Mitchell: that no one sends an email across border right, implies that disabled point

Erika Najarian: companies are coming after across border.

Jim Mitchell: So the questions are,

Erika Najarian: how much of the total company's revenue is cross border?

Mark Mason: And do you have an appetite to proactively disrupt

Jim Mitchell: yourself in a way

Glenn Schorr: to get ahead of these new entrants coming into the business. Oh, I can't wait to answer this question.

Jane Fraser: So if you keep in mind right now, stablecoins about 88% of all Stablecoin transactions are used to settle crypto trades. There's only 6%, which is payments, in a traditional offering, if you are moving from cash to stablecoin and back to cash, right now, you're incurring as much as a 7% transaction cost. I mean, that's just that's prohibitive. So this is where Citi token services is so exciting because it enables the client to move from physical fiat to the digital and back again without incurring that transaction cost.

So a client can move cash across their regional and global hubs let's say, from New York to Hong Kong and the UK and back again, on us, instantaneously, 24/7, cross border. And it we also absorb all of the complexities that you'd have to do if you're working with Stablecoin and moving back to fiat, such as the accounting, the AML, you know, etcetera, etcetera. So I truly I'll ask as I mentioned, we've been already moving billions in transaction volume in this year on Citi token service

Ebrahim Poonawala: But

Jane Fraser: ours is the superior offering here. Particularly for our corporate clients. And if anything, what's holding us back at the moment is it's our clients readiness to operate in this world because we're ready. We're doing it, and we're gonna keep on innovating We're just gonna keep building these capabilities out into the payments financing, liquidity, and other spaces. So and we'll do it in a safe and sound manner because trust is also important.

Glenn Schorr: Jane, I appreciate that color.

Operator: For my follow-up, so I

Jim Mitchell: fully get the value of the token to your clients.

Erika Najarian: And I asked Jamie this question this morning on the JPMorgan call.

Jim Mitchell: But when I think about the innovators you have,

Erika Najarian: you have the last mile relationship. So you're in the pole position right now.

Jim Mitchell: But when we think about the value of, let's say, Circle payment network does you know, it over time, they need to build a network. You already have one. They need to build one. But they'll connect everybody that uses different banks

Erika Najarian: And, you know, if you got together with Bank of America and JPMorgan and others, you could very quickly create a network that could almost be impenetrable by these newer entrants. And what

Jim Mitchell: this is the perplexing thing to me. Like, what is holding the banks up today from joining together same way you did from Zelle and you'll block off these new entrants entirely. Because that to me, that's what needs to happen

Erika Najarian: for all the benefits you talked about to stay in our ecosystem. So this is one of the reasons we really welcome the administration's willingness

Jane Fraser: to allow banks to participate in the digital asset space more easily. The is where the Genius Act is also something that we're enthusiastic about. Particularly because it gives a level playing field as well. Up until now, it has been hard for us to participate. You know, in an in the level playing field as you talked about. And I go back to, I think, your point, but also the point I made earlier. What do clients want? They want multi-asset, multi-bank, cross-border, always-on solutions in payments, financing, and liquidity. We shall do that. We shall do that in a safe and sound manner.

There'll be areas we'll cooperate with other banks, but to do what I just said, we don't need another bank. We're the global leader in this. And we'll absorb all of those complexities of compliance, reporting, accounts, AML for the client. To your point, I think we have the killer app here

Operator: Our final question comes from Saul Martinez with HSBC. Your line is now open. Please go ahead.

Vivek Juneja: Hi. Thanks for squeezing me in. I just one question for me. Wanted to ask about USPP. Good momentum there. The 11% RONSI in the direction of travel.

Mark Mason: Is positive there. But it's still, you know, pretty low given the mix of businesses that you're in. Largely, you know, you know, cars, you would think that the RAVI will, you know, should be higher And, you know, can you just remind me what your goal is there? How quickly you can get there, and what's what is still an impediment to

Erika Najarian: you delivering that kind of return? Is it do you still have transfer do you have transformation cost? In there? Is the is the retail banking business a drag? What sort of a make you've under earned still in this business?

Ebrahim Poonawala: Yep.

Jane Fraser: So our goal is mid-teens then high teens on the RO target for this business. We're we are very committed to both the cards business as well as the retail bank. And I'll talk a little bit about the retail bank quickly in a minute as well. But we have a path to high returns from revenue in terms of also improving expenses, as you say, We have elevated expenses because of the transformation. And we've also got the path on capital there. So I'm feeling I feel very good about the strategy in cards. We're prime credit led card issuer. We've got a very diverse portfolio.

Sizable proprietary portfolio that we're growing, and we've got some real market of partner clients. We will continue growing our revenue by expanding and refreshing the product suite. You've just seen what we've we've announced. We've also invested a lot in the digital capabilities, incentivizing cardholders to do more. And we've had eleven quarters now. I think it is a positive operating leverage. I think you're just gonna see us you know, keep delivering about that in a in a an improved credit environment, we hope. And that's what we're seeing going forward. The other area is we're investing a lot in AI. And that is gonna deliver efficiency as well as service benefits.

I'm pretty excited about what we see there. And you know, I don't wanna forget the retail bank strategy because it is the front door to city in the states. That we, you know, while we've only got six hundred and fifty branches, our six core markets have a third of the household high net worth households in the states. It makes the retail bank a very important feeder for wealth. We have the highest deposits per branch as well. And so this is not just a low-cost funding option for us. But, I'll really positive to have seen the good growth on the retail bank there. So I think you just see a steadily moving forward towards that target.

And next year, we've got the benefit of Barclays portfolio coming on board as well. So I'm I'm nicely I think you can tell nicely confident about the path we're on, the direction of travel, and meeting those returns.

Erika Najarian: Good. That's great. Thank you very much.

Operator: There are no further questions at this time. Turn the call over to Jen Landis for closing remarks.

Jennifer Landis: Thank you everyone for joining us. Please reach out if you have any follow-up questions. Thanks, everyone. Thank you.

Ken Usdin: This concludes

Operator: the Citi second quarter 2025 earnings call. You may now disconnect.

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DATE

Tuesday, July 15, 2025 at 12 p.m. ET

CALL PARTICIPANTS

Chief Executive Officer — Ron O'Hanley

Interim Chief Financial Officer — Mark Keating

Head of Investor Relations — Elizabeth Lynn

Need a quote from one of our analysts? Email [email protected]

TAKEAWAYS

State Street Corporation(NYSE:STT)

Earnings Per Share (EPS): EPS was $2.17 in Q2 2025, up from $2.15 (GAAP) in Q2 2024, while EPS excluding notable items grew 18% to $2.53.

Total Revenue: Excluding notable items, total revenue increased 9% year-over-year; fee revenue rose 12% year-over-year.

Operating Leverage: Achieved a fourth consecutive quarter of positive fee operating leverage and a sixth consecutive quarter of positive total operating leverage, excluding notable items.

Pretax Margin and ROTCE: Pretax margin approached 30%, and return on tangible common equity was approximately 19%, both excluding notable items.

Expenses: Expenses rose 6% year-over-year, with about half attributable to higher performance and revenue-related costs, plus unfavorable currency translation; ongoing investments in technology and infrastructure accounted for the remainder.

Notable Items Impact: Recognized $138 million of notable items pre-tax, including a $100 million repositioning charge tied to the severance of roughly 900 employees and about $40 million of notable items related to a client contract rescoping.

Assets Under Custody and Administration (AUCA): AUCA reached a record $49 trillion, up 11% year-over-year due to higher period-end market levels and client flows.

Assets Under Management (AUM): AUM exceeded $5 trillion for the first time, increasing 17% year-over-year, with net inflows of $82 billion.

Servicing Fee Revenue Wins: Secured $145 million in new servicing fee revenue wins and two new State Street Alpha mandates.

To-be-Installed Servicing Fee Revenue: Backlog of $441 million in to-be-installed servicing fee revenue, the highest on record, with about half expected to install in 2025.

ETF Trading Volumes: U.S. ETFs achieved $4.6 trillion in trading volume, leading the industry in equity and commodities, and ranking among the top three in fixed income.

FX Trading and Securities Finance Revenues: FX trading revenue rose 27% and securities finance revenues increased 17% year-over-year, each excluding notable items; prime services fee revenue advanced 29% year-over-year.

Software and Processing Fees: Software and processing fees grew 19% year-over-year, with front office software and data revenue up 27% year-over-year, excluding notable items, mainly from CRD wealth client renewals.

SaaS Recurring Revenue: Annual recurring revenue from SaaS increased about 10% year-over-year to $379 million.

Net Interest Income (NII): NII was $729 million, down 1% year-over-year, mainly due to lower average short-end rates and deposit mix, but up 2% sequentially from Q1 2025.

Deposit Balances: Average deposit balances rose 7% sequentially, reflecting early-quarter macro uncertainty that subsided through May and June.

Capital Return: Returned $507 million to shareholders (comprised of $300 million of share repurchases and $217 million in dividends), with an 82% payout ratio.

CET1 Ratio and LCR: Standardized CET1 ratio at quarter-end was 10.7%, down roughly 30 basis points sequentially; State Street Bank’s LCR stood at 136%.

Dividend Increase: Announced intention to raise the quarterly common stock dividend by 11% to $0.84 per share, pending board approval in Q3 2025.

Full-Year Outlook Update: Management raised 2025 total fee revenue growth guidance to 5%-7% (from 3%-5%) and full-year expense growth guidance to 3%-4% (previously 2%-3%), both excluding notable items (non-GAAP).

Productivity Initiatives: Over the past three years, delivered more than $1 billion in expense savings, largely from productivity initiatives; on track to achieve over $1.5 billion in expense savings by year-end 2025, toward a $500 million 2025 target.

Investment in Technology and Efficiency: Continued operating model transformation prioritized, with over $150 million in year-over-year expense savings generated and approximately $250 million year-to-date toward the annual goal.

Alpha Platform Adoption: Added two new Alpha mandates totaling $380 billion AUCA and converted three Alpha installations.

SUMMARY

Management emphasized sustained growth in core fee-based businesses while maintaining expense discipline through substantial productivity initiatives. Executives highlighted that net interest income remained roughly flat compared to last year’s record in the first half of 2025, despite sector headwinds from lower global interest rates. Enhanced operating model investments—including AI and platform scaling—were identified as key drivers of further efficiency and long-term value creation.

Ron O'Hanley stated that the expanded scale and client relationships in the Alpha platform and back-office sales are essential to driving recurring fees and ancillary revenue streams.

U.S. low-cost ETF products achieved notable market share gains, supported by innovation in defined contribution offerings such as income protection embedded in target date funds.

State Street announced a strategic partnership with the University of California to pilot a “super app” for individual stakeholders, aiming to test scalable offerings for wealth democratization.

Management reiterated that capital return is prudently managed toward the high end of the 10%-11% CET1 target range, with incremental payout increases expected in H2 2025 subject to market conditions.

Executives confirmed the repositioning charge for severance of approximately 900 employees is expected to produce expense savings primarily in 2026.

FX volatility in April was a major contributor to quarterly activity spikes; subsequent deposit normalization aligns with expectations for a progressive moderation in coming months.

Management clarified that recent client contract rescoping was limited in scope and did not impact servicing fee revenue backlog or AUCA to be installed.

Tokenization of assets was described as a strategic opportunity, with anticipated acceleration as regulatory frameworks progress globally.

INDUSTRY GLOSSARY

Alpha mandate: A fully integrated front-to-back investment servicing solution leveraging State Street’s Alpha platform, encompassing data aggregation, analytics, and workflow automation for institutional clients.

CRD (Charles River Development): A subsidiary of State Street providing front and middle office investment management software solutions, integral to the Alpha platform.

Servicing fee revenue to be installed: Contracted, but not yet implemented, annual recurring fee revenue pending client onboarding for asset servicing solutions.

SaaS (Software as a Service): Cloud-based delivery model for software solutions allowing clients to access and utilize applications on a subscription basis rather than via traditional on-premises installations.

CET1 (Common Equity Tier 1): A regulatory capital measure reflecting the highest quality core capital that a bank holds in its capital structure, critical for regulatory compliance and financial stability.

Full Conference Call Transcript

Operator: Good afternoon, and welcome to State Street Corporation's second quarter 2025 earnings conference call and webcast. Today's call will be hosted by Elizabeth Lynn, Head of Investor Relations at State Street. We ask that you please hold all questions until the completion of formal remarks, at which time you will be given instructions for the question and answer session. Today's discussion is being broadcast live on State Street's website at investors.statestreet.com. This call is also being recorded for replay. State Street's conference call is copyrighted, and all rights are reserved. This call may not be recorded for rebroadcast or distribution in part or in whole without the express written authorization from State Street Corporation.

The only authorized broadcast of this call will be housed on the State Street website. Now, I would like to hand the call over to Elizabeth Lynn.

Elizabeth Lynn: Thank you, Operator. Good afternoon, and thank you all for joining us. On our call today, our CEO, Ron O'Hanley, will speak first, then Mark Keating, our Interim CFO, will take you through our second quarter 2025 earnings presentation, which is available for download on our website investors.statestreet.com. Afterward, we'll be happy to take questions. Before we get started, I'd like to remind you that today's presentation will include results presented on a basis that excludes or adjusts one or more items from GAAP. Reconciliations of these non-GAAP measures to the most directly comparable GAAP or regulatory measure are available in the appendix to our presentation. In addition, today's call will contain forward-looking statements.

Actual results may differ materially from those statements due to a variety of important factors, such as those referenced in our discussion today and in our SEC filings, including the risk factor section in our Form 10-K. Our forward-looking statements speak only as of today, and we disclaim any obligation to update them even if our view should change. With that, let me turn it over to Ron.

Ron O'Hanley: Thank you, Liz, and good afternoon, everyone. Before we begin, I want to take a moment to acknowledge the devastating floods in Texas. Our thoughts are with those who have tragically lost their lives and with the people and communities who have been affected by this event. Now turning to the second quarter, in a period characterized at times by significant financial market volatility driven by geopolitical and economic uncertainty, our strong Q2 results demonstrate the powerful and diversified nature of our franchise.

By advancing and leveraging our deep capabilities in technology and investment services, markets, and investment management, we continue to strategically position State Street as our client's essential partner and execute on our purpose to help create better outcomes for the world's investors and the people they serve. Disciplined execution of this strategic approach is delivering positive results, including accelerating financial performance and strong business momentum. For example, on a year-over-year basis, our Q2 results marked the fourth consecutive quarter of positive fee operating leverage and the sixth consecutive quarter of positive total operating leverage excluding notable items.

New business was strong, as we generated a near-record quarter for sales in investment services, surpassed $5 trillion in AUM at State Street Investment Management, and generated record FX trading volumes in Q2. This positive momentum reflects the strong strategic, operating, and technology foundation we have built over the past several years to support the long-term growth of our businesses. As we work to build on this progress, we remain focused on disciplined execution against our strategy, delivering consistent growth for our shareholders, and maintaining operational excellence in the service of our clients. Turning to slide two of our investor presentation, I will cover our second quarter highlights before Mark takes you through the quarter in more detail.

Beginning with our financial performance, we reported earnings per share were $2.17 as compared to $2.15 in the year-ago period. Excluding notable items, which Mark will speak to, fee and total revenue increased 12% and 9% year-over-year. We delivered positive fee and total operating leverage, increased pretax margin to nearly 30%, and achieved a 19% return on tangible common equity. While EPS increased 18% year-over-year, all excluding notable items. Turning to our business momentum, within investment services, we delivered a very strong sales performance this quarter, securing over $1 trillion in new AUCA asset servicing wins and generated $145 million of related new servicing fee revenue wins, including two new State Street Alpha mandates.

With this continued good sales performance, we remain confident in our ability to meet our full-year servicing fee and A wins target of $350 to $400 million for a second consecutive year. The second quarter marked an important milestone for our asset management business, which we rebranded State Street Investment Management. This new name reflects our commitment to investing in our relationships, innovation, and in the future. Among other benefits, this new brand name reinforces our one State Street approach that aims to leverage collaboration across our firm, expand product offerings, and deepen relationships with our clients. This moment for our investment management business came as period-end AUM exceeded $5 trillion for the first time.

Quarterly net inflows were over $80 billion, and we continued to gain market share in the strategically important US low-cost ETF market segment. The second quarter also offered further evidence of the strength and depth of our ETF franchise, as our US ETFs led the industry in trading volume, surpassing $4.6 trillion in total volume for the quarter, ranking number one in equity, number one in commodities, and among the top three in fixed income. State Street Markets is seeing the results of its efforts to deepen client relationships, and in Q2 clearly demonstrated its ability to support clients through volatile periods with deep liquidity and trading expertise, while also providing important diversification to our revenue profile.

Amid a constructive environment for our markets business, we saw significant year-over-year increases in both FX trading and security finance revenues driven by higher client volumes. Our FX trading business recorded its best quarter since 2020, and security finance revenues rose to the highest level since 2019. Turning to our balance sheet, our strong financial position enabled over $500 million in capital return in the second quarter, over $800 million year-to-date.

Our financial strength was further underscored by the results of the Federal Reserve's annual stress test in June, subsequent to which we are pleased to announce our intention to increase State Street's quarterly per-share common stock dividend by 11% to $0.84 beginning in the third quarter, subject to approval by our board of directors. As we look ahead, we remain committed to returning capital to our shareholders, subject to market conditions and other factors.

Elizabeth Lynn: Turning to our operational efficiency,

Ron O'Hanley: we have a well-established track record of expense discipline. This continues to be supported by a proven ability to generate productivity savings to fund investments in our business, which in turn is driving revenue growth and operating leverage. For example, over the last three years, we have generated over $1 billion of expense savings largely from productivity initiatives. And we anticipate that number will increase to over $1.5 billion by year-end as we continue to progress well against our $500 million expense savings target in 2025. Importantly, as we look further ahead, the next generation of our operating model transformation remains our priority and a key opportunity to add even more value for clients and shareholders.

The charge we as we drive further operational efficiency and unlock productivity gains over time supported by AI and continued platform scaling. To conclude, our first-half results build meaningfully on 2024. The second quarter included a number of strategic and platform milestones for State Street, offering tangible proof points that our strategy is delivering. Reflected in the continuing improvement in our financial performance and the strong momentum we're seeing across our businesses. These results underscore the strength of our franchise and the disciplined execution of our strategy by our teams.

As we look ahead, we have strong conviction in our strategy and in our ability to serve our clients well, underpinned by our distinctive value proposition, financial strength, and the next generation of our technology and operational transformation. With that, let me hand the call over to Mark, who will take you through the quarter in more detail.

Elizabeth Lynn: Thank you, Ron, and good afternoon, everyone. Picking up on slide three, before turning to our second quarter financial results,

Mark Keating: let me briefly walk you through the notable items we recognized this quarter. Notable items totaled $138 million pre-tax, or $0.36 per share, primarily driven by a $100 million repositioning charge associated with our ongoing operating model transformation. This action relates to the severance of approximately 900 employees and, as we noted in June, is expected to drive expense savings mostly in 2026 with a payback period of roughly four to five quarters. We also recognized roughly $40 million of notable items related to a re-scoping of an Alpha client contract along with a few smaller items as detailed on the slide.

Turning to slide four, excluding notable items, second quarter EPS grew a robust 18% year-over-year to $2.53 a share. Total revenue increased 9% and fee revenue increased 12% year-over-year, each excluding notable items, reflecting strong business momentum across the business.

Elizabeth Lynn: Expenses increased 6% year-over-year,

Mark Keating: excluding notable items. Approximately half of the year-over-year increase was driven by a combination of higher performance and revenue-related costs, associated with the more constructive revenue environment in the second quarter, and to a lesser extent, the unfavorable impact of currency translation. The remaining increase primarily reflects continued investments in the franchise, including technology and infrastructure. This performance enabled us to deliver meaningful fee and total operating leverage, with 526 basis points and 241 basis points respectively, excluding notable items. Accordingly, our pre-tax margin expanded to nearly 30% while ROTCE was approximately 19% excluding notable items. Turning now to slide five, AUCA reached a record $49 trillion, up 11% year-over-year, driven by higher period-end market levels and client flows.

AUM also reached a new record in the second quarter, increasing 17% year-over-year to over $5 trillion, reflecting higher period-end market levels and positive net inflows. Key market indicators reflected the dynamic operating environment in the second quarter, with higher period-end market levels and elevated FX volatility across both developed and emerging markets. Against this backdrop, our markets business performed well, supported by record quarterly FX volumes, as we helped clients navigate a shifting market landscape, which I'll speak to in more detail shortly. Turning to slide six, servicing fees increased 5% year-over-year, supported by higher average market levels, net new business, improved client activity, and the favorable impact of currency translation.

We were encouraged by the strong sales momentum in our investment services business this quarter, with $145 million of servicing fee revenue wins. These wins were well distributed across regions, with key new mandates in Europe and North America, and are closely aligned with our strategic priorities, particularly in core back-office solutions and private markets. Installations progressed steadily and as expected during the quarter. Onboarding our $441 million of to-be-installed servicing fee revenue, the highest on record, remains a key priority as we aim to drive consistent and sustainable servicing fee growth. In addition, we reported two new Alpha mandates representing $380 billion of our AUCA wins this quarter.

Our interoperable front-to-back Alpha platform remains a key enabler in deepening and expanding client relationships. Moving to slide seven, management fees increased 10% year-over-year, primarily reflecting higher average market levels and the benefit of prior period net inflows. For the quarter, net inflows totaled $82 billion, driven by solid performance across ETFs and institutional. In ETFs, we saw healthy inflows across the product set, including US low-cost, gold, SPY, and US fixed income. Our US low-cost offering achieved continued market share gains in the quarter, reflecting the strength of our strategic positioning in this segment.

As Ron noted, the market volatility in the second quarter further highlighted the deep liquidity of State Street Investment Management's ETF franchise, which led the industry in US ETF trading volumes. In our institutional business, we delivered a record $68 billion of quarterly net inflows, driven by continued momentum in retirement, including our strategically important US defined contribution business. Overall, we were pleased with the strong performance of our investment management business in the second quarter, which generated a pre-tax margin of approximately 33%. Turning now to slide eight, FX trading revenue increased 27% year-over-year, excluding notable items. This strong performance was driven by record client volumes, with solid activity across our trading venues, reflecting heightened FX volatility.

Securities finance revenues increased 17% year-over-year, with strong balance growth across both agency lending and prime services. Within our prime services business, fee revenue increased 29% year-over-year, supported by higher balances and continued momentum in client engagement. Moving to slide nine, software and processing fees increased 19% year-over-year in the second quarter, excluding notable items. Front office software and data revenue increased 27% compared to the prior year quarter, excluding notable items. This strong performance was primarily driven by higher on-premises renewals largely associated with CRD wealth clients. In addition, software-enabled and professional services revenues increased 10% year-over-year, excluding notable items, reflecting continued momentum in SaaS client conversions and implementations.

We are pleased with our ongoing success in transitioning clients to our cloud-based SaaS platform, with annual recurring revenue increasing by approximately 10% year-over-year to $379 million in the second quarter. Moving to slide ten, net interest income of $729 million was down 1% year-over-year, primarily due to the impact of lower average short-end rates and changes in deposit mix. These headwinds were partially offset by continued loan growth and securities portfolio repricing. On a sequential basis, NII increased 2%, supported by growth in non-US deposit balances, securities portfolio repricing, and loan growth, partially offset by the impact of lower average short-end rates.

As detailed on the right of the slide, the average balance sheet size expanded relative to Q1, driven by a 7% increase in average deposit balances. The sequential increase in average balances was partly a reflection of the more uncertain macro backdrop that we observed early in the quarter, which moderated through May and June. We remain committed to supporting our clients with our strong, highly liquid balance sheet. Looking ahead, while we expect deposit balances to remain somewhat elevated relative to our expectations coming into the year, we do anticipate that balances will continue to moderate over the coming months and quarters, subject to market conditions.

Turning to slide eleven, expenses increased 6% year-over-year, excluding notable items, as I mentioned earlier. Compensation-related costs were up 7% year-over-year, excluding notable items, mainly reflecting higher performance-based costs and the impact of currency translation, while total headcount was down slightly. Information systems and communications expense increased 11% year-over-year, excluding notable items, as we continue to invest in technology and infrastructure to modernize our platforms while enhancing data delivery and user experience. At the same time, we continue to execute on our productivity and optimization savings initiatives, which generated over $150 million in year-over-year savings during the quarter. Year-to-date, these efforts have delivered approximately $250 million of savings towards our $500 million full-year target.

Our ability to consistently generate productivity and optimization savings reflects the intense work of recent years and is a key enabler of strategic investment, fueling technology modernization, supporting revenue growth, and helping us drive six consecutive quarters of positive operating leverage, excluding notable items. We expect the repositioning actions taken in the second quarter to build on this momentum and support the continued transformation of our operating model in the quarters and years ahead. Moving to slide twelve, our capital and liquidity levels remain strong, enabling us to continue supporting our clients as we look ahead. As of quarter-end, our standardized CET1 ratio of 10.7% was down approximately 30 basis points from the prior quarter.

Risk-weighted assets increased approximately $8 billion from the prior quarter, reflecting growth in our lending and securities finance businesses, as well as higher volumes and volatility in our FX trading business. The LCR for State Street Bank was a robust 136% in the quarter. Capital return increased to $507 million during the quarter, consisting of $300 million of common share repurchases and $217 million in declared common stock dividends, for a total payout ratio of 82%. As Ron noted, following our strong performance in this year's Federal Reserve stress test, we also announced our intention to increase our per-share quarterly common dividend by 11% in Q3, subject to board approval.

Looking ahead to the second half of the year, we continue to expect a progressive cadence of common share repurchases, targeting a total payout ratio of approximately 80% for 2025. In summary, we are encouraged by our second quarter and first-half results, which highlight our ability to execute on our strategy, driving sustained business momentum while delivering positive fee and total operating leverage, excluding notable items. With that, let me turn to our improved full-year outlook, which, as a reminder, excludes notable items and remains subject to significant variability given the current economic and geopolitical environment. Over the first half of 2025, we have demonstrated our ability to drive sustainable growth across our core businesses.

Given this strong performance, plus the current more constructive market environment and the anticipated impact of currency translation, we now expect 2025 total fee revenue growth in the 5% to 7% range, which is an improvement to our prior 3% to 5% full-year outlook. We expect full-year NII to be roughly flat to last year's record performance, with the potential for some variability driven by global monetary policy and changes in deposit mix and levels, which are difficult to predict.

With our improved revenue expectations, full-year expense growth is now expected to be roughly 3% to 4%, up from our prior full-year outlook of 2% to 3%, reflecting higher revenue-related costs and as well as expectations of a negative impact from currency translation. And importantly, we continue to expect to generate both positive fee and total operating leverage this year. And with that, operator, we can now open the call for questions.

Operator: At this time, we will open the floor for questions. If you would like to ask a question, please press star five on your telephone keypad. Please note, you will be allowed one question and one follow-up question. We will pause just a moment. Okay. Our first question will come from Ken Usdin with Autonomous. Please ask your question.

Ken Usdin: Hi, guys. Good afternoon. I just wanted to just ask on kind of, like, fees and fee operating leverage. Just kind of walking through the implied fee update. And, we'll get what drives that. Is it mostly just the market backdrop? Is it what we see in terms of the yet to convert and anything in terms of, like, how that timing of these, you know, great new wins and still left to convert will come through. Thank you.

Ron O'Hanley: Yeah. Ken, what it's Ron. Why don't I start that? So as we've noted, our pace of sales continues to be at an accelerated level. We said we were going to do in service for fees $350 to $400. We're on track to do that. That's what we did last year. That has led to a fairly sizable, in fact, a record level of fees to be installed, roughly $440 million. About half of that's going to install this year, and yet we're adding to that at about the same pace. So just on sales alone, there's a bit of a flywheel element to it.

We've talked about what's occurred in the asset management business that continues to grow these at a double-digit rate. Some of that market, but there's been positive organic revenue growth throughout this whole period. And then finally in markets, we'd invested heavily in client relationships. We that really do pay off when you get times of elevated volatility. So the organic elements in here are the primary driver of what we're talking about assisted by some constructive markets.

Ken Usdin: K. Great. And can you talk about just, you know, the new ones you're putting on and put it in context with the client rescoping that occurred. Like, is that now kind of a done in the past issue and or is there anything else that we could see regards with regards to that type of thing going forward?

Ron O'Hanley: Yeah. We don't anticipate anything like that going forward. As we noted, we had two new alpha wins this quarter. Three alpha installs. In terms of the nature of the back of our servicing fee revenue wins. About half of that are back office related. Which that's a combination of pure back office sales, plus alpha, which now only comes with back office sales. We will not do so that alpha related without some kind of back office element to it because as you know, back office drives recurring fees, but also gives us the right to other revenue sources like deposits, like FX, like securities finance, and that.

So in terms of that one client, it remains a very important client to us. It's a very important partner to us. And basically, they changed one element of it. Instead of going to a single platform, a multi-platform in their front office. And we have built Alpha to be interoperable. So whether it's Charles River or some other provider or Charles River plus another provider as it will be in this case, we've got the ability to interop in that way, and we'll be providing all the other services that we intended to. More importantly, this was a client that worked with us right in the very beginning. On the development side of all we were doing.

So going back to the 2019 time frame, and all that development IP still remains with us. Which is important because being extended to other clients.

Mark Keating: And, Ken, it's Mark. Maybe I'll just add to that just to make sure. And, you know, this was very contained to a software client contract, rescoping, so it had no impact on the servicing fee. Revenue to be installed, did not have an impact on our assets to be installed. It was very contained, as Ron said, to one particular aspect of a software agreement. Which we, you know, renegotiated and took the appropriate kind of actions on our that we've talked about here in our notable.

Ken Usdin: Okay. Thank you.

Operator: Our next question comes from Glenn Schorr at Evercore. Please ask your question.

Glenn Schorr: Hi. Thanks very much. Maybe we could step back and ask this big picture question of NII that feels a little different for you guys. And you've been consistent in talking about some in the range of flat year on year after a good 2024. But feels like the NIM has moved lower more so than others and balances. Your thought process on moderating is more so. Is that did is there something maybe related to your client base that's a little bit different? I appreciate the full package of operating leverage and better margins and all that. I'm just wanna focus on NII for a sec.

Mark Keating: Yeah. Thanks, Glenn. It's Mark. Let me take you through the kind of two-part of there. One was kind of our overall NII guide and then secondly, is, I think, a specific question on NIM, which I can get at as well. So you know, first, I'd say our guide, as you mentioned, is, you know, generally, you know, consistent with our original outlook of, you know, flat year over year. And I said roughly flat because there's still some amount of variability. The fact is that we always talk about in terms of rates and deposit mix and levels.

You know, I think now that we're halfway through the year, you'd expect that we'd be able to start to narrow, you know, possibly narrow the outcome that we're seeing here. But, again, we feel good about being able to, you know, continue to deliver on our guide of roughly flat, you know, standing here today. You know, if you look at the first half of 2025, NII has been roughly, you know, flat to slightly down versus, again, the record year we had in 2024. First half was down about 0.6% versus the first half of last year. So we're tracking well to our guide, you know, given some puts and takes that I can get into.

In a little more detail. So, again, holding NII flat to a record year after 6% growth last year. You know, means we're delivering on our guide and, you know, executing well in terms of what we've laid out for you. And, you know, we understand how important NII is, obviously. But, you know, we unpack the NII guide with a little more detail, and I'll frame it in the same way that we've been doing it since January and then again in April. Using kind of the four buckets of drivers and describing what the impact is to us. As a firm in terms of tailwinds and headwinds.

So, you know, the first one would be, you know, deposit levels and obviously you saw those, you know, go up this quarter. So, you know, interest-bearing deposits have certainly provided, you know, upside versus our expectations in what we talked about in January and then again in April. You know, while non-interest-bearing deposits have actually largely played out as expected, not withstanding, you know, an early pop in the second quarter. You know, we did have a near-term benefit in April, you know, during the peak of market volatility and uncertainty.

You know, however, in May and June, and then again, as we sit here in mid-July, we have seen some normalization in deposit balances, you know, since the quarterly high point in April. I'd also point out the majority of the spike in asset and deposits that we saw happened in lower spread buckets, like market rates and exception rates, and so they did carry a more limited, you know, benefit for us. So mix is important. So while deposits are up about 7% sequentially, our non-interest-bearing balances, where we have the widest liability spread, that was down sequentially roughly a billion. So we think deposits will remain, like, somewhat elevated.

But we do expect to see some leveling off over the coming months, and we'll obviously continue to track that closely. You know, in terms of other impacts, again, to us as a firm, our loan growth we've talked about, that's also played out as expected. It's been a tailwind year over year, and I can talk about that a little bit more in-depth. The investment portfolio reinvestment, you know, we talked about $4 billion a quarter. A hundred to a hundred and fifty basis points. You know, in terms of benefit there, given where rates are, we're seeing it more at the lower end around a hundred basis points.

You know, which brings us then to, like, the major, you know, bucket for us, which is short-term rates. And as we've discussed previously, we are an asset-sensitive bank. We've seen rates come down, you know, faster than expected. If you look at the US treasury curve, the two, three, five-year rates are down fifty to sixty basis points over the first six months of the year on a spot basis. Also, non-US central banks. You know, while the ECB and the Bank of England have largely been in line with expectations, albeit a little more aggressive in the case of Bank of England in terms of timing.

Other central banks have actually been relatively more aggressive in lowering their rates, such as the Reserve Bank of Australia and Canada. You know, I've talked previously about a cut at the ECB or Bank of England being worth, you know, about five to ten million per cut per quarter for twenty-five basis points. And while you know, Australia and Canada may not be that large to us, you know, when you start to look across, you know, several of the central banks, you know, it does start to add up as a headwind. So, hopefully, that helps, you know, and that we're putting all this together. We're kind of standing back from it.

We have some positives like a short-term pop in interest rates and interest-bearing deposits. Some negatives like the pacing of cuts. But we see it as being relatively balanced, you know, which brings us back to a guide of roughly, you know, flat, you know, to our record year of NII in 2024. So, again, we understand how important NII is. We've been pleased with our ability to deliver on our guidance, you know, this is 20% of the revenue of the company, and when we stand back and look at what we are delivering for our shareholders, it's really the momentum across the fee revenue franchise, which is roughly 80% of the firm's revenue.

For us, it's really the story.

Glenn Schorr: That was awesome. I really appreciate all that. Ron, I got one quick one for you. I can't resist. You guys have been great acquirers in the past and integrators. You almost got BBH done, but through no fault of you on that one helped through. What I'm curious if you share any thought process with us on what you thought when you saw the news, when we saw the news that maybe BK and Northern were doing the dance. I'm just curious. What crossed your mind and how we should think about that?

Ron O'Hanley: Well, you know, I'm not gonna comment on market rumors either about our sales or others, but our view on M&A remains consistent. We have a lot of confidence in the organic growth capability and potential of our franchise. But we've always viewed M&A as an important complement to our strategy. But it's a high bar. Right? You have to show that is it actually or is it a good trade-off for shareholders to sacrifice a return on capital to some kind of investment that's going to yield some kind of return. And so it's a high bar. And but as you know from us, we evaluate these things. Our focus is of late, has largely been around capability building.

So if you think about some of the relatively small investments we've done over the past year or two. Small case that technology platform in India, ethics, the direct indexing player, the investment in investment, all about helping to augment our capabilities and propel us forward. We will always look for opportunities to build scale. And, you know, you've seen us do some of those in the past. But right here, right now, we're quite happy. With our position, and we'll continue to focus on serving our clients well and building out our capabilities. And if something comes along that makes sense, we'll evaluate it.

Glenn Schorr: Okay. Cool. I appreciate it, Ron.

Operator: Our next question will come from Jim Mitchell with Seaport Global. Your line is open. You may ask your question.

Jim Mitchell: Hey. Good afternoon. Maybe just talk a little bit about the asset management business, record net inflows in the institutional channel and long-term assets. That's a pretty big change of what we see in the recent years. So can you just talk to is there anything kinda lumpy in there that maybe not to get too excited about, or do you feel like there's a turn in sort of the organic growth in that space? And how do we think about the fee rates in the long-term institutional AUM space? Thanks.

Ron O'Hanley: Yeah. So the I'll answer for the second quarter first. For the second quarter, it's a little bit of both. We have seen and talked about consistent organic growth in the institutional channel, mostly in defined contribution. And that's in the US, but not just the US. That's been led by a combination of innovative products. You know, we were the first to be out the door with some kind of an income protection product embedded in a target date fund. We've got a we're doing lots of different partnerships to add innovation to target date funds. And we're doing that not just in the US, but outside the US.

In addition, in the second quarter, we had a large new mandate from an existing client in Asia Pacific, and so that helped drive that number, which was a record quarterly inflow for us in the institutional business. But if you will, on a structural basis here, the investment in DC for us has been very important. We're very tied in with the investment consultants. We've got a very strong product set that we're constantly innovating and bringing both our know-how to it, but also when it makes sense bringing in partner know-how. And so we're quite bullish on that segment.

Jim Mitchell: Okay. That's helpful. And maybe just pivoting to regulation, it seems like some of your bigger peers benefit from the SLR being lowered, you guys already had some exemptions. So you're still somewhat constrained, but tier one leverage ratio. Do you in your conversations with regulators, do you think there's any acknowledgment of the tier one leverage constraint? And do you think that could also be lowered in the future? What's your sense?

Ron O'Hanley: Yeah. Jim, so, I mean, you've portrayed it accurately. We've gotten relief earlier. So tier one leverage as it relates to leverage constraint that is the binding constraint at this moment. I think there's some acknowledgment amongst regulators this is something to be looked at. I don't think it's something that's gonna be looked at immediately. You know, it may take till the end of the year for that because there's other things, obviously, around G SIB and stress test and things like that are reportedly higher up on the agenda.

But I would say that in this period where I think fifteen, sixteen, seventeen years after the financial crisis and all the changes that were put in place after that. I think there's for the first time, at least in the US, there's a real look at this. And, well, don't think any of us expect or even are asking for a, you know, a massive across the board rollback, I think that you're seeing a very sensible look both within agencies and across agencies, and I think that will play out favorably. Both in regulation and also even how the supervisory environment works and so it's a I think it's a constructive environment now for large GSIBs.

Jim Mitchell: Right. Okay. Thanks very much.

Operator: Our next question will come from Alex Blostein with Goldman Sachs. Your line is open. Please ask your question.

Alex Blostein: Hey, good afternoon. Thanks for the question. Ron, I wanna go back to the sales momentum you highlighted in these two service in business. And, again, appreciate the disclosure you guys out there a couple of quarters ago, both on the feedback log and the few wins that's obviously relevant. In the last several quarters, you know, maybe a year or so, the redemption have been fairly elevated. Obviously, part of that is BlackRock.

But are you, I guess, aware of anything notable on the redemption side that could sort of offset some of the strong wins you're having and maybe a little bit more color on the sources of these wins and how investors should think about sustainability of this new business within servicing potentially turning kinda the growth algo around in that part of the business.

Ron O'Hanley: So, Alex, let me start. I think that, you know, we've been quite consistent now going back two or three years that we had recognized maybe to make some changes on the servicing side. And, also, at the same time, we're investing heavily over the past several years in our operating model, which drives service quality. And service quality is those two things for you. One, it drives retention rates up and two, it gives you the right to win. Right to win with existing clients of deep relationships with existing clients, but also to be able to show up with new clients or takeaway clients. And that's all playing out as we said it would.

So we do not see any kind of elevated loss rate. In fact, we're quite pleased with where our retention rates are now. In terms of the nature of the clients, again, Alpha is a very important platform for us. So that's driving there. That's driving fee wins kind of across the stack. Front office, middle office, back office. But if we really think about it as if it doesn't as I said earlier, if it doesn't come along with back office, then we're really not interested in it. Or it'll be a lower priority for us. What we're also finding is that there's an increasing appeal for alpha within the private space.

As we're seeing an increasing appeal just in general as the private markets move from an in-source market to an outsource market. And then finally, our global footprint is really helpful. Because we saw a lot of wins a fair number of wins this quarter outside the US. Which again shows the power of the global franchise here.

Mark Keating: And it's Mark. Maybe I'll just jump in to offer a couple of maybe proof points and some context on that and to kinda maybe talk through how this has been building. This is not a, kind of just, you know, recently, we've started looking at posting these type of sales results. So I think I've talked about this before. You know, back in 2019 and 2020, we were doing $140, $160 million in servicing fee sales, and then we started to take that up, you know, in, you know, $250, $260, and 2021 and 2022.

And that's when we started talking to all of you about setting, you know, a more aggressive target for that of the $350 to $400. And again, that came from understanding our business and we've talked you through this before, the kind of, you know, rubric we have around, you know, the compression and, you know, DNC business each year, and then we knew that number needed to be much higher. So then we did, you know, we did $300 million in 2023, and then we did $380 million last year. And, you know, if I put it in context, we just talked about $145 million, you know, for the second quarter, and it was a very good quarter.

And we've talked about how it can be lumpy and all that, but it was a very good quarter. And you go back and put that in context. That's more in the second quarter than we did in all of 2020. So to me, that's, like, real change. That didn't just happen. You know, we changed our organization, our incentives. We focused on service excellence like Ron talked about. We invested in products and features and functionality. So we expect, you know, the performance to stay in that range and we know we need to target that going forward. And with proper execution, that's gonna really power the business forward.

Alex Blostein: Gotcha. Alright. Great. That's very helpful. Mark, I wanted to follow-up with you on your answer to Glenn's question around NII and sort of how you guys are thinking about on a forward basis. So you know, obviously, no 2026 guidance just yet, but as you sort of pointed to being, you know, assets sent to the bank, the forward curve is what it is. Help us maybe think about what are the things you guys could do and what are you working on to perhaps mitigate the effects of lower interest rates as you look out beyond this year. And importantly, is the interplay between NII and operating leverage?

You guys have been focused correctly on both positive fee operating leverage and positive total operating leverage. Is that kind of total operating leverage dynamic still possible if NII sort of peaks and starts to go down from here?

Mark Keating: Yeah. Yeah. I mean, thanks, Alex. I guess, I don't wanna get into anything around, you know, 2026. I mean, there are things that we, you know, have been doing in terms of looking at our, you know, client deposit pricing. We've been looking at our balance sheet strategy. We've been looking at our investment portfolio. So there's many things, you know, that we can look at, all those things that we have been. In trying to gauge, you know, where we're going into 2026 with NII. But I think it's just pretty early to start talking about that now.

Operator: Our next question will come from Mike Mayo with Wells Fargo. Your line is open. Please ask your question.

Mike Mayo: Hi. I just wanted a clarification just with all the discussion here. So did you benefit from heightened volatility and now you see that going down and NII is at a peak, and now you see that going down. I guess, are you over-earning the way you look at things or not?

Mark Keating: Hi, Mike. It's Mark. I'll I can start with that. And, you know, in terms of the volatility, so maybe talk a little bit about our FX, you know, our markets business. And again, as we've said, we think that business performed very well in the second quarter. We saw and we did see some heightened FX volatility, but we also saw the payoff in our strategy of expanding geographically in continental Europe, for example, has been a big focus for us. You know, we've increased our product mix, you know, added some capabilities and things like derivatives.

We've deepened our client engagement, you know, both existing clients and new, you know, new clients at privates and hedge funds, which, again, those businesses, you know, private markets business, we've been talking about that. I mean, that been growing. I think year over year grew 19%. And, again, that brings new clients, new opportunities for our markets business as well. And that's what really powered sequentially FX trading being up 18%, you know, sequentially, and year over year, 27% again ex Notable. So how we look at the second half, I you know, with continued, you know, political and economic risks, you know, we expect, you know, the investment climate's gonna remain challenged.

The volatility we've seen is really from multiple sources, so geopolitics, national economics and politics, differing central bank policies. So that type of divergence between countries, we think, is reflected in the FX markets. And so while, you know, a replay of the second quarter is not our base case, you know, we do expect volatility likely be more sustained. We're gonna have to see where it plays out for there from here. Hopefully, that gives you a little more color on the market side.

Ron O'Hanley: Mike, it's Ron. I've got everything I'd add two things to that. The heightened volatility in markets was really an April event. Real spike in volatility then, but it came back down. You know this as well as anybody's. So I think after April, the benefit of our deepened client relationships were as important as anything here.

Mark Keating: On the other hand, I get the cyclical high point here. That you come down to that volatility. On the other hand, seems like some of the core businesses are doing better like Charles River, over quarter. At some kind of growth rate. You've been up-tiering the Salesforce. Are you still upgrading? Seems like you have some core business momentum that you didn't have a few years ago. Am I looking at the right data? Is it are you a big thing to substantiate that?

Ron O'Hanley: Yeah. I mean, you are. And I'll just pick up on what Mark said a few minutes ago. A hundred forty-five million in servicing fee sales in 2020. A hundred and forty-five million of servicing fee sales in the second quarter of this year. And I think that actually does paint a good picture. Secondly, I would just point to the guide and we try and be very straight with our you. When we give guides. The beginning of the year, we gave you a three to five percent guide. We're giving you a five to seven percent guide now, which I think reflects what we're seeing in terms of the increased power of the franchise.

Mike Mayo: Alright. Thank you.

Operator: Just a reminder. Analysts are allowed one question and one follow-up. Thank you. Our next question will come from Betsy Graseck with Morgan Stanley. Your line is open.

Betsy Graseck: Hi. Good morning.

Ron O'Hanley: Hi, Betsy. Good morning.

Betsy Graseck: Hi. Have a question on an announcement that was made on July first with University of California on building a super app for individuals, and it was interesting I wanted to understand thought process behind in, you know, investing in this. And is this a one-off? Or are you anticipating broadening this out to other participants, partners, and is there any way this would feed into other parts of State Street, or is it a goodwill venture just thanks.

Ron O'Hanley: Yep. So Betsy, first of the University of California, it's a long-time partner of ours. And this initiative is quite consistent with our strategic commitment to the wealth business. Within State Street Investment Management, your wealth now is about it's a little over a trillion about $1.2 trillion of our total assets and growing quite rapidly. Through the ETF channel. And we have a commitment to the wealth services business. But part of this is an overall belief that the democratization of wealth is continuing unabated.

And in spending some time with the University of California, we realized that they were a quite interesting partner because if you add up all of their stakeholders there so you look at so students, faculty, employees, and alumni. There's 350,000 potential stakeholders there. They're quite close to most of them, and it becomes an interesting platform to start to experiment with new sorts of offerings. So it's a bit of an experiment for both of us, but certainly our objective would be to develop something that, firstly, work for the University of California and then was leverageable. Other places.

So we look on it as a way to at scale, develop some innovative offerings for the wealth market consistent with this idea of democratizing investing. And being able to extend that or potentially being able to extend that elsewhere.

Betsy Graseck: Okay. Thank you.

Ron O'Hanley: Thanks, Betsy.

Operator: Our next question will come from Ebrahim Poonawala with Bank of America. Your line is open. Please ask your question.

Ebrahim Poonawala: Thank you. Just a couple of follow-ups. One, on capital and apologize if you clarified on this, but I think I heard you talk about 80% payout for the full year. Just give us a sense remind us in terms of from a capital perspective what we are managing to terms of the ratio feels like you've a lot of flexibility there. And what stops you from leaning in and doing more in buybacks than the 80%? Thanks.

Mark Keating: Yeah. Sure. It's Mark. Let me just maybe a two-parter. I'll talk a little bit about our capital return, and then I'll talk a little bit about, you know, CET1, which is really the ratio that we're managing to here. So you're right. I mean, we previously talked about 80% payout. So we've also highlighted, you know, previously that, you know, our intention is to, you know, return capital at a progressive cadence through the year. So you saw that, you know, going from Q1 up into Q2 now at $517, which was an 82% payout. It was $320 in Q1. So and we expect, you know, to move through the third quarter and then into the fourth quarter.

You know, anticipating additional step-ups as we move to deliver on our overall payout target of 80%, you know, subject to market conditions and other factors, obviously. So that's kind of still our guide, and that's what we're committed to. In terms of CET1, I think we've talked about this before, you know, given the current environment, we are, you know, continue to prudently manage toward the higher end of our 10% to 11% CE1 target range. You should generally expect us to continue in that range and managing to that as our clients, you know, really appreciate the value, you know, financial stability and soundness and appreciate us running the business and help capital levels.

And, also, I'd say we're cognizant of our own sensitivities, you know, around our RWA stack, which can swing, you know, several billion at quarter-end, with market volatility. And that's what you saw this quarter, right, with our 10.7 print. So, you know, still, again, very much in line with what we've talked about over the last few quarters.

Ebrahim Poonawala: Thanks, Mark. Just one quick I think you talked about deposit balances. Elevated, but maybe drifting lower in the back half. Just give us a sense of when you think about non-interest-bearing or overall deposit balances, what gets them growing again? Is there a trough that we should look at from a cycle standpoint? Or just how you're thinking about it. Yeah?

Mark Keating: Yeah. So maybe a couple things. First, in terms of overall levels, So, you know, Ron mentioned it earlier too. April was really the month that had the most volatility, and we saw the quarterly, like, period spike. Right? That's what happened in April. And then we saw deposit levels overall, you know, come down in April. Sorry. In May and then again in June. And then, you know, sitting here in mid-July, you know, our deposit levels are, you know, not too far off like our expectations that we had given back in April around the kind of high end of the $230 to $240.

It's not quite down back to that high end of that range, but it's approaching it. You know, sitting here kind of middle of July. So that's number one. Number two on non-interest-bearing, again, it was down a billion quarter to quarter. You know, we expect it, as we said, you know, before, we expect that to continue to, you know, moderately decline. You know, maybe into the low twenties is what we've talked about. You know, so that's kind of generally deposit levels. Now your question about raising deposits, you know, the best way that we can raise deposits is to sell and install back office business. Right?

Custody brings deposits, Custody brings FX trading revenues, securities finance revenues, all the kind of good stuff that goes around, you know, custody as the hub of the company. So, you know, $444 billion in to-be-installed revenue of which roughly 60% of that is back office, which means custody. That's a good sign in terms of our ability to generate, you know, custody, client-related deposit, you know, And if we keep the flywheel spinning on the servicing fee sales target, that's what we'll see.

Ebrahim Poonawala: Thanks, Mark.

Operator: Our next question will come from Brian Bedell with Deutsche Bank. Your line is open. Please ask your question.

Brian Bedell: Great. Thanks. Good afternoon, folks. Just one housekeeping one quickly and then a longer-term one. The housekeeping is just your assumptions on market returns for the second half that underpinned the 5% to 7% guide?

Mark Keating: Yeah. Sure. Let me take the opportunity, maybe take you quickly through kind of the macro points that are underpinning the guide, and I guess I'll just start with the equity market. So, you know, entering the year, right, we expected 5% point to point, which implied average market levels up, you know, 8% for the year. Obviously, you know, as we sit here today, we're tracking a bit better than the assumptions we had coming into the year. So, you know, that's constructive in our current guide. So you expect that to be a tick higher. You know, that said, we've seen, you know, considerable volatility over the past quarter.

So, you know, we'll continue to monitor developments there and see how the average go up from here. So that should, you know, cover the equity, the, you know, market appreciation side.

Brian Bedell: K. Great. And then longer-term pick one for Ron. Just on the concept of tokenization of equities in any ETPs and other assets, how are you thinking about that longer term? I guess just your view and whether you think that will evolve, you know, more slowly over time, or do you think there's a stronger movement? And maybe some of the pros and cons of that and what is State Street doing to, you know, to be a participant in any kind of trend?

Ron O'Hanley: Yep, Brian. So we think about it in two ways. One is as a bank ourselves, but maybe more importantly, as this as an important servicer to other asset managers. So we do see a tokenization has been slower than I think anybody anticipated. If you go back three, four years, But I think with the current administration and the regulatory framework really in most parts of the world starting to emerge, we think that the pace on that will continue to accelerate. And the opportunities for tokenization are really broad.

I mean, it's not just the tokenization deposits, tokenization money market, funds enables uses of that money market of that of these kinds of assets, and it different way than originally anticipated. It could be on some cases, used for collateral better than it could be in other cases. For example. So we think this will, as regulatory frameworks are developed, we think this actually will accelerate. I think the questions that the regulators, particularly the bank regulators, need to deal with all of these things is how do they think about core deposits and how do they think about banks as the transmitters of monetary policy?

And to the extent to which any of this causes more deposits to leave the banking system, I mean, remember, money market funds seem like a passing fad four years ago, and now $6 trillion is out of the banking system. So I think that's a little bit of the unknown and where regulators come down on this.

But given the breadth of tokenization opportunities, let's broaden it out to real assets and the ability to actually take assets that right now are paper-intensive, very legal-intensive, and be able to make them much more liquid, we think that this will start to take off at an accelerating pace, but probably nowhere near as much as the optimists think, nowhere near as fast as the optimists think it will. But for us, we need to be there and intend to be there. First and foremost as a servicer, as a major servicer to these markets. And secondly, as a bank ourselves.

Brian Bedell: That's great color. Thank you.

Operator: Our next question comes from Gerard Cassidy with RBC Capital Markets. Your line is open. Please go ahead.

Gerard Cassidy: Thank you. Good afternoon. Can you guys come back to the sensitivity of revenues to market moves? I think in your 10-K, you give us that 10% increase in equities global equity valuations generally leads to maybe a 3% increase in service fee revenues. When you look at your service fee revenue growth this quarter of 12% ex notable items, how much was associated to, you know, market conditions moving higher?

Mark Keating: Hey, Gerard. It's Mark. I guess I would just say that 10% 3% is servicing fees. And so our service fee growth year over year is 5%. So 12% is total including software and trading and asset management. So, you know, obviously, the I don't have in front of me, but, obviously, the, you know, impact year over year of where markets have been has been positive. It's been a positive to us, and that has generally, you know, been pretty consistent in terms of the, you know, if you see a 10% growth again over time because quarter to quarter can be we've talked about this before in terms of, you know, billing cycles and whatnot.

But the 10% 3% for servicing fees, and it's, like, 10% 5%, over from asset management. It's been pretty consistent.

Gerard Cassidy: I say thank you. And maybe, Ron, just a broader question. You referenced in your opening comments about the rebranding of State Street Investment Management and how that reinforces your one State Street strategy approach and how you're going to, you know, leverage the collaboration between different product offerings and deepening your relationships with your clients. How as outsiders can we measure that success as you achieve those deeper relationships?

Ron O'Hanley: Yeah. It's a good question, Gerard, and we take that away and think if there's some additional disclosures that we wanna make to help on that. But if you let me talk about it at a conceptual level. If you think about our client base, and this is across the firm, we have one broad set of clients, which is really the global institutional investors. Is our client base. If you think about the subsegments of that, for example, asset owners, pension funds, sovereign wealth funds, insurance companies, those clients, we serve them both from an investment services basis, from an asset management basis, and from a market's basis.

A large segment is our asset managers, there, we're really not servicing them out of their investment management business, but we're providing services and markets. So this idea of one State Street and how do we deliver the whole firm, part of it is because if you think about who we are, notwithstanding our size, right, we've got a relatively small number of relatively large clients. So it's very important we be able to, one, help them help deal with their issues and address their strategic objectives at the highest level. And be able to do that across our firm. So it's not just about words.

I mean, part of that is you have to then think about how your relationship-facing force is squared off against that. We've made a lot of changes over the years. In that regard. So that rather than have just product-specific sales, efforts we have, particularly for our largest clients and our global clients, we have relationship managers that think about the total of State Street. And point's a good one, and we'll think about how we can actually show you the results. We see them, but we can think about how to disclose those in some way.

Gerard Cassidy: Appreciate it. Thank you.

Ron O'Hanley: Thank you.

Operator: There are no further questions. I will turn the call back to management for closing remarks.

Ron O'Hanley: Well, thank you all for joining us this afternoon.

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DATE

• Tuesday, July 15, 2025, at 10 a.m. EDT

CALL PARTICIPANTS

• Chief Executive Officer — Charlie Scharf
• Chief Financial Officer — Mike Santomassimo

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RISKS

• Mike Santomassimo noted, "Commercial net loan charge-offs rose by $36 million from the first quarter, reaching eighteen basis points of average loans." with losses described as borrower-specific, not systematic.
• Mike Santomassimo said, "We expect additional [commercial real estate] losses, they should be well within our expectations," highlighting ongoing risk in that loan portfolio.
• Mike Santomassimo reported, "Auto revenue decreased fifteen percent year over year, driven by lower loan balances and loan spread compression from previous credit tightening actions," indicating ongoing headwinds for that segment.

TAKEAWAYS

• Net Income: $5.5 billion in GAAP net income and GAAP diluted earnings per share of $1.60 for Q2 2025, both increasing sequentially and year-over-year.
• Return on Tangible Common Equity (ROTCE): Reached 15% in Q2 2025, including a gain from the merchant services joint venture; management stated this figure is not normalized.
• Net Interest Income: Increased $213 million, or 2% from the previous quarter, attributable to lower deposit costs, one additional day, higher securities yield, and higher loan balances.
• Non-Interest Income: Grew by $348 million, or 4% year-over-year, benefiting from the merchant services JV gain and a 9% rise in investment banking fees.
• Expense Control: Non-interest expenses rose 1% year-over-year due to revenue-related compensation, but fell 4% from the prior quarter as seasonally higher personnel expenses receded.
• Loan Growth: Period-end loan balances increased by $10.6 billion year-over-year, led by commercial and industrial lending within corporate investment banking, as well as modest increases in auto, other consumer, and credit card loans.
• Deposit Trends: Total average deposits declined 1% from the first quarter, while average deposits in our businesses increased 4% from a year ago; a small increase in consumer deposits was more than offset by lower commercial and corporate treasury deposits.
• Credit Performance: Net loan charge-off ratio dropped 13 basis points year-over-year and 1 basis point sequentially; Consumer net charge-offs improved across all non-real estate portfolios.
• Capital Actions: Repurchased over $6 billion in common stock during the first half of 2025, including $3 billion in Q2; Board authorized a new $40 billion repurchase program in Q2 2025.
• Dividend Policy: Announced intention to raise the common stock dividend by 12.5% to $0.45 per share in Q3 2025, pending board approval.
• Asset Cap Removal: Scharf said, "The big news in Q2 2025 was the removal of the asset cap, allowing the company new flexibility to proactively pursue deposit and balance sheet growth."
• Stress Capital Buffer (SCB): The expected SCB will decrease by 120 basis points in Q4, lowering the CET1 regulatory minimum plus buffers to 8.5%.
• Regulatory Trends: Management expects greater clarity and flexibility from finalization of Federal Reserve rules, which may allow for longer-term capital optimization.
• Business Segment Results: Investment banking fees rose 16% in the first half of 2025 compared to the prior year; Mortgage loan originations increased 40% year-over-year. Auto revenue fell 15% year-over-year but rose 2% sequentially.
• Digital Engagement: Active mobile users exceeded 32 million, up 4% year-over-year.
• Expense Guidance: 2025 non-interest expense is projected at approximately $54.2 billion.
• Outlook for Net Interest Income: 2025 net interest income (GAAP) is expected to be roughly in line with 2024's $47.7 billion (GAAP), representing a slight reduction from prior forecasts due to increased balance sheet allocation to the markets business.
• Commercial Loan Credit: Commercial real estate losses decreased sequentially; office market stabilization noted but gradual recovery and further losses anticipated.
• Non-Core Business Divestitures: Entered into an agreement to sell the rail equipment leasing business in Q2 2025, with closing expected in Q1 2026.

SUMMARY

Wells Fargo (NYSE:WFC) reported sequential and annual gains in net income and earnings per share in Q2 2025, supported by expense discipline and diversified loan growth. Management highlighted that the removal of the asset cap provides significant new capacity for deposit and balance sheet expansion, which had been constrained in previous years, including since 2019. The company intends to use this flexibility for both targeted growth strategies and continued shareholder returns, including a planned dividend increase and newly authorized $40 billion share repurchase program. Investment banking and fee-based revenue momentum offset lower net interest income attributable to capital reallocation toward markets activity.

• Charlie Scharf noted, "We are now able to move forward more aggressively to serve consumers, businesses, and communities to support US economic growth," underscoring management’s strategic shift post-cap removal.
• Segment trends included double-digit net asset inflows and increasing balances in the Wealth and Investment Management channel, as well as digital checking account growth across Consumer Banking in the first half of 2025.
• The shrinking stress capital buffer and anticipated regulatory easing could enable further capital deployment for organic initiatives.
• Expense and efficiency initiatives, including persistent headcount reduction and AI pilots, signal a commitment to invest in growth while maintaining return targets.

INDUSTRY GLOSSARY

• Asset Cap: A regulatory limit imposed by the Federal Reserve restricting a bank’s total assets, typically as an enforcement mechanism; its removal signals regulatory compliance and restored growth potential.
• SCB (Stress Capital Buffer): The capital buffer determined under the Fed’s Comprehensive Capital Analysis and Review (CCAR) to ensure banks have sufficient capital to survive a financial downturn. Lower SCB reduces minimum required capital levels.
• ROTCE (Return on Tangible Common Equity): A profitability measure calculated as net income available to common shareholders divided by average tangible common equity, reflecting core earnings power.

Full Conference Call Transcript

Charlie Scharf: Thanks, John. Good morning, everyone. I'll make some brief comments about our results and update you on our priorities. I'll then turn the call over to Mike to review second quarter results in more detail before we take your questions. Let me start with some second-quarter highlights. Our second quarter results reflect the progress we're making to consistently produce stronger financial results with net income, diluted earnings per share, and our return on tangible common equity all up from both the first quarter and a year ago. We continue to invest in our businesses, which has driven higher fee-based income. This growth was diversified with each of our business segments increasing during the first half of the year.

While we've been investing, we've also continued to take a disciplined approach to expenses and we have now reduced headcount for twenty consecutive quarters, resulting in a twenty-three percent decline from five years ago. We maintained our strong credit discipline and credit performance continued to improve in the second quarter with lower net loan charge-offs from both the year ago and the first quarter. Losses in both our consumer and commercial portfolios improved from a year ago. The big news during the quarter was having the asset cap removed. The lifting of the asset cap marks a pivotal milestone in our transformation, along with the termination of thirteen orders since 2019, including seven this year alone.

We are a far stronger company today because of the work we've done. In addition, we've also changed and simplified our business mix, transformed the management team and how we run the company, and have been methodically investing in the company's future while improving our financial results and profile. I know this call is for investors, but I want to once again thank the over two hundred and twelve thousand employees at Wells Fargo & Company who all contributed in one way or another to this milestone. Though we have tremendous opportunities, this has been a demanding place to work.

We have recognized the contributions of many here by increasing compensation, improving benefits, investing in more employee learning and development programs, and by giving those employees making below eighty-five thousand dollars in total compensation special year-end cash awards for the past two years. With the lifting of the asset cap, we wanted to do something special for everyone who invested so much of themselves into the company in recent years. As a demonstration of our appreciation from what we've accomplished, we give a special award to all employees so they could own part of Wells Fargo & Company and hopefully benefit from our future success. So everyone has been asking, what does the lifting of the asset cap mean?

First, we will continue to move forward with our risk and control agenda and embed the disciplines we have built deep into the culture of the company. But we are certainly in a different position with the asset cap and the many orders lifted. It is hard to convey the amount of time and effort the senior team has devoted to this work. So much of this work we with so much of this work completed, we can allocate our time differently and spend more time focusing on growth and the future. While we have not ignored this, the additional time we now have proved meaningful.

As you know, though we have generated substantial amounts of capital in the years since the asset cap was imposed, we've been limited in how much we've been able to deploy to support our customers and communities. While shareholders benefited from increased stock buybacks, we would have preferred to allocate more capital to grow our businesses and the overall balance sheet. We now have the flexibility to proactively grow deposits, and to allocate capital to grow loans and our corporate investment bank. Since I arrived, we've had to make difficult choices where to allocate our balance sheet given our inability to increase total assets. As we pointed out, we have turned away deposits from corporate clients.

And while we have not turned away consumer deposits, we've been careful not to aggressively grow consumer deposits given the limitations we were subject to. We've also had to be cautious about loan commitments, especially given the potential for significant drawdowns of committed facilities as we saw during the early days of COVID. We have also pointed out that we have constrained our markets-related balance sheet to allow for activity elsewhere in the company. As we look forward, we are now able to move forward more aggressively to serve consumers, businesses, and communities to support US economic growth. We expect to be more aggressive in our pursuit of consumer and corporate deposits, and we will selectively look to grow loans.

Though we will be cautious during periods of economic uncertainty. We also see opportunities to allocate more balance sheet to our markets business, to drive increased profitability. Our goal is to increase customer trading flow and financing activity without significantly increasing our risk profile. We also have the opportunity to think more broadly about using our balance sheet as we evaluate additional opportunities. In addition to the lifting of the asset cap, we expect that changes in both the regulatory and supervisory environment will allow us to compete more effectively. We announced earlier this month that our expected stress capital buffer will decrease by one hundred and twenty basis points starting in the fourth quarter.

Which would reduce our required CET1 regulatory minimum plus buffers back to eight and a half percent. We are also encouraged by the Federal Reserve's intention to provide more details supporting the CCAR process. And that detail along with the finalization of the broader set of capital rules will help us determine the appropriate level of capital we should hold going forward. We are also very supportive of the review the different regulatory agencies are conducting regarding rules and supervisory constraints that go beyond safety and soundness and do not allow us to effectively serve our customers and communities.

We are committed to continuing to maintain a strong capital position and are excited about using our excess capital and additional capital generation to reinvest in our franchise as well as continuing to return excess capital to shareholders. As a reminder, we have returned a significant amount of capital to shareholders over the past five years, including reducing our average common shares outstanding by twenty-three percent since 2019. As we previously announced, we expect to increase our third quarter common stock dividend by twelve point five percent to $0.45 per share subject to approval by the company's Board of Directors at its regularly scheduled meeting later this month.

We've repurchased over six billion dollars of common stock during the first half of this year, and during the second quarter, our Board of Directors authorized an additional common stock repurchase program of up to forty billion dollars. We continue to make significant investments in our core business which are helping to improve our returns. We continue to invest in our credit card business, not only by launching new products, but also enhancing the overall customer experience. Our commitment to delivering a seamless, secure, and user-friendly digital experience to our card members was recently recognized by J. D. Power which ranked Wells Fargo & Company number two in both mobile app and online credit card satisfaction.

Enhancements like these have spurred new account growth and higher balances and spending from a year ago. In our auto business, we completed the launch of our multi-year co-branded agreement as a preferred purchase financing provider from Volkswagen and Audi vehicles in the US. We had strong auto originations in the second quarter and ending balances in our auto portfolio grew for the first time in over three years. In consumer small and business banking, we have continued to see momentum in the primary checking accounts benefiting from our investments in marketing offers and enhancements to both the digital and branch experience.

We are on track to have over half of our branch network refurbished by the end of this year, and to complete a refresh of the entire network by the end of 2028. We continue to optimize and better position our network, including expanding in certain locations, including Chicago, New York City, and Nashville. We continue to enhance our digital experience, and consumer checking accounts opened digitally continued to increase and active mobile users now exceed thirty-two million, up four percent from a year ago. We also continue to see good momentum from Wells Fargo Premier, our offering for absolute clients. Let me highlight a few areas that demonstrate our growth.

We are investing in more bankers to serve these clients and have increased branch-based financial advisors by over ten percent from a year ago. The improved collaboration between our bankers and advisors has helped to drive over sixteen billion dollars of net asset flows into the wealth and investment management premier channel during the first half of the year, up over sixty percent from a year ago. Deposit and investment balances from Premier clients have also been steadily increasing and were up approximately ten percent from a year ago. Turning to our commercial businesses.

The investments we have been making in corporate, investment banking have continued to help drive growth with investment banking fees up sixteen percent during the first half of the year. We've also made steady progress increasing our US investment banking market share with our share up each of the last two years and again in the first half of 2025, driven by gains in leverage finance and M&A. We're continuing to invest in top talent to strengthen and expand our commercial banking business. For example, in our technology banking group, we have grown our team of bankers by over twenty-five percent over the past year.

We expect to continue to add bankers to this priority sector and in a number of additional markets and sectors where we have room to grow. In addition to driving growth in our core business, our strategy also includes simplifying our businesses and focusing on the products and services that matter most to our clients. As part of the strategic focus, in the second quarter, we entered into an agreement to sell the assets of our rail equipment leasing business. This transaction is expected to close in the first quarter of next year. As we look ahead, what we see regarding the health of our clients and customers has not changed.

Consumers and businesses remain strong, as unemployment remains low and inflation remains in check. Credit card spending growth softened very slightly in the second quarter, but is still up year over year. And remains strong overall and debit card spending growth has remained strong and consistent with what we saw in prior quarters. Consumer delinquencies continued to improve from a year ago. And commercial credit performance continued to be relatively strong. Deposit flows for both our consumer and commercial clients were in line with seasonal trends. I've had the opportunity to meet with many of our commercial banking clients this past quarter and many have conveyed optimism that the administration is working to level the trade playing field.

They would like certainty, but prioritize a good outcome for US trade above short-term certainty. Many have found ways to avoid passing the ten percent tariffs onto their customers. At the same time, they are preparing for the downside and are not growing inventories or hiring aggressively and developing contingency plans if the downside scenario occurs. As I've said before, we are hopeful, the results of the current negotiations will make our clients more competitive and help drive stronger economic growth in the US but there is uncertainty we should recognize there is risk to the downside as the market seems to price in successful outcomes.

As I highlighted, now that the asset cap has been lifted, we are more committed than ever to serving our customers supporting businesses and communities, and contributing to economic growth in the US. I continue to believe we have one of the most enviable financial services franchises in the world, I'm excited to continue to move forward with plans to produce industry-leading sustainable growth and returns. I'll now turn the call over to Mike.

Mike Santomassimo: Thank you, Charlie, and good morning, everyone. The second quarter, we had net income of $5.5 billion or $1.60 per diluted common share, up from both the first quarter and a year ago. These improved results reflect our continued focus on our strategic priorities, through our ongoing investments in our businesses, expense focus, strong credit discipline, and continued capital return, we have steadily increased profitability and returns. Our second quarter results included $253 million or six cents per share from the gain associated with our acquisition of the remaining interest in our merchant services joint venture.

Turning to slide four, Net interest income increased $213 million or two percent from the first quarter driven by lower deposit costs, one additional day in the second quarter and higher securities yield and higher loan balances. I'll update you on our expectations for full-year net interest income later in the call. Moving to slide five. Both average and period-end loans grew from the first quarter. Period-end balances were up $10.6 billion from a year ago, driven by growth in commercial and industrial loans, predominantly in the corporate investment banking business as well as slightly higher auto, other consumer, and credit card loans, while residential mortgage and commercial real estate loans continued to decline.

Average deposits in our businesses increased four percent from a year ago, We reduced higher cross corporate treasury deposits by fifty-eight percent from last total average deposits to decline one percent. Total average deposits also declined one percent from the first quarter as a small increase in consumer deposits was more than offset by lower commercial and corporate treasury deposits. Average deposit costs continued to decline and were down six basis points from the first quarter. Turning to slide six. Non-interest income increased $348 million or four percent from a year ago. Results in the second quarter benefited from the gain associated with our merchant services joint venture transaction.

I would note that the increase in card fees versus the first quarter reflected a change in where we recognized merchant services revenue resulting from this transaction. Revenue is now included in card fees whereas previously our share of the net earnings in the joint venture were included in other non-interest income. We continue to have growth in many of the businesses where we have been investing, including a nine percent increase in investment banking fees from a year ago. The growth in non-interest income more than offset lower net interest income resulting in modest revenue growth from a year ago. Turning to expenses on slide seven.

Non-interest expense increased $860 million or one percent from a year ago, driven by an increase in revenue-related compensation predominantly in wealth and investment management. Our other expenses were relatively stable as the investments we were making in our businesses, including the increased spending in technology and advertising, were offset by lower operating losses and the impact of efficiency initiatives. The four percent decline in non-interest expense from the first quarter was driven by seasonally higher first quarter personnel expense. Turning to credit quality on slide eight. Credit performance continued to improve and remain strong. Our net loan charge-off ratio declined thirteen basis points from a year ago and one basis point from the first quarter.

Commercial net loan charge-offs increased $36 million from the first quarter to eighteen basis points on average loans. The losses in our commercial and industrial loan portfolio were borrower-specific with little signs of systematic weakness across the portfolio. Commercial real estate losses decreased during the first quarter, As we have said, it will take time for the office fundamentals to recover. Valuations appear to be stabilizing, and although we expect additional losses, they should be well within our expectations. In Consumer net loan charge-offs declined $48 million from the first quarter to eighty-one basis points of average loans with improvement across all of our non-real estate portfolios, the residential mortgage portfolio continued to have net recoveries.

Non-performing assets declined three percent from the first quarter, driven by lower commercial real estate non-accrual loans predominantly in the office portfolio. Moving to slide nine. Our allowance for credit losses for loans increased modestly from the first quarter our allowance coverage ratio for total loans has been relatively stable for the past five quarters as credit trends have remained fairly consistent even amid macroeconomic uncertainty. Our allowance for coverage allowance coverage for our corporate investment banking, commercial real estate office portfolio has also been relatively stable over the past year and was eleven point one percent in the Turning to capital and liquidity on slide ten.

We maintained our strong capital position with our CET1 ratio at eleven point one percent, well above our current CET1 regulatory minimum plus buffers of nine point seven percent. Starting in the fourth quarter of this year, our new CET1 regulatory minimum plus buffers is expected to decline to eight point five percent. As you know, the Federal Reserve has a pending notice proposed rulemaking that would include averaging stress test results from the previous two years determine the stress capital buffer, If that is finalized as proposed, the effective date may move to January first and our expected new CET1 regulatory minimum plus buffers would be eight point six percent.

We repurchased three billion of common stock in the second quarter and have Also, as Charlie highlighted, we expect to increase our common stock dividend to forty-five dollars per share in the third quarter subject to board approval. Moving to our operating segment, starting with consumer banking and lending on slide eleven. In Consumer small and business banking revenue increased three percent from a year ago driven by lower deposit costs and higher deposit balances. For the second consecutive quarter, deposit balance grew from a year ago even with higher outflows for tax payments and second quarter of this year compared with last year.

Debit card spending remained strong, up four percent from a year ago consistent with prior two quarters. Home lending revenue was stable from a year ago, Mortgage loan originations increased forty percent from a year ago as we focused on servicing Wells Fargo & Company customers, This higher volume also reflected a stronger mortgage market from a year ago, However, the mortgage market continued to be weak compared with historical levels due to the high rate environment. We continue to reduce headcount, which has declined forty-nine percent since the end of 2022, we have simplified the business and reduced the amount of third-party mortgage loan service for others by thirty-three percent since the end of 2022.

Credit card revenue grew nine percent from a year ago as loan balances increased and spending slowed slightly but remained strong. Auto revenue decreased fifteen percent from a year ago driven by lower loan balances and loan spread compression from previous credit tightening actions. While these actions have reduced revenue, they have improved credit performance. Auto revenue increased two percent from the first quarter, the first linked quarter increase since fourth quarter 2021. The decline in personal lending revenue from a year ago was driven by lower loan balances. Turning to commercial banking results on slide twelve.

Revenue was down six percent from a year ago as lower net interest income due to the impact of lower interest rates was partially offset by growth in non-interest income driven by higher revenue from tax credit investments, an increase in treasury management fees. Average loan balances in the second quarter increased one percent from both a year ago and the first quarter as clients have largely remained cautious while waiting for more clarity on the economic environment. Turning to corporate investment banking on slide thirteen.

Banking revenue was down seven percent from a year ago, driven by the impact of lower interest rates, This decline was partially offset by lower deposit pricing and higher investment banking revenue, including higher advisory fees. Commercial real estate revenue declined six percent from a year ago due to lower loan balances, the impact of lower interest rates, as well as reduced mortgage banking income after the sale of our commercial knowledge third-party servicing business in the first quarter. Markets revenue declined one percent from a year ago as higher revenue in foreign exchange and rates products was offset by declines in equities.

We had a hundred and twenty-two million dollars gain related to an exchange of shares for Visa v common stock that benefited equities a year ago. Average loans grew four percent from a year ago and three percent from the first quarter, The increase from the first quarter was broad-based with higher balances in markets, banking, and commercial real estate. On slide fourteen, wealth and investment management revenue increased one percent from a year ago, as growth in asset-based fees driven by higher market valuations was partially offset by lower net interest income due to the impact of lower rates.

A reminder, the majority of WIM advisory assets are priced at the beginning of the quarter, so third quarter results will reflect higher July for the higher July first market valuations. Slide fifteen highlights corporate results. Revenue increased from a year ago, driven by the gain associated with our merchant service joint venture transaction. Turning to our 2025 outlook on slide sixteen. Starting with net interest income, we currently expect net interest income for 2025 to be roughly in line with full-year 2024 net interest income of $47.7 billion.

While there's several moving pieces of why we currently expect net interest income to be a little lower than we've discussed in April, The largest driver is that we have dedicated more balance sheet to our markets business than we originally assumed, including supporting stronger client activity in products like commodities and rates, which can be low which can have low or non-earning assets. The cost of funding this activity results in lower net interest income, while most of the revenue generated is recognized in noninterest income. Our updated expectation still assumes net interest income gross sequentially in both the third and fourth quarter of this year.

We are only halfway through the year and several key variables including net interest income remain uncertain. We will closely monitor how these assumptions evolve over the remaining of the year. We still expect 2025 non-interest expense to be approximately $54.2 billion. In summary, our second quarter results reflected the consistent progress we've been making to improve our financial performance.

Compared with a year ago, we had double-digit growth in net income and diluted earnings per share grew revenue including fee-based growth across many of our businesses maintained our expense discipline, improved our credit performance, and reduced common shares at Now that the asset cap is lifted, the management team has more time to focus on our growth initiatives and we'll have we will also have the flexibility to allocate more capital to growing our balance sheet, including deposits, loans, and trading assets. We will now take your questions.

Operator: At this time, we will now begin the question and answer session. If you would like to ask a question, please first unmute your phone and then press star one. Please record your name at the prompt. If you would like to withdraw your question, you may press star two to remove yourself from the queue. Once again, please press star one and record your name if you would like to ask a question at this time. Please stand by for our first question. Your line is open, sir.

John Pancari: Hi. Good morning. Mike, thanks for the explanation. You know, on the NII outlook is helpful. The markets piece of it, Just on the non-markets NII, could you talk about what kind of loan growth assumption you kind of built into the NII outlook for the back half of the year and how that connects to what you saw in terms of loan growth in the second quarter?

Mike Santomassimo: Yeah. Sure, John. Thanks for the question. You know, when you break apart the portfolio, on the consumer side, we're not you know, on the mortgage portfolio, we expect that'll likely just you know, continue to, you know, come down just a little bit. In the second half. I think you should see a little bit of growth in card Some of that season seasonality in terms of, you know, what happens as you go third and fourth quarter spending. And then we started to see some growth in auto, small, but started to see that turn. So, hopefully, that will continue to grow in the in the second half of the year.

But relatively modest in the overall balance sheet. On the commercial side, we do expect to see some, you know, modest growth as we go into the rest of the year. I think it likely comes from the same places, at least in, you know, at least as we come into the third quarter, you know, mostly in the corporate investment bank. Hopefully, we'll start to see some of the commercial bank customers borrow a little bit more as well. But I'd say overall, still relatively modest. But as you get to the end of the year, you know, hopefully, you know, if things play out, we'll start to see a little bit more activity more broadly.

John Pancari: Okay. And then maybe you could just give us your thoughts in terms of total revenue. I know you don't give total revenue guidance, but just maybe when you look at your own internal projections and budgeting, how is the revenue outlook for this year shaping up? What are the puts and takes relevant to your expectations if we think about the year so far?

Mike Santomassimo: Yeah. No. It's a it's a it's you know, as you sort of break apart, like, the pieces, you know, we talked a bit about where NII is coming out at this point. I think when you look at the fee side, you know, the biggest you know, go through the biggest line items. You know, and you look at, you know, the investment advisory fees, you know, the market been very supportive, you know, as you look at, you know, the rest of the year.

And so you know, you can easily sort of model what the third quarter looks like based on where the SED where the markets ended, you know, already given most of the fees are already sort of certain. And then and so as long as the market sort of holds up or grows a little potentially as you go into the fourth quarter, that should be you know, constructive. You know, you start breaking down, you know, deposit fees, card fees, you know, all that stuff, you know, plays into some of the seasonal activity that we'll see in the third and fourth quarter.

And I'd say largely those things are kinda playing out pretty close to what we modeled, you know, depending on the month or quarter, maybe a little bit better, but they're playing out know, largely as we expected. You know, across most of those. And then it's really sort of trading line. And that'll be driven by, you know, what kind of activity and volatility we see in the market. But I think, you know, we've had a pretty constructive environment now for a couple quarters. Hope of that continues. And then I think lastly, just, you know, we'll see how the year comes out on the equity securities gains that we saw.

We did see some modest gains in this quarter. You know, big improvement relative to what we saw last quarter. You know, as the market, you know, remains constructive that, you know, hopefully, that will continue as well.

John Pancari: Okay. And I guess just to clarify, Mike, you mentioned you used previously say that your NII guide assumes the asset cap remains in place. Now we relax that assumption. The outlook's a little worse. It just this counterintuitive mix shift that you're gonna grow the capital markets balance sheet, but it's gonna come in fees?

Mike Santomassimo: Yeah. I would well, I'll remind you first that it's been off for, what, six weeks now? Five and a half weeks, six weeks? And so I do think it has been off for a very short amount of time. And, you know, I think what's happened, you know, as we sort of looked at and some of this started in the you know, towards the end of the first quarter, early second quarter, and we sort of talked about it in some other public you know, forums. You know, we've seen some increase in the activity, and that's what's causing it.

You know, that's the by far the largest driver of what's causing it to move down a little bit. From the low end of the range that we talked about in April. And so and as we said, like, you know, that's largely offset in fees, you know, on those because you get paid in fees for some of those for some of that activity.

Charlie Scharf: Yeah. And let me just add a little hey, John. It's Charlie. Let me just add just a one thing here, which is as we look forward to the end of the year, we have so far assumed I would describe it as a very small increase in the overall size of the balance sheet. So we do assume it grows above what used to be the cap, but not in any really meaningful way. And when we look at where that growth is coming from, you know, part of it is the loan growth that Mike spoke about earlier. But we had been and assumed that we dedicate know, balance sheet to our market's business.

And as we think about that, we're not focused on maximizing net interest income. We're focused on maximizing returns, how much money we make overall. And so we'll try and, you know, do as good a job as we can going forward giving some more clarity on how we intend to use that balance sheet, how it can affect the different pieces. But that is you know, it's a little bit of what we saw during this past quarter, and it's the way we're thinking about the rest of the year.

John Pancari: That's really helpful. Thank you.

Operator: The next question will come from Scott Siefers of Piper Sandler. Your line is open.

Scott Siefers: Good morning, guys. Thanks for taking the question. Was hoping, Mike, maybe we could approach the NII question maybe, I guess, a little differently. I guess, what are if loan growth in second in the second half will only be kinda modest, what are the other factors that will allow NII to grow? Because I think you'll still need to average few percent higher in the second half than you just did in the second quarter. So just trying to understand what the major puts and takes are within there.

Mike Santomassimo: Yeah. Scott, it's a little bit of a lot of things, right, that will sort of add up to some growth each quarter. We do expect deposit cost to continue to come down. We do expect to see some loan growth you know, come through. We do expect which will be a driver. We do expect you know, to see, you know, further repricing of this securities, you know, portfolio. So it really is, you know, a little bit of a little bit of a lot of things plus some, you know, deposit growth as we go into the end of the year.

And so I think all of that sort of adds up to, you know, seeing it grow sequentially each quarter.

Scott Siefers: Okay. Perfect. Thank you for that. And then, Charlie, maybe just sort of a top-level thing with the asset cap now off. I guess one of the questions that I get pretty to revisit medium-term return targets. Do you have any broad sense for sort of where you are in thinking about that kind of dynamic?

Charlie Scharf: Sure. I guess a couple of things on that. I think, you know, you didn't directly ask the question, but let me just maybe talk for a second about capital levels. Because capital levels obviously know you know, dictate know, returns to a certain extent. And so, you know, with what's hap you know, we you know, we've certainly seen a lot of change you know, over the past quarter or so. You know, obviously, we've got the ability to rethink how we use balance sheet with the asset cap.

And I do just wanna remind people that, like I had said, very consistently over and over and over again, when the asset cap is lifted, it's not like this light switch is gonna go off and all of a sudden, things are gonna dramatically change. We didn't know exactly when the cap was gonna be lifted. We didn't wanna get ahead of ourselves. And so we're very carefully thinking through how we use the additional capacity to help grow the company. And so we expect that to happen over time. We, you know, we never wanted to lead people to believe that there'd be any major change in the next week, the next month, the next quarter.

But it certainly does open options for us to grow and increase returns beyond what we've seen in the past. And so now that it's off, we're gonna be thoughtful about it. And as we go to our planning for next year, like, this is the perfect time, we will know, do our best to talk more about it and provide more clarity broadly to everyone. So we can create a level of understanding there. We have the lower SCB. Which, you know, is it's you know, it is a huge decrease. You know, after a significant increase from the year before. Which we commented in the year before, we didn't understand why we saw the increase.

As we think about how that impacts where we should be running our capital levels, We wanna take a little bit of time to let the Fed go through its process, both on CCAR and on the work they're doing on capital requirements. So we can try and get an understanding of what the right long-term level of capital is. So they've said that they're gonna provide more transparency on CCAR. Whether it's the underlying assumptions, the models, things like that. That'll be extremely helpful for us so that we're not constantly readjusting capital targets on a yearly basis in any material way in our view we haven't materially changed the risk of the company.

So, you know, that'll be forthcoming, hopefully, over the next couple of months as you know, the work they're doing on capital. So know, that'll allow us to come back with a more definitive point of view on where we should be running capital. But, certainly, all these things are, you know, lower levels where we had been running it because of the increases that we saw. So you know, that allows us to you know, deploy excess capital either organically or through buybacks. And so we do expect to get there.

And then just, you know, more specifically to your question, we've also said very, you know, very clearly fifteen percent is a, you know, is not the it's an interim target. It's not the final target. Once we get there, it's a good time to revisit where we go. So both through hopefully some, you know, increased returns that we're seeing in terms of how we run the business, know, running at some point with lower capital returns, we believe we'll be consistently at that fifteen percent. And then we'll provide more information on you know, where we go from there, you know, which obviously be, you know, a higher number, not a lower number.

Scott Siefers: Alright. That's perfect. Thank you both very much.

Operator: The next question comes from Ken Usdin of Autonomous Research. Your line is open.

Ken Usdin: Hi. Thanks. Good morning, guys. Just one more question on capital. You know, given what all you just said, try Charlie, and that we still have now really big amount of capital. The buyback in the second quarter was a little smaller than the first, and loan growth, as you said, looks like it's getting better, but not that quickly.

So should we can we expect that you might do more in terms of the buyback in advance of kinda getting that final zone of where you wanna live given that you just have it seems like you have enough capacity to do kind of all things you would wanna do in terms of growing the balance sheet and also returning more?

Charlie Scharf: Yeah. I listen. I don't think we wanna, you know, don't think we wanna give a specific forecast on how much we intend to do, but to your point, we have more capacity, not less capacity. You know, the price of the stock does matter. And so we'll be thinking about that. And I think we'll go from there. But, you know, I think, you know, the you know, we how I describe it. I would guess I would say we don't on the one hand, we don't feel like we need to deploy all of this capital immediately because we do wanna have the opportunity to use the balance sheet to grow and do interesting things.

But I've also said that we don't intend to you know, to do anything dramatic. And so that does create more opportunity to buy stock back. But, again, the way we're thinking about it is we wanna first use the capital that we have to grow the company organically. That's what allows us to know, produce the right kind of returns. It allows us to create the ability to increase the dividend and, you know, buying stock back is kinda what we're left with.

So I you know, what we hope the answer is and what, you know, what certainly seems like is we'll have the ability to do all of those things to a greater extent than we've been able to do in the past, and we'll just be very hopefully, be very thoughtful about the timing.

Ken Usdin: Got it. And on one of you've laid out all the organic potentials in the past, but the one I wanted to ask you specific about is on retail deposits. Where there's it's obviously a strong competitive landscape and a lot of banks still building branches in other territories. You've talked about how that consent order coming off last year has helped you kinda just go to market in a in a broader sense. But, like, how will that manifest itself in terms of just retail deposits growth? Can you see do you expect an acceleration there in either, you know, net new checking or just overall deposit growth taking on the retail side? Thank you.

Charlie Scharf: Sure. Yeah. I mean, the yeah. I mean, I think the answer is as I said, I think if you just know, a little bit of you go back for a second is, you know, when we had the sales practices consent order, it was specifically, you know, driven by know, some of the, you know, the things that happened in those businesses. And so we had to be very, very careful about what we did. We scaled back an awful lot of stuff. Which stood in the way of our ability to grow.

And then even as that order came off, recognizing we had a deposit cap, Well, I'm sorry, an asset cap, which effectively can be a deposit cap, we were even though we were adding back some of the things that would actually help us grow quicker, know, we were you know, very careful about not doing too much too quickly because you have a constraint, you just don't wanna bump up against that constraint. So, you know, the activities that we've kinda reinstated inside the consumer business have to do with reporting. They have to do with the way we manage the business. They have do with the way we pay people.

And so you're starting to see increased net checking account growth. We're focused on, you know, primary check account growth. That should and we believe will lead to higher deposits. That you're you know, what you'll see is you're gonna see more marketing, you're gonna see more aggressive marketing, You're gonna see more merchandising in our branches. You're gonna see more local advertising as well as national advertising, as well as just you know, expansion of footprint in areas, you know, where we think we have room to grow. And so those are all things that we've been, you know, have been very, very cautious about doing up till now.

And with the value proposition that we have for our customers in strength of the brand and the great quality of the people here, we think we'll be able to compete very effectively I remind people, we're not competing with a small number of banks. We're competing with a lot of banks out there. That we believe we have a better value proposition for.

Ken Usdin: Got it. Great. Thank you, Charlie.

Operator: The next question will come from Ebrahim Poonawala of Bank of America. Your line is open.

Ebrahim Poonawala: Hey, good morning. I just wanted to follow-up, Charlie, on what you said in terms of in one of your responses around nothing's gonna change dramatically. Fifteen percent raw c was, like, step number one, which you were at two q again. Just one quarter. Appreciate that. But I think we are half full way of to look at this you mentioned the word grow aggressively many, many times on the call.

And I think the concern from an investor standpoint is a lot of this growth may come from a cost of ROTCEA, I don't think that's what you're saying, but just give us a sense of the lens with which you're looking at these growth, beat on consumer deposits, commercial deposits, Could it be that we could see a near term hit in terms of profitability before things pick up and you gain more wallet share? Just how should we think about the impact on the next six, twelve, eighteen months of returns? And are they offsetting fact on the expense side or productivity side that could mitigate things that you do to pursue growth? Thanks.

Charlie Scharf: Yeah. No. Thank you for the question. I mean, we don't mean to imply at all that we will sacrifice returns for growth. As we do all of our planning and we think about the opportunities, we think the things that we're gonna do to grow the company will actually be very focused on continuing to increase returns that we have. So please don't take anything that we've said as anything under that other than we continue to be very focused on those two things. You do raise the question about expenses.

We you know, we do point out in the remarks that we made that, you know, we've continue to be very, very focused on using the expense resource that we have as wisely as we can. And so that means that we are still focused on continuing to drive efficiencies in the company. And, you know, as we've done up till now, hope to be able to use this, you know, material part of the efficiencies that we continue to drive in the company as a way to pay for a lot of the investments that know, we intend to make. But that is very consistent with what we've done.

So even as we've increased marketing spend, we've you know, increased the number of hires that we have in the corporate investment bank. We've increased the hires in the commercial bank. We've increased the number of bankers that we've had in the consumer business. We've increased the number of financial advisor that we have we haven't stood up and say that those things are dilutive to returns. It's, you know, it's it's it's it's just the opposite. We've been able to do those things because we're driving efficiency elsewhere in the company, and those things will drive you know, increased revenue over a period of time and ultimately higher returns.

And so we're continuing to think about those things you know, the exact same way we've been thinking about them. And I would just say that we, as I've said, every quarter, including, I think we said it on the last quarter, we continue to feel like there are significant opportunities drive efficiencies in the company. Both traditionally and through technology, including AI. The only thing I'll just make sure just make sure we're clear on is yes, we had fifty percent RO two c in the quarter. But we also recognized that we had to gain in the in our merchant services business. So we don't really think about that as ongoing.

So, you know, we would say it's, you know, it's a little, you know, still a little bit lower. Even though we were running capital levels set, you know, the know, before the SCB adjustment, was put in place.

Ebrahim Poonawala: Got it. So thanks for walking through that. And maybe a separate question Mike, for you on in terms of NII, the market's view on what the Fed might do keeps changing. I appreciate that. But remind us in terms of asset sensitivity as we put into context, like the sequential growth in NII in the back half and maybe into next year. But how should we think about what three or four rate cuts would do to the balance sheet and the ability to maybe offset that given the growth outlook that you have so Thanks.

Mike Santomassimo: Yeah. Look. I mean, we're you know, we look at, you know, the implied forwards and with the market's pricing in on cuts obviously. And so that's all sort of embedded in sort of the view of where NII is sort of trending as we look in into the, you know, latter part of the year. Obviously, you're you know, even with that, you're still gonna see you know, you're gonna see pricing come down on the positive side and the commercial you know, businesses. You're gonna see, you know, continued repricing on the on the fixed you know, for on the fixed assets, you know, components of the balance sheet.

And then you're gonna see you know, hopefully, start to see some more growth come out of it. That will also help from an NII perspective. And so all those things will you know, should be constructive as you look forward despite what could be, you know, rates coming down a little.

Ebrahim Poonawala: No. Thank you.

Operator: The next question will come from Matt O'Connor of Deutsche Bank. Your line is open.

Matt O'Connor: Good morning. I was hoping you could just provide some clarity on the net interest income ex markets this quarter. Having a hard time finding that. And then maybe just give the guidance or comments on kind of the four year guide on the IX markets. Just to clarify?

Mike Santomassimo: Yeah. We don't we don't break out the components in total, you know, across markets versus non-markets. That's not something we've historically done. I think when you look under what's happening, you know, in the it NIIX, markets. There's lots of puts and takes, you know, across the across the balance sheet. I think if you know, look at the kind of rates in general, are sort of about kind of what we expected plus or minus a little bit. Like, so that's, you know, you know, the change in rates that we've seen throughout the year is not you know, not impacting sort of our guides really in any significant way.

You've seen slightly higher payment rates in places like credit cards, so that's probably muting balances there just a little bit and, you know, as well as some other you know, factors there. And so loan growth, you know, depending on the you know, outside of card, has been a little bit slower, you know, to deposits are sort of mostly behaving the way we thought. We're not seeing any significant or we're seeing really the trends of any cash rebalance into higher yields. It's sort of been stable now for a bit. For a number of quarters. And so we're not seeing that change in any significant way.

And so I'd say overall, the trends are you know, ex markets are pretty stable to what we've seen over the last couple quarters and largely consistent with what we've expected to see, you know, with a few puts and takes across, you know, the different portfolios.

Matt O'Connor: Okay. That's helpful. And I'm sure you guys have heard it before, but just as you grow in the training business, I think the clarity on the trading that I over time would be helpful. And then just separately want to ask about the lower tax rate this quarter. And somewhat related just the impact of the new legislation reducing clean energy tax credits. I think there's some kind of puts and takes there as you think about some stuff going away and some stuff that you might be able to do that you're not doing now. So just a broader tax this quarter and going forward. Thanks.

Mike Santomassimo: Yeah. On the last piece, on the tax credits, you know, that'll that'll be a few years out before you see anything, any real impact that in terms of new projects that will come on. So it'll be a little bit it'll be a while before you start to see that matter much. The broader bill doesn't, you know, have a lot of direct impacts relative to the taxes other than the tax credit piece. Few small things. You know, I think just more broadly on the on the tax line, There's always there's always puts and takes on tax line, you know, given how big we are. Yeah.

There's a few things in the in the quarter that probably brought the tax line a little bit you know, the tax rate down a little bit lower than, you know, what you see, you know, over a longer time period, including, you know, a California tax change that sort of changed the way they do revenue attribution, a few other sort of wonky items that sort of, you know, change it. And so our view on the tax rate over a longer period of time is still you know, high kinda high teens. You know, tax rate is sort of, you know, the probably the right place given what we see, you know, over a longer period of time.

But it but there always seems to be a, you know, stuff in the each quarter sort of changes out a little bit.

Matt O'Connor: Okay. Thank you very much.

Operator: The next question will come from Erika Najarian of UBS.

Erika Najarian: Hi. Good morning. I wanted to ask another question about capital Charlie. You know, I everyone appreciate that the regulatory reform is influx. You know, you mentioned earlier, you know, an eight point six percent minimum on CET one. And your current CET one level implies a hundred forty basis point minimum to that nine point seven.

I'm just wondering know, as we think about where you should operate going forward, are you saying that you wanna take the time to make sure that eight and a half percent is something that know, is a little bit sustainable when, you know, when if we get GSEB reform, if we get more comprehensive stress test reform, And if that's the case, is a hundred forty basis points still an appropriate buffer you know, which would imply that your sort of minimum would buffer would be about ten percent.

Charlie Scharf: So listen, I think what I tried to answer this before. I think the way we're in a period so we're in a period of time where we have seen over, you know, a thirteen month period, we've seen our capital requirement go up, like, a hundred and I'm sure it go up. It went up ninety days. Hundred and ninety days. Ninety days. Hundred ninety base. Ninety. Ninety basis points. And then we saw it come down a hundred and twenty basis points. The Fed has said that we're gonna give you more information which would be super helpful to us so that we can understand the future volatility looks like.

One would presume that with this administration and the types of things that they're saying, that the lower level is probably more indicative of what the future would look like rather than the higher level. We just don't think it makes a whole lot of sense to come and say, well, here's how we're gonna here's a number that we're gonna run with capital until we avail ourselves of the information that they tell us they're gonna give us. So trying to, you know, directionally, you know, lower is the direction we're going, but we don't want it to be moving target every quarter where we tell you something different.

We don't think that's, like, the right way to provide you know, the kind of information to you that we should be providing. So we just wanna take that time to understand what the right level is, and we will also be thinking about you know, with other changes that they're making and any other changes to these moving pieces, what the right buffer will be. But directionally, you know, lower is certainly you know, where things are going. But we don't know enough to actually tell you what that number should be yet. And the good news is, right, we have a ton of excess capital.

We have more flexibility to deploy it to help support clients and, you know, the, you know, the broader you know, economy here. Right? And so that should give us more opportunity to use it. And then yeah. We'll we'll bring it down. What and I think we've we've shown over the last you know, five years that, you know, we are not shy about returning capital back to shareholders. You know, through buybacks when, you know, when we feel that's what that's appropriate. And so, hopefully, we can get that come through over the quarters. We live in, like, a really I mean, for us, like, this is an incredibly interesting and fun time.

I mean, you know, we're sitting here where even with the constraints that we've had, I think we've, like, you know, started to show that the things that we're doing have the ability to drive you know, higher revenues across the company, regardless of what's happened in the NII cycle. So we spent a lot of time talking about the things that we've been doing to, you know, to focus on growing non-interest revenues, which have been which we've been doing because they're strategic opportunities not just because of the balance sheet. Those strategic opportunities haven't changed, and those will continue to be there for us.

So we're still incredibly focused on increasing the noninterest revenues of the company as we've seen we've been able to do We're starting to see some loan growth. Yes. The loan growth hasn't turned out this year be as much as we otherwise would have hoped. When we first set our targets. Our guidance. But, you know, overall, where we sit today and the types of things that we're seeing is, you know, certainly marginally better. Than what we had seen in terms of what we're seeing. We're starting to see deposit flows as we've talked about. We've got new account growth. We've got expenses in check. Credit is performing well.

We've got more capital than, you know, we had the last time we had the conversation. We have less constraints. So, you know, for us, as we sit here, even though, you know, there's a lot of work for us to do and we've got a lot to prove, we understand that. Those things all line up to, you know, be pretty exciting for the management team here.

Erika Najarian: Agree with that. Thanks so much.

Operator: The next question will come from Betsy Graseck of Morgan Stanley. Your line is open.

Betsy Graseck: Hi. Good morning. Good evening. Charlie, I had a question about just how you're thinking about the arc of expenses over the next period of time, call it a year or two. With the asset cap removal, underlying question is, are there efficiencies that can be generated from investments you had to make that were unique to the asset cap period? And if so, with those efficiencies, is there reinvesting in everything you just mentioned on, you know, headcount to drive revenues, or is there a technology angle to some of this reinvestment that we should be expecting? And how are you positioned for generating efficiencies from AI? Thanks.

Charlie Scharf: Sure. Let me start, Mike, and then you pick up because I've been getting all the questions here. So first of all, on the question of expenses related directly to the asset cap, We would the way so first of all, it's important to point out that the consent order that had the asset cap is still in place. And just as a reminder for those that haven't followed as closely as we do, asset cap gets lifted when we adopt and implement the series of things. And then the full order gets listed when the regulators view it as effective and sustainable. We obviously feel really good about the progress that we're making.

We feel very comfortable that we're getting there. But until that order is lifted, gotta be very, very careful about just changing anything because of the plans that we put in place and the way we and the regulators go back validation. So we're not assuming that there are and that anything materially changes up to this point, you know, until that happens, even then we'll be very, very careful. As we think about the opportunities to drive efficiency, when we talk about the fact that there's still substantial opportunities away from our ability to just do things more efficiently from a risk and control perspective.

And so we're continuing to focus on driving those things across the company, what you've seen kinda quarter on quarter on quarter is know, where headcount has come down using attrition much as we can as our friend to create those efficiencies. And, yes, technology will be able to help that trajectory continue even more. We wanna be careful about giving any long term guidance beyond this year on expenses, which is why we've stopped because as we said very consistently, we really like the idea of going through the planning cycle being able to take a look at what we want to invest in, what we think we can drive in terms of efficiencies, and then give a number.

But I would say the same thing that we said is similar to the question that Abraham was asking before. We're very, very conscious of the fact that the expenses are an important lever for us. For us to be able to increase the returns for the company. And so hopeful we'll be able to create the right kind of balance by increasing the level of investments while we're keeping expenses in check-in. Focus on not just driving more growth, but driving higher returns in the shorter and medium term as we've tried to do it till now.

And Betsy, I have to say from an AI perspective, it's very early to see any impact of any significance from AI, but we've got you know, capabilities and pilots you know, in our branch system, in our op system, in our call centers, you know, really across anywhere where you've got anything manual and a lot of people. And those things are starting to mature a little bit very early, but you're starting to see, you know, some of the benefit you thought you'd see in terms of efficiency start to come through in some of the early use cases, but it's super, super early. And I think the impact will build over time there.

Betsy Graseck: Okay. Thanks. And I know you said that you would address the Roth's target when you hit the fifteen percent, which you did this quarter. So can you give us a sense of the timing when we should expect that you would be revisiting that target?

Charlie Scharf: But just as a reminder, the fifteen percent that we've got reported this quarter did include the merchant services gain. So, again, we try and be, you know, as transparent as we can and look through that and some stuff you saw in taxes. So we don't we're we're not declaring victory on getting to the fifteen percent yet. And then some maybe as we get towards the end of the year and we talk about next year, we'll talk a little bit more about the timing on those things and recognize that people wanna understand a little bit more about how we're thinking about the future.

Betsy Graseck: Super. Thank you. So maybe the January call post the strategy deck.

Charlie Scharf: You just won't stop. I mean, we'll we'll see. We'll see.

Betsy Graseck: Okay. No. Thanks.

Charlie Scharf: Yeah. I we hear you, though. Thanks.

Operator: The next question will come from John Pancari of Evercore ISI. Your line is open.

John Pancari: Good morning. Just wanted to see if you can give us a little bit more color on the loan yields this quarter. The looks like they were relatively flat. I guess, overall, would have expected an increase given the some of the front book back book dynamics could you maybe talk us through some of the puts and takes and your expectation as you look out given the rate environment in the curve outlook as well?

Mike Santomassimo: Yeah. I mean, when you look at when you look at, you know, spreads that are you know, you particularly on the commercial side, John, it's still very competitive. And so, you know, there's been a couple spots where you see a little bit of widening of spreads, but not a lot. In most cases, it's, you know, what's holding spreads to be as tight as they are is really the competition we're seeing across the space particularly in the middle market commercial banking side of things. And so that's that's what's driving it when you look at that side of the house.

John Pancari: And is that did that competition intensified to a greater degree than you may have thought But it seems like, you know, higher a higher loan yield expectation would have been imperative soon.

Mike Santomassimo: No. It's been pretty consistent now for a number of quarters. Right? It ebbs and flows a little bit depending on which part of the country or which segment you may be talking about. But it's been the competition's been pretty intense there for a while. And so you're just not seeing sort of the widening that you might if in sort of a slowing, you know, economic environment, that's just not materializing that way.

John Pancari: Okay. And then I'll my follow-up would be related to that too. Like, where are you seeing that competitive pressure come from? Is it private credit? Is it other types of non-banks? We've heard some setting, you know, insurance players stepping up again in certain parts of real estate. Are there areas that you'd flag? And then has that impacted anything around loan growth expectations? Thanks.

Mike Santomassimo: Yeah. Actually, it's still the primary competitor particularly when you're talking about the middle market, you know, commercial bank or other banks. You certainly see, you know, other non-bank players that, you know, at times in certain pieces of it, but the primary competitor still is other banks, you know, and they vary depending on part of the country you're in, obviously. But I think that's what that's what's what's driving it mostly.

John Pancari: Okay. Thank you.

Operator: The next question will come from Gerard Cassidy of RBC Capital Markets. Please go ahead.

Gerard Cassidy: Hi, Mike. Hi, Charlie. Mike, you talked about the growth in the commercial and industrial loans in the quarter. It was for on the into where you saw that in that segment of the commercial and industrial loan portfolio growth?

Mike Santomassimo: Yeah. Sure. It's a it's a little it's across the board in a in a bunch of sectors, you know, Gerard. But, you know, I'd say we're seeing growth in places like fund finance, which are capital call facilities with big private equity firms. We're seeing you know, we saw a little bit of growth in probably three or four sectors across, you know, the large corporate space, including TMT and industrials, health care. So a little bit, you know, a little bit across the board. You're also seeing some more asset-backed loan growth coming out of our markets business. Across, you know, whether it's mortgages or other types of, you know, collateral.

A lit a tiny bit of, you know, growth in prime brokerage. So it really is sort of across, you know, across the board in terms of a number of different areas within the corporate investment bank.

Gerard Cassidy: Very good. And you guys have talked a lot about improving and efficiencies and in and improving profitability of with the asset gap being lifted. Kind of a pivoting question. You talked about exiting the rail equipment leasing business and you've exited other businesses over the years. Are there any other businesses left that are not meeting your internal profitability targets possibly that could enhance the longer term profitability, like, of the company? Or is this essentially at for divesting of different segments?

Mike Santomassimo: Yeah. The rail portfolio was really the last thing of any size. I mean, we, you know, we looked at the businesses, you know, a few years ago now and sort of the what's methodically sort of worked our way through, you know, each of each of them. And really the rail portfolio is sort of the last of those.

Gerard Cassidy: Very good. Thank you.

Operator: And the last question for today will come from Chris McGratty of KBW. Your line is open.

Chris McGratty: Oh, great. Thanks for squeezing me in. On operating leverage a little bit more broadly, the markets feel better today and more optimism in markets, but certainly, we know that's fluid. I know you touched briefly on it, but just maybe unpacking the degree of confidence in the operating leverage over the medium term and then I guess, both sides of it, the revenue and the expenses. Thanks.

Mike Santomassimo: Yeah. I you know, look, I just come back to what we talked about a little bit earlier in the call. I think on the on the we feel know, as confident, as we can be that there's a lot more to do on the and over the last, you know, four or five years, we've we've taken out twelve billion already seen headcount come down by, you know, twenty consecutive quarters in a row. And so, you know, we're gonna continue to focus on that, and it's it's how we start all of our conversations with the business leaders and our budgeting. Our each quarter, we go through it.

And so I think there's more to do there really across almost every part of the company, and I think we'll we'll continue to drive that the same way we've done that the last number of years. And look, I think on the revenue side, you know, I just come back to the broader, you know, opportunity that we have to grow across each of the businesses. You know, how that manifests itself in any given quarter, you know, is a little out of your control. Some degree. And so given how markets can be but I do think, you know, across every single one of our businesses, there's a tremendous amount of opportunity to grow.

And so I think that's that's those two things together should, you know, provide you know, growth and profitability and returns, you know, over the long run.

Chris McGratty: Great. Thank you.

Operator: And we have no more questions at this time.

Charlie Scharf: Great. We appreciate the time and look forward to talking to you next quarter. Thank you.

Operator: Thank you all for your participation on today's conference call. At this time, all participants may disconnect.

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DATE

• Tuesday, July 15, 2025, at 8:30 a.m. EDT

CALL PARTICIPANTS

• Chief Executive Officer — Susan Morris
• President and Chief Financial Officer — Sharon McCollam

Need a quote from one of our analysts? Email [email protected]

RISKS

• The gross margin rate declined by 85 basis points to 27.1%, excluding fuel and legal expenses. This was due to investments in the customer value proposition and an unfavorable mix shift related to pharmacy and digital growth.
• Sharon McCollam said, Pharmacy will be the biggest driver of comparable sales growth for FY2025. She also noted the impact on profitability, stating, "There is an impact on profitability there."
• Susan Morris stated, "We're starting to see increases in in cost of goods moving ahead," indicating that tariffs and ingredient costs may contribute to future inflationary pressure.
• Susan Morris said, "there will be an impact from the strike that we had, during the quarter."

TAKEAWAYS

• Identical Sales Growth: 2.8%, driven by a 20% increase in pharmacy and 25% growth in digital sales.
• Adjusted EBITDA: Adjusted EBITDA was $1.111 billion versus $1.14 billion in the prior year, reflecting ongoing investments and margin pressures.
• Adjusted EPS: $0.55 per diluted share, compared to $0.66 per diluted share last year.
• E-commerce Growth: 25% year-over-year, with e-commerce accounting for 9% of total grocery revenue.
• Loyalty Program: Membership rose 14% to 47 million. 30% of engaged households chose the "cash-off" option.
• Pharmacy and Health Digital Platform: Grew 20% year over year, with GLP-1 prescriptions contributing approximately half of pharmacy comp growth.
• Gross Margin Rate: 27.1%, a decrease of 85 basis points excluding fuel and legal expense; productivity initiatives partially offset this decline.
• Selling and Administrative Expense Rate: Improved by 63 basis points, excluding fuel, due to employee cost leverage and lower merger-related expenses.
• Interest Expense: Decreased by $4 million to $142 million, compared to $146 million in the prior year.
• Capital Expenditures: $585 million deployed in capital expenditures, including three new stores and 36 remodels.
• Shareholder Returns: $401 million returned through $86 million in dividends and $315 million in share repurchases; $1.5 billion remains authorized.
• Own Brand Sales Penetration: 25.7% own brand sales penetration, with continuing expansion of product offerings and launches.
• Net Debt to Adjusted EBITDA: Net debt to adjusted EBITDA ratio was 1.96 at quarter end.
• Guidance Update: Full-year identical sales growth now expected in the 2%-2.75% range (previously 1.5%-2.5%). Adjusted EBITDA and EPS outlook unchanged at $3.8-$3.9 billion and $2.16-$2.30, respectively (non-GAAP).
• Media Collective: Growth outpacing the industry with accelerated audience refinement, faster campaign feedback, and expanded digital inventory.
• Labor Negotiations: Agreements reached for nearly half of approximately 120,000 associates covered by current negotiations. Two remain pending in Colorado and Southern California.
• Productivity Initiatives: Targeting $1.5 billion in savings from FY2025 through FY2027 to fund growth and offset inflationary headwinds.
• Technology and Automation: Deployment of AI, data analytics, and in-store digital tools aimed at enhancing labor productivity and operational efficiency.

SUMMARY

Albertsons Companies (NYSE:ACI) reported modest top-line gains in Q1 FY2025, driven by pharmacy and digital platforms and supported by elevated investment in price and loyalty initiatives. Sequential improvement in core grocery units was noted, although total adjusted EBITDA and adjusted earnings per share declined compared to the prior year due to margin and expense headwinds. Management raised full-year guidance for identical sales growth, citing ongoing pharmacy and digital expansion confirming earlier forecasts for adjusted EBITDA and adjusted EPS. Significant capital was allocated to expansion, technology upgrades, and share repurchases, underscoring the company’s multi-year strategic roadmap centered on digital engagement, labor productivity, and national buying scale.

• Susan Morris said, From FY2025 through FY2027, we expect our productivity engine to deliver $1.5 billion in savings, earmarked for reinvestment in growth and cost-offsetting measures.
• Susan Morris indicated that the e-commerce business is near breakeven and improving. Profitability advances attributed to volume leverage and operational efficiencies.
• Store and digital platform integrations -- including app-based meal planning and omnichannel features -- are positioned as key enablers for cross-selling and customer retention.
• Management stated that gross margin investment and expense leverage dynamics will gradually improve as national buying and productivity initiatives ramp in the second half of the fiscal year.

INDUSTRY GLOSSARY

• Identical (ID) Sales: Comparable store sales, excluding fuel, reflecting performance at established locations over consistent periods.
• GLP-1: Glucagon-like peptide-1 agonists prescribed for diabetes or weight management, which have recently driven pharmacy sales comps.
• Media Collective: Albertsons’ digital retail media offering that monetizes first-party data for marketing and advertising partners through targeted campaigns.
• Own Brands: Private label product categories owned and distributed exclusively by Albertsons Companies, Inc.
• Adjusted EBITDA: Earnings before interest, taxes, depreciation, and amortization, adjusted for non-recurring and certain other items.
• Shrink: Inventory loss due to theft, damage, or administrative error, a key factor in retail profitability.

Full Conference Call Transcript

Susan Morris: Thanks, Cody. Good morning, everyone, and thanks for joining us today. In the first quarter, our teams delivered solid results with ID sales growth of 2.8%, adjusted EBITDA of $1.11 billion, and adjusted earnings per share of $0.55. These results again demonstrate gradual and incremental progress against our five strategic priorities, which include driving customer growth and engagement through digital connection, growing our media collective, enhancing the customer value proposition, modernizing capabilities through technology, and driving transformational productivity. Within these priorities, our four digital platforms continue to be the catalyst for customer growth and engagement. We continue to drive increased sales, all while generating data and insights for the media collective.

Our first digital platform is e-commerce, which grew 25% and reached 9% of total grocery revenue in the first quarter. This growth was again led by strong performance in our first-party business, driven by award-winning capabilities and our fully integrated mobile app, and supported by our five-star certification program. Our focus on delivering exceptional customer service experience is fueling new customer acquisition and strengthening existing customer retention. To do this, we are continuing to enhance our digital shopping experience, including the introduction of AI and interactive features that deliver both ease and convenience.

For example, we launched our new shop assist feature, which enables a connected shopping experience that allows customers to communicate back and forth with our in-store associates throughout their order's fulfillment process. We've also created more flexibility in our basket building. Customers can now add items to their orders up until picking has started, recognizing that shoppers often think of one more item they need just after an order is placed. While our e-commerce penetration is still below industry peers, it is one of our biggest growth, customer acquisition, and customer retention opportunities for 2025 and beyond. From a profitability perspective, our e-commerce business is near breakeven and improving.

Our second digital platform is loyalty, which grew 14% to 47 million members in the first quarter as we capitalized on the simplification of our program and further enhanced the value the program offers. Members in the program today are engaging more frequently, using more of our easy-to-understand and redeem features, and spending more with us. As a case in point, 30% of our engaged households are now electing the cash-off option, reinforcing the customer's desire for immediate value. As we did last quarter, loyalty is a key enabler of digital engagement and a rich source of data for our media collectives.

Throughout 2025, we will continue to introduce compelling benefits that will attract new members, improve share of wallet, and further enable marketing and monetization opportunities for the media collective. We will also continue to simplify and expand the program to include strategic partnerships to offer even more value. Our third digital platform is pharmacy and health, which grew 20% year over year, driven by industry-leading script and immunization growth, best-in-class customer satisfaction scores, and the ongoing integration of pharmacy and Sincerely Health into our overall digital experience. Cross shoppers between grocery and pharmacy are exceptionally valuable.

Over time, these customers visit the store four times more often and buy significantly more groceries with us, resulting in outsized customer lifetime value across the entire store. For this reason, in addition to the market share opportunity competitor closings are creating for us, we're also continuing to invest in our pharmacy and health digital platform. Through this platform, we're also launching customized omnichannel benefits that are not only attracting new customers but also converting existing pharmacy and grocery-only customers to become cross shoppers. It is also helping customers to find new and personalized ways to improve their health and well-being, consistent with evolving national trends.

Our pharmacy and health plus platform is an integral part of our customers for life strategy and a significant growth and customer engagement opportunity. For this reason, leveraging our growing scale to improve pharmacy profitability over time is a key operational priority. To deliver this, we are continuing to pursue higher-margin service offerings and drive productivity through improved sourcing, increased automation, and labor optimization. This quarter, we opened our third central fill processing facility, which is reducing our cost of serve while at the same time improving overall customer experience. The fourth digital platform is the integration of the mobile app for use in our stores. We're not just selling food.

We're simplifying meal planning and making shopping easier and more convenient both in-store and online. Our app has become the epicenter of the omnichannel experience, with digital customers engaging nearly three times a week on average. What began as a tool for enabling e-commerce and delivering great deals is now a Swiss army knife of tools that makes customers' lives easier, regardless of whether they're shopping in our stores or online. These tools include best-in-class list building, personalized meal planning capabilities, powerful search and product locating capability, and an in-store mode that connects meal planning and other store-specific capabilities.

In our media collective in the first quarter, we significantly increased the high-impact digital inventory as our digital platforms work together to enrich our data and generate deeper customer engagement to accelerate growth and deliver superior return on ad spend. We'll continue to invest in building industry-leading integrated solutions that will support both endemic and non-endemic partners. These solutions include refining shopper audiences, running targeting media campaigns with compressed measurement timelines, and delivering consistent omni execution to develop personalized relationships for our collective partners with our customers. These same solutions are also providing benefits for our internal loyalty and marketing initiatives.

As we look forward, we expect the collective to grow faster than the retail media market and ultimately be one of the largest sources of fuel for reinvestment into our core business over time. To improve our customer value proposition, we intentionally invested in value, both loyalty and promotional offerings, as well as by partnering with strategic vendors to invest in price in certain categories and certain markets. We also surgically manage through the pass-through of cost inflation to further invest in the customer's needs for immediate value. While it is early, these investments did deliver a sequential quarterly unit sales improvement and over time are expected to drive greater existing and new customer engagement across our banners.

We additionally amplified our own brand presence to drive further value for our customers. Own brand sales penetration finished the quarter at 25.7% as we launched new offerings across multiple categories. We also expanded the assortment in our recently introduced Overjoyed brand and launched our newest brand, Chef Counter, a chef-inspired meal solution targeting foodies seeking fast and easy restaurant-quality choices at affordable prices. These launches, coupled with greater prominence and better value in OMEN, were increased digital and omnichannel household engagement and higher transaction counts over time. Our next priority is the modernization of our capabilities through technology.

As we said last quarter, our North Star is to use technology in everything we do, and we are energized by the progress we are making toward this aspiration. Our technology-first focus is positioning us to make a greater impact faster, allowing us to drive greater innovation at a lower cost. Our advanced technology platform, on which we are continuing to innovate, powers our e-commerce, store, pharmacy, supply chain, merchandising, and media collective operation. And is allowing us to leverage emerging AI technologies to accelerate our operational transformation going forward. We are also using our advanced capabilities to use AI agents to enhance many business functions, including pricing and promotion, personalization, customer care, and cogeneration, among others.

Driving transformational productivity is our next priority, which is an imperative to fuel our growth. Our productivity engine continues to reduce costs, offset headwinds, and fund our growth priorities. It works hand in hand with our technology modernization, including our initiatives to leverage AI and data analytics, optimize supply chain costs through automation, build out shrink and labor management tools, to name a few. In addition, the largest of our opportunities continues to be the leveraging of our consolidated scale to buy goods for resale through national buying and more efficient supplier relations.

As we previously shared, from fiscal year 2025 through 2027, we expect our productivity engine to deliver $1.5 billion in savings, which we plan to reinvest in growth and our customer value proposition, as well as to offset other inflationary headwinds. Before I hand the call over to Sharon for an overview of our first quarter and to provide an update to our 2025 outlook, I'd like to give you an update on recent labor negotiations. In fiscal 2025, we have negotiations covering approximately 120,000 associates. As of today, we've reached agreements covering nearly half of these associates, with two pending rectifications in Colorado and Southern California.

We appreciate and value our associates, and in these contracts, we are meaningfully improving wages and benefits. At the same time, we're working to negotiate contracts that are not only financially responsible but also provide the operational flexibility the company needs to streamline operations, manage costs, and offer affordable prices in a rapidly changing grocery landscape. Sharon, over to you.

Sharon McCollam: Thank you, Susan, and good morning, everyone. It's great to be here with you today. As Susan shared, the investments we are making are delivering value to our customers and adding breadth to the capabilities we need to drive future growth. During the quarter, we saw early wins from these investments, affirming our confidence in our strategic priorities and our customers-per-life strategy. Included in these wins was identical sales growth this quarter of 2.8%, driven by 20% growth in pharmacy and a 25% increase in digital sales. We also saw a sequential improvement in core grocery units.

To drive this growth, our gross margin rate of 27.1% was lower than last year by 85 basis points, excluding fuel and legal expense. Incremental investments in our customer value proposition and the mix shift impact related to the strong growth in our pharmacy and digital businesses drove this decrease but was partially offset by benefits driven by our productivity initiatives, including improved shrink expense. Offsetting this gross margin investment was a 63 basis point improvement, excluding fuel, in our selling and administrative expense rates. This decrease was primarily driven by the leveraging of employee costs, reflecting the positive benefits from our ongoing productivity initiatives and lower merger-related costs.

Interest expense in Q1 2025 decreased $4 million to $142 million compared to $146 million last year due to lower average borrowings. Income tax expense in the first quarter totaled $75 million or 24.1%, compared to $69 million or 22.3% in Q1 last year. This tax rate increase was primarily driven by a reduction of an uncertain tax position last year that did not recur in 2025. Adjusted EBITDA was $1.111 billion in the first quarter compared to $1.14 billion last year. Adjusted EPS was $0.55 per diluted share, compared to $0.66 per diluted share last year. Now I'd like to discuss capital allocation, the balance sheet, and cash flow.

Consistent with our capital allocation priorities, during the first quarter, we invested $585 million in capital expenditures, including the opening of three new stores and the completion of 36 remodels, as well as the ongoing modernization of our digital and technology capabilities. We also returned $401 million to our shareholders, including $86 million in quarterly dividends and $315 million in share repurchases, leaving approximately $1.5 billion in our multiyear $2 billion share repurchase authorization. At the end of the first quarter, our net debt to adjusted EBITDA ratio was 1.96. Now, let me walk you through our updated 2025 outlook. As Susan said, we remained focused on our five strategic priorities.

Through the balance of fiscal 2025, we will continue to invest in our customer value proposition, customer experience, digital growth, media collective, and health and pharmacy. These investments are expected to drive outside growth in digital and pharmacy, both of which drive higher future customer lifetime value but create near-term margin headwinds. We will also continue to drive our productivity agenda to fuel this growth and offset inflationary headwinds. With that backdrop, we are updating our outlook this balance. We expect identical sales growth in the increased range of 2% to 2.75%, up from 1.5% to 2.5% last quarter. This assumes continuing growth in pharmacy and digital sales, as well as gradually increasing units in grocery.

From a cadence perspective, expect the second quarter ID sales to be towards the lower end of our guidance range, with gradual acceleration in the back half of the year. We expect adjusted EBITDA to be in the range of $3.8 billion to $3.9 billion, unchanged from last quarter. As a reminder, this includes approximately $65 million in adjusted EBITDA in the fourth quarter related to our fifty-third week. We expect adjusted EPS to be in the range of $2.30 to $2.16, unchanged from last quarter and including $0.03 related to the fifty-third week. The effective income tax rate is expected to be in the range of 23.5% to 24.5%, unchanged from last quarter.

And capital expenditures are expected to be unchanged in the range of $1.7 billion to $1.9 billion. Looking beyond 2025, to capitalize on the investments we are making behind our strategic priorities, we continue to expect fiscal 2026 to coincide with our long-term growth algorithm of 2% plus identical sales and adjusted EBITDA growth higher than that. I will now hand the call back to Susan for closing comments.

Susan Morris: In closing, our customers for life strategy is working. We're investing in our core operations and improving our customer value proposition. These investments are driving increased traffic and growing digitally engaged customers, omnichannel households, and loyalty members. To fuel these initiatives, we are driving productivity and leveraging new technologies to drive efficiencies across our operation. As Sharon said, we continue to expect 2025 to be a year of investment, including enhancing our customer value proposition.

As a result, we expect gradual and incremental improvement in top-line trends in our grocery business in the second half of 2025, ultimately driving growth in line with our long-term algorithm of 2% plus identical sales and adjusted EBITDA growing higher than that in fiscal year 2026. With just over two months as CEO of Albertsons Companies, Inc., let me say that I am more confident in our strategy with each day. I'm energized by the work our teams are progressing and excited to continue building on our strong foundation. To our 285,000 great associates, I am more inspired than ever by you and all that you make possible for our customers and our communities each day.

No matter where you are across our business, you make a difference. To keep our systems running, ensure our products are in stock, and delight our customers. We will now open the call for questions. Thank you. Before pressing the star key. To allow for as many questions as possible, and one follow-up. Thank you. Our first question comes from the line of Paul Lejuez with Citi. Thanks, guys.

Paul Lejuez: Curious if you could talk about the drivers of the gross margin decline this quarter, maybe find some for us, and how we should think about each of them remaining a headwind for the rest of the year, which stay, which might go away, which become less of a headwind. Maybe that you'd start with that. And then also curious how you would characterize the pricing environment around you in the competitive landscape. Thanks.

Susan Morris: Thanks, Paul. As I think about gross margins, so I we've been very clear that our top priority is driving sales and specifically driving an increase in units. And we're investing in that and remain true to that. We expect to continue that, by the way, throughout the rest of the year. As we think about Q1, it was actually one of our largest overlaps year over year. And thus the compare that you're seeing from the gross margin investment. That said, as I mentioned before, we're gonna continue to invest in margin, but we also expect our productivity to begin to provide a tailwind as our national buying gradually kicks in as the year progresses.

Also, keep in mind, our focus is on gross margin pillars.

Sharon McCollam: On EBITDA dollars, and not on rate. You had a second question about the pricing environment and if I promotional investment from the competitive set, of course, in our own operations. We're also leaning in more heavily on loyalty on personalized deals. I would say that the pricing environment is rational. So we've not seen any broad swings across the industry at this point in time. And I would just add to that you're continuing to see pressure from mass

Susan Morris: club stores and the value players. Thank you, guys. Good luck.

Sharon McCollam: Thank you.

Susan Morris: Our next question comes from the line of Leah Jordan with Goldman Sachs. Please proceed with your question. Good morning. Thank you for taking my question. You made an interesting comment that e-com profitability is near break-even and improving. Just seeing if you could provide more detail on the key drivers supporting that improvement. You know, how much is Albertsons media collective a factor at this point? And what's your line of sight into reaching breakeven in that business? So, Leah, I think it's really important to recognize that different companies are calling e-commerce different things in their P&L's. When we are talking about e-commerce, that is specifically our e-commerce business.

There is nothing in our e-commerce P&L related to the media collective from a financial point of view. Of course, it creates data, for the media collective, and it is a major provider of information for the media collective, but from a P&L point of view, it's pure. What is driving that is volume. First and foremost. Leveraging the fixed cost of the operations of that business. Also, labor efficiency in the business. We've invested in tools and systems in order to drive efficiency and labor. And then we are also very much focused on continuing to leverage transportation costs in that process.

So it's across the P&L where we're seeing improvement, but in that type of a business where you've got fixed costs, that put the space in the stores, the real estate, because all that's allocated to that business. We are continuing to lever that. So we are getting very close to breakeven in our e-com business.

Sharon McCollam: Sharon, if I could just add to that as well. I know you touched on this a reminder that the our fulfillment model is through our stores. And our stores are already in the neighborhoods that are serving our customers. So that creates efficiencies for us, perhaps, versus some others out there. I think that's

Susan Morris: That's very helpful. Thank you. And then I just had a quick follow-up on the ID sales guidance. I mean, just seeing if you could comment on the cadence of ID sales throughout the quarter. And then with the deceleration that you're guiding in 2Q, just

Sharon McCollam: what are the key drivers of that? Are you seeing something change with the consumer? Is this related to the pharmacy business?

Susan Morris: Anything there would be helpful. Thank you. Leah, there's a couple of things. First and foremost, that compares on pharmacy you have to look at pharmacy growth last quarter, which we disclosed. So if you take a look at that, that has a major swing impact on the comp each quarter, so look at that. Secondly, from a cadence point of view, we feel pretty confident that as we progress through the year, we expect to see our on the grocery side of the business, we talked about the fact that we're expecting to see progressive units as we go through the back half of the year thus the price investment that we have spoken about.

So in Q2, we do need to keep in mind that there will be an impact from the strike that we had, during the quarter. So that'll have an impact, but we quantified that for you in order for you to help model. We said in our prepared remarks that we expect it to in the second quarter to be at the low end of our guidance range. So hopefully that will be helpful and we continue to expect to see strong pharmacy in the numbers going into Q2. Very helpful. Thank you. Thank you. Our next question comes from the line of Edward Kelly with Wells Fargo.

Edward Kelly: Hi. Good morning, everyone. I was hoping that you could maybe take a step back and update us on your price investment goals, you know, just kinda given what you have seen so far you customer response, you know, does that give you any confidence maybe to lean in a little bit more? And then as you think about know, productivity initiatives rolling in, then you think about, you know, returning to your algo next year, is it your expectation that eventually get to the point where, you know, you will continue to invest in price, productivity offsets, gross margin is a bit more stable. Curious as to how we should be thinking about all that. Thank you.

Sharon McCollam: Sure. Thanks, Ed, for the question. So, as we think about price, just a reminder, as we went into the year, we have an incredible amount of data, and our price investments are very surgical. We know the categories and the markets. Where we need to make those investments, and we've begun that process. And keep also keeping in mind too that as we talk about investing in price, it's really investing in the total value proposition. So, yes, some of it's based pricing. It's promotional, is investing in our loyalty programs as well, and, of course, focusing on own brands. To date, it's still early. In the investment process, so we'll be able to understand a little bit more.

This is certainly a journey not something that we're is a one and done. It'll be an iterative process with multiple phases launching throughout the year. Right now, we've seen sequential improvements in our unit trajectory, which is what we expected to see.

Susan Morris: We have

Sharon McCollam: been tracking our CPI versus the competitive set, and are generally pleased with what we see. But once again, it's quite early in the process. You asked about productivity, and what I would say here is as I mentioned a moment ago, there will be a tailwind from a gross margin perspective as we implement our national buying processes. But keeping in mind too that is a process. We're working closely with our vendor partners, category by category, vendor by vendor. So we expect to see that start to show through towards the second half of the year. And expect to leave 2025 going into 2026 delivering on the long-term algorithm.

Edward Kelly: And then just maybe a follow-up on the pharmacy and grocery cross-shopping momentum. I mean, pharmacy growth has obviously been know, very impressive. But the grocery, you know, business has lagged. And I'm just curious as to you know, what's happening with, the momentum of that cross shopping activity, you know, what you're doing to know, to get those customers to engage more in the store and in over time, I mean, it seems like we should expect the grocery ID to respond to all this. I'm just kinda curious as to how you are thinking about you know, the momentum there and, you know, when that really begins to improve.

Sharon McCollam: So it's to be shared with before, it does take time for our the cross-shopping to begin between pharmacy and grocery customers. That said we know what they do. They often visit the store four times more frequently. They drive outsized customer lifetime value. They and they one of our goals with all of this is, of course, getting an engagement with both center store and pharmacy. Recognizing that if they're engaging in the pharmacy side of the business, we are working to increase their engagement with higher service offerings. Test and treat is one example. Immunizations is another. From a grocery perspective, we did see positive growth in grocery in the first quarter, exclusive of our pharmacy business.

So we were pleased to see that happening there. As I mentioned before, two words, focused on creating incredible product incredible amount of productivity in our pharmacy business

Paul Lejuez: including

Sharon McCollam: improving our sourcing, buying better increasing automation, creating solutions for our pharmacy techs and teams to create to make their jobs more efficient. We've invested in three central fill facilities. In our Southwest division, in Dallas, and in Southern Washington state, which are also helping our productivity. So again, we like the total value equation when our customers engage with us in store, in pharmacy, online. That's a virtuous flywheel for us to drive ongoing growth. And productivity, by the way. So we're very excited about the future and believe in the priorities that we've laid for us.

Edward Kelly: Thank you.

Susan Morris: Thank you. Our next question comes from the line of Rupesh Parikh with Oppenheimer and Company. Please proceed with your question.

Rupesh Parikh: Good morning, and thanks for taking my question. Just going back to retail media, I was just curious how that ramp is going versus expectations so far and just anything surprising at this point.

Sharon McCollam: Hi, Pash. We are very pleased with progress that we're seeing on the media collectives. I Our growth is outpacing the industry. Our team has done a phenomenal job of condensing the amount of time that it takes for us to be able to give feedback to our vendor partners on performance of their investments. They're enhancing our digital properties. So that we have more inventory to be able to settle. And we are also working on really creating more streamlined personalization opportunities so that our vendor partners can have direct connections with the customers that they're serving. So we feel good about our progress there. But we also see that as some blue sky ahead.

We recognize that we're catching up in some ways, and our goal is to leap forward. But there's there's great progress there from the team. Great. And then maybe just one follow-up question. Just on the consumer,

Rupesh Parikh: just curious what you guys are seeing right now and with the recently passed legislation, just any thoughts on SNAP impact?

Sharon McCollam: I'll start with the SNAP impact. So for us, we have a lower penetration of SNAP than majority of the competitive set that we have. That said, that customer is very important to us. They did typically have a larger basket. They're very loyal. We'll work hard to make sure that they have the communication information they need to get access to them. To resources when available.

Susan Morris: I would also add to that there when you look at the new legislation, there is a very long ramp to implementation of many of the things within that legislation. So in the short term, we don't anticipate that being a headwind of any material amount in the short term. Thanks, Sharon. And on the on the consumer side, we continue to see the customer seeking value. We're selling more on

Sharon McCollam: promotion. That's been happening for quite some time now. We're leaning heavily into owned brands. Understanding that. And as we've mentioned before, we're proud of our own brands program that we have, but we're not satisfied with the penetration that we have. So we're really leaning in for the Q2 and the rest of the year. That's upside potential for us moving ahead. As I think about the customer, we were looking at some category information and it's been interesting. Some of our top performing categories in the first quarter was kind of a tale of two cities.

We absolutely saw increases in a shift into pork and ground beef as one example, again, indicating that the customer is looking for value. We also saw strong growth in our deli chicken business as an example. Knowing that, I think, customers are always looking for quick and easy meal solutions and with these increase of food away from home, I think inflation was almost four percent. We're absolutely providing value there.

Rupesh Parikh: Great. Thank you for all the color.

Susan Morris: Thank you. Our next question comes from the line of John Heinbockel with Guggenheim Partners. Please proceed with your question.

John Heinbockel: Hey, guys. I want to start with I think you said if maybe I heard wrong, food volumes were positive in the quarter, grew Was that right? If so, is that predominantly traffic or items per basket? And then I think your goal

Sharon McCollam: is a couple of quarters ago, you talked about fifty basis points. Is that still a fair goal? You think you can do better than that?

Susan Morris: Yeah. So, John, traffic and AIV were positive. On the units. It is a sequential improvement in units from Q4 to Q1. And that is not yet to positive.

John Heinbockel: Okay.

Sharon McCollam: Then and then follow-up is if you think about you reference technology. Where do you think the most fruitful labor productivity opportunities are? Right? I think about these you guys are promotional electronic shelf labels. You know, thinking about that. Thinking about know, automation back into the warehouses. Where are the biggest opportunities to move the needle on cost per unit?

Susan Morris: John, thanks for the question. So you actually touched on a few that are very important to us today, one of which is DC automation. We've had great success with recent launches and look forward to accelerating that agenda for a variety of reasons. Efficiency being one of them. With regards to store labor, we are so have an incredible amount of data, and I think about e-commerce as one example where we've actually been able to enhance productivity because we're able to get the data that we need to create more predictive scheduling. That's really helping us create efficiencies there. That's already underway.

In the rest of the store, and we're in the process, is actually fairly robust in center store, we're working through the fresh departments.

Sharon McCollam: So

Susan Morris: wall-to-wall forecasting is what we call it, and that's gonna be a big unlock for us. We are currently in pilot on ESL and I think it's forty stores at this moment in time, seeing great results there. But to your point, we're absolutely leaning in heavily on technology and automation of tasks where we can eliminating pain points across the organization and the existing experiments on AI across the company because we see further opportunity there for efficiency.

John Heinbockel: Thank you. And also as

Susan Morris: that over the last several years, we've invested heavily in our stores in several technologies that are used by a very large number of people in our stores. We implemented Refresh, We've implemented ordering and other types of technologies. And one of the big opportunities that every retailer has. Is the utilization of that technology and there is a full court press within the company on execution in the stores and elevating that in our stores. So we are expecting to see changes and continued improvement in the stores in the utilization of the tools we currently have. Another area that we continue to invest in you have to invest in it from two perspectives.

One is the customer experience, and one of them is from a shrink perspective. But is in the self checkout. And the various things we can do with self checkout from a customer experience point of view. Using vision AI as part of that process. We saw if you saw in our prepared remarks, that we did have some favorability in shrink. Part of that, we believe, is coming from the technology that we have invested in sub checkout.

So that is another area that it benefits you in labor in many different ways, but the key to self checkout is making sure that customer experience is as great as it can be, and we're spending time on that and then ensuring that, and I believe that will help us continue to take self checkout to the next level.

Rupesh Parikh: Thank you.

Susan Morris: Thank you. Our next question comes from the line of Simeon Gutman with Morgan Stanley. Please proceed.

Simeon Gutman: Hey, Susan. Hey, Sharon. How are you? I wanted to follow-up on pricing. Susan, I'll I ask you a about where your head is on pricing. I think you've lived in the high low environment for most of your career. So curious what this iteration looks like. Are you moving to part EDLP with Hi Lo? And you mentioned this isn't is this a one time catch up or this is iterative? And, of course, you know, open to changes down the road? And then I don't know what in the conversations with vendors, how you're communicating some of the changes as you try to work with them on the central buying.

Sharon McCollam: Damian, thanks for the question. So first and foremost, I wanna highlight the fact that and I've mentioned this a couple times and we talked about this last time. We have an incredible opportunity with our own brand. Our penetration well it's growing at 25.7% for the quarter. We should be at 30% plus. So we are leaning into that from both ends. Both from a price perspective, but also from a cost of goods perspective so we can fuel our own growth there. Going back to your price question in general, I would yes, you're right. We typically bid a high low retailer.

And if I had to describe our go-forward approach, I think we're more of a modified high low. That's that's where we're looking to achieve. And, yes, it's iterative. This is absolutely not a one-and-done. And what the team has created, which is it's actually pretty fantastic. And, Charlie, we've created a suite of tools that helps us utilize the data that we have to anticipate the changes that we're making based off of past performance of various price points understand the customer elasticities, and then feed us what those pricing changes should be to optimize unit growth, optimize profitability. And those tools are only becoming more and more robust. We continue to add to the suite.

So to I guess, to no. This is not a one-and-done. This is a new go-to-market strategy. We are deeply engaging our vendor partners, That takes time, by the way. So as we talk about our productivity, as a as a tailwind, that will come gradually over time. As we're leaning into partnerships with our vendors to say, hey, how do we do this together? We wanna move more units. We wanna move them with you. How can we lean in and create the right opportunity to grow sales and share unit sales and share collectively?

Simeon Gutman: Okay. And then switching topics for follow-up. SG and A run rate, Can you talk about I think it was up three and a half or so percent. Union contracts, I'm sure, was part of your plan at some point. Because you know when they come up and you have some expectation. Can you talk about how the unit contract could or couldn't change that run rate and any investments that come in and then you know, managing it relative to where you think comps can come in. Is it in the right range so that you could eventually leverage when you get some of the unit pickup in the back half?

Susan Morris: To me, yes. In our SG&A guidance that in our outlook for this year, we have anticipated what these increases could look like and that is incorporated in the adjusted EBITDA value that we provided for the year. As it relates to other areas in SG&A that you didn't ask about, keep in mind this quarter, we were we had a year-over-year benefit of about 63 basis points. Take a look at how much of that is one-time cost. You can see the one-time cost in our reconciliations in the press release. So about half of that comes from the elimination of departure costs. But the rest of that has been driven by productivity.

One of the big areas of productivity that we expect to see this year, early in the year particularly, is going to be in SG&A. Remember, we are materially changing our ways of working. We've had several announcements on the opening of our new headquarters in India. For technology, which we're very excited about. We are also transitioning many of our back-end accounting functions to an existing location that we have in the Philippines. And that transition is also happening. So we are making several I call we call them internally ways of working moves that are helping to offset some of the pressure that we're seeing in wages. And wages, it's your I don't wanna specifically say union wages.

It's wages in general.

Simeon Gutman: K. Thanks. Good luck.

Susan Morris: Thank you. Our next question comes from the line of Mark Carden with UBS. Please proceed.

Mark Carden: Thanks so much for taking the questions. So on the pharmacy front, how did that contribution shake out from GLP one And then for the growth outside of GLP ones, is it being more driven by newer customers or more by your engaged existing customers?

Susan Morris: The JLP one question, it's about half the pharmacy comp. So think about GLP one as half the comp. However, remember, it comes in an incredibly outsized average unit retail and script growth actual script growth outside of GLP one was also very strong Susan, do you have something you'd like to add to that?

Sharon McCollam: Yeah. So and Sharon touched on it. Clearly, the profitability is quite different on the DLT one script itself, but the customer is quite valuable. What we found is there might be an initial dip when they start shopping with us in their in their grocery basket, but that quickly turns around. And actually leans into items like supplements, lean proteins in our meat department, categories that are actually quite profitable for us as a company. Sharon mentioned our course group count GLP one is very strong.

And we're that's, again, exciting to us as customers continue to engage in our total ecosystem that adds profitability, that adds long term lifetime value, So we feel very good about where we're at the pharmacy's pace. That said, and I mentioned this earlier, we are very focused on productivity there. Improving sourcing, increasing automation, and of course, the central field that I spoke of.

Mark Carden: Great. And then on tariffs, I know that indirect impacts

Sharon McCollam: were a big unknown from the ingredient and a packaging standpoint in grocery and pharmacy. Now that we're a few months in, are you expecting this to be any more or less a contributor to inflation over the course of the next few quarters relative to what you're expecting last quarter?

Susan Morris: Thank you. And yes, as we've mentioned before, well over ninety percent of the goods we source are domestically based, but to your point, ingredients are certainly playing a factor in our CPG partners and their cost of goods. We're starting to see increases in cost of goods moving ahead, and we've got a very rigorous process of first and foremost quite frankly, just pushing back. We've worked hard and it and it showed that our price as well that we've not passed through all of the inflation that we're seeing. From a cost of goods perspective.

Our first line of defense though is to push back with our vendor partners, deconstruct the costing increase, and make sure that we're all in alignment of their back rationale behind it. Looking for alternate sources of supply or other products that we can push if the tariffs become unwieldy and then finally in certain cases, if we have to, we'll pass them on to customers but we're gonna remain very close to the competitive set, especially on key items. When I start to think about commodity items that come through, which is something we do every day. By the way. You know, this is part of our DNA.

We sell a lot of commodity-driven items, and we are very agile in the pricing process there.

Sharon McCollam: And Susan, I would just add to that. It is also having us take a look

Mark Carden: at

Sharon McCollam: what we are offering in other branch. So as we look forward and we look at the tariffs, it may be that there comes a point where we decide that an expansion in our assortment and own brands is a great solution for our customer, and we're looking at that as well.

Susan Morris: Great. Thanks so much, and good luck.

Sharon McCollam: Thank you. Our next question comes from the line of Kelly Bania with BMO Capital Markets. Please proceed with your question. Hi. Good morning, Susan and Sharon. Thanks for taking our questions. Wanted to go back to the sequential

Susan Morris: improvement in grocery units. It sounds like you were pleased with that. Just wanna clarify, would you expect that to continue into Q2, and just a pharmacy dynamic there in Q2? Just wanted to understand really what underpins that confidence regarding the stronger second half IDs, and what's the measure of that? Is that more of a grocery unit dynamic?

Sharon McCollam: Yeah. Kelly, first and foremost, in Susan's prepared remarks, her statements about the sequential improvement in units that is and we were clear. It is grocery. So when we are referring to this sequential improvement and what we expect for the balance of the year, what is important and one of our top priorities is growing units in grocery. When you now as we look for the rest of the year, we said last quarter and we continue to believe that each quarter this year, we will continue to sequentially improve grocery units.

We're making the investment in the margin We are focused on driving those units and as we get toward the back half of the year when you think about the March that remember what Susan said the productivity will start to provide a tailwind to the investment order to drive the units But we are committed to driving units through the balance of the year.

Susan Morris: Susan, do you wanna add to that? No. Sure. I think I think you said it well. The primary purpose of the investments that we're making, yes, in price, yes in loyalty, yes in home brands is literally all about driving that unit growth and driving those improvements. So we do expect it to continue We will be funding it again over time. As we mentioned, those investments and the deal with don't exactly line up. Which, again, though, fits the algorithm that we've shared.

Sharon McCollam: But that's what gives us the confidence. Your question was what gives us confidence That is why we are confident. That's that's helpful. And is there anything that you've learned as you

Susan Morris: had these discussions with, vendors in terms of more of a national buying process that makes you think about the opportunity, you know, over time and in any different way. And sizing that up in terms of the impact that could have on productivity. Yeah. So just what we're learning is we go through the process is there's an incredible opportunity for us. Right? And as you think we own our own manufacturing plants. So we understand that the more information that we can get and the further out that we're out on forecasting for our own plans creates incredible efficiencies. For production. It's no different for our vendor partners.

Who shared with us that their ability to forecast demand which by the way we're also developing have developed and then there's more in development. Various AI tools to help us create stronger and further out demand planning signals. But it's it's just a complete unlock in terms of efficiencies for everybody. It also enables us to plan further ahead and align our media collective dollars along with our digital dollars. And, of course, the cost of goods reductions that we'll see so that we can create a comprehensive program in store online to drive more traffic, and drive more units by creating this again, this total package for the customers that we serve.

Our vendors, I think, you know, we're a large company, and there are times when it's very efficient and effective for us to act.

Sharon McCollam: Locally.

Susan Morris: And be very agile, but our vendors clearly recognize that there's a significant change in our thought processes we're committed to doing this. And I'm excited about what that brings for the future.

Sharon McCollam: And in the conversations the goals that we have about driving units are completely aligned with our vendors. So we are aligned when you're aligned on the same business objective, it's very helpful and very constructive in those conversations.

Susan Morris: Yes. And to your point, sure. We have joint business plan

Sharon McCollam: goals that we put in place with most of the major CPGs. So again, we're aligned on the same targets We're leaning in together. And I really am excited about what will come in the second half of the year.

Susan Morris: Thank you.

Sharon McCollam: Our next question comes from the line of Michael Montani with Evercore ISI. Please proceed with your

Michael Montani: Yes. Hi. Good morning. Thanks for taking the question. Just wanted to ask one on guidance and then one on the trends for the consumer. So on the guidance front, there was about a forty or fifty bit increase in ID sales. But then, obviously, EPS did not change. I just wanted to confirm, is that due to the nature of the ID sales being stronger in pharma, or was there incremental investments either in price or labor as you do the union contract negotiations that caused that?

Susan Morris: Yes. So I think I think it's a blend of some of the things that you just described. Yes. Some of the growth within our pharmacy growth continues to be outsized. Right? And that's great because we love that customer. We will love that relationship. There is an impact on profitability there. Cherish, is there anything that you would add from

Sharon McCollam: I think that throughout the year, we expect this in the total comp guidance for 2025, pharmacy is going to be biggest driver of cockspur sales growth for the year. We are continuing you know what that business doing like, and we continue to believe that we are going to continue to take share from pharmacy. On the grocery side, you will see that each quarter, we expect to see gradual and incremental improvement in units and that will, through the year, bring the grocery comp as a slightly bigger percentage of the total but on the top line, you're gonna see a bit the increase that we put in the guidance for 2025 that is pharmacy.

Michael Montani: Got it. Okay. Thanks for clarifying that. And then just in terms of the consumer trends, as it relates to kind of better for you product, natural, organic, and otherwise, what percent of the mix is that for you today? You know, how is that trending? And I guess, is there any surprises that you're seeing with respect to GLP one absorption and then you know, how that's impacting consumer buying behavior. Sure. So, like, what we're seeing in

Sharon McCollam: we have a we call it Noshi, natural organic specialty health and ethnic products. And those categories are growing for us. And what we're and it's interesting as you start to break it down, I think there's a few things in play. Certainly trends for you sorry. Certainly trends in better for you products. Are strong. Also interesting though, the influence that we see from specialty items like premium sparkling water is one of our top gross categories. It's it's fascinating to watch. This one oh, I had to double check the numbers, but cottage cheese. Is actually a strong growth category. Yes.

Some of that's from the focus on protein, lower carbs, perhaps GLP one users, and then just being totally frank, TikTok is driving some of that. So we're leaning into those categories. They do lend themselves Those categories pair well with some of what we see for GLP one customers. But it goes well beyond just the GLP user. We're definitely seeing overall trends focusing on health and well-being, and that works perfectly for us. As one of our five priorities is driving a cut the customer value proposition, and creating a an environment, an ecosystem that brings customers into brick and mortar, into digital, into pharmacy and health.

Michael Montani: Got it. Thank you.

Sharon McCollam: Thank you.

Susan Morris: Thank you. Our final question this morning comes from the line of Robby Ohmes with Bank of America. Please proceed with your question. Hi. This is Kendall Tiscan. I want to Robby. Thanks for taking my question. Just have a follow-up in terms of the percent of your customers that are cross shopping

Sharon McCollam: grocery and pharmacy today versus much higher you think that number could go over time. And, basically, just trying to get a sense of after four years of pharmacy growth in the double digit range, which has obviously been a huge

Susan Morris: sales driver, but a headwind to profitability. Are we nearing a point where pharmacy could eventually start to normalize or the growth rate could start to normalize?

Sharon McCollam: Thanks. Hi, Kendall. So what we're seeing is, you know, yes, of course, the cross shopping between pharmacy and grocery is pivotal for us. We do have very strong pharmacy growth, and I mentioned a lot of that is core pharmacy business. Just to sidenote on there as well, in that core pharmacy business, we continue to strive for profitability. Stronger profitability, increasing our generics mix, improving offerings such as test and treat, immunizations, those kinds of things. And then and again, creating that linkage between store and pharmacy is critical. From a the pharmacy business, I here's what I see. There's been a experience I mean, you guys see the information out there.

There's been a serious decline in the availability of doors for customers to go to take care of their pharmacies. We think that's critical. And I believe that we're well positioned with this the steps that we've made both from an acquisition perspective meaning acquiring scripts from outside, hiring the amazing pharmacists and techs that are out there that are looking for work we need more and more of that support. So we're leveraging that and becoming know, I think we're becoming helps become an essential choice for customers. I could get my groceries there. I could meet my pharmacy needs in an environment where the doors are shrinking. Right?

We have less and less opportunity in certain markets, less choices for customers, or we're happy to be there for them. So I actually see it as a vote as a competitive advantage for us moving ahead with the investments that we've made in pharmacy. And so that, again, just I can't repeat also the enough the fact that we are striving to improve the profitability there. Again, recognizing that customer's total value when we engage them in both center store as well as pharmacy is tremendous for us. We love those customers. We want to serve them.

Susan Morris: And, Susan, I would only add also, we have invested significantly in the customer experience in pharmacy, integrating it into the total company app, and being able to serve that customer including we talked last quarter, now being able to pick up your prescription at the same time that you're picking up your drive up and go order. And as we continue to create the linkage and the ease of shopping between the pharmacy plus customer and the grocery customer, we believe that does provide incremental opportunity for us as we move forward through the year and into next year.

So these investments we're making on the digital side and linking them together with everything we're doing in pharmacy and health, and then the mobile app for use in the stores, we think that is also going to make a significant difference with these cross shopping customers.

Sharon McCollam: Thank you.

Susan Morris: Thank you. Ladies and gentlemen, that concludes our question and answer session. I'll turn the floor back to Ms. Morris for any final comments.

Sharon McCollam: Just thank you everybody for the time today. We're excited about the year come, and thank you to our associates that make all of this happen.

Susan Morris: Thank you. This concludes today's conference call. You may disconnect your lines at this time. Thank you for your participation.

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DATE

• Tuesday, July 15, 2025, at 10 a.m. EDT

CALL PARTICIPANTS

• Chairman & CEO — Brad Elliott
• Bank CEO — Rick Sems
• Chief Financial Officer — Chris Navratil
• Chief Credit Officer — Krzysztof Slupkowski

Need a quote from one of our analysts? Email [email protected]

TAKEAWAYS

• Net income: $15.3 million, or $0.86 per diluted share (GAAP) in Q2 2025; adjusted to $16.6 million, or $0.94 per diluted share, excluding M&A and debt extinguishment costs, in Q2 2025.
• Net interest income: $49.8 million in net interest income in Q2 2025, with a core net interest margin of 4.17%, representing a 10 basis point sequential improvement when compared to the core margin of 4.07% in the linked quarter.
• Noninterest income: $8.6 million in noninterest income in Q2 2025, rising $500,000 over the previous quarter after adjusting for a prior BOLI benefit of $2.2 million.
• Noninterest expense: $40 million (GAAP) in noninterest expenses in Q2 2025; excluding debt extinguishment and M&A charges, noninterest expenses were $38.3 million, down modestly and in line with outlook.
• Provision for credit loss: $19,000 (GAAP provision for credit loss) in Q2 2025, primarily reflecting realized charge-offs offset by a decline in ending loan balances.
• Tangible common equity (TCE) ratio: Ended the quarter at 10.63%, up 41% from the second quarter of 2024; bank-level TCE finished at 10.11%.
• Tangible book value per share: $32.17 tangible book value per share, up 25% from the second quarter of 2024.
• Loan growth: Year-to-date, loan balances increased $100 million through the first two quarters of 2025. Average loans increased at an annualized rate of 6.2% during the quarter.
• Loan pipeline: Loan pipeline measured at 75%, or $481 million, up $119 million, or 33%, from the first quarter.
• Loan production: $197 million in loan production in Q2 2025, matching prior period levels and doubling Q2 2024's volume.
• New loan yields: 7.17% yield for new loan production in Q2 2025, up from 6.73% in the prior quarter.
• Deposit trends: Excluding brokerage funds, balances declined by $43 million during the quarter, due to normal commercial outflows.
• Nonaccrual loans: $42.6 million at period end, up $18.3 million, almost entirely due to a single QSR relationship.
• Total classified assets: $71 million in total classified assets, or 11.4% of total bank regulatory capital, remaining below historical averages.
• Delinquency (over 30 days): Delinquency in excess of thirty days declined during the quarter to $16.8 million.
• Net charge-offs (annualized): Net charge-offs annualized were six basis points during the quarter. Year-to-date, net charge-offs annualized were four basis points through Q2 2025.
• Allowance for credit losses to loans: Coverage stood at 1.26%.
• MVC Bank acquisition: Closed July 2, 2025; acquired balance sheet arrives largely in cash after prior bond portfolio sale.
• Debt extinguishment: $1.4 million in charges incurred by redeeming subordinated debt during the quarter; refinancing expected within the month.

SUMMARY

Equity Bancshares (NYSE:EQBK) emphasized core margin expansion and adjusted earnings growth during the quarter. Management reiterated a disciplined M&A approach, citing a "high rate" of market conversations, expanding target size, and an ongoing focus on value realization without near-term regulatory hurdles being the main driver for sellers entering the market. This occurred even as nonaccrual loans rose notably due to a single large quick-service restaurant (QSR) relationship undergoing restructuring. The company highlighted a rising loan pipeline, sustained production, and improved new loan yields as signals of optimism for loan growth and net interest margin in the coming quarters, specifically referencing expectations for the remainder of 2025. Deposit migration was attributed to normal cyclical flows without underlying commercial account attrition.

• Chief Financial Officer Navratil noted, "the MVC management team actually effected the sale of their bond portfolio prior to our acquisition of the bank. So coming over to our balance sheet, effectively, those have been monetized into cash balances."
• The proportion of total assets based in Wichita is now less than 10% as of the Q2 2025 earnings call, with direct aerospace credit exposure reduced to under $5 million.
• This is reflecting ongoing earning asset remix.
• Management expects "core margin. It's kind of maintaining right where we realized it this quarter," with continued lagged loan repricing projected into 2026.
• Chief Credit Officer Slupkowski confirmed, regarding QSR sector risk, "outside of [the single large relationship], you know, we have a lot of granularity in this portfolio. ... this is definitely the largest concern."
• Retail deposit production generated net positive DDA account growth in the first half of 2025, as commercial deposits remained open and active despite balance reductions.

INDUSTRY GLOSSARY

• TCE ratio: Tangible common equity to tangible assets, a measure of core capital strength without goodwill or intangibles.
• BOLI: Bank-owned life insurance; investment vehicles banks use to offset employee benefit costs.
• QSR: Quick-service restaurant; refers to fast food and related restaurant operations within loan portfolios.
• Nonaccrual loans: Loans on which the bank has stopped accruing interest due to borrower payment delinquency or concern over ultimate repayment.
• Classified assets: Loans and securities deemed at risk by regulators or internal review, requiring heightened scrutiny.
• DDA: Demand deposit account; a checking account allowing withdrawals and transfers on demand.
• Loan pipeline [75%]: The committed or near-committed portion of potential loan originations, representing business expected to close within a near-term window.

Full Conference Call Transcript

Brad Elliott: Good morning, and thank you for joining Equity Bancshares' earnings call. Joining me today are Rick Sems, our Bank CEO, Chris Navratil, our CFO, and Krzysztof Slupkowski, our Chief Credit Officer. We are excited to share our company's sustained strong beginning to 2025. In the second quarter, we achieved strong earnings, core margin expansion, and successfully closed our merger with MVC Bank on July 2. Limiting time between announcement and closure of our transaction has been a core competency of equity. Our work to receive all required approvals on this transaction within sixty days of announcement provides confidence to a seller and value to our shareholders.

We are proud of our teams for putting us in a position to continue to excel in this space. We could not be more excited to welcome the leadership and team members of MVC Bank. HK Hatcher, Glenn Floresca, Jeff Greenleigh, Dennis Demer, and Scott Bixler. That team coupled with Ken Ferguson joining our board are excellent additions to the Equity Bank franchise. I look forward to all they can and will accomplish as we continue to expand our presence in the state of Oklahoma. While executing on our M&A strategy, our team has also remained hyper-focused on serving the communities in which we operate. I am very proud of all that Rick has accomplished.

As he and Jonathan Roop have worked to reset and retool our retail staff and philosophy. He has also made a lot of progress with our commercial teams. Originations are growing, as are our commercial product sales. Loan balances year to date are up $100 million while deposits, excluding seasonal public funds, have held their ground. Our teams are motivated and armed with tools to meet the needs of our communities. And we look forward to continued execution on our mission. We closed the quarter with a TCE ratio of 10.63% and a tangible book value per share of $32.17.

Compared to the second quarter of 2024, our TCE ratio is up 41% and our tangible book value per share is up 25%. Providing top-notch products and services through exceptional bankers continues to be our guiding principle as we aim to grow Equity Bank. We started the year with a strong balance sheet, motivated bankers, and a solid capital stack, to execute on our dual strategy of organic growth and strategic M&A. We have executed through the first half of the year and look forward to maintaining this momentum throughout the year. I will now hand it over to Chris to walk you through our financial results.

Chris Navratil: Thank you, Brad. Last night, we reported net income of $15.3 million or 86¢ per diluted share. Adjusting for costs incurred on M&A and the extinguishment of debt, earnings were $16.6 million or $0.94 per diluted share. Net interest income for the period was $49.8 million, up $1.8 million linked quarter when adjusting for $2.3 million in nonaccrual benefits realized in the prior period. Margin for the quarter was 4.17%, an improvement of 10 basis points when compared to the core margin of 4.07% linked quarter. We continue to be optimistic about our opportunities to maintain spread and improve earnings through repositioning of earning assets throughout 2025. More to come on margin dynamics later in this call.

Noninterest income for the quarter was $8.6 million, up $500,000 from Q1 when excluding the $2.2 million BOLI benefit realized in that quarter. The increase was driven by improvement in customer service charge line items including deposit services, treasuries, debit and credit card, mortgage, and trust and wealth. Noninterest expenses for the quarter were $40 million. Adjusted to exclude loss on static extinguishment, M&A charges, noninterest expenses were $38.3 million, down modestly in the quarter, and in line with outlook. Debt extinguishment charges of $1.4 million were realized during the quarter. As the company chose to redeem our outstanding subordinated debt issue following a first capital and interest rate reset period. The plan is to refinance within the month.

As we have discussed in past calls, we are in an opportunity-rich environment and maintaining this source of capital provides continued flexibility while resetting allows for capital maintenance and a better coupon. Our GAAP net income included a provision for credit loss of $19,000. The provision is the result of realized charge-offs partially offset by a moderate decline in ending loan balances. We continue to hold reserves for any economic challenges that could arise. To date, we have not seen concerns in our operating markets that would indicate these challenges are on the horizon. The ending coverage of ACL to loans is 1.26%. As Brad mentioned, our TCE ratio for the quarter remained above 10%, closing at 10.63%.

The funds from the capital raise in Q4 to be maintained at the holding company with no current intention of pushing into the bank. At the bank level, the TCE ratio closed at 10.11%, benefited both by earnings and improvement in the unrealized loss position on the securities portfolio. I will stop here for a moment and let Krzysztof talk through our asset quality for the quarter.

Krzysztof Slupkowski: Thanks, Chris. During the quarter, nonaccrual and nonperforming loans moved up, as we saw migration of the QSR relationship we have discussed on previous calls. Nonaccrual loans closed the quarter at $42.6 million, up $18.3 million from the previous quarter. The increase is almost entirely driven by that same QSR relationship. The customer has a good path to exiting the underperforming locations over the next several quarters. We remain engaged with the borrower in a collaborative effort to pursue a full resolution through multiple avenues. Until resolution of the challenged stores is realized, classification as a nonaccrual asset is an appropriate step. Total classified assets closed the quarter at $71 million or 11.4% of total bank regulatory capital.

Importantly, classified asset levels remain well below our historical averages and continue to be actively monitored and managed. Delinquency in excess of thirty days moved down during the quarter to $16.8 million. Net charge-offs annualized were six basis points for the quarter, while year-to-date charge-offs annualized were four basis points. Recognized charge-offs continue to reflect specific circumstances on individual credits and do not signal systemic issues within our markets. Looking ahead, we remain positive on the credit environment and the outlook for the remainder of 2025. Despite some uncertainty in the broader economy, credit quality trends across our portfolio remain stable and below historic levels.

Our disciplined underwriting, strong capital, and reserve levels position us well to navigate any potential headwinds. We believe this practice and a measured approach support continued sound credit performance while allowing us to respond quickly if conditions change.

Chris Navratil: Thanks, Krzysztof. As I previously mentioned, margin adjusted for one-time items in Q1 improved 10 basis points in the quarter. The improvement during the period was driven by remixing of the balance sheet. Loans comprised 76% of average earning assets as compared to 75% in the previous quarter. Yield expansion on the loan portfolio, driven by increasing coupon results, and a reduction in both the level and cost of interest-bearing liabilities. Average loans increased during the quarter at an annualized rate of 6.2%, while average interest-earning assets increased 1.7%. The increase in margin and earning assets coupled with an additional day in the period led to core net interest income growth of $1.8 million.

As we look to the remainder of the year, we are optimistic about margin maintenance on the legacy portfolio as we see loan balance growth and continued lagged repricing on our asset portfolios. In addition to our legacy portfolios, following the July 2 closing of MVC, we will begin to realize the benefits of that transaction. While we are continuing to work through fair valuation estimates, we expect to realize margin improvement from the addition of the underlying assets and liabilities. Refer to our outlook slide for additional detail on second-half earnings expectations reflecting current estimates of the impact of MVC.

As a reminder, we do not include future rate changes, though our forecast continues to include the effects of lagging repricing in full on our loan and deposit portfolios. Our provision is forecasted to be 12 basis points to average loans on an annualized basis.

Rick Sems: Our production teams have had an excellent start to the year, as we realized loan growth of more than $100 million through the first two quarters while also maintaining deposit balance exclusive of anticipated municipality outflows. As we look to layer in the MVC footprint, their exceptional leadership team, I am excited to see what the equity team can accomplish in the second half of 2025. Production in the quarter totaled $197 million, in line with prior period organic production and twice as much as Q2 2024. Rates on new production were 7.17%, compared to 6.73% in Q1. Continuing to provide accretive value compared to current yields.

While originations kept pace, decreasing line utilization and increasing level of payoffs during the period resulted in a decline in ending balance sheet as compared to prior quarter end. Higher payoffs resulted during the period were related to positive outcomes for borrowers, asset sales, or upstream takeouts. We anticipate additional opportunities to bank these borrowers in the future. As we close the quarter, our 75% pipeline is $481 million, up $119 million or 33% from quarter one. The team continues to focus on growing relationships, deepening wallet share, and pricing for the value provided, which will benefit Equity Bank in the future.

Our retail teams entered the year with aligned direction and a framework designed to drive success throughout our footprint. The first half of the year showed positive trends in gross and net production levels including net positive DDA account production. Though we have a long way to go to meet the aggressive goals we have set, I look forward to assisting this group in realizing success throughout 2025 and beyond. Deposit balance, excluding brokerage funds, declined $43 million. Lost balances were primarily in commercial accounts due to normal outflow activities. The accounts remain open and active. With the closing of MVC, Equity adds Oklahoma City, a growing metro market, with opportunities to leverage a larger balance sheet and franchise.

While the many Oklahoma communities added continue to align with the Equity Bank mission. With Greg Kossover and H. Hatcher and all of our market leaders driving our franchise forward, we can accomplish a lot.

Brad Elliott: It is a very exciting time for everyone associated with equity. Our employee base has opportunities to grow and learn, our board is incredibly engaged and focused on what creates long-term shareholder value. The communities we serve continue to get the scale of a larger company with a small-town feel. And our shareholders benefit by continued EPS growth, market and deposit base expansion, all leading to compounding tangible book value. We are in a great position in our markets, with our organic sales team. Our management team is ready for the challenge and relishes the opportunity ahead of us. Our board has done a great job navigating a strategic path that allows us to grow both organically and through M&A.

M&A conversations continue at a very high rate. Equity will remain disciplined in our approach to assessing these opportunities, emphasizing value while controlling dilution, in the earn-back timeline. I look forward to the rest of the year and beyond. Thank you for joining our call today. We are now happy to take any questions you might have.

Operator: Thank you. We will now begin the question and answer session. We will prepare when preparing to ask you a question, please ensure your device is unmuted locally. We will make a quick pause here for the questions to be registered. And our first question comes from Terry McEvoy with Stephens.

Terry McEvoy: Hi. Good morning, everybody. Maybe start with a question for Chris. Could you just, Chris, could you talk about plans for the MVC Bank bond portfolio at MVC Bank and just overall thoughts on managing the securities portfolio in the second half of the year?

Chris Navratil: Yes. Good question, Terry. Under the terms of the MVC agreement, the MVC management team actually effected the sale of their bond portfolio prior to our acquisition of the bank. So coming over to our balance sheet, effectively, those have been monetized into cash balances. There's a very small level of securities being brought over that have just been retained for the purposes of managing pledging positions. So that cash will come into our environment with the opportunity to deploy both for securities portfolio needs as well as funding loan growth and funding other alternatives on the balance sheet.

So no specific actions needing to be taken by us at this point as it relates to their bond portfolio just based on what's actually coming over to us. In terms of managing the rest of the way, you know, the bond portfolio for us is a mechanism by which to deploy cash with, you know, an improved return potentially. But, really, the balances fluctuate dependent on need on both liquidity and pledging as well as, you know, cash balances relative to deposits. So we saw in the quarter some average balance decline. We had some purchases into the end of the quarter, which is going to grow that balance for average balance purposes going in as we begin Q3.

But that it's it's a balancing function in that portfolio where we're maintaining to, you know, kind of best leverage our cash position while also having the liquidity and the pledging required for municipality deposits.

Brad Elliott: We've got Chris, look. And then yeah. We constantly are looking, Terry, at is there an opportunistic time to rebalance that portfolio also? So if there's a thought process that we'll we come up with to do a structured treasure rebalance that portfolio, we'll we'll move forward with that as well.

Terry McEvoy: And a question for Krzysztof. Are you seeing any stress within that QSR portfolio outside of the one relationship that we've talked about for the past couple of quarters?

Krzysztof Slupkowski: Yeah. So and I've discussed this on previous calls. We do have we do see softer, you know, softer operating numbers from in that sector from, our other borrowers. When it comes to classified numbers that we have, we have one small relationship in that space. Outside of this large one that we that I mentioned. But outside of that, you know, we have a lot of granularity in this portfolio. We have diversification between the different QSR concepts, different brands, We have diversification when it comes to geography. And borrowers. So there's a lot of granularity over there and you know, this is this is definitely the one we just downgraded is definitely the you know, the largest concern.

Terry McEvoy: And maybe just one last quick one. Back to Chris. That step down in the fourth quarter as it relates to noninterest expenses relative to the third quarter, is that all cost savings from the deal? Or is there anything else baked into that decline in 4Q?

Chris Navratil: Yes. It's predominantly the impact of MVC. I think we always have a little bit of a downward trend through the year in terms of NIE, primarily in the salaries and the employee benefit line items. But most of that reduction is at the MVC savings.

Terry McEvoy: Great. Thanks for taking my questions.

Operator: And the next question comes from Jeff Rulis with D.A. Davidson.

Jeff Rulis: Thanks. Good morning. Maybe a couple of questions on the larger QSR credit. The first, is what triggered the move to nonaccrual? Is it just sort of a time, suppose, is sort of the first part? And then the second piece is, Krzysztof, you mentioned the expectation for a path of exiting some of the better locations. And I guess if there's properties that are sold, would you anticipate that can, I guess, reduce the nonaccrual amount before you kind of fully resolve the whole relationship, in other words, can we see that balance trickle down as you have progress in some of those other locations? Thanks.

Krzysztof Slupkowski: Yeah. So your first question on the nonaccrual treatment, we just got to a point of time where it was appropriate from an accounting standpoint. The loans were past due from a payment perspective. When it comes to exiting the stores, I talked about exiting the unprofitable stores. They have a market that is unprofitable for them. All of the stores in the markets are underperforming, dragging their cash flow down. So, we're working on a plan in place that they are executing or we're going to exit these stores. And then the rest of the locations are performing very well. They're able to carry the debt load that we have.

So we're not exactly sure how long this process is going to take. We think it's going to be the next several quarters, at least three quarters. To execute on this plan and then stabilize cash flow. So the hope is that once that's executed and we're in a better cash flow situation, later in next year, you know, we could potentially talk about upgrading this to accrual status.

Jeff Rulis: Okay. I appreciate it. And Brad, it sounds fairly positive on the M&A front. I'm interested in the sellers, the conversation there as they view, you know, seeing regulatory approval for deals accelerating. Is that changing the tone or bringing more folks to the table, or has it just been a pretty steady state of the folks that you talked to in terms of partnerships? Wondering if that reg approval speed is changing the tone with sellers at all.

Brad Elliott: Yeah. Let me finish on the QSR restaurant. There's several paths to resolution there. One is that they closed down the eight restaurants that are underperforming, and then the other restaurants are currently cash flowing positive today. So they actually have a really good business of their other 33 stores. And so if they cannot execute on getting things done fast enough, we're going to ask them to sell the whole package and force them into that process. So there's several avenues to liquidation here from our standpoint. On the M&A front, I do not think it's driven by regulatory.

I think it's driven by, you know, we're on a tail end of a four-year or five-year period you couldn't sell your financial institution, because four years ago, you were in COVID. Two years ago, we had a really low interest rate environment, which has, you know, taken some time for people to realize what their new tangible book value really is. And so now that we have kind of passed those two windows, I think the age of ownership and age of management is driving those decisions. And so, you know, ownership teams have windows on when they want to have liquidity. A lot of them are past that window from two to five years.

And so that's really what's driving this. Or the management team is three to five years older than they wanted to be when they had talked to their owners about selling the institution. And so it's really age of ownership and age management that's driving every conversation that we have and that hasn't changed, and I do not think it will change. I think there's the reason why there's so much activity is I think there's been so much put off of timing from the past several years.

Jeff Rulis: Appreciate that. Thanks, Brad.

Operator: Thank you. And just as a reminder, it's star one to ask a question. The next question comes from Damon Del Monte with Keefe, Bruyette & Woods.

Damon Del Monte: Hey. Good morning, guys. Thanks for taking my question. First one, maybe for Rick on the outlook here in the second half of the year for loan growth. It seems like you clearly explained what led to the end of period decline this quarter. Could you just talk a little bit about kind of the optimism here in the back half of the year and kind of what's driving that both from a geographic standpoint and asset class?

Rick Sems: Sure. Yeah. We're definitely seeing continued pipelines building. I mean, our pipelines are at the highest levels they've been at. So that's a lot of where the optimism comes. It's, we're seeing more activity in the C&I side as well and our treasury side remained strong as well. So got a lot of deals coming in, and you get these waves of payoffs. And the reality is we know, you get typically one quarter you get a lot of it seems like you get a lot of payoffs. And so reality is in the last year, trailing four quarters, we've had two months with larger payoffs.

So I think there's some aspects of that slowing down as well with the production engine that we have in our the last four quarters of production has been really good. So if we just continue on that path, with a little bit less payoffs, you're going to see that growth. So that's really why we have the optimism for the second half of the year.

Damon Del Monte: Got it. And the lower line utilization this quarter, was that something that was kind of seasonally driven? Or is that maybe a shift in your customer operating approach?

Rick Sems: No. I think there's a couple there's, actually, a couple of specific things with, with a large it's it's actually a situation where a couple of our wealthy customers have some lines. They received some money up and had lines and paid them down. It's sort of a unique situation that happened. Those lines remain in place. We expect those to, you know, probably be drawn again on again as we get later in the year as well. So that had a sort of a disproportional amount. I think also some of it's in the in some of the ag lines as well. Those come back.

So, you know, we're again, we're optimistic this was just sort of a one-time thing. It actually affected our deposit balances and our loan balances because they were carrying them in different entities on the deposit side. They distributed those funds to several principals, and then those principals paid down their lines of credit. So we got hit twice from the same customer base, but that's actually a positive result from the standpoint. Customer's doing extremely well. And they'll draw those lines back up again.

Damon Del Monte: Got it. Appreciate that color. And then, just lastly, Chris, on the margin outlook, I think you mentioned that there's some repricing that's going to be occurring over the next few months for loans. Do you have some numbers around kind of what you expect total loans to be repricing in the back half of the year?

Chris Navratil: Yeah. We continue to have kind of, like, repricing in there, Damon, really on both sides. There's some up. There's some down. I would look at our core margin. It's kind of maintaining right where we realized it this quarter. So that lag repricing had the effect of maintaining around that 4.17 point as you consider both the liabilities and the loans. And then as we look forward into 2026, there continues to be some runway there. Of additional repricing again, on both sides of the balance sheet, some time-structured deposits and some longer-dated loans that will continue to see move up.

Damon Del Monte: Okay. Great. That's all that I had. Thank you very much.

Operator: Yeah. So just as another reminder, it's star one to ask a question. Our next question comes from Brett Rabatin with Hovde Group.

Brett Rabatin: Hey, guys. Good morning. Wanted to just start on Wichita and just with the, you know, with the environment of more defense spending and, you know, Wichita having a bit of an aviation and military backdrop. Just wanted to hear, you know, what was going on in Wichita and then, you know, you guys have gotten away from aircraft lending and that kind of thing, but just wanted to see if that might be an opportunity for you and get maybe, get a little bit of color on how Wichita is doing with the subtrend.

Brad Elliott: Yeah. So if you look at our portfolio, it's less than 10% of our company now is based in Wichita. So it's not a big factor for us on an overall basis, macro basis. On a micro basis, we, you know, we have less than $5 million, I think, outstanding to suppliers in the aircraft industry. From a direct exposure that's down from a $100 plus million, five years ago. So we've really we're not in that space any longer. It's not affecting our community what's going on with Boeing in particular very much because Cessna, Beechcraft, and Learjet are doing so well that there's so much demand for the jobs. And Spirit isn't laying people off.

Spirit and Boeing are not laying people off yet. And having them made any announcements that they're going to. So there's still a lot of demand for jobs here. And the workforce is very intact. You know, their biggest issue in that workforce is, I think, Cessna has somewhere between five hundred and seven hundred and fifty retirees annually out of their workforce. So making sure that they can replace them with skilled workers is important. Then I'm sure all the subcontractors are the same way. So the demand for talent here is still very, very high. And we're not seeing any effects of the Boeing Spirit relationship on the marketplace yet today.

I can look out my window and I can see 190 fuselages on the ground out there for Spirit on delivery.

Brett Rabatin: Okay. And then just a question for Chris. Back on the margin, you know, and it would seem like you're implying that you can't get much more out of the deposit betas or get deposit costs lower from here absent Fed cuts. Any thoughts on how you're modeling that and just what you guys think deposit growth takes at this point?

Chris Navratil: Yeah. So a couple things on that. In terms of the actual deposit betas as it applies to our base today, so call it a no-growth base position. There's a little bit of potential continued repricing as we have some time deposit maturities, but yeah, as you saw over the past few quarters, as rates started to come down, we, like the industry, took, you know, we're strategic in that. We moved forward quickly. We're able to get those costs out relatively quickly so the opportunity set for looking decline went down. That said, we continue to have some that are, what I'll call, at market today.

I think depending on how competition behaves, there's always going to be a little bit of continued opportunity there. Now the offset to that is this competition stays irrational or moves to a more irrational, it should go the other direction on the. So I think that's the risk. What I tell you is new deposits today, that they're interest-bearing. You know, the market competitive out there. So seeing numbers that are meaningfully accretive to where our current cost of deposit is on an interest-bearing basis. A challenge right now in a relative to cost of funds basis. So there's still some value there.

But where we can pursue commercial relationships, we grow the loan balances and with them drive commercial deposit relationships and we're, you know, John Roop and Rick Sems can find success in driving consumer relationships and DDA account. All those incrementally create value. So as we see traction there, there's opportunity for us. But on a, call it, static basis, Brett, the majority of those costs have come out of this point.

Brett Rabatin: Okay. And then maybe just one last one for me. You know, Brad, I think you're, you know, you're still optimistic about M&A and the possibilities. Is the size range for you guys from a target perspective increasing or any color on how you're thinking about, you know, the typical target from here?

Brad Elliott: Yeah. The opportunities have been increasing in size for us. But I think their size range, you know, the set that we have is one and a half billion and below. And so I think you could we're going to spend our energy on $150 million institutions to one and a half billion. In kind of anything in between there that fits our geographic footprint is kind of what we're focused on.

Operator: Okay.

Brett Rabatin: Great. Appreciate all the color, guys.

Operator: Thank you. So just as a final reminder, if you would like to ask a question, it's star one on your telephone keypad. And as we currently have no further questions in the queue,

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DATE

Tuesday, July 15, 2025 at 9:30 a.m. ET

CALL PARTICIPANTS

Chief Executive Officer — Robin Vince

Chief Financial Officer — Dermot McDonogh

Need a quote from one of our analysts? Email [email protected]

TAKEAWAYS

Earnings per Share (EPS): $1.93, up 27% year over year on a reported basis for Q2 2025; $1.94 excluding notable items, up 28% year over year.

Total Revenue: $5 billion, up 9% year over year, surpassing $5 billion for the first time.

Operating Leverage: Approximately 500 basis points of positive operating leverage on both a reported and operating basis, driven by 9% year-over-year revenue growth and a 4% year-over-year increase in expenses.

Pre-tax Margin: Pre-tax margin was 37% for the quarter.

Return on Tangible Common Equity (ROTCE): Return on tangible common equity was 28% for the quarter.

Fee Revenue: Fee revenue rose 7% year over year, with investment services fees up 9% year over year—supported by growth in the Securities Services and Markets and Wealth Services segments.

Net Interest Income (NII): Net interest income was $1.2 billion, up 17% year over year and 4% sequentially, driven by reinvestment at higher yields and balance sheet growth.

Provision for Credit Losses: Benefit of $17 million, due to property-specific reserve releases in commercial real estate.

Assets Under Custody and Administration (AUCA): $55.8 trillion, up 13% year over year;Assets Under Management (AUM): Assets under management were $2.1 trillion, up 3% year over year.

Liquidity Coverage Ratio: 112%, down 4 percentage points sequentially, owing to elevated, largely non-operational, deposit balances.

Tier 1 Leverage Ratio: 6.1%, down 17 basis points sequentially;CET1 Ratio: 11.5%, unchanged.

Capital Return: $1.2 billion returned to common shareholders, with a 92% total payout ratio year to date for the first half of 2025.

Dividend Increase: Board declared a 13% increase to the quarterly common stock dividend following the Federal Reserve’s stress test.

Guidance Updates: Full-year 2025 net interest income expected to rise by a high single-digit percent year over year; expenses excluding notable items expected to increase about 3% for the full year; full-year tax rate expected in the 22%-23% range.

Securities Services Segment: Revenue was up 10% to $2.5 billion year over year; pre-tax income of $867 million, up 26% year over year; pre-tax margin of 35% for the Securities Services segment.

Markets and Wealth Services Segment: Revenue up 13% to $1.7 billion; pre-tax income of $851 million, up 21% year over year; pre-tax margin of 49% for the Markets and Wealth Services segment; Net new assets were negative $10 billion, reflecting a client deconversion.

Investment and Wealth Management Segment: Revenue was down 2% to $801 million year over year; pre-tax income of $148 million, down 1% year over year; pre-tax margin of 19%; witnessed $17 billion of net outflows, mainly from index, multi-asset, and equity strategies.

Digital Assets and Stablecoin Developments: The company was selected as reserve custodian for Societe Generale's first USD stablecoin in Europe in June 2025, and as primary custodian for Ripple’s US stablecoin reserves (as announced in July 2025); described as "a leader in servicing the growing stablecoin market,"

AI Adoption: Nearly all employees using the "Eliza" multi-agent AI platform; digital employees introduced, with benefits expected to accelerate "in the quarters and years ahead."

Operating Model Transition: 50% of staff are now in the platforms operating model, with full transition on track for completion by next year.

Pricing Environment: Overall at the enterprise level, pricing has been flat to slightly positive so far this year, and repricing volume is 'down about eighty percent from where it was three years ago.'

SUMMARY

The Bank of New York Mellon Corporation (NYSE:BK) delivered a record-setting quarter, with total revenue surpassing $5 billion for the first time. Management emphasized the company's ongoing transformation toward a platforms-oriented business, citing the integration of commercial and product models to drive innovation and organic growth. Strategic investment in digital assets was highlighted by new stablecoin custody mandates, while adoption of its internal AI tool, Eliza, was described as nearly universal among employees and set to drive productivity into future periods. The company maintained conservative guidance on fee growth for the third quarter and the remainder of the year due to seasonality and market uncertainty, but upgraded NII outlook to high single-digit percentage gains and confirmed a 13% dividend increase, reflecting board confidence following the stress test. Robust capital return practices remain in place, with the payout ratio at 92% year to date and a plan to return approximately 100% of 2025 earnings through buybacks and dividends.

Robin Vince said, "we don't see a ceiling" on ROTCE targets and characterized current performance as "early innings"

Management reaffirmed a "very high bar" for M&A, with a focus on organic growth and disciplined, capability-led acquisitions only if they closely align with strategic priorities.

Fee revenue guidance remains conservative due to "A lot of external factors that we don't necessarily control." as stated by Dermot McDonogh.

The platforms operating model is enabling agile integration of acquisitions, as the Archer deal illustrated, supporting future scalability if appropriate targets arise.

Management reported no "negative pricing" trends, with price levels largely flat or slightly positive across the enterprise and down about eighty percent from where it was three years ago.

Deposits and NII growth may moderate in the third quarter due to seasonal effects, particularly as Q3 is a "tough comp." yet confidence remains in high single-digit net interest income growth for the full year.

Segment performance was mixed, with Investment and Wealth Management experiencing net outflows and lower revenue, while other segments posted double-digit revenue and income growth.

INDUSTRY GLOSSARY

Platforms Operating Model: BNY’s company-wide organizational structure combining commercial and client-facing approaches to streamline product innovation, scalability, and cross-segment collaboration.

Stablecoin: A digital asset pegged to a fiat currency (such as the US dollar) and used for transactions or settlement within digital ecosystems; BNY acts as a custodian for related reserve assets.

Eliza: BNY’s proprietary multi-agent AI platform used internally to enhance productivity, automate tasks, and support digital workforce integration.

Full Conference Call Transcript

Robin Vince: A strong performance. Earnings per share of $1.93 were up 27% year over year on a reported basis and up 28% excluding notable items. Total revenue was up 9% year over year, and for the first time, exceeded $5 billion in a quarter. In combination with expense growth of 4%, we at The Bank of New York Mellon Corporation generated another quarter of significant positive operating leverage, roughly 500 basis points on both the reported and operating basis. And in what is seasonally our strongest quarter, our pretax margin improved to 37%, and our return on tangible common equity improved to 28%. These are clear outputs from our multiyear transformation and robust indicators of BNY's potential.

Turning to page three, over the past few years, we have been laying the foundations for our future. In our January update, we outlined how BNY is well positioned to capture market beta and capitalize on evolving market trends as we work hard to generate alpha through the continued transformation of our company. We entered 2025 with good momentum. Midway through the year, we are seeing results from our consistent execution and continuous delivery that add to our confidence for the medium to long term. Our strategy is simple but powerful: to be more for our clients by running our company better, all powered by our culture. I'll briefly touch on each.

First, our commercial model enables BNY to be more for our clients, helping them achieve their goals using the full breadth and depth of our platforms. As we mark the model's one-year anniversary, early signs point to the growing effectiveness of our commercial organization, with significant runway ahead. We achieved a second consecutive quarter of record sales. The number of multiproduct relationships continues to grow, and we continue to broaden and deepen our engagement with clients. For example, in June, we expanded our relationship with specialist active UK asset manager, LionTrust.

In addition to utilizing our data vault and middle office operating capabilities, LionTrust is fully outsourcing its trading to our buy-side trading solutions team, which delivers 24-hour global trade execution and reaches 100 markets globally across all major asset classes. Another important way for us to be more for our clients is to deliver innovative solutions to the market that come from the powerful combination of capabilities we have at BNY. As I've said before, we're not just in the product sales business; we're in the solutions delivery business. BNY enjoys a suite of highly adjacent platforms that, when delivered together, create powerful solutions for clients.

Our commercial model, combined with our platform's operating model, is intentionally designed to encourage more of this type of innovation. An example of this solutions mindset is our work to build the financial infrastructure of the future by bridging traditional and digital financial ecosystems to enable clients to unlock new capabilities securely and at scale. Early and continuous investments in our digital assets platform have positioned us to meet increasing institutional interest and adoption. Last month, Societe Generale selected BNY to act as reserve custodian for their first USD stablecoin in Europe. And last week, Ripple announced that BNY will act as primary custodian of Ripple's US stablecoin reserves.

Today, BNY is a leader in servicing the growing stablecoin market, enabling companies to create and use stablecoins by providing wide-ranging services from issuance to ongoing operations. Our advancements in the digital assets ecosystem are just one example of continual innovation, but there are many others: flexible financing and global clearing, the integration of collateral agency lending in Saudi Arabia, depository receipts in Canada, to name just a few. This is an important theme for us, not just periodic higher-profile product launches, but product-level micro innovations week by week, month by month that drive our organic growth. Next, on running our company better, with purpose.

2025 will be a milestone year for BNY's transition into our platform's operating model, which realigns how we work and organize ourselves across the entire company. As a reminder, running our company better is not just about expenses. It's about better. Yes, we are driving efficiency, but we're also enabling commercial opportunities, enhancing client journeys, and accelerating speed to market. With more than half of our people at BNY working in the model today, we remain on track to complete our phased transition into the platform's operating model by this time next year.

Already, we are starting to see the impact of this new way of working, enabling our people to launch more new solutions, deploy more code releases, and come together better than ever before to support our clients. Finally, on culture. Culture is about generating a collective will to make our company achieve its full potential, harnessing the breadth of our talent to be there for clients and to help the company. This includes so many things, but one part of that enablement is our embrace of AI. It's an exciting moment for AI at BNY. Nearly all of our employees are using our multi-agentic enter AI platform, Eliza, and we have started to introduce digital employees into our workforce.

It's early days, but we are beginning to see the benefit of some of these agents and digital employees, and we expect that to accelerate in the quarters and years ahead. To wrap up, against the backdrop of a busy operating environment, our priorities are clear, and we remain relentlessly focused on execution. BNY is showing strong momentum, and we are determined to deliver further value for our clients, our shareholders, and our people. At this midpoint of the year, we are pleased to see the initial work of our multiyear transformation bearing fruit. I'd like to thank our teams around the world for delivering strong results and for their continued commitment to the work ahead.

We have a lot of opportunity in front of us, but the strategy to unlock it is working. And with that, over to you, Dermot.

Dermot McDonogh: Thank you, Robin, and good morning, everyone. I'm starting with our consolidated financial results for the second quarter on page four of the presentation. Total revenue of $5 billion was up 9% year over year. Fee revenue was up 7%. That included 9% growth in investment services fees from our security services and marketing and wealth services segments, driven by net new business, client activity, and higher market values. Investment management and performance fees were flat. Growth from higher market values and the impact of a weaker US dollar was offset by the mix of AUM flows and the adjustment for certain rebates that we discussed on our last earnings call.

While not on the page, I will note that firm-wide AUCA of $55.8 trillion were up 13% year over year, reflecting client inflows, higher market values, and the impact of the weaker dollar. Assets under management of $2.1 trillion were up 3% year over year, reflecting higher market values and the impact of the weaker dollar partially offset by cumulative net outflows. Foreign exchange revenue was up 16% year over year on the back of elevated volatility and higher volumes, partially offset by the impact of corporate treasury activity. Investment and other revenue was $184 million, including $35 million of net losses from investment security sales partially offset by favorable capital and other investments results.

Net interest income was up 17% year over year, driven by continued reinvestment of maturing investment securities at higher yields as well as balance sheet growth, partially offset by changes in deposit mix. Provision for credit losses was a benefit of $17 million in the quarter, driven by property-specific reserve releases in our commercial real estate portfolio. Expenses of $3.2 billion were up 4% year over year both on a reported basis and excluding notable items. The variance excluding notable items reflects higher investments, employee merit increases, higher revenue-related expenses, and the unfavorable impact of the weaker dollar, partially offset by efficiency savings.

Taken together, we reported earnings per share of $1.93 on a reported basis, up 27% year over year. Excluding the impact of notable items, earnings per share were $1.94, up 28% year over year. Our pretax margin was 37% and our return on tangible common equity was 28% in the quarter. Turning to capital and liquidity on page five. At the end of June, the Federal Reserve released the results of its 2025 bank stress test, which once again underscored BNY's resilient business model and our strong balance sheet. The results also confirmed that our stress capsule buffer remains unchanged at the regulatory floor of 2.5%.

With regards to our second quarter results, our Tier 1 leverage ratio was 6.1%, down 17 basis points sequentially. The Tier 1 capital increased by $689 million, primarily reflecting capital generated through earnings and a net increase in accumulated other comprehensive income, partially offset by capital returns through common stock repurchases and dividends. Average assets increased primarily driven by deposit growth. Our CET1 ratio at the end of the quarter was 11.5%, unchanged from the prior quarter. Over the course of the second quarter, we returned $1.2 billion of capital to our common shareholders, resulting in a 92% total payout ratio year to date.

With regards to liquidity, the consolidated liquidity coverage ratio was 112%, down four percentage points sequentially, reflecting elevated deposit balances which were largely non-operational in early parts of the quarter. The consolidated net stable funding ratio was 131%, down one percentage point sequentially. Next, net interest income and balance sheet trends on page six. Consistent with the backdrop of elevated volatility and active trading in capital markets, we saw clients seek the strength of BNY's balance sheet and leverage our platforms for execution and settlement. Net interest income of $1.2 billion was up 17% year over year and up 4% quarter over quarter.

Both the year over year and sequential increase primarily reflect continued reinvestment of maturing investment securities at higher yields as well as balance sheet growth, partially offset by changes in deposit mix. Average deposit balances grew by 6% sequentially, non-interest bearing deposits grew by 3% in the quarter, and interest-bearing deposits grew by 7%. Accordingly, average interest-earning assets increased by 6% sequentially. Cash and reverse repo balances increased by 9%, investment securities balances increased by 4%, and loans increased by 2%. Turning to our business segments starting on page seven. Security Services reported total revenue of $2.5 billion, up 10% year over year. Total investment services fees were up 10% year over year.

In asset servicing, investment services fees grew by 7%, reflecting higher market values and client activity. And in issuer services, investment services fees were up 17%, driven by exceptionally strong client activity in our depository receipts business. In this segment, foreign exchange revenue was up 22% year over year on the back of elevated volatility and higher volumes. Net interest income for the segment was up 13% year over year. Segment expenses of $1.6 billion were up 4% year over year, driven by higher investments, employee merit increases, revenue-related expenses, and the unfavorable impact of the weaker dollar, partially offset by efficiency savings.

Security services reported pretax income of $867 million, up 26% year over year, and a pre-tax margin of 35%. Onto Markets and Wealth Services on page eight. In our Markets and Wealth Services segment, we reported total revenue of $1.7 billion, up 13% year over year. Total investment services fees were up 9% year over year. In Pershing, investment services fees were up 8%, reflecting client activity and higher market values. Net new assets were a negative $10 billion in the quarter, reflecting the deconversion of a client that was acquired by a self-clearing competitor. In clearance and collateral management, investment services fees were up 14%, driven by broad-based growth in collateral balances and clearance volumes.

And in treasury services, investment services fees were up 3%, reflecting net new business. Net interest income for the segment was up 21% year over year. Segment expenses of $897 million were up 8% year over year, driven by higher investments and litigation reserves, employee merit increases, and higher revenue-related expenses, partially offset by efficiency savings. Taken together, our Markets and Wealth Services segment reported pre-tax income of $851 million, up 21% year over year, and a pretax margin of 49%. Turning to investment and wealth management on page nine. Our investment and wealth management segment reported total revenue of $801 million, down 2% year over year.

Investment management fees were down 1% year over year, driven by the mix of AUM flows and the adjustment for certain rebates, partially offset by higher market values and the favorable impact of the weaker dollar. Segment expenses of $653 million were down 2% year over year, driven by lower revenue-related expenses and efficiency savings, partially offset by higher severance expense and the unfavorable impact of the weaker dollar. Investment and wealth management reported pretax income of $148 million, down 1% year over year, and a pre-tax margin of 19%. As I described earlier, assets under management of $2.1 trillion were up 3% year over year.

In the second quarter, we saw $17 billion of net outflows driven by index multi-asset and equity strategies, partially offset by net inflows into cash and fixed income strategies. Wealth management client assets of $339 billion increased by 10% year over year, largely driven by higher market values. Page ten shows the results of the other segment. For this segment, I'll just note that the sequential decrease in revenue primarily reflects the net losses from investment securities activity I mentioned earlier, while the sequential decrease in expenses reflects lower litigation reserves and severance. Turning to page eleven, I'll close with a midyear update of the financial outlook for 2025 that we provided on our earnings call in January.

As you can see on the slide, BNY is entering the second half of the year with great momentum amid elevated geopolitical and policy uncertainty. Based on where we sit today, looking out to the balance of the year, we now expect full-year 2025 net interest income to be up high single-digit percentage points year over year. And we continue to expect solid fee revenue growth in 2025, of course, market dependent. We now expect expenses excluding notable items for the year to be up approximately 3% year over year. We continue to expect our effective tax rate for the full year to be in the 22% to 23% range.

Considering our 21% tax rate in the first half, that means approximately 23% for the second half of the year. And we continue to expect to return roughly 100% plus or minus of 2025 earnings through common dividends and buybacks. Following the release of the Federal Reserve's annual bank stress test, our Board of Directors declared a 13% increase of our quarterly common stock dividend, and we plan to continue repurchasing common shares under our existing share repurchase program. As always, we consider macroeconomic and interest rate environments, balance sheet growth, and many other factors with a conservative bias in managing the pace of our buybacks.

To wrap up, BNY posted very strong results, demonstrating the impact of consistent execution and delivery amid a complex but yet for BNY constructive operating environment. Momentum of our multiyear transformation continues to build, and progress to date gives us incremental confidence in BNY's great potential for the medium and long term.

Operator: And one related follow-up question. We'll take our first question from Ebrahim Poonawala with Bank of America. Please go ahead.

Ebrahim Poonawala: Thanks. Good morning.

Dermot McDonogh: Morning, Ebrahim.

Ebrahim Poonawala: Maybe, Robin, for you, I saw the call in terms of the transformation efforts, digital assets, AI just sounds like significant runway on all things organic. But address for us how you're thinking about capital deployment relative to where the stock's trading at today, and I'm sure this is not news to you in terms of news around BNY pursuing a merger with a competitor. Your interview in Barron. So give us a sense of when we think about capital deployment as shareholders, how should we think what the priority is outside of funding the business? Be it buybacks versus M&A? Thanks.

Robin Vince: Sure. So look, you know, the beginning point of what you said is actually the most important thing. We have got strong momentum. We really see the pathway to be able to generate value over the medium and long term. Obviously, you're seeing some of the early signs of that, and we're pleased with it. And that is our biggest focus because at the end of the day, the top of the capital waterfall is that ability to invest in the business. Now look. The good news is that we're a pretty capital-light business. You can see it in the 28% ROTCE that we generated in the quarter. We're pleased with that.

That's another sign of the transition and transformation of the company towards this more platforms orientation because that is the sort of feature that you'd expect of a company in terms of the direction of travel that we've got going. Now in terms of the sort of the inorganic stuff, look, our broad approach hasn't changed, which is M&A done well can be a powerful tool in the toolkit. It's not accustomed to comment on any specific rumor or speculation, but I think we demonstrated last year with the Archer acquisition that we've got the ability to make M&A work for us in a sensible way. Having said that, I just really want to underscore this point.

It's a very high bar for us for M&A, especially a larger transaction. It would have to make a ton of sense. We'd need to have a lot of conviction and execution. We're focused on ongoing alignment with our strategic priorities. Strong cultural fit matters, and, of course, the financials really have to work. And our M&A story is a two-sided story as well because you saw that last year. We bought Archer, but we sold our corporate trust Canada business. So the punchline I'll leave you with is we are focused on our organic growth. That is working. We are beginning the process of a multiyear journey on that.

And we're going to be open because we should be open to sensible things inorganically if they make sense, but I'll underline again if they make sense.

Ebrahim Poonawala: That's very clear. Thank you. And I guess maybe just following up on that. You referenced the 27% ROTC this quarter. I get it's a seasonally strong quarter. But as we think about again relative to new investors trying to put money to work in the stock, if, structurally, based on all the work you've done so far over the last few years, and where things are going, is it safe for investors, shareholders, the street to assume that this is becoming a high twenties low C institution, which should then support a very different multiple than we've been used to for the last several years. Thanks.

Robin Vince: So look, I'll blend sort of two things together here. One is the broader medium-term targets as we think about them. We have not put a ceiling on any of our medium-term targets. We viewed them as milestones on a longer journey. At the time that we first communicated them, you know, people understandably thought about them as ambitious based on where we had been in the past. But we are on a journey here, and we are making important steps forward. And so on ROTCE specifically, we don't see a ceiling on that number.

Because as a more platforms-oriented company, remember, NII is only 25% of our revenues, view that as broadly for the balance sheet, which means three-quarters of our business is largely a pretty capital-light business. That's driving forward in terms of fee growth. And so I would just look generally at our medium-term targets. I would throw ROTCE, your question, into that as well. And say, we have a lot of ambition. We think we're relatively early in our journey. And we're absolutely going to be moving the bar higher on ourselves, which frankly we do every single day in terms of how we run the company.

Ebrahim Poonawala: Perfect. Thank you, Robert.

Robin Vince: Thanks. We'll move to our next question from Ken Usdin with Autonomous Research. Your line is now open.

Ken Usdin: Hey. Good morning, everyone.

Dermot McDonogh: I wanted to ask about just the evolution of, as the year goes on, of just overall top of the house performance. Because, obviously, you're taking up your NII guy, but NII is only 25% of revenues. And while the cost guide is up, I think it maybe misses the point that on the fee side, your guide is only just for year over year, and here we are plus 6% in the second quarter and plus 7% for the year to date. So I'm just wondering on the fee side, are fees better than your original expectations too?

And is that informing as much as the NII upside, you know, the slight drip up on the overall cost guide as the total is coming in better?

Dermot McDonogh: Hey, Ken. Ken, I'll start with that. Look, the way I kind of think about the firm is I start with overall positive operating leverage. And I guess a key message I would leave you there both on operating and reported basis I think it was roughly 500 basis points of operating leverage. And so since Robin took over as CEO, we've kind of made the positive operating leverage our North Star. And so consistently delivering that to the market has been our kind of core strategy around how we think about the financials. So you have three components to that. You've got fees. You've got NII, and you've got expenses.

And you'll see from the financial yeah, revenue up 9%, expenses up 4%, you know, delivering that positive operating leverage within the revenue. You've got fees. You've got NII, really solid performance on NII, which gives us comfort around for the balance of the year. Giving a higher guide to kind of high single digits. And on the revenue side, I think the strength in fees really underscores the commercial model that we launched about a year ago two consecutive quarters of kind of record sales, notwithstanding that, the second quarter is a seasonally strong quarter, so we would expect strong fee strong sales. But that was on the back of a Q1.

And we see going into Q3, although it is a kind of seasonally slower quarter for us, given the vacations, etcetera, we see kind of strong momentum continuing. So you see a picture on page three of the midyear update. Where we kind of show you a little pictorial about how we think about organic growth, and we have high conviction around that beginning to build and grow.

Robin Vince: And, Ken, let me just build on a couple of things that Dermot said. So first of all, yes, it was a constructive environment in the second quarter, but I'll bring you back to our comments in January when we talked about the various different things that drive our business. We've been intentionally been repositioning the company gradually to be able to take advantage of more different types of environment.

So I think the punchline is, well, there are always amazing environments that you could have for a business or potentially environments which just don't have any element of being particularly constructive we think we're broadening out the probabilities of any given environment as actually working reasonably well for us because equity markets up fixed income market's up, equity volume's up, fixed income volumes up, transaction volumes and GDP up, issuance up, asset management activity, wealth management activity. There are a lot of cylinders in this particular engine. And so the second quarter was constructive, but we have been positioning the company to be able to take advantage of more and more environment as constructive.

And I think that plus the point that Dermott made around our commercial model, is allowing us to grind organic growth higher. So we want to take advantage of the beta. We want to be able to participate in whatever the quarter happens to bring, but this constant focus on alpha generation in terms of how we're running the company and positioning the company is an important part of the story. And we do think that this is a quarter where you're starting to see that but, again, the early innings point that Dermot and I have made many times before there's a lot of runway here in our estimation.

Ken Usdin: Understood. That's great color, and I do like that upper right chart on page three. Just one thing on the environment then. Can you've talked previously about just the stickiness of deposits and obviously that's informing the better than expected NII outlook. Does anything change in the environment to that point? Because I think Robin will bring back in your point about, like, you know, tools in the kit and arsenal to just continue to add deposits, but maybe you can just help us understand the environment.

Dermot McDonogh: So I think point number one here that I would make Ken, is as a matter of strategy, we don't really lead with deposits. So when you see deposits being a little bit higher, the mix of IB and IB a little bit higher, it really speaks to the breadth and the depth of the franchise and doing more with clients. And doing more with clients kind of attracts deposits.

And specifically around second quarter, in our corporate trust business, we had higher levels of activity, and we were able to kind of help clients with unique specific situations that attracted deposits into the system particularly on the NIB side, and that was able for us to kind of have a good NII print this quarter. And when we look out for the balance of the year and run our various scenarios, we really have reduced the tails with respect to interest rates sensitivity, and that was really on the back of a ton of work done towards the back end of last year when the Fed made the pivot after Jackson Hole around the forward rate curve.

And so that gives us now a lot of confidence to be able to kind of provide that higher NII growth against what is a constructive backdrop for us.

Ken Usdin: Thanks very much, guys.

Operator: Our next question comes from Glenn Schorr with Evercore ISI. Your line is now open.

Glenn Schorr: Hi, thanks very much.

Robin Vince: With so much going well, forgive me, I'm going to

Glenn Schorr: pick on the one area that wasn't as good as everything else in investment management. So fees down a little bit. Flows out, margins down, you know, in that nineteen range. So despite the good market. So the question is, if we step back a little bit, we talk can we talk a little bit about what investments you're making to improve the business and, like, what's high on your to do list to help you know, drive better performance as we move forward in investment management? Thanks.

Dermot McDonogh: Thanks for the question, Glenn. I would say investment number one was Robin appointing Jose as the leader of that business, and he started last September. And you can see, you know, between first quarter where we had a margin of eight percent to this quarter where we're about nineteen percent, you can see that step up in margin, and you can see Jose is beginning to work the opportunity and making some decisions to right size it from an efficiency standpoint and, I'm very pleased with what Jose has done.

What I what I also think he's doing very, very effectively and, look, both Robin and myself will have talked about this on prior quarters, the one BNY approach in terms of de-siloing the firm you kind of have to go that extra mile as it relates to our investment and wealth management strategy and bringing the boutique closer to the firm. And I think Jose sees a lot of opportunity for us to cross sell within the firm, both within our asset servicing business and within our Pershing business.

So bringing the strength of our manufacturing capabilities to our Pershing clients and our asset servicing clients is a kind of a key forward strategy that we can see we can do well at. And also bringing in leadership and product development. So think you're going to see more positive stories coming from this particular segment, whereas as with all transformations, it takes a little bit time, and Jose is getting that time to make the decisions that he needs to. And, Glenn, let me just build on one particular point that Derma just made. You know, one of Jose's early

Robin Vince: observations about the business was we have a terrific to use Dermot's term, manufacturing base If you look under the hood of our $2.1 trillion of AUM, you have some real market leading franchises. We have Insight, which is number one in its market. That's a trillion dollars of it right there. You have Walter Scott, which is terrific, long only, long dated, equity manager. You have a terrific business in the form of Dreyfus, money markets. And we have a in Mellon, a direct indexer that's capable of being able to create product that are asset servicing clients are very interested in.

Obviously, it also has a lot of relevance for the $3 trillion of wealth distribution that we have in Pershing. So you think about the manufacturing base, let's give ourselves a check that we have a pretty good set of businesses that are actually performing pretty well. On the distribution, if we didn't have BNY, then you could look at asset management, and you could say there are a lot of parallels with other midsized to large asset managers, and the question of wow. This investment manager it at BNY is the one of the reasons why I joined BNY. Because there's all of this distribution potential, but we just haven't fully unlocked it. Okay.

So then what sits in the middle? And that's the word that Dermat used product, where if you if you take a metaphor for this for a second, imagine that you were a Coke or a Pepsi and you were making a beverage and you had to concentrate and you have all of this terrific distribution because you can sell in restaurants, you can sell in grocery stores, you can sell in a corner store as well. But in the middle of that is a critical point of product, which is, are you taking the manufacturing base that you have and making cans when you want to sell it in the corner store.

Because if you put bottles of concentrate in the corner store, it's not going to help you. But when you're delivering to a large fast food outlet, there you want to be able to deliver the concentrate Canned is not as useful. So this piece in the middle, this product shaping, that leverages the manufacturing base with an eye the distribution channels that you have available to you is critical and I think we haven't done as good a job on that as we could. And so that's a very big focus for us, and we think that when you take all of those things together, we think there's an interesting pathway here.

Glenn Schorr: Thanks for all that.

Glenn Schorr: Maybe I could do a tiny follow-up on previous question. And forgive me if you said it, but the fee revenue were up 5% for the first half and the guide is still, quote, up on the year. Markets are higher. Despite this investment management, it feels like deliberately conservative which I'm cool with. I just curious on how we square the up five for the first half. Markets are trending well. Your momentum's good. Why wouldn't the fee outlook be better? I know I asked you that last quarter and you outperformed.

Dermot McDonogh: So the way I would answer it is it's like, there are a lot of factors that go into the fee. A lot of external factors that we don't necessarily control. Control, very market dependence, we kind of go back to the foundational building blocks of the platform operating model and the commercial model, which is, you know, it's still only a year old, but it is working. You can see it. Have higher conviction about our ability to drive organic fee growth from here

Glenn Schorr: But

Dermot McDonogh: you know and we've changed a lot over the last three years, Glenn, about the transparency of our numbers and how we give you a lot more than we did three years ago. So I think as we get more conviction and as we get more kind of sales telemetry around us, we'll give you more guidance as we feel comfortable But for now, I think the momentum is there. The upper trajectory is there, but we're not ready to yet guide on specific around fees. And third quarter is usually a seasonally slower quarter, and Q2 is a seasonally strong quarter. So it's important to be balanced in that as well.

Glenn Schorr: Fair enough. Thanks for all that.

Robin Vince: Thanks, Glenn.

Operator: We'll move to our next question from Betsy Graseck with Morgan Stanley.

Betsy Graseck: Please go ahead. Hi. Good morning, Robin. Good morning, Dermot. Good morning, Ben. I wanted to dig

Betsy Graseck: I wanted to dig in a little bit on the AI commentary that you had, Robin. And starting off,

Betsy Graseck: the operating leverage is just so strong almost double what consensus had baked in for you and really terrific results here. I wanted to understand your comments on AI as it relates to the forward look because you indicated that nearly all your employees are using the Eliza, you know, AI platform. And you're starting to you're beginning to see the benefit of this. I mean, is it the benefit from AI at a level that we can see in these operating leverage results And maybe you could help us understand, is this more revenues or expenses?

Robin Vince: Sure. Well, thanks for your comments about positive operating leverage as Dermot and I both said over time Betsy, that is a great North Star. And going back to Glenn's question at the end, there, you know, one of the reasons why we've been always a little reluctant to guide on all of the elements underneath the hood of positive operating leverage is we recognize the composition in any quarter or any year could be a little different, and we don't want to create ceilings for ourselves. Positive operating leverage, and we see a ton of pathway.

And when you when you go under the hood, one of the reasons why over the past three years, we've really focused on showing you all the inputs to what we're doing is because we recognize that the timing of exact when each of these strategies starts to really hit varies a little bit. And so we've got several things driving the positive operating leverage. We've got a commercial engine which is starting to now make a meaningful contribution. Output evidence, you can see it in the record sales quarters that we had in the first and second quarter. The platform's operating model, we knew there would be a longer lead time to that.

We started work on it three years ago, and now it's starting to come into own, but it's still very early days because only less than ten percent of our people have been in the model for at least a year. And as we indicated, in our prepared remarks, we see the actual value really starting to shine through in platforms operating model after we've had people in the model for about that period of time. So that is still to come, little bit of it now, most of it twenty six, twenty seven, twenty eight, and beyond. The next layer is heart of your question, which is AI.

We view AI as a top line story, and an expense story in because what we're really doing is we're unlocking capacity in the company, and we want to then be able to use that capacity to do other higher value things. That's why we've been encouraging all of our people to participate in AI because we view our AI solutions, which we put on the page three again, demonstrating the inputs today and then we'll show you the outputs over time.

We see those as being able to be very helpful as two will be our digital employees as essentially companions and leverage for our people to be able to go faster and create capacity for themselves they can they can reinvest in doing new things, pushing forward with clients, more time in the day, all of the above. So the our excitement about AI is a very medium to long term excitement but we've invested heavily early on in the psychology of it in the company so that we have AI for everyone everywhere, for everything. And that's really how we think about AI. So it's early days. There's not a ton in the P&L right now.

To your point with net investment, but we are starting to see the early signs of what we think will be an acceleration twenty six, twenty seven, twenty eight, twenty nine, beyond.

Betsy Graseck: Thank you.

Operator: We'll take our next question from Mike Mayo with Wells Fargo Securities.

Mike Mayo: Hi. No good deed goes unpunished. I know you talked about

Robin Vince: organic growth and You could you could make that you could make that one of your punch lines, Mike.

Mike Mayo: You could I know you've trademarked the world's worst oligopoly, but that one you could put it could put in trademark as well. And BNY not your parents' bank? Look. I'm the first to say you've optimized much better than I had expected these last two years. And, but yeah. And you have these very high returns as

Mike Mayo: but the organic growth And you do it correctly x markets, x currency, x deals,

Mike Mayo: whether it's two percent or three percent, is still not great in the scheme of, you know, the overall world. And, I know you want that growth to be better. And I know you said you had record sales, but it's

Mike Mayo: the growth is still the growth. It hasn't changed that much at an organic level. And I know you guys have thought about this, but know, to the degree you sacrifice the high very high returns, reinvest for better growth, than what the company's had so fast. Five, ten, twenty years. Right? And so I where do you stand in that trade off? Of maybe having lower returns or maybe

Mike Mayo: know,

Mike Mayo: not raising your return targets and reinvesting more for growth And where should that organic growth be in your perfect world the way you define it?

Robin Vince: Sure. So several things here, Mike. So one of the reasons why we put that chart, the top right corner of page three, was to illustrate the fact that organic growth has been growing. I hear your point about three versus two, but three is still fifty percent more than two. And significantly up from where it has been in the past. But a few other points to note. Our growth in the past generally has been quite subject to markets. And so we are very happy to take advantage of constructive backdrops.

And as I answered in a prior question, we're trying to position the company to take advantage of more types of backdrops so that we can we can be less handed our results by the market conditions and more in charge our own destiny. That's a very deliberate strategy, and we feel like we're making some progress on that. So that's sort of observe the next observation. The next thing under the hood is what are the prerequisites for the real type of organic growth that you're talking about that you've challenged us on understandably and rightly so over the course of the past two or three years.

And this is where we really feel like we've set the table for the future. And to your point about how we think about investing versus harvesting, we've been very clear on this. We are taking a decade view of the transformation of BNY, and we're pleased where we are close to three years in, but we are far from done because much of what we have done has actually been investing for the future, and we're in the very early stages of seeing that being harvested. We talked about the commercial model. We talked about the platform's operating model. We talked about AI, which is part of the growth story as well as it is on the expenses.

But let me just come back to the key elements of what we've got. We've got a diversified set of platforms. That is, yes, helping us to be more diversified in different environments, but it is also allowing us to better position to capitalize on these market trends and to generate alpha because it's less one business going to market at by itself. It's more what's the synergy between the component parts.

You know, a client who custody these with us who also does treasury clearing with us, who also does collateral management, with us is going to be able to get better outcomes over time because of the fact that all of those things can just be book entry for us within our ecosystem. That allows us to move to 24-hour. That allows us to think an embraced digital assets maybe in a different way than somebody else can. And you're starting to see the early signs of these platforms coming together to show something where the sum is more than the individual parts, and that's what our commercial model is actually about.

So we're investing in these micro innovations, the bigger things, the synergies between the platforms. We've positioned people behind this. We've positioned culture behind this, and we're organizing the company behind this. And we think it is starting to show, but we absolutely agree with you that they should be more a lot more gas in the tank here.

Dermot McDonogh: Hey, Mike. I would add just a couple of more points as well.

Mike Mayo: One is, you know, you ask the question sometimes about

Dermot McDonogh: negative pricing. We just we haven't seen it this quarter, which really kind of goes to the efficiency point about us being able to reduce our cost to serve, which is able to help us drive the organic growth because we're able to compete more effectively to win our share of business. So that would be point number one. Point number two, to Robin's points about the commercial model, now we're in the early stages of a of a product model. Which is joining with the commercial model, and that's been led by Carolyn Weinberg, where she's able to see in between the scenes of our various businesses to create new products that clients want.

So lots of opportunity to come there And the third point I would make is when you look at the firm overall and you have to think about the enterprise, it's a 37% pretax margin. Diversified business model. And so when you look at IWM, which is now hovering around the 19%, it's upside from here for their enterprise as we resume that path towards 25% which is going to further fuel organic growth at the enterprise level.

Mike Mayo: And I guess just one more follow-up on the

Mike Mayo: talk about acquisitions, and I heard you, it can be a powerful tool if it made sense. You're not going to do anything stupid. I hear you. As you've gone and the art of what's possible. Since you are talking about a different type of not your parents' BNY because you are more diverse in terms of your offerings. What's the realm of possibilities for acquisition? Clearly, traditional trust

Mike Mayo: you know,

Mike Mayo: businesses or sub businesses are always possible. Going back to the merger, the big merger. But what other areas would you consider maybe buying?

Robin Vince: So it's it's it's an important question, Mike. Again, you know, focus our primary focus is on driving the growth And but there are many different pathways on this thing. So we you know, two or three years ago, we said there's absolutely no way that we're going to make any acquisitions. Then we sort of warmed up to the idea of capability buys, which is how I would frame Archer. And that really does check the box of helping us to go faster, to derisk because we could buy versus having to build ourselves. And we're seeing the early signs of that output. Great client feedback. The integration's been going well. New client wins as a result of it.

So I still think that is the most likely path for us when it comes to M&A helping us to go faster? And I'm going to guess, but it doesn't have to be this way. That those types of things are generally more likely to be in the bits of the business which are a little bit more platform like. Although it's interesting that Archer was a buy once use across the firm type of acquisition. So that's our that's our expectation for the primary focus. Because the bar for larger transactions is super high, we'd have to have a lot of conviction in the execution of something like that because clearly they could be quite complicated.

And there, you could you could make a case elsewhere in some of the other segments that maybe there would be the opportunity to have even more scale. Because if you're a scale player, and you've got a platforms operating model like organization, the thesis would be that you could bolt on more activity onto your existing chassis, and there would be a lot of scalability associated with that. So that's a fine thesis and something that we certainly keep in mind. As well.

But, you know, as now we have close to two-thirds of the of the company in platform like businesses either in MWS or in our issuer services business, you know, when you look at MWS alone, it's a 49% margin. You know, we've got we've got choices in this space. But we're not going to let those choices get distracting for us. We are focused on building our company, to your favorite term, the organic way, and then we'll just be opportunistic and disciplined on external related stuff.

Mike Mayo: Message heard. Thank you.

Operator: We'll take our next question from Alex Blostein with Goldman Sachs. Your line is now open.

Alex Blostein: Thank you. Good morning for the question. Thank you.

Alex Blostein: Busy morning. So I had a couple of questions for you guys around the new business, upper opportunities. I know you mentioned a couple things around the digit digital assets and just kind of tokenized environment, which obviously continues to be quite dynamic. Was hoping you could build on that a little more. Obviously, there's a lot of you know, debates in the financial services industry today, perhaps more so on the stock than the past in terms of what's a risk versus what's an opportunity.

So when you think about where BNY sits in that in that realm, where do you see both risk to, you know, the existing business and some of the new revenue opportunities that could come out of this?

Robin Vince: Sure. Thanks, Alex. Look, net, we see these advancements providing more opportunities than risks, but you're right. There are things on both sides of the ledger If you just go back and just think about industries and big changes in technology that happen over time, they create disruption. And what disruption does is it allows for a little bit of a reorganization sometimes of the ecosystem. And it's our observation that companies that have a lot of forward thinking innovation that push forward take advantage of that as opposed to sticking their heads in the sand, tend to be tend to be winners.

Now we have many specific valuable attributes that help us make us a great partner to these digital assets firms. And that's one of the reasons why we've been so engaged in the space for several years because initially, it had been about providing our traditional banking services to those digital asset companies. We serve many of them. With our traditional banking services. Then it's been about helping with the on ramps, off ramps between that traditional banking world and the on chain world And in the future, we think it's also going to be about more activity on chain. We are live with Bitcoin custody today.

We do it natively, and we can help clients There's more stuff in the world. We want to we're in the business of looking after stuff as one of our businesses, and we're happy to do that. But we're also in the payments business. Again, there's synergy between our platforms. We're also in the issuer services corporate trustee business. They're synergy. We're in the NAV business. That's relevant. Synergy. Distribution business, relevant. Money market fund business, relevant. And so when you take all of these things together, we're a terrific partner for some of these clients because we can do a lot of different things with a trusted brand that actually helps them to feel to feel good.

So, look, Stablecoins particularly, it's obviously one of the topics of the day, and we're very active in that space. And that's the reason why we mentioned a couple of those recent examples, but there are many more in our prepared remarks. But, Alex, what I would say is don't lose also that's all great stuff, but don't lose sight

Alex Blostein: of our core businesses that are market leading

Dermot McDonogh: that are growing share, because the market is growing. So growing the pie with existing clients in our core businesses is also happening and very important.

Alex Blostein: Yep. That's totally fair. Demi, we want for you on just the balance sheet dynamic and deposits. You know, I know you mentioned you guys don't lead with deposits. That'll that'll make sense. But when we look at the trajectory deposit base for the last couple of quarters, obviously much more stable, and nice to see the noninterest bearing deposits improving here as well. So as you look out into the back half and ultimately, you know, where we are in July, maybe give us sense where interest deposits in particular sit And as we think about the forward, which businesses tend to drive those for you guys as sort of think about the trajectory beyond twenty five?

Dermot McDonogh: So it was a strong quarter. I expect the balances to moderate into Q3. You might remember Q3 of last year was a strong quarter for us in terms of NII So Q3 is a tough comp. So and deposits we expect to moderate at the seasonal slowdown. And so the diversity of the NIB across the franchise is particularly pleasing. But corporate trust is a highlight. And because of the breadth and the depth and the market shares that we have in that business, we do attract a lot of cash into the system by virtue of increased client activity. So Corporate Trust in Q2 was a notable highlight particularly around escrow as a result of increased M&A activity.

So but I would expect that to moderate a little bit in Q3 and pick up again in Q4 But overall, I feel pretty convicted around the high mid single digits NII growth for the year?

Alex Blostein: Alrighty. Thanks so much.

Operator: We'll take our next question from Brian Bedell with Deutsche Bank.

Brian Bedell: Oh, great. Thanks. Good morning, folks. Maybe two separate questions on the

Alex Blostein: platforms operating model. So first one, maybe for you, Dermid. Focusing on the cost reduction element as we've, you know, we have another fifty percent to migrate over the next call it, twelve months. And I know, obviously, expense guidance went up a little bit, which makes complete sense given the, you know, stronger revenue growth environment and all the dynamic budgeting aspect that you've talked about. But on the cost reduction side from that conversion on the platform's operating model, and how should we think about framing that as a know, as a positive contributor to the expense story for the rest of this year in twenty six?

Dermot McDonogh: So I do go back to a little bit, Brian, what Robin said

Dermot McDonogh: earlier about you know, fifty percent of the people are in the model We've done three waves over the last fifteen months. The maturity level between wave one and wave three is quite stark. And what the wave one businesses that went into the model are doing now in terms of one BNY connectivity, automation, you know, dynamic innovation, having an entrepreneurial spirit within their own businesses it's it's gives me a great sense of pride to actually see it day in, day out. And while your question led with the cost reduction, we really think about it internally about running the company better and creating capacity.

And we either deploy that capacity into new investments, new opportunities, or we let it flow through to positive operating leverage. And you can see in Q2 of this year, we kind of gave you gave the market 500 basis points of positive operating leverage. And the platform operating model was a continue was a was a contributor to that. So with fifty percent of the firm in the model and ten percent in it

Brian Bedell: about fifteen months, I would expect the maturity of this

Dermot McDonogh: to kind of give us a benefit for the next few years. And so it's not for another two years where I would say the firm will be reasonably mature in the model. And it's creating its own flywheel of momentum and innovation. And when you overlay that with maturity of the commercial model and you overlay that again with what Caroline is doing on the product side, you're going to see the North Star of positive operating leverage be delivered for this for the foreseeable future. So I'd like, it's all about running the company better, and I don't talk internally about expenses or cost reduction. Yep. Okay. And then that's great. And then maybe just also on

Brian Bedell: following question on the on the on the platform's operating model. As you think about M&A, maybe just

Brian Bedell: your thoughts around how much the operating model, you know, the platforms operating model you know, kind of informs your decision about what type of M&A to

Brian Bedell: to do? Is it a main is it a major or a primary factor in bringing on businesses that you think can fit into that model and therefore you can scale them in organically. And then I guess is it even possible to do large scale

Brian Bedell: M&A

Brian Bedell: and, you know, integrate that into this platform? Or do you see know, too many disparities with other know, large providers that would make that difficult?

Robin Vince: Yeah. It's it's an important question. So look, broadly in the platform's operating model, Dermott touched on the fact that it's a two-sided thing because we're very much looking for it to drive revenue. This interlock between platforms operating model and the commercial model is super important because by having defined our product and client platforms in the way that we have, And then by layering over that, a new go to market approach with our commercial model, that's just allowing us to go faster collaborate more across the platforms, create more solutions, and really create a lot of empowerment to our teams to go and listen to clients invent new stuff, provide more solutions to them.

And, of course, that and just running the company better, more broadly, as Dermot mentioned, those are the reasons why we are doing this. Now it has a nice byproduct, which is it organizes ourselves in a way where our chassis is super well organized and very strong, and we clearly see the benefits of that across the board as we continue to go through the model. And so I think what that will result in is when we talk about some type of bolt on acquisition and almost irrespective of its size.

If it's sort of adding to us in something that we broadly do today or something that essentially speeds us forward in something that we do today, we're able to add it with really without having to take on all of the expenses associated with us because it sort of becomes a bolt on to a chassis that we have. You could

Mike Mayo: see that with Archer as a good example, which is

Robin Vince: they are able to do more of what they want to do because they're able to tap in to the right additional parts of BNY. They client onboarding capabilities that our client onboarding platform provides to Archer in its acquisition of new clients allows them to go faster. The fact that we've able been able to wrap our technology and our AI around that is going to allow them to do more things.

And so there's a real you're able to actually achieve an economy of scale and actually add scale to a scale business or go faster in a business where you're adding capability where sometimes that's a theoretical conversation because you look at something and you say, oh, well, you could just you're pretty scaled. You could just add more stuff and it'll scale. But that's not true if you're adding a complicated back end you know, trying to smash two incompatible things together. And I think that was a lesson that this company learned twenty years ago with the acquisition between or the merger between Mellon and BNY. That was not consolidated properly.

So the punchline is the platform's operating model allows us to have a clarity of chassis that I think actually will allow for higher quality integrations in the future if ever we choose to do one.

Brian Bedell: Yep. Great color. Thank you.

Dermot McDonogh: Yeah.

Operator: We'll take our next take our next question. David Smith with Truist Securities.

David Smith: Good morning.

David Smith: So you're pretty clear that, you know, you see further upside on returns and margin from here even with the strong results you've had in this quarter in the first half? Are there areas right now that you feel like you're over earning Or would you say that you know, you're looking to hold or improve profitability across the firm, from these levels right now?

Dermot McDonogh: I would say it's a good question, David. How I would answer that is we're trying to get better every day in every business and a mindset I adopt with everybody that I work with and talk to is one percent improvement every day, be better, run the company better, Always be humble. It's all about the client, if you keep the client happy, gonna win more business. And that really is, I think, our secret sauce I talked to a couple of people this week who've been at the firm last a long time, and I said, what's the difference between BNY today and BNY of ten years ago? And in a word, it was about client centricity.

And so we're very focused on putting the client at the heart of everything that we do. And so I wouldn't say that any one business we feel like we've meet we've reached max potential because we've invested in a lot. If you kind of take corporate trust two or three years ago, that was that was a well that was a high performing business from a margin standpoint, but had been neglected for a long time with respect to investments because the margin was good. But now we've kind of decided to invest in the business, and we're growing share. We're doing it at a higher margin than we did before. We're using AI.

We have better employee NPS scores. So all in the round, the strategy is working when you look at the three strategic pillars for that particular business. Looked at it objectively three years ago, you would say nothing to do there. We felt like there was a lot to do, and we're making great progress.

Robin Vince: David, let me add a couple of things because this your question go is some one of these things that we debate quite a bit internally as a team, and it goes back actually to the very earliest days of us re underwriting our strategy. At the time, you might remember us saying this, we looked back over the industry, for instance, on annual operating and we say, what does great look like? What are the what are the two best performers in the prior decade from twenty twelve to twenty two? On positive operating leverage and what actually is that number?

And the answer well, it was a hundred and fifty basis points of positive operating leverage on average over the course of that decade. So we said, okay. Well, we think we can be best in class. We think we've got the businesses to do it. Let's shoot for that. And, you know, lo and behold, we've sort of blown that out of the water in twenty three and twenty four and also in the first half of twenty five. So it begs the question to ourselves about are we over earning? How does the environment fit into this? And then we realized, of course, well, we keep talking about being a platforms operating company.

We have these great set of businesses, We don't actually think that banks are our pure comp. We think that there's also a comp out there with other platforms companies and other financial services platforms company who don't happen to exist in bank form. And so when you start to look at the world through those lenses, suddenly, ROTCE you can see a pathway to bigger numbers, and you can see a path to bigger numbers on margin. And we look at those types of comps, and we say, okay. Let us not be satisfied with what we originally thought of as maybe the way that we think about positive operating leverage it's okay to push harder.

Having said that, we're constantly want to be able to invest. And so to Dermot's point, we're not going to let a pursuit of positive operating leverage cause us somehow to underinvest in the business. We are investing with a decade view first and foremost. But I think it does go to one of the earlier questions, and your point also about our vent ceilings So I'm sure there will be, but we're not allowing ourselves including not being lulled into a sense of security by achieving our medium term outlooks and targets, we're not allowing ourselves to think about any ceilings across the business.

David Smith: So just to push you a little bit on that,

David Smith: know, if you're not putting any ceilings or, you know, capping your

David Smith: yourself on growth on expenses in order to achieve positive operating leverage, you know, why not invest a little bit more than just three percent expense growth you know, given the strong backdrop you're seeing and strong performance you've shown so far in the first half?

Robin Vince: No. It's it's a good push, and we do challenge ourselves on that question. I think, you know, you if you were in our sort of weekly syncs on these types of topics internally, you'd hit Dermot on a regular basis going out to the various different businesses and platforms and say, tell me what you need to invest. Do you need more investment and more expense allocation in order to be able to help you to go faster? And so that is a constant push that we are giving to the businesses. Now having said that, we are mindful of the fact that some of what we do is also dictated by the environment.

Maybe less and less over time, but it's clearly is still a meaningful backdrop for us. And so we are naturally a little bit conservative in terms of how we think about the year going into it. Because if, for instance, we'd had a much, much tougher backdrop which would not have been impossible in the quarter when you think about what was happening in April, and all of the sort of uncertainties that were in April. We wouldn't have felt comfortable necessarily if we'd had a more negative environment growing our expense guide.

So there's there's a certain amount of agility as opposed to going into the year assuming everything's going to be perfect betting on a big expense number and then getting disappointed. That's the old version of BNY Mellon. That's not the BNY of today.

Dermot McDonogh: Financial discipline is a very important skill and must memory that we've developed over the last few years. And we like to think that you have given us some credibility for that. It's not our desire to lose that. So financial discipline is very important to us.

David Smith: Alright. Thank you.

Operator: And our final question comes from the line of Rajiv Bhathiya with Morningstar.

Rajiv Bhathia: Great. Good morning. I just want to follow-up on your remark that you're not seeing negative pricing. Should I interpret that as pricing being flat year over year is that on a consolidated basis? So are you seeing the pricing environment differ by LOB?

Dermot McDonogh: So I would it's broadly flat across the firm. And significantly improved from three years ago where I would say it was a headwind few years ago. And I think as a result of all the strategies and that we initiatives that we talked to you about and that we've talked about today, I would say repricing, if I was to give you a stat, is roughly down about eighty percent from where it was three years ago. And so overall at the enterprise level, it's flat to slightly positive this year so far.

Rajiv Bhathia: And does it differ by, like, LOB?

Dermot McDonogh: Not really. No. Not there's no standout really by LOB. I would say it's broadly consistent.

Rajiv Bhathia: Thank you.

Operator: And with that, that does conclude our question and answer session for today. I would now like to hand the call back over to Robin for any additional or closing remarks.

Robin Vince: Thank you, operator, and thanks everybody for your time today. We appreciate your interest in BNY. If you have any follow-up questions, please reach out to Marius and the IR team. Be well, and enjoy the rest of the summer.

Operator: Thank you. This does conclude today's conference and webcast. A replay of this conference call and webcast will be available on the BNY Investor Relations website at two o'clock PM eastern time today. Have a great day.

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