Welcome to the U.S. Bancorp Second Quarter 2024 Earnings Conference Call. Following a review of the results, there will be a formal question-and-answer session. [Operator Instructions] This call will be recorded and available for replay beginning today at approximately 10 A.M. Central Time. I will now turn the conference call over to George Andersen, Senior Vice President and Director of Investor Relations for U.S. Bancorp.

Thank you, Krista, and good morning, everyone. Today, I'm joined by our Chairman and CEO, Andy Cecere; Vice Chair and CAO, Terry Dolan; and Senior Executive Vice President and CFO, John Stern. Together with their prepared remarks, Andy and John will be referencing a slide presentation. A copy of the presentation, our earnings release, and supplemental analyst schedules can be found on our website at usbank.com. Please note that any forward-looking statements made during today's call are subject to risks and uncertainty. Factors that could materially change our current forward-looking assumptions are described on Page 2 of today's presentation, our press release, and in reports on file with the SEC. Following our prepared remarks, Andy, Terry, and John will take any questions that you have. I will now turn the call over to Andy.

Thanks, George. Good morning, everyone, and thank you for joining our call. I'll begin on Slide 3. In the second quarter, we reported diluted earnings per share of $0.97, which included $0.01 per share of notable item related to the FDIC special assessment. Excluding this one-time charge, we delivered earnings per share of $0.98. This quarter was highlighted by an increase in net interest income, continued fee income growth, prudent expense management, credit quality stabilization, and strong capital accretion. Notably, our return on tangible common equity increased to 18.6% on an adjusted basis. Turning to Slide 4. Revenue growth for the quarter was supported by improved spread income and well -- as well as continued growth across many of our fee-based businesses. On both a linked-quarter and year-over-year basis, non-interest expense as adjusted was down benefiting from cost synergies with Union Bank, prudent expense management, and multiyear investments across the business that have resulted in greater efficiencies and enhanced operating effectiveness. As I mentioned earlier, credit quality results were in line with our expectations as we saw stabilization in delinquency rates and a modest increase in NPAs. Average total deposits increased 2.2% and we continue to see growth in consumer deposits despite industry and liquidity headwinds. As of June 30th, our tangible book value per share increased $23.15 -- to $23.15 or 2.8% better than last quarter and 10.1% higher than last year. Our CET1 capital ratio increased 30 basis points from the prior quarter and 120 basis points from last year to end the quarter at 10.3%. John will discuss some key takeaways from this year's stress test in his opening remarks. Slide 5 provides key performance metrics. Excluding notable items, our return on average assets increased to 0.98%, and return on average common equity improved to 12.6%. Our efficiency ratio also improved from the first quarter to 60.7% on an adjusted basis. Turning to Slide 6. Fee income represents just over 40% of total net revenue and benefited this quarter from high seasonal revenues across each of our payment businesses. Strong [core] (ph) growth in trust and investment management fees as well as improved treasury management revenue. Overall, diversified fee income businesses continue to operate at scale and provide earnings consistency through the cycle. And most importantly, we are encouraged by the progress we're making to deepen our most profitable client relationships, expand our product set, and enhance our distribution channels. These efforts are positioning us well for continued growth and strategic differentiation. Let me now turn the call over to John, who will provide more detail on the quarter as well as forward-looking guidance.

Thanks, Andy. If you turn to Slide 7, I'll start with a balance sheet summary followed by a discussion of second quarter earnings trends. Total average deposits increased $10.8 billion or 2.2% on a linked-quarter basis to $514 billion, driven by stable institutional deposit balances and continued consumer balance growth. Average noninterest-bearing deposits decreased $1.4 billion or 1.6% on a linked-quarter basis, as we continue to emphasize stickier relationship-based deposit generation. The pace of decline in noninterest-bearing balances continued to slow this quarter. As the chart on the upper-left shows, we are prudently managing our pricing as we remained focused on retaining and growing core operational relationships across the franchise. Average total loans were $375 billion, an increase of $3.6 billion or 1.0% linked-quarter. The increase was driven by higher credit card loans from high spend -- higher spend volumes and increased commercial loans from growth in corporate banking. Loan growth this quarter was partially offset by lower commercial real estate and total other retail loans. With elevated deposit levels, we opportunistically increased the size of our investment securities portfolio with short-dated high-quality securities to better optimize cash levels. As a result, the ending balance on our investment portfolio was $168 billion as of June 30. Actions taken on the investment portfolio this quarter, together with approximately $3 billion of securities runoff resulted in an average yield increase to 3.15%, a 19 basis point increase from the prior quarter. Going forward, we would expect the balance on the investment portfolio to remain relatively flat to the current level and for the reinvestment benefit from quarterly securities runoff to be approximately 6 basis points to 8 basis points on average based on current rates. Slide 8 highlights our credit quality performance. Asset quality metrics continue to develop in line with expectations…

Thanks, John. I'll finish up on Slide 15. Second quarter results highlighted the resiliency of a business model that features a highly diversified revenue mix, strong risk management discipline, and a robust earnings and capital generation profile. We remain focused on our core competencies and are aggressively building upon our key differentiators. The investments we're making across the businesses are showing through in the form of enhanced customer acquisition, improved client experiences, and deeper relationships that are further propelling our growth story. Expense management is a key priority for us and we remain focused on our target of positive operating leverage in the second half of this year and beyond. Looking ahead, we are well-positioned to continue to build upon our solid foundation and already established interconnectedness across the business with the scale, reach and product capabilities that allow us to deliver industry-leading returns well into the future. Let me close by thanking our employees for everything they do to make us the destination of choice for many clients, communities and shareholders we serve. We'll now open up the call for Q&A.

Thank you. [Operator Instructions] Your first question comes from Scott Siefers with Piper Sandler. Please go ahead. Your line is open.

Good morning, everyone. Thanks for taking the question.

Good morning, Scott.

Hey. John, I was hoping you could please sort of discuss the puts and takes within the NII trajectory from here. It looks like we would hopefully get a bump in the fourth quarter after a stable third quarter if we sort of assume the midpoint of the full year range. I guess maybe just a thought or two on factors that would cause you to come in either towards the high-end or the low-end of the full year range, please.

Sure, Scott, and good morning. First of all, we're pleased to see our net interest income grow, and we like the actions that we've taken to position ourselves for the future. Deposit rotation and rate paid have stabilized. Loan mix has improved. Our fixed asset repricing -- earning asset repricing continues to march on, and we've been opportunistically working with the investment portfolio to deploy excess liquidity. So, if you think about some of these things going forward, the higher and lower end of the range, I'd say a couple different things. First of all, I would just say, as I mentioned, we expect stable third quarter net interest income. And then from there, we do expect growth. We would anticipate that the pluses and minuses is going to be depending upon deposit rotation and beta. We do expect some level of rotation out of deposits going forward, but it's going to be relatively modest. And as you can tell, it's slowed. In terms of rate paid, that's going to be dependent on the market. But as you can tell, that has slowed as well. And we feel good about our positioning for rate cuts as we move forward should they occur. Our earning assets, we know are going to be formulaic and continue to reprice, whether that's the investment portfolio or the mortgage book. We expect kind of in that 6 basis point to 8 basis point range on average, given current levels. And then, loan growth, we assume to be very modest in this -- in our forecast kind of going forward just kind of given the loan dynamics that we're seeing. And then, finally, I would just say, although it's not as going to be meaningful for 2024, it's just the actions of the Fed and what they do, whether they cut or not. So, those are kind of the puts and takes as we kind of think about the next couple of quarters.

Okay. Perfect. Thank you, John. And then maybe if I could ask you to delve a little more deeply into one portion of that, just you noted modest loan growth here going forward. What are you all seeing in terms of commercial loan demand? I guess, I sort of asked within the backdrop of the modest outlook, but your average commercial loan growth this quarter looked a little more favorable than what we've seen from peers. So, just curious as to sort of the insight based on that.

Sure. So, I think on loan growth, we did see pockets of loan growth occur in the corporate loan book, but I think our overall thesis really hasn't changed over the last several quarters. The loan growth environment remains tepid. It remains -- there's caution in the clients, but there's a lot of interest rate movement, and I'm sure that will -- that could spark some things. But overall, it's still a very tepid market. We just happen to find good -- some pockets of growth on the corporate loan book this quarter.

Perfect. Okay, good. Thank you very much.

You bet.

Your next question comes from the line of Ebrahim Poonawala with Bank of America. Please go ahead. Your line is open.

Good morning.

Good morning.

I guess maybe, John, just following up on the NII, by my math, like your fourth quarter could be as high as $4.3 billion. So, appreciate the puts and takes you provided earlier. As we think about the NII trajectory from here, in a rate cut scenario, just remind us, in terms of the positioning of the balance sheet, what four to six rate cuts would imply, and flex on the deposit side, given sort of your corporate institutional makeup?

Sure. Thanks, Ebrahim. So, the way I think about potential rate cut shift and change in market there is that we are well positioned, given the mix of our deposit base. So, approximately 50% of our balances are retail-based and about 50% of our balances are institutional or corporate-type balances. And in a cut environment, those institutional corporate balances, the beta, if you will, of those are going to go down as quickly as they came up. So, we feel very good about the repositioning of that. On the retail side, I would just say that there will always be some arc to the retail, so there'll be probably some repricing that occurs at the [still current] (ph) higher levels, but over time those balances will come down. And so, overall, it gives us an advantage as the curve in theory should starting to steepen and you have a lower short-term rate and a higher longer-term rate that allows for continued earning asset favorability on the repricing side of things.

Got it. And I guess just separately, when you think about the outlook for the back half on fee revenue growth, the mid single-digits, where do you think fee revenue growth is going to be driven? What categories are going to drive that growth? Where do you expect some more moderation relative to what we've seen in the first half of the year? Thank you.

Sure. I think on the fee side of things, we had a solid quarter, but we continue to expect momentum in the various categories. And it's going to be a combination of all the main ones. It's going to be payments, it's going to be our trust investment management fees, and it's going to be in the capital market space is probably the three areas that I would point you to. On the payment side of things, we continue to see strong core competencies and whether in merchant processing, you're talking about our tech-led areas, if you're talking about our corporate payments side of things, you're looking at us starting to lap some of the things in freight and fleet. And on credit, credit card, we continue to see strong spend level. So, those are all going to be positive things for us as we move forward. The trust in investment management fees as well as the capital markets continue to see very strong market backdrop. And we have been doing very well in terms of investment in those businesses and as well as just utilizing our client base and deepening relationships there in a number of different facets. And then, those are going to be kind of the tailwinds that we see that position us well for continuing our guidance here in terms of mid-single-digit growth for fees.

Got it. Thank you.

You bet.

Your next question comes from the line of Betsy Graseck with Morgan Stanley. Please go ahead. Your line is open.

Hi, good morning.

Good morning.

I know we already talked a little bit about the loan growth piece, but going through the slide deck, you highlighted that there's utilization rate increase. So, I guess, I'm just wondering this, and it's important, right, because at least you're the first institution I've seen this quarter that's had a utilization increase. Do you think that's a function of the types of industries where you're seeing utilization increase, or is that more your new geographies where perhaps more focused attention on new clients is driving that? Would just like to understand that.

Sure. Thanks, Betsy. So, in terms of utilization, it did tick up. I would say it's pretty modest and I would say it's pretty much in line with where we've seen in the past. I wouldn't point to it as some new trend that we're going to see continued utilization investment or increase. I think it's really more of a function of the loan mix that we saw this quarter. Some of the loans that were brought on came at a high utilization level versus some of the things that rolled off. So, I just think it's more of a mix shift rather than a change in trend.

Okay, thanks. And then just on the credit outlook here, I got a sense that maybe there was a little bit more credit coming through towards the back half of the year. Is that right, or did I get that wrong?

Well, I don't think -- well, first of all, our guidance really hasn't changed from a credit standpoint. It continues to be -- it's stabilizing. It's as expected. From a net charge-off perspective, we came in at 58 basis points. We would anticipate approaching 60 basis points here in the back half of the year is kind of how we're thinking about the charge-off. But things like delinquencies and non-performing, those metrics have come in -- have stabilized, and have come in very nicely, giving us confidence in our credit outlook.

Okay. And are you already reserved for these NCOs? Just wondering if there's a reserve release behind that as well.

Yeah, we feel very much appropriately reserved for the book that we have. We saw a little bit of increase in our reserve build this quarter just simply because of growth, particularly in cards and things of the like. So that's kind of what has been the driver on the reserve side.

Okay, super. Thanks so much.

You bet.

Your next question comes from the line of Erika Najarian with UBS. Please go ahead. Your line is open.

Hi, good morning.

Good morning.

My first question -- good morning. First question is for you, Andy. I think what was really striking about this quarter is that the balance sheet growth was impressive on both sides of the sheet and really outperforming peers. At the same time, I think we were all surprised by the stress test results, especially given we thought that the PPNR dynamics with MUFG fully baked in would be a little bit cleaner. And so, if I'm calculating this right, your adjusted CET1 would be 8% this quarter versus 7.6%. And I'm wondering, as we think about balancing those dynamics, how are you thinking about managing growth relative to this sort of changing, unpredictable element of the SCB plus, obviously, you have done a great job at managing risk-weighted assets last year, and obviously there's a burn-off rate to the AOCI. At the same time, rates are staying a little bit higher for longer, and there's a huge debate on what's going to happen to the belly of the curve, even if everyone subscribes to Fed cuts. So, I'm wondering how we should think about balance sheet management from here, especially in light of the good growth that you experienced this quarter.

Sure. Thanks, Erika. And let me start on the CCAR results. So, as you think about MUFG, the component that we were focused on there that did happen was the expense component that came down. So, that was as expected. The component that went up versus the Fed last year was the fee income component. And we don't have a lot of clarity or transparency into why that happened. It happened for a number of banks, and it happened in spite of the fact that our fee growth is actually even positive. So that was the part that was the driver of the increased SCB for us and for a number of other banks. Let me take a step back and let me talk about capital and the balance sheet overall. As we've talked about in the past, Erika, our priorities from a capital distribution standpoint haven't changed there. First is investing in the business, second is dividends, and third is buybacks. And so, as a part of this year's stress test, as we talked about, our planned capital distribution assumed an increase to the quarterly dividend of about 2% starting in the fourth quarter. And as you saw, and as you referenced, our CET1 ratio is 10.3% this quarter. So, we continue to have strong capital accretion each quarter. We expect to be well above our fully-loaded Cat II capital targets well before the cross -- we will cross that threshold. So, from a capital standpoint, we're comfortable with our levels and our ability to accrete 20 basis points to 25 basis points a quarter. So, the one open item, as you all know, is the final Basel III endgame rules. And while we prefer to have those clarified before revising our capital and distribution targets, we will assess whatever information we have available and update on our capital distribution, our targets, as well as our return targets at Investor Day on September 12.

So, Andy, just as my follow up is, based on what you've just told us, it doesn't seem as if, as we think about the rest of 2024 and the CCAR years, '24 October 1st, 24th of September 30th of next year, it doesn't sound like we should expect this similar active balance sheet management in terms of growth, as we saw in '23.

So, as we've talked about, I think most of the capital accretion going forward, Erika, will be through normal earnings accretion. And as we talked about, we expect that to be 20 basis points to 25 basis points. We had a little bit of a benefit this quarter from additional RWA optimization, but going forward, I would think about that 20 basis points to 25 basis points a quarter.

Okay. Perfect. Thank you.

You're welcome.

Your next question comes from the line of Ken Usdin with Jefferies. Please go ahead. Your line is open.

Hey, guys. Good morning. I just wanted to ask you to dig in a little bit on the payments business. Obviously, the sequential math worked as normal, but the year-over-year growth looked like it slowed from 4% in the first quarter to 3% in the second. I know we have some easier comps coming up in the second half, but can you just kind of help us understand just the absolute trajectory within the three business areas? And how do you expect that kind of growth rate to go, aside from just comps? Thanks.

Sure. So, thanks, Ken. And I do agree, I think, we do expect momentum. Part of that is comps, but we're not, obviously, relying on that. If I kind of think about the different businesses here, maybe I'll just start with merchant processing. We have seen a very good core growth in our tech-led initiative. That's about a third of our sales now, and has been growing at a very strong rate. The margins on that business have -- we are seeing nice expansion there. And a lot of our non-travel categories are really seeing very good growth. So, those are kind of the tailwinds. We have seen some headwinds this quarter, particularly on travel volumes in Europe, but that is something that we hope that will reverse and things of that nature. But otherwise, we feel like we're positioned well on the merchant side of things. On the retail card side, credit card spend is strong and constructive. I would say, the Union Bank client acquisition, we're continuing to increase the penetration rate there, but we did see a little bit of a decrease as well, just because of risk mitigation around prepaid card, which may pressure this quarter, but may linger into a couple quarters as we move forward. But still, we think that the strong growth on the retail side of things is going to -- continue to be very helpful. And then, on the corporate side of things, we are starting to get into that inflection point of lapping freight and fleet and all those sorts of things, as well as our bank card is really performing quite well. And so, I think those are really some of the things, I think especially on corporate, we -- payments we -- by lapping that fleet kind of in the third quarter or so is going to allow for very strong rates as we think about the fourth quarter. So, at a high level, we just think that there's momentum on this side of things that will allow us to grow and grow nicely.

Great. Thank you. One more follow-up on NII. You had a really good second quarter result, but the outlook for a third quarter is stable and that's with an extra day. And I'm just wondering, can you just work us through like what's the holdback in terms of NII, not just growing from here? Was there either some things that helped in the second that don't recur? It looked like your securities yields were a lot higher as one example, but I'm not sure if that would have been it. So, why don't we just see the growth straight up from that 40, 50 zone we just saw in the second quarter? Thanks.

Sure. Well, I think it just comes down to the question earlier that is really around the range of outcomes that -- what's going to drive it. And it's really going to be around the deposit behavior and things. Now we saw very good trends in terms of rotation out of DDA, that pace has certainly slowed. We continue to expect it to slow moving forward, but it doesn't mean it's over, right? And so, there is that component. On the rate-paid side of things, we're just monitoring just how the competitiveness of the deposit rates will go. And quite frankly, we don't expect a lot of deposit growth in the next quarter just simply because QT is still around and is still putting pressure on industry liquidity for us and for the market. And so, that's the primary driver is just kind of the watch of that. And on top of that, we just don't know if the Fed will cut or not. I know the market has priced that in, but that's another factor in this sort of thing. So, those would be the factors I would call out.

And John, in our projections, we've assumed two more rate cuts in September and December.

That's right. We've assumed September and December for rate cuts. That's right.

Okay. Got it. Great. Thank you.

You're welcome.

Your next question comes from the line of Mike Mayo with Wells Fargo. Please go ahead. Your line is open.

Hi. I just think my math is wrong here. If you can help me out with that? Even assuming the four items you just mentioned for NII not going higher in the third quarter, if you could just highlight your fixed asset reprice a little bit more? Here's my math, and it's clearly wrong, because, one, you said security should reprice up 6 basis points to 8 basis points per quarter, if I heard that correctly. So, if you take 7 basis points on $168 billion of security, that'd be like $100 million extra next quarter. If you take your mortgage book of $117 billion, and you take 7 basis points on that, I wasn't sure if you meant 7 basis points on that, but then you get up to almost $200 million more for NII on a base of $4 billion. That'd be 5% growth next quarter, 5% growth the quarter after that, et cetera, et cetera. And that's not your guidance. So, first, if you could just fix my math as far as the fixed asset repricing on the securities mortgages, what I'm doing wrong, and then confirm or not those four items that you mentioned offset all of that? Thank you.

Sure, Mike. Happy to. So, I think in terms of the math, in terms of mortgage, that's going to continue, given that's a very much a fixed rate book. On the investment portfolio, given current rates, we would expect 6 basis points to 8 basis point increase. However, if we assume in our projections, as we just mentioned, that there'll be a cut in September, and about half of our book is floating rate, or swap to floating and that sort of thing. And so, that will impact the investment portfolio that way. And the deposits, of course, on the other side of that will start to shift. Of course, the institutional side would start to move right away, but the retail side will have an arc to it. And so, it's the movement of the cut within the quarter, which is sort of a part of why we anticipate a relatively stable third quarter.

And just for clarification, you did intend that the mortgage book should reprice upward by 7 basis points a quarter also same as the security?

Yeah, that's right. Mortgage book is kind of that 6 basis point to 8 basis point range.

And then, one more follow-up and I'll re-queue. Your noninterest-bearing deposits, you mentioned that as one of the risk factors. You said it's slowing. Can you remind us what it did between the second and first quarter? And what's your all-time low for that ratio?

On the mix of DDA to total deposits, I think, 16.2% or so is where we came in this quarter, it was 16.9% a quarter ago, it was 18% or so the quarter before that. So, that pace is changing and slowing. And in terms of where it goes, it's going to be just how clients behave and all that sort of thing, but it is an all-time low for us, for sure as we look back at our data.

And Mike there is a -- on Slide 7, there's a chart upper left that shows the migration out that has slowed. It was 7.1% in the fourth quarter, down 6.4% in the first quarter, and then slowed to 1.6% down in the first -- in the second quarter of '24.

Okay. Thank you.

Sure.

Sure.

Your next question comes from the line of Gerard Cassidy with RBC Capital Markets. Please go ahead. Your line is open.

Hi, Andy. Hi, John.

Good morning, Gerard.

John, you talked about the deposits and how you will approach them as the Fed starts to cut rates. I thought it was interesting in your supplement on the average balance sheet that one of your largest deposit category, if I'm seeing it correctly, money market savings, the yield was down from the prior quarter at 3.85% versus 3.92% in the March quarter. Can you share with us what kind of strategies you used or what took that down when many of the other rates like, time deposits obviously went up in the quarter?

Sure, Gerard, no problem. So, if you look at that category, it's, as you mentioned, our largest category for deposits. So, it's a mix of wholesale as well as retail and small business and all that sort of thing. And I think what we have done is, in light of loan growth, obviously it grew a little bit, but it's not -- again, it's not growing tremendously. And so, we have the opportunity to look at our relationships across the bank and price things in an appropriate manner that makes sense for us to do. And so, we've taken some opportunities to exit some high-cost deposits and we've really utilized our distribution network, whether that's on the retail side, the branch network, our app capabilities, really taking advantage, and our partnerships really taking advantage of our national bank reach and really growing in deposits in areas that have a lower cost. And so that's kind of the positive rotation that you're seeing in that specific category.

I got it. I don't want to put words in your mouth, but when the Fed starts to cut rates, from this line item, at least you guys could potentially benefit from lower rates and the balances continue to grow, which obviously would be beneficial. Andy, just a more bigger macro question. John touched it a little bit a moment ago about the utilization rate on the C&I loans. Can you share with us when you guys go out and talk to clients, what are they -- commercial clients, that is, what are they thinking about CapEx spending, which would enable them to draw down lines? And then second, are you seeing any increased competition from alternative lenders, whether it's private credit or other, that may be affecting the C&I loan growth?

Yeah, Gerard. I think our clients are probably a little bit more focused on defense than offense right now. We just did a CEO survey and we talked to clients. They are focused on productivity, efficiency, expense management, and the investments that they're making to the extent that they're utilizing lending activity is to really amplify some of that efficiency opportunity that they're focused on. So, a little bit more on defense. But as John mentioned, the utilization rates were up modestly in pockets across the board. And I would expect that to continue as we go forward. So, nothing significantly different from what we saw in prior quarters. The competition is strong, so both bank and non-bank competition, that's driving pricing a little bit. We're continuing to seek full relationships with appropriate returns, and that'll drive the volumes as well.

And just as a quick follow-up on the competition, are you guys seeing more aggressive underwriting for banks that want to grow that balance sheet? How are you seeing that from the underwriting standpoint?

Yeah, I'm not sure that the underwriting is changing significantly as opposed to the pricing, Gerard. That's how I would focus on it.

Okay. Thank you, Andy.

Sure.

Your next question comes from the line of Matt O'Connor with Deutsche Bank. Please go ahead. Your line is open.

Good morning. Wanted to circle back on payments. A lot of good details, kind of by segment, but was wondering if you could update kind of your thoughts on the growth you expect for full year this year. And then just still, it might be a little bit lower than what you were thinking before. And then just the medium-term outlook, if that's still the same?

Yeah. I'll answer your second question first. The medium-term outlook has not changed in terms of growth rate trajectory for the payment businesses. So, we think of high single-digit growth in terms of the merchant and corporate payments system categories. And we think of mid-single-digit growth as we get into the credit card, debit card kind of area. As I mentioned, we had 4% or so and then 3% growth this quarter, the last two quarters on a year-over-year basis. We would expect momentum as we move forward and getting and approaching those sort of medium-term levels. And some of the puts and takes I had mentioned earlier are going to be kind of the drivers of that. And, of course, whether or not we're on the higher end or lower end is going to depend upon spend levels and where that ultimately comes through, but we feel confident in terms of where the market is going and how that is. So, we feel like we're well positioned in that space.

Okay. And then, what's the prepaid card risk mitigation that you referred to? Maybe I missed if you've mentioned that in the past, but can you just remind us what that is and how long it [might drive for] (ph)? Thanks.

Yeah. So, it's just more fraud and things of that variety that has picked up. And so, we just -- there's just some areas there that we want to mitigate against, and so that we've chosen to just step away from some of those sorts of things.

And then, how much of a drag is that and how long will it continue? That's my last one. Thanks.

Well, I think it's -- you saw the card growth rate was about 1% or so versus our sales area of about 4% -- 3% to 4%. So, I think there's going to be some of that pressure in the third quarter or so.

Okay.

Your next question comes from the line of Vivek Juneja with JPMorgan. Please go ahead. Your line is open.

Hi. Thanks.

Good morning.

A couple of just follow-ups. One on payments. So, trying to understand, I know you've said merchant, you expect to get to high single-digit. What's happening with the -- when I look at the volumes, merchant was only up 1.7% year-on-year, and that's the slowest volume growth we've seen in six quarters. So, why has -- despite all the tech-led initiatives, which are great, and the other areas that you're trying to spend, why is volume growth slowed so much? And then, what would cause that to turn around?

Sure. So, I can talk to that, Vivek. So, on the merchant processing side, you mentioned that the sales component was about 2% or so. In terms of where we saw some volume decreases was really had to do with travel, particularly on the European side of things. Volumes were just lower for our clients in that particular area. So that's really the focal point. I think if you think about as we start to lap some of that sort of thing and same store sales come in and that sort of thing, that's where we expect the momentum in the second half of the year.

Okay. Shifting gears, you're talking about charge-offs going to 60 basis points in the second half. Delinquencies are down, so that should help. But your C&I losses are running high. Despite the losses, NPLs are running still up. Where -- first, a two-part question there. Where in C&I are you seeing these losses, which industry sectors? And your overall charge-off rate of 60 basis points, which categories do you expect would tick that up from where you are currently given the outlook for delinquencies coming down?

Sure. So, on your two-parter, I'll take the C&I question first. First of all, the increase there in charge-off was really attributed to one unique or idiosyncratic loan that went through, and that was an NPA that we saw a couple quarters ago that worked its way through. We don't anticipate anything really in the C&I book outside of that. So that is something that -- is something that we're not concerned about. On the rest of the charge-offs, if I think about just at a big picture on credit card for, as an example, we did see a little bit of an increase in charge-offs this quarter, but given the delinquency, as you just mentioned, we would expect our charge-offs in the first or the third and fourth quarter to look more like the first quarter. And I think the balance of it will be more kind of in the commercial real estate office side of things. So that's kind of the puts and takes to the charge-off guide.

Okay. So, you had one large loan written off, but then what refilled that bucket, John, given that the NPL has actually ticked up, not down in C&I?

Well, yeah, I mean, I think it's very -- it's just very modest. It's more idiosyncratic-type loans. It's not something that we're holistically concerned about at any reach.

Vivek, as you mentioned, and as John mentioned, the delinquency levels are stable. And so that drives stabilization on credit card. The idiosyncratic loan that John mentioned, it was the second quarter. As we think about the future, I think the lumpiness will come out of CRE office and that's the one that's going to go up and down a little bit. We talked about that. We've mentioned that in prior calls. Certainly manageable, but that will just cause a little bit up and down.

Okay. Thank you.

You bet.

Your next question comes from the line of John Pancari with Evercore ISI. Please go ahead. Your line is open.

Hey, John.

Good morning. Andy, I appreciate the color you gave on capital. And as you look at it, I know it sounds like you're still on the sidelines on buybacks as you walk through your priorities and the expectation for capital here, but I guess what changes that? Is it continued pull to par on the AOCI side? Is it Basel III clarity? Is it clarity on rates? What gets you to the point where you get confidence in buyback outlook, or how you're thinking about your internal CET1 target? If you could just walk us through the thought process there?

Yeah. So let's start, John, by saying that I'm very confident in our capital levels and our ability to accrete capital. It's consistent with what we've talked about, that 20 basis points to 25 basis points, and we've made great improvements, as you saw from the number, 140 basis points over the last year. So, let me start there. Second, as we talked about before, we were seeking clarity on two components: number one is CCAR, which we now have; and number two is Basel III endgame, which we're getting closer to. And my expectation, John, is that we will -- one way or the other, we'll have more clarity or not -- if not the perfect answer. We will update on both our capital targets and distribution objectives as we think about it at Investor Day on September 12. So, I'll give you a full update at that point.

Okay, thanks. Appreciate that. And then, separately on operating leverage. I know you reiterated your confidence in achieving positive operating leverage in the second half of this year. I mean, can you help us -- I know you're not giving formal 2025 expectations, but I'm trying to think about what that positive operating leverage you're generating in the back half of that expectation, what that could mean as we look into the quarters through 2025. I mean, it looks like consensus is ballparking around 300 basis points positive operating leverage. When you look at the full year '25 expectations, you were above 200 basis points in 2022, but in the years prior, you were well below that. What's a good way to think about it medium term in terms of where USB should be operating from that standpoint?

Let me do it in components. So, first of all, as you saw this quarter, our expenses were relatively flat and we focused on the $16.8 billion or lower for the full year '24. So, we are past the point of investment in the curve on increasing expenses and now realizing the benefits from those expenses. So, I would expect us to be moderate from an expense growth standpoint going forward and managing that well. We talked about the momentum in fee growth, and I would expect that to continue given the unique businesses we have. I think the biggest difference is the headwind that was net interest income turned into a tailwind this quarter. And as we talked about stabilization in the third quarter, I think as we get into '25, that becomes more of a tailwind, and those things all drive positive operating leverage into '25.

Okay, great. Thanks.

You bet.

Your next question comes from the line of Chris Kotowski with Oppenheimer. Please go ahead. Your line is open.

Yeah, good morning.

Hey, Chris.

Hi, it's a small item, but a curiosity to me. I mean, I noticed that your automobile loan portfolio is down by more than 30% year-over-year. And I'm just curious, how did that category suddenly become in like no-fly zone? Because you think it's short-duration assets? Do you think it would be attractive given the...

Sure, Chris. So, in terms of the drop, obviously, we haven't been as active in the auto loan market just simply because the spreads and the returns on those sorts of loans have not been at our standard. And the competitors that we're facing aren't banks and they have a different return profile in this particular environment. That doesn't mean we've exited or anything like that. In fact, we've been very strong in terms of some of the leasing and some of the other areas and we continue to monitor that market very closely. And if the spreads and returns are appropriate, we will be very active in that space just as we have been in the past.

Okay. All right. Thank you.

You bet.

Your next question comes from the line of Saul Martinez with HSBC. Please go ahead. Your line is open.

Hi. Hey, good morning, guys.

Good morning, Saul.

Just a follow-up on the cards growth, 1.4% year-on-year, credit of 4.3%. I guess, John, is that entirely due to the exiting or the reducing of exposure to prepaid, or you've seen any weakness in debit as well? That would be somewhat unusual typically debit in an environment where there is an economic slowdown, tends to outperform. So, just any additional color there. And just wanted to reaffirm that this is sort of a transitory thing and you should lap this and I suspect in the fourth quarter. Is that -- did I get that right?

Yeah. I think to answer your question very simply, I mean, the difference between the fee growth and versus the sales is really all prepaid on that side of things. We see strong trends in terms of credit card spend and all the union penetration, all those things that I mentioned. Those are the things and all the different partnerships that we have, those are all still very good. It's just that it's all on the prepaid side.

Okay, got it. And then just a follow-up on deposit dynamics. You've talked a few times about a slowing of the rotation. And -- but if I look at period-end noninterest-bearing, it did fall close to 5% sequentially versus much different -- much worse than or much larger sequential decline than what you see on average. Just anything there that you want to call out what drove that? Is this -- and is it something that's somewhat transitory or not?

Thanks for asking that question, because I want to point something out. We have a lot of volatility in the day-to-day NIB deposit levels principally due to our corporate trust business that has payments coming in and out on a daily basis, and depending upon where the quarter ends, the holidays, the end of the week, the end of the month, you could have volatility. So, we are very focused on the average balances and I would encourage you to do the same, because day-to-day, it could be very volatile and it does not indicate any trends.

Got it. All right. Thanks very much.

Sure.

Your next question comes from the line of Mike Mayo with Wells Fargo. Please go ahead. Your line is open.

Hi. During the last quarter, there's been a few management changes, people leaving, people getting repositioned. And I think as we get ready for the September 12th Investor Day, we might look at the presenters and say, "Wow, these are a lot different than the presenters at your last Investor Day." So, I'm just trying to figure out what the tea leaves are saying and maybe you can just tell us directly, Andy, in terms of what is your time horizon for remaining CEO? And I only ask that given some of these recent changes. So -- and who are the contenders to be the next CEO of U.S. Bancorp? And would you consider looking outside of U.S. Bancorp for your successor? Just a little more color on all the moves that have taken place? Thanks.

Thanks, Mike. So, as it relates to Investor Day, you're going to see some new faces for sure, but you're going to see some familiar faces as well. So, we'll have a good mix of both people that you're very familiar with as far as -- and some new. One of the things that we made a change with was putting Gunjan in the President's role. And about a year and a half ago, we combined what was then called WSIB, which is the -- or we combined to the institutional wealth group together with the corporate and commercial Group. And the synergies and the activity and the customer focus that evolved from that was just terrific. So, Gunjan has that same objective to do that with the entire bank, with the payments organization, with the consumer and business banking organization. And pulling together the leadership under one -- the businesses under one leader with the customer in the center and really taking advantage of all the diverse set of businesses that we have to really grow the business, that's the objective. And she's done a terrific job with that already. She's already started very fast to do it with the entire bank, and I'm looking forward to sharing that story on September 12th.

Okay. And the departures, anything related to that? Is that...

Yeah, Mike, I would just say that's natural activity. We've had a very stable senior leadership group for years and years, and sometimes change happens, but there's no messaging in that.

Okay. And so, the theme, not to front run your conference too much, is, it's One USB, so you've done more One USB with wealth and commercial and now you're looking to be One USB, deliver the whole firm to the client, that sort of simple statement that's easy to say, tough to execute?

Exactly.

Okay. All right. Thank you.

Thanks, Mike.

Your next question comes from the line of Ken Usdin with Jefferies. Please go ahead. Your line is open.

Hey, thanks, guys. I just had a follow-up on the securities book. Just can you help us understand the meaningful increase that happened this quarter in the yields? And then, also, you mentioned 50% of the bond book is floating. Is that the total bond book? And then, can you help us understand how much of that book is swapped and what you do with that going forward in the -- given the rate outlook? Thanks.

Sure. So, on the securities book, in terms of the quarter, the 19 basis point increase, a majority of that was related to opportunistically taking some of the excess liquidity that we had and putting it into the securities book. And so, you can think of that as short-dated treasuries or treasury swap to floating, that sort of thing, which is the equivalent from a net interest -- or an interest-rate risk perspective versus cash is just a kind of a simple way to think about it. In terms of the book itself, I would say that I made that comment because about in terms of AFS risk and all that sort of thing, we have hedged approximately 40% or so of the risk component. And then that coupled with just natural floating rate securities that we have within the book that are already floating, that gets you to about 50% that are either floating or synthetically floating through swaps. So that's kind of the details of it. Now on the other side of that, we have put on hedges to -- put receive fixed swaps on our corporate book, so that if rates do fall, we're protected on that end as well. So, those are kind of the balances. All in, it gets us to where we want to be from an interest-rate risk standpoint, which is neutral to shocks, which is where we are today.

Okay. So just -- so are you saying that gets you to around half of the total book, AFS and HTM?

Yes, that's correct.

Okay, cool. And sorry, just one last one. Under $16.8 billion for cost after the second quarter result, can you just remind us what that means for the trajectory from here? And thanks again for follow-ups.

Yeah. $16.8 billion or less, that's our fee -- or excuse me, that's our expense outlook. Where we have been over the last couple of quarters is very consistent with where we're at. As Andy talked about, we've hit the -- that point on the investment curve. We continue to feel like we're in a very good spot in terms of managing expense going forward.

Thanks, Ken.

Thank you.

And we have no further questions in our queue at this time. Mr. Andersen, I turn the call back over to you.

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

This concludes today's conference call. Thank you for your participation, and you may now disconnect.