Q2 2024 US Bancorp Earnings Call

Operator: 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. If you would like to ask a question, please press star then 1 on your phone. If you wish to withdraw your question, please press star then 1 again. This call will be recorded and available for replay beginning today at approximately 10 a.m. Central Time.

Speaker Change: 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.

Speaker Change: If you would like to ask a question, please press star then 1 on your phone. If you wish to withdraw your question, please press star then 1 again.

George Andersen: 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.

George Andersen: I will now turn the conference call over to George Andersen, Senior Vice President and Director of Investor Relations for US 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.

George Andersen: 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.

Speaker Change: 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.

George Andersen: Please note that any forward-looking statements made during today's call are subject to risk and uncertainty. Factors that can 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.

Speaker Change: Please note that any forward-looking statements made during today's call are subject to risk and uncertainty.

Speaker Change: Factors that can materially change our current forward-looking assumptions are described on page 2 of today's presentation, our press release, and in reports on file at the SEC.

Speaker Change: 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 three.

Andrew J. Cecere: 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 97 cents, which included one cent per share of a notable item related to the FDIC Special Assessment. Excluding this one-time charge, we delivered earnings per share of $0.98.

Andy: In the second quarter, we reported diluted earnings per share of 97 cents, which included one cent per share of notable item related to the FDIC special assessment.

Andrew J. Cecere: 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 four, revenue growth for the quarter was supported by improved spread income 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 multi-year investments across the business that have resulted in greater efficiencies and enhanced operating effectiveness.

Andy: Excluding this one-time charge, we delivered earnings per share of 98 cents.

Andrew J. Cecere: 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.

Andy: Notably, our return on tangible common equity increased to 18.6% on an adjusted basis.

Andy: Turning to slide four. Revenue growth for the quarter was supported by improved spread income and as well as continued growth across many of our fee-based businesses.

Andy: 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 multi-year investments across the business that have resulted in greater efficiencies and enhanced operating effectiveness.

Andrew J. Cecere: 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 MPAs. 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 CET-1 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.

Andy: 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 MPAs.

Andy: Average total deposits increased 2.2% and we continue to see growth in consumer deposits despite industry and

Andy: Liquidity headwinds.

Andy: 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.

Andy: Our CET-1 capital ratio increased 30 basis points from the prior quarter and 120 basis points from last year to end the quarter at 10.3%.

Andy: John will discuss some key takeaways from this year's stress test in his opening remarks.

Andrew J. Cecere: 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 Co-Growth and Trust in 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.

John C. Stern: Slide 5 provides key performance metrics.

John C. Stern: 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.

John C. Stern: 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.

John C. Stern: Strong co-growth and trust in investment management fees, as well as improved treasury management revenue.

John C. Stern: Overall, diversified B-income businesses continue to operate at scale and provide earnings consistency through the cycle.

Andrew J. Cecere: 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. I now turn the call over to John, who will provide more detail on the quarter, as well as forward-looking guidance. Thanks, Andrew.

John C. Stern: 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 positioned as well for continued growth and strategic differentiation. Let me now turn it over to John , who will provide more detail on the quarter, as well as forward-looking guidance.

John C. Stern: 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 comparable quarter basis, to $514 billion, driven by stable institutional deposit balances and continued consumer balance growth. Average non-interest-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 non-interest-bearing balances continued to slow this quarter.

John C. Stern: 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.

John C. Stern: 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.

John C. Stern: Average non-interest 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 non-interest bearing balances continued to slow this quarter.

John C. Stern: As the chart in the upper left shows, we are prudently managing our pricing as we remain 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 higher spend volumes and increased commercial loans from growth in corporate banking. However, loan growth this quarter was partially offset by lower commercial real estate and total other retail loans.

John C. Stern: As the chart on the upper left shows, we are prudently managing our pricing as we remain focused on retaining and growing core operational relationships across the franchise.

John C. Stern: 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 higher spend volumes and increased commercial loans from growth in corporate banking.

John C. Stern: Loan growth this quarter was partially offset by lower commercial real estate and total other retail loans.

John C. Stern: 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.

John C. Stern: With elevated deposit levels, we opportunistically increase the size of our investment securities portfolio with short-dated, high-quality securities to better optimize cash levels.

John C. Stern: As a result, the ending balance on our investment portfolio was $168 billion as of June 30.

John C. Stern: 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 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, and we remain appropriately reserved for potential adverse economic conditions. In the second quarter, delinquencies were flat sequentially.

John C. Stern: 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.

John C. Stern: 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 to 8 basis points on average based on current rates.

John C. Stern: Slide 8 highlights our credit quality performance.

John C. Stern: Asset quality metrics continue to develop in line with expectations and we remain appropriately reserved for potential adverse economic conditions.

John C. Stern: Non-performing assets increased approximately 3.7% late in the quarter, reflecting a slower pace of change. The ratio of non-performing assets to loans and other real estate was 49 basis points at June 30th, compared with 48 basis points at March 31st and 29 basis points a year ago. Our second quarter net charge-off ratio of 58 basis points increased 5 basis points from the first quarter, in line with our expectations, and we continue to expect our net charge-off ratio to approach 60 basis points in the second half of this year. Our allowance for credit losses as of June 30th totaled $7.9 billion, or 2.1% of period end loans.

John C. Stern: In the second quarter, delinquencies were flat sequentially.

John C. Stern: Non-performing assets increased approximately 3.7% linked quarter, reflecting a slower pace of change.

John C. Stern: The ratio of non-performing assets to loans and other real estate was 49 basis points at June 30th, compared with 48 basis points at March 31st and 29 basis points a year ago.

John C. Stern: Our second quarter net charge-off ratio of 58 basis points increased 5 basis points from the first quarter, in line with our expectations, and we continue to expect our net charge-off ratio to approach 60 basis points in the second half of this year.

John C. Stern: Our allowance for credit losses as of June 30th totaled $7.9 billion, or 2.1% of period end loans.

John C. Stern: Slide 9 provides a more detailed earnings summary. In the second quarter, we reported $0.97 per diluted share, which included $0.01 per share, or a $26 million charge, for an increase in the FDIC special assessment following last year's bank failures. Turning to slide 10, net interest income on a taxable equivalent basis totaled approximately $4.05 billion, an increase of 0.9% on a linked quarter basis. The increase in net interest income this quarter was driven by a combination of deposit volume growth, pricing stabilization, and slower migration, as well as fixed asset repricing, improved loan mix, and other actions taken on the investment portfolio to optimize cash balances. Elevated deposit levels and higher on-balance sheet liquidity drove a three basis point decline in the net interest margin this quarter to 2.67%.

John C. Stern: Slide 9 provides a more detailed earnings summary.

John C. Stern: In the second quarter, we reported $0.97 per diluted share, which included $0.01 per share, or a $26 million charge, for an increase in the FDIC special assessment following last year's bank failures.

John C. Stern: Turning to slide 10, net interest income on a taxable equivalent basis totaled approximately $4.05 billion, an increase of 0.9% on a linked quarter basis.

John C. Stern: The increase in net interest income this quarter was driven by a combination of deposit volume growth, pricing stabilization, and slower migration, as well as fixed asset repricing, improved loan mix, and other actions taken on the investment portfolio to optimize cash balances.

John C. Stern: Elevated deposit levels and higher on-balance sheet liquidity drove a three basis point decline in net interest margin this quarter to 2.67 percent.

John C. Stern: Slide 11 highlights trends in non-interest income. Fee income increased $115 million, or 4.3% on a linked quarter basis, driven by seasonally higher payments revenue and stronger mortgage banking fees, which included an approximate $30 million gain on the sale of mortgage servicing rights. This increase was partially offset by a slight decrease in commercial product revenue due to lower corporate bond fees and losses on investment security sales of $36 million.

John C. Stern: Slide 11 highlights trends in non-interest income.

John C. Stern: Fee income increased $115 million, or 4.3% on a link quarter basis, driven by seasonally higher payments revenue and stronger mortgage banking fees, which included an approximate $30 million gain on sale of mortgage servicing rights.

John C. Stern: This increase was partially offset by a slight decrease in commercial product revenue due to lower corporate bond fees and losses on the investment security sales of $36 million.

John C. Stern: Non-interest income through the first six months of the year increased 5.4% on a year-over-year basis as we continue to benefit from deepening client relationships across our fee businesses.

John C. Stern: Non-interest income through the first six months of the year increased 5.4% on a year-over-year basis as we continue to benefit from deepening client relationships across our fee businesses. Turning to slide 12, non-interest expense, as adjusted, decreased $6 million or 0.1% on a linked quarter basis. The decrease was primarily driven by lower compensation in employee benefit expense, which was partially offset by higher net occupancy in equipment, as well as marketing and business development costs.

John C. Stern: Turning to slide 12, non-interest expense, as adjusted, decreased $6 million, or 0.1% on a linked quarter basis.

John C. Stern: The decrease was primarily driven by lower compensation and employee benefit expense, which was partially offset by higher net occupancy in equipment, as well as marketing and business development costs.

John C. Stern: Year over year, non-interest expense as adjusted decreased $71 million, or 1.7%, as we prudently managed expenses, identified operational efficiencies across the business, and realized synergies from the Union Bank acquisition. Turning to slide 13, our common equity tier 1 ratio of 10.3% as of June 30th was reflective of a 30 basis point increase from the first quarter and a 120 basis point improvement compared to last year. On June 26, the Federal Reserve released its 2024 stress test results.

John C. Stern: Year-over-year, non-interest expense, as adjusted, decreased $71 million, or 1.7%, as we prudently managed expenses, identified operational efficiencies across the business, and realized synergies from the Union Bank acquisition.

John C. Stern: Turning to slide 13. Our common equity tier 1 ratio of 10.3% as of June 30th was reflective of a 30 basis point increase from the first quarter and a 120 basis point improvement compared to last year.

John C. Stern: On June 26, the Federal Reserve released its 2024 stress test results.

John C. Stern: Consistent with the industry, the Fed's modeled results were largely reflective of an assumption taken to significantly lower fee income and increase provision expense in stress, which resulted in a 60 basis point increase to our preliminary stress capital buffer of 3.1%. We remain well capitalized and prepared to manage any potential industry stress that might result from a severe macroeconomic downturn. I will now provide forward-looking guidance on slide 14, which is consistent with our previous guidance.

John C. Stern: Consistent with the industry, the Fed's modeled results were largely reflective of an assumption taken to significantly lower fee income and increase provision expense in stress, which resulted in a 60 basis point increase to our preliminary stress capital buffer of 3.1%.

John C. Stern: We remain well capitalized and prepared to manage any potential industry stress that might result from a severe macroeconomic downturn.

Speaker Change: I will now provide forward-looking guidance on slide 14, which is consistent with our previous guidance. We expect net interest income for the third quarter on an FTE basis to be relatively stable to the second quarter.

John C. Stern: We expect net interest income for the third quarter on an FTE basis to be relatively stable to the second quarter. Full year 2024 net interest income on an FTE basis is expected to be in the range of $16.1 to $16.4 billion. For the full year, we expect to achieve mid-single-digit growth in non-interest income as adjusted. We continue to expect full-year non-interest expense of $16.8 billion or lower. Let me now turn it back to Andy for his closing remarks. Thanks, John. I'll finish up on slide 15.

Speaker Change: Full year 2024 net interest income on an FTE basis is expected to be in the range of $16.1 to $16.4 billion.

Speaker Change: For the full year, we expect to achieve mid-single-digit growth in non-interest income, as adjusted.

Andrew J. Cecere: We continue to expect full-year non-interest expense, as adjusted, of $16.8 billion or lower. Let me now turn it back to Andy for closing remarks. Thanks, John . I'll finish up on slide 15.

Andrew J. Cecere: 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.

Andrew J. Cecere: 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.

Andrew J. Cecere: 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.

Andrew J. Cecere: 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.

Andrew J. Cecere: Looking ahead, we are well positioned to continue to build upon our solid foundation and already establish 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 to questions and answers. Thank you.

Andrew J. Cecere: Looking ahead, we are well positioned to continue to build upon our solid foundation and already establish interconnectedness across the business with the scale, reach, and product capabilities that allow us to deliver industry-leading returns well into the future.

Speaker Change: 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.

Operator: At this time, I would like to remind everyone, in order to ask a question, please press star, then the number one on your telephone keypad, and please limit yourself to one question and one follow-up. For any additional questions, please requeue. Your first question comes from Scott Siefers with Piper Sandler. Please go ahead. Your line is open. Good morning, everyone.

Speaker Change: Thank you. At this time, I would like to remind everyone, in order to ask a question, please press star then the number 1 on your telephone keypad.

Speaker Change: and please limit yourself to one question in one follow-up. For any additional questions, please re-queue. Your first question comes from Scott Siefers with Piper Sandler. Please go ahead, your line is open.

Robert Scott Siefers: Thanks for taking the question. John, hey, John was hoping you could please sort of discuss the puts and takes within the NII trajectory from here. You know, it looks like we would hopefully get a bump in the fourth quarter after a stable third quarter if we sort of. [inaudible] Sure, Scott. Good morning.

Robert Scott Siefers: Morning, everyone. Thanks for taking the questions.

Speaker Change: How are you, Scott? I'm done.

Scott: Hey, John , I was hoping you could please sort of discuss the puts and takes within the NII trajectory from here. You know, it looks like we would...

Robert Scott Siefers: 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, you know, either toward the high end or the low end of the full year range, please.

John C. Stern: You know, 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 rates paid have stabilized. The loan mix has improved. Our fixed asset 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 ends of the range, I'd cite a couple of different things.

Robert Scott Siefers: Sure, Scott. Good morning. You know, 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.

Speaker Change: rotation and rate paid have stabilized, loan mix has improved.

Speaker Change: Our fixed asset earning asset repricing continues to march on and we've been opportunistically working with the investment portfolio to deploy excess liquidity.

Speaker Change: 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 from there we do expect growth.

John C. Stern: 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 are 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.

Speaker Change: 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.

John C. Stern: In terms of the 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. You know, we expect them to be kind of in that six to eight basis point range on average, given current levels.

Speaker Change: And as you can tell, it's slowed. In terms of rate pay, 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.

Speaker Change: Our earning assets, we know, are going to be formulaic and continue to reprice, whether that's the investment portfolio or the mortgage book, you know, we expect kind of in that six to eight basis point range on average, given current levels.

John C. Stern: And then loan growth, we assume to be very modest 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 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 quarters. Thank you, John.

Speaker Change: And then loan growth, we assume to be very modest in our forecast, kind of going forward, just kind of given the loan dynamics that we're seeing.

Speaker Change: 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 quarters.

Robert Scott Siefers: And then maybe, if I could ask you to, double 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 you know, your average commercial loan growth this quarter looked a little more favorable here, so just curious as to sort of the inside... Sure, so I think on loan growth. We did see pockets of loan growth occur in the corporate loan book, you know, but I think our overall thesis really hasn't changed over the last several quarters.

Speaker Change: Thank you. Thank you. Thank you.

Speaker Change: Perfect. Thank you, John . And then maybe if I could ask you to...

Speaker Change: a little more deeply into one portion of that, just, you know, 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, you know, your average commercial loan growth this quarter looked a little more favorable than what we've

Pierce: I'm just curious as to sort of the inside base on all of that.

Pierce: it.

Speaker Change: Sure, so I think on loan growth, we did see pockets of loan growth occur in the corporate loan book. You know, but I think our overall thesis really hasn't changed over the last...

Robert Scott Siefers: The loan growth environment remains tepid, there's caution among clients, but you know, there's a lot of interest rate movement, and I'm sure that could spark some things, but overall, it's still a very tepid market. We just happen to find some pockets of growth in the corporate loan book this quarter. Perfect. Okay, good. Thank you very much.

Speaker Change: over the last several quarters. The loan growth environment remains tepid, it remains, there's caution in the clients but you know there's there's 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

Speaker Change: Find some pockets of growth in the corporate loan book this quarter.

Speaker Change: Terrific. Okay good. Thank you very much. You bet.

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

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

Ebrahim Huseini Poonawala: Morning. I guess maybe, John, just following up on the NII, by my math, your fourth quarter could be as high as $4.3 billion. I appreciate the puts and takes you provided earlier. As we think about the NII trajectory from your 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.

Ebrahim Huseini Poonawala: Good morning. Morning.

Ebrahim Huseini Poonawala: 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

Speaker Change: 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.

Speaker Change: What four to six date cuts would imply and flex on the deposit side given sort of your corporate institutional makeup.

John C. Stern: So the way I think about potential rate cuts and a shift in the 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 went up. So we feel very good about the repositioning of that. On the retail side, I would just say that there'll always be some arc to retail. So there'll probably be some repricing that occurs at still higher levels.

Speaker Change: 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.

Speaker Change: And, you know, 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.

Speaker Change: On the retail side, I would just say that there will always be some arc to the retail, so there will be probably some repricing that occurs.

John C. Stern: But over time, those balances will come down. And so, overall, it gives us an advantage as the curve, in theory, should start to steepen, and you have a lower short-term rate and a higher longer-term rate that allows for continued earnings asset favorability on the repricing side of things. And I guess separately, when we think about the outlook for the back half of the year 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, and where do you expect some more moderation relative to what we've seen in the first half of the year? Thank you.

Speaker Change: at the silker higher levels, but over time those balances will come down and so overall it gives us an advantage as the curve

Speaker Change: In theory, it should start 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.

Speaker Change: Got it. And I guess just separately, when we think about the outlook for the back half on fee revenue growth, the mid-single digits.

Speaker Change: Where do you think fee revenue growth is going to be driven?

Speaker Change: 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?

John C. Stern: 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. Those are 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 in credit, credit cards, we continue to see strong spend levels.

Speaker Change: Thank you.

Speaker Change: 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.

Speaker Change: point you to. You know, on the payment side of things, you know, we continue to see strong core competencies and whether in merchant processing, you're talking about our tech-led areas.

Speaker Change: If you're talking about our corporate payments side of things, you're looking at us starting to lap.

Speaker Change: Some of the things in freight and fleet.

Speaker Change: And then credit, you know, credit card, you know, we continue to see strong spend levels. 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, you know, 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.

John C. Stern: So those are all going to be positive things for us as we move forward. Trust in investment management fees as well as the capital markets continue to see a very strong market backdrop, and we have been doing very well in terms of investment in those businesses, as well as just utilizing our client base and deepening relationships there in a number of different ways. 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. Thank you. Your next question comes from the line of Betsy Graseck with Morgan Stanley. Please go ahead. Your line is open. Hi, good morning. Hi, good morning.

Speaker Change: Growth for Fees.

Betsy Lynn Graseck: I know we've already talked a little bit about the loan growth piece, but going through the slide deck, you highlighted that there was an increase in utilization rates. So I guess I'm just wondering, and it's important, right, because at least you're the first institution I've seen this quarter that's had an increase in utilization. Do you think that's a function of the types of industries where you're seeing utilization increase? Or is that more, you know, your new geography? Sure. Thanks, Betsy.

Speaker Change: Thank you.

Speaker Change: You bet.

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

Betsy Lynn Graseck: Hi, good morning.

Betsy Lynn Graseck: Good morning.

Betsy Lynn Graseck: I know we already talked a little bit about the loan growth piece, but, you know, going through the slide deck, you highlighted that there's utilization rate increase.

Betsy Lynn Graseck: So I'm I guess I'm just wondering this and 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

Speaker Change: The types of industries where you're seeing utilization increase, or is that more, you know, your new geographies where, you know, perhaps more focused attention on new clients is driving that? I would just like to understand that.

John C. Stern: So, in terms of utilization, it did tick up, but 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. So, 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.

Speaker Change: 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.

Speaker Change: point to it as some new...

Speaker Change: 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.

Speaker Change: 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 mixed shift rather than a change in trend.

Betsy Lynn Graseck: And then just on the credit outlook here, I got a sense that maybe there was a little bit more. Well, I don't think our, 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, you know, we came in at 58 basis points.

Speaker Change: Okay, thanks. And then just on the credit outlook here.

Speaker Change: I got a sense that maybe there was...

Speaker Change: A little bit more credit coming through towards the back.

Speaker Change: back half of the year, is that right, or did I get it wrong?

Speaker Change: I hope I didn't get that wrong.

Speaker Change: Well, I don't think our, 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.

John C. Stern: We would anticipate, you know, 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 loans, those metrics have come in, have stabilized, and have come in very nicely, giving us confidence in our credit outlook. Unknown Speaker, Yeah, we feel very much appropriately reserved for the book that we have.

Speaker Change: You know, we came in at 58 basis points. We would anticipate, you know, approaching 60 basis points here in the back half of the year is kind of how we're thinking about the charge-off.

Speaker Change: 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.

Speaker Change: Okay, and are you already reserved for these NCOs?

Speaker Change: I think there's a reserve release behind that.

John C. Stern: We saw a little bit of an increase in our reserve bill 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. OK, super. Thanks so much.

Speaker Change: as well.

Speaker Change: Yeah, we feel very much appropriately reserved for the book that we have. We saw a little bit of increase in our reserve bill 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.

Betsy Lynn Graseck: You bet. Your next question comes from the line of Erika Najarian with UBS. Please go ahead. Your line is open. Hi, good morning.

Stuber: Thanks so much.

Stuber: You bet.

Speaker Change: Your next question comes from the line of Erika Najarian with UBS. Please go ahead, your line is open.

Erika Najarian: My first question, morning. The first question is for you, Andy. I think what was really striking about this quarter is that, you know, the balance sheet growth was impressive on both sides of the sheet and, you know, really outperforming peers. But, at the same time, I think we were all surprised by the stress test results, especially given that, you know, we thought that the PP&R dynamics with MUFG fully baked in would be a little bit cleaner, and so if I'm calculating this right, your So, I'm wondering how we should think about, you know, balance sheet management from here on, especially in light of the good growth that you experienced this quarter. Thanks, Erika.

Erika Najarian: Hi, good morning. My first question is for you, Andy. I think what was really striking about this quarter is that, you know, the balance sheet growth was impressive on both sides of the sheet.

Speaker Change: 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 PP&R dynamics.

Speaker Change: with MUFG fully baked in would be a little bit cleaner. And so if I'm calculating this right, you know, your adjusted CT1 would be 8% this quarter versus 7.6.

Speaker Change: And I'm wondering, as we think about balancing those dynamics,

Speaker Change: How are you thinking about

Speaker Change: managing growth relative to this

Speaker Change: Sort of, you know, changing, unpredictable.

Speaker Change: Element of the SCB Plus.

Speaker Change: You know, 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. You know, 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, you know, even if everyone subscribes to the Fed cuts.

Speaker Change: So I'm wondering how we should think about, you know, balance sheet management from here, especially in light of the good growth that you experienced this quarter.

Andrew J. Cecere: And let me start on the CCAR results. 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.

Speaker Change: Sure, thanks Erika. And let me let me start on the CCAR results. So

Speaker Change: 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.

Speaker Change: The component that went up...

Speaker Change: 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.

Andrew J. Cecere: It happened to a number of banks, and it happened in spite of the fact that our fee growth is actually even positive. So that was part of the driver of the increased SEB for us and for a number of other banks. Now, let me take a step back and 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. First, investing in the business.

Speaker Change: 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 SEB 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.

Speaker Change: As we've talked about in the past, Erika, our priorities from a capital distribution standpoint haven't changed. The first is investing in the business.

Andrew J. Cecere: Second, is dividends, and third, is buybacks. And so as part of this year's stress test, as we've talked about, our plan capital distribution assumed an increase to the quarterly dividend of about 2% starting in the fourth quarter.

Speaker Change: Second is dividends and third is buybacks.

Erika Najarian: And so, as a part of this year's stress test, as we've 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.

Andrew J. Cecere: 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-2 capital targets well before we cross that threshold. So from a capital standpoint, we're comfortable with our levels and our ability to add 20 to 25 basis points a quarter. So the one open item, as you all know, is the final Basel III endgame rules.

Erika Najarian: We expect to be well above our fully loaded CAT-2 capital targets well before we will cross that threshold. So, from a capital standpoint, we're comfortable with our levels and our ability to accrete 20 to 25 basis points a quarter.

Andrew J. Cecere: 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 12th. 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, you know, the rest of 2024 and the CCAR years as 24, October 1st, 24 till 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, So as we've talked about, I think most of the capital accretion going forward, Erika, will be through normal earnings accretion.

Speaker Change: So, the one open item, as you all know, is the final Basel III endgame rules, and while we'd prefer to have those clarified,

Speaker Change: 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 12th.

Speaker Change: 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...

Speaker Change: the rest of 2024 and the CCAR years of 24, October 1st,

Speaker Change: It doesn't sound like we should expect this similar active balance sheet management in terms of growth as we saw in 2023.

Speaker Change: 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've talked about, we expect that to be 20 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 to 25 basis points a quarter.

Andrew J. Cecere: And as we talked about, we expect that to be 20 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 to 25 basis points a quarter. Okay, perfect. Thank you. You're welcome. Your next question comes from the line of Ken Usdin with Jeffreys. Please go ahead. Your line is open. Hey guys, good morning.

Erika Najarian: Okay, perfect. Thank you. You're welcome.

Erika Najarian: Your next question comes from the line of Ken Usdin with Jeffreys. Please go ahead. Your line is open.

Kenneth Michael Usdin: I just wanted to ask you to dig in a little bit on the payments business. You know, obviously, the sequential math worked as normal, but the year over year growth looks 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.

Kenneth Michael Usdin: Hey guys, good morning. I just wanted to ask you to dig in a little bit on the payments business.

Kenneth Michael Usdin: 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.

Kenneth Michael Usdin: But can you just kind of help us understand just the absolute direct trajectory within the three business areas? And, you know, what do you expect that kind of growth rate to go, aside from just comps? Thanks. Sure. So, thanks, Ken. And I do agree.

Speaker Change: 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?

John C. Stern: I think, you know, we do expect momentum. Part of that is comps, but we're not obviously relying on that. You know, if I kind of think about the different businesses here, you know, maybe I'll just start with merchant processing. You know, we have seen very good core growth in our tech-led initiative. That's about a third of our sales now, and it has been growing at a very strong rate. The margins on that business are very high, and 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.

Speaker Change: Sure, so thanks Ken, and I do agree, I think, you know, we do expect momentum, part of that is comps, but we're not obviously relying on that.

Speaker Change: If I kind of think about the different businesses here, maybe I'll just start with merchant processing.

Speaker Change: You know, we have seen a very good core growth in our tech-led initiative. That's about a third of our sales now, and it has been growing at a very strong rate.

Speaker Change: The margins on that business, 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.

John C. Stern: We have seen some headwinds this quarter, particularly on travel volumes in Europe, but that is something that we hope 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.

Speaker Change: 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.

Speaker Change: On the retail card side, credit card spend is strong and constructive. I would say the Union Bank

John C. Stern: 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 cards, 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.

Speaker Change: 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.

Speaker Change: 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.

John C. Stern: So, I think especially on corporate payments, 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.

Speaker Change: And so I think those are really some of the things, I think especially on corporate payments, 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.

Speaker Change: 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.

Kenneth Michael Usdin: You had a really good second quarter result, but the outlook for the 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 on, in terms of NII not just growing from here? Was there either some things that helped in the second quarter that don't recur?

Speaker Change: Great, thank you. One more follow-up on NII. You had a really good second quarter result.

Speaker Change: 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 NIH not just growing from here? Was there either some things that helped in the second that don't recur?

Kenneth Michael Usdin: It looked like your security yields were a lot higher, as one example, but I'm not sure if that would have been it. So, like, why don't we just see the growth straight up, from that 40-50 zone we just saw in the second quarter? Thanks.

Speaker Change: It looked like your security yields were a lot higher, as one example, but I'm not sure if that would have been it. So, like, why don't we just see the growth straight up, you know, from that 40-50 zone we just saw in the second quarter? Thanks.

John C. Stern: Sure. Well, I think it just comes down to, you know, the question earlier that is really around the range of outcomes, what's going to drive it, and it's really going to be around deposit behavior and things like that. Now, we saw very good trends in terms of rotation out of DDA, but that pace has certainly slowed.

Speaker Change: Sure. Well, I think it just comes down to, you know, the question earlier that is really around the range of outcomes, 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.

John C. Stern: We continue to expect it to slow down, you know, moving forward, but it doesn't mean it's over, right? So, there's that component. On the rate paid side of things, you know, we're just monitoring just how competitive 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.

Speaker Change: In terms of rotation out of DDA, that pace has certainly slowed.

Speaker Change: We continue to expect it to slow, you know, moving forward, but it doesn't mean it's over, right, and so there's that component.

Speaker Change: on the rate paid side of things, you know, we're

Speaker Change: We're just monitoring, you know, just how the competitiveness of the deposit rates will go.

Speaker Change: 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.

John C. Stern: And on top of that, we just don't know if the Fed will cut or not. And 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. We have. September and December. That's right. We've assumed September and December for rate cuts. That's right.

John C. Stern: 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, and 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. We have. September and December . That's right. We've assumed September and December for rate cuts. That's right. Okay. Got it. Great.

John C. Stern: Okay. Got it. Great. Thank you. Your next question comes from the line of Mike Mayo with Wells Fargo. Please go ahead. Your line is open. I just think my math is wrong here, if you can help me out with that.

Speaker Change: Your next question comes from the line of Mike Mayo with Wells Fargo. Please go ahead, your line is open.

Michael Lawrence Mayo: Again, even assuming the four items you just mentioned for NII not going higher in the third quarter, you could just highlight your fixed asset reprice a little bit more. Here's my math, and it's clearly wrong.

Michael Lawrence Mayo: I just think my math is wrong here, if you can help me out with that. Again, even assuming the four items you just mentioned for NII not going higher in the third quarter.

Michael Lawrence Mayo: 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

Michael Lawrence Mayo: One, you said... Security should be priced up. [inaudible] $168 billion in security. That'd be like $100 million extra next quarter.

Speaker Change: Security should reprice up six to eight basis points per quarter, if I heard that correctly. So if you take seven 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,

Michael Lawrence Mayo: You take your mortgage book of $117 billion, and you take seven basis points on that. I wasn't sure if you meant seven basis points on that. But then you get up to almost, you know, 200 million more for NII on a base of four billion, that'd be 5% growth next quarter, 5% growth the quarter after that, etc, etc. 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, please explain what I'm doing wrong. And then, please confirm or not those four items that you mentioned offset all of that. Sure, Mike, and Tabby, too.

Speaker Change: Billion and you take seven basis points on that, I wasn't sure if you meant seven base points on that, but then you get up to almost, you know, 200 million more for NII on a base of four billion, that'd be five percent growth next quarter, five percent growth the quarter after that.

Speaker Change: etc. etc. And that's 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

John C. Stern: So I think, you know, in terms of the math, in terms of mortgages, that's going to continue given that it's a very much a fixed rate book. On the investment portfolio, given current rates, we would expect six to eight basis points of increase. However, 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 swapped to floating, and that sort of thing.

Speaker Change: Confirm or not, those four items that you mentioned offset all of that. Thank you.

Michael Lawrence Mayo: Sure, Mike, Tabby too. So I think, you know, in terms of the math, in terms of mortgage, you know, that's going to continue given that's a very much a fixed rate book.

Speaker Change: On the investment portfolio, given current rates, we would expect 6 to 8 basis point increase. However, we assume in our projections, as we just mentioned, that there will 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.

John C. Stern: And so that will impact the investment portfolio in 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.

Michael Lawrence Mayo: And the deposits, of course, on the other side of that will start to shift. Of course, the institutional side would start to move.

John C. Stern: 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 Morris book should reprice upward by seven basis points a quarter also, same as the security. Yeah, that's right.

Michael Lawrence Mayo: 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.

Speaker Change: And just for clarification, you did intend, the Morris book should be repriced upward by seven basis points a quarter also, same as the security?

John C. Stern: The Mortgage book is kind of in that six to eight basis point range. And then one more follow-up and I'll quit. Your non-interest bearing deposits, you mentioned that as one of the risk factors. You said it's slowing. Can you remind us what it did in the second and first quarter, and what your all time low for that is?

Michael Lawrence Mayo: Yeah, that's right. Mortgage book is kind of that six to eight basis point range.

Michael Lawrence Mayo: Oh, and 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.

Speaker Change: 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.

John C. Stern: So that pace is changing and slowing. And, you know, 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, on slide seven, there's a chart on the 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.

Speaker Change: A quarter ago, it was 18 or so, the quarter before that, so that pace is changing and slowing and I, you know, 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.

Michael Lawrence Mayo: And Mike, there's 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 second quarter of 24.

Michael Lawrence Mayo: Okay. Thank you. Your next question comes from the line of Gerard Cassidy with RBC Capital Markets. Please go ahead, your line is open. (Inaudible) Mind your head.

Michael Lawrence Mayo: Okay, thank you. Sure, sure.

Speaker Change: Your next question comes from the line of Gerald Cassidy with RBC Capital Markets. Please go ahead, your line is open.

Gerard Sean Cassidy: John, you talked about the deposit approach, and how to approach them as the Fed starts to cut. I thought it was interesting in your supplement on the average balance sheet. One of your largest, 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, you know, many of the other rates, like time deposits, obviously went up? Sure, Gerard, no problem.

Gerard Sean Cassidy: Hi, Andy. Hi, John . Morning, Gerard.

Gerard Sean Cassidy: John , you talked about the deposits and how you will approach them as the Fed starts to cut rates.

Gerard Sean Cassidy: 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

Speaker Change: The yield was down from the prior quarter at 3.85% versus 3.92% in the March quarter.

Speaker Change: Can you share with us what kind of strategies you used or what took that down when, you know, many of the other rates like time deposits obviously went up in the quarter?

John C. Stern: 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, you know, loan growth, obviously it grew a little bit, but it's not, again, 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.

Speaker Change: Sure, Gerard, no problem. So if you look at that category, it's, as you mentioned, our largest category for deposits.

Speaker Change: So it's a mix of wholesale as well as...

Speaker Change: [inaudible]

John C. Stern: 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 of 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.

Speaker Change: 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.

Gerard Sean Cassidy: 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 bigger macro question, John touched on a little bit a moment ago about the utilization rate on the C&I loan. Can you share with us when you guys go out and talk to clients?

Speaker Change: 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...

Andrew J. Cecere: 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...

Andrew J. Cecere: What do they think commercial clients... 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 others, that may be affecting the CNILO? 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, and expense management, and in the investments that they're making, to the extent that they're utilizing lending activity, to really amplify some of that efficiency opportunity that they're focused on.

Speaker Change: Commercial clients, that is. What are they thinking about CapEx spending which would enable them to draw down lines? Then second, are you seeing any increased competition from alternative lenders whether it's private credit or other that may be affecting the CNI loan growth?

Andrew J. Cecere: 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.

Andrew J. Cecere: 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.

Speaker Change: They are focused on productivity, efficiency, expense management, and in 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.

Speaker Change: 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.

Andrew J. Cecere: So both bank and non-bank competition is driving prices a little bit. We're continuing to seek full relationships with appropriate returns, and that'll drive 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 their balance sheets? How are you seeing that from the underwriting? 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.

John C. Stern: So nothing significantly different from what we saw in prior quarters.

John C. Stern: The competition is strong. So, you know, 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 will drive the volumes as well.

Speaker Change: 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?

Speaker Change: 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.

Gerard Sean Cassidy: Okay, thank you. Sure. Your next question comes from the line of Matt O'Connor with Deutsche Bank. Please go ahead, your line is open. Good morning.

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

Matt O'connor: I wanted to circle back on payments. There are a lot of good details kind of by segment, but I was wondering if you could update thoughts on the growth you expect for full year this year. And then just, 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 case, Yeah, I'll answer your second question first. The medium-term outlook has not changed in terms of the growth rate trajectory for payment businesses.

Matt O'connor: Good morning. I 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're thinking before and then just the medium term outlook if that's still the same.

Speaker Change: 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.

Speaker Change: Categories, and we think of mid-single-digit growth as we get into the credit card, debit card kind of area. You know, as I mentioned, you know, we've...

John C. Stern: 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. You know, as I mentioned, we've had 4% or so and then 3% growth this quarter and the last two quarters on a year-over-year basis. We would expect momentum as we move forward and approach 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.

Speaker Change: We had 4% or so and then 3% growth this quarter and the last two quarters on a year-over-year basis. We would expect momentum as we move forward.

Speaker Change: 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.

Speaker Change: 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's going and how that is. So we feel like we're well-positioned in that space.

John C. Stern: Okay, and then what's the prepaid card risk mitigation that you referred to? Maybe I missed it if you've mentioned that in the past, but can you just remind us what that is? How long am I going to drive?

Speaker Change: Okay, and 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?

John C. Stern: Yeah, so it's just more fraud and things of that variety that are picked up. And so we just there's just some areas there that we want to mitigate against. And so 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?

Speaker Change: How long am I going to drive for?

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

John C. Stern: Well, I think it's, you know, and we saw the card growth rate was about 1% or so versus our sales area of about, you know, four, three to 4%. So I think there's going to be some of that pressure in the third quarter or so. Your next question comes from the line of Vivek Juneja with JP Morgan. Please go ahead, your line is open. Hi.

Speaker Change: And how much of a drag is that and how long will it continue? That's my last one.

Speaker Change #100: Well, I think it's, you know, I mean you saw the car growth rate was about 1% or so versus our sales area of about, you know, 4, 3 to 4 percent, so I think there's going to be some of that pressure in the third quarter or so.

Speaker Change: Your next question comes from the line of Vivek Juneja with JP Morgan, please go ahead, your line is open.

Vivek Juneja: Thanks. A couple of just follow-ups. One on payments. So trying to understand, you know, I know you've said merchant, you expect to get to the high single digits. 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, you know, areas that you're trying to fund? Why has volume growth slowed so much?

Vivek Juneja: Hi. Hi. Thanks. A couple of just follow-ups. What on payments? To try to understand, you know, I know you've said merchant, you expect to get to high single-digit.

Speaker Change #103: up

Speaker Change: What?

Speaker Change #104: What's happening with the when I look at the volumes merchant was only up 1.7% year-on-year

Speaker Change #102: 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, you know, areas that you're trying to expand, why is volume growth slowed so much? And then what would cause that to turn around?

John C. Stern: And then what would cause that to turn around? Sure, so I can talk about that, Vivek. So on the merchant processing side, you mentioned that the sales component was about 2% or so. You know, in terms of where we saw some volume decreases, it really had to do with travel, particularly on the European side of things.

Speaker Change #102: Sure, so I can talk to that, Vivek. So on the merchant processing side, you mentioned that the

Speaker Change #105: The sales component was about 2% or so. You know, 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...

John C. Stern: Volumes were just lower for our clients in that particular area, so that's really, you know, 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. Shifting gears, you're talking about charge-offs going to 60 basis points in the second half, and delinquencies are down, so that should help. Yes, CMI losses are running high.

Speaker Change #105: You know, 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.

Speaker Change #106: 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.

Vivek Juneja: Despite the losses, NPLs are still rising, 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 take that up from where you are currently, given the outlook for delinquency? Sure. So, on your two-parter question, I'll take the C&I question first. First of all, the increase in charge-offs 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, you know, is something that we're not concerned about.

Speaker Change #107: Yes, CMI losses are running high. Despite the losses, NPLs are still up.

Speaker Change #108: First, a two-part question there. Where in CNI are you seeing these losses, which industry sectors, and

Speaker Change #109: 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?

Speaker Change #110: 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 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 third and fourth quarter to look more like that.

John C. Stern: On the rest of the charge-offs, you know, if I think about just the big picture of credit cards, 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 third and fourth quarter to look more like the first quarter, and I think the balance of it will be more kind of on the commercial real So, that's kind of the puts and takes on the charge-off guide.

Speaker Change #110: like the first quarter. And I think that the balance of it will be more kind of in the in the commercial real estate office side of things. So that's kind of the puts and takes to the to the charge off guide.

John C. Stern: So you had one large loan written off, but then what refilled that bucket, John, given that the NPL is actually ticked up, not down? Well, yeah, I mean, I think it's just very modest, it's more idiosyncratic loans. It's not something that we're holistically concerned about at any rate.

Speaker Change #111: Okay, so you had one large loan written off, but then what refilled that bucket, John , given that the NPL is actually ticked up, not down in CNI?

John C. Stern: 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.

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

Vivek: You know, Vivek, as you mentioned, and as John mentioned, the delinquency levels are stable and so that drives stabilization on credit card.

Speaker Change #113: The idiosyncratic loan that John mentioned is the second quarter, and 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've talked about that. We've mentioned that in prior calls. Certainly manageable, but that'll just cause a little bit up and down.

Vivek Juneja: 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, morning.

Speaker Change #114: Thank you. You bet.

Speaker Change #114: Your next question comes from the line of John Pancari with Evercore ISI. Please go ahead, your line is open.

John G. Pancari: Andy, I appreciate the call you gave on capital and, As you look at it, you know, I know it sounds like you're still on the sidelines on Bible. Unknown Attendee, Is it, is it, you know, continue to pull the par on the AOCI side? Is it Basel III clarity?

John C. Stern: Hey John . Morning.

John C. Stern: Andy, I appreciate the call you gave on capital and

John G. Pancari: As you look at it, you know, 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, you know, continued pull to par on the AOCI side, is it Basel III clarity?

Andrew J. Cecere: Clarity on rates, what gets you to the point where you get confidence in the buyback outlook or, you know, or how you're thinking about your internal TEP-1 target, if you could just walk us through the whole process. Yeah, so let me start, John, by saying that I'm very confident in our capital levels and our ability to attract capital. It's consistent with what we've talked about, that 20 to 25 basis points. And we've made great improvements, as you saw from the number, 140 basis points higher over the last year.

Speaker Change #116: Is it clarity on rates, you know, what gets you to the point where you get confidence in buyback outlook or, you know, or how you're thinking about your internal GEP-1 target, if you could just walk us through the thought process there.

Speaker Change #117: Yeah, so let me 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 to 25 basis points And we've made great improvements as you saw from the number 140 basis points up over the last year

Andrew J. Cecere: 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's endgame, which we're getting closer to.

Speaker Change #117: 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.

Andrew J. Cecere: And my expectation, John, is that, one way or another, we'll have more clarity, or if not the perfect answer, we will update on both our capital targets and distribution objectives as we think about them at Investor Day on September 12. So I'll give you a full update at that point. Okay, thanks. I 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. But, can you help us?

Speaker Change #117: And my expectation, John , is that we will, one way or the other, we'll have more clarity or 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 12th. So I'll give you a full update at that point.

Speaker Change #118: Okay, thanks. I 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

John G. Pancari: 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 could mean as we look into the quarters through 2025. I mean, it looks like incentives are ballparking around 300 basis points of positive operating leverage when you look at full year 2025 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 USBs should be operating from that point on?

Speaker Change #119: 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 incentives...

Speaker Change #120: is ballparking around 300 basis points positive operating leverage when you look at full year 25 expectations.

Speaker Change #121: 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 USBs should be operating from that standpoint?

Andrew J. Cecere: 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 or lower for the full year. So we are past the point of investing 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 manage that well.

Speaker Change #122: Let me do it in components. So first of all, as you saw this this quarter, our expenses were relatively flat and we focused on this 16-8 or lower for the full year 24. So we are past the point of investment.

Speaker Change #122: 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

Andrew J. Cecere: We talked about the momentum and fee growth, and I would expect that to continue given the unique businesses we have. I think the biggest difference is that the headwind that was net interest income turned into a tailwind this quarter.

Speaker Change #122: 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.

Andrew J. Cecere: 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.

Speaker Change #123: Okay, great. Thanks.

Speaker Change #124: You bet.

Speaker Change #125: Your next question comes from the line of Chris Kotowski with Oppenheimer. Please go ahead. Your line is open.

Christoph M. Kotowski: Please go ahead. Your line is open. Yeah, good morning. Hi. 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 a no fly zone? Because you think it's short duration assets? Would you think it would be attractive?

Christoph M. Kotowski: Yeah, good morning.

Christoph M. Kotowski: 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.

Speaker Change #127: And I'm just curious, how did that category suddenly become a no-fly zone? Because you'd think it's short-duration assets, you'd think it would be attractive, you know.

John C. Stern: Sure. Sure, Chris. So, you know, 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.

Speaker Change #128: Thank you.

Speaker Change #128: Sure.

Speaker Change #129: Sure, Chris. So, you know, in terms of the drop, obviously, we

Speaker Change #130: You know, 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.

Speaker Change #130: 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.

John C. Stern: 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, you know, if the spreads and returns are appropriate, we will be very active in that space, just as we have been in the past. Your next question comes from the line of Saul Martinez with HSBC. Please go ahead. Your line is open. Hi. Hey, good morning, guys.

Speaker Change #131: Okay, all right. Thank you.

Speaker Change #132: You bet.

Speaker Change #133: Your next question comes from the line of Saul Martinez with HSBC. Please go ahead, your line is open.

Saul Martinez: 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 exit or the reduction of the exposure to prepaid, are you seeing any weakness in debit as well? That would be somewhat unusual; typically, debit in an environment where, you know, there is an economic slowdown tends to outperform. So just, you know, any additional color there and just wanted to, you know, reaffirm that this is sort of a transitory thing, and you should lap this, and I suspect in the fourth quarter 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.

Saul Martinez: Hi, good morning guys. 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

John: The exiting or the reducing of exposure.

Speaker Change #135: to prepaid or you seeing any weakness in in debit as well that that would be somewhat unusual typically debit in an environment where you know there is an economic slowdown tends to outperform so just you know just any additional color

Speaker Change #137: there and and just wanted to you know reaffirm that that this is sort of a transitory thing and and you know you should lap this and I suspect in the fourth quarter that is that did I get that right?

Speaker Change #138: 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.

John C. Stern: We see strong trends in terms of credit card spend and 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.

Speaker Change #138: 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.

Saul Martinez: Okay, got it. And then just a follow up on deposit dynamics. You've talked a few times about [inaudible] What drove that, you know, and is it something that's, you know, somewhat transitory or not? I want to thank you for asking that question, because I want to point something out. You know, 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.

Speaker Change #143: Okay, got it. And then just a follow-up on...

Speaker Change #140: Deposit Dynamics, you know, you've talked a few times about...

Speaker Change #139: A slowing of the rotation, but if I look at period end non-interest bearing, it did fall close to 5% sequentially and much worse than, or much larger sequential decline than you see on average. Just anything there that...

Speaker Change #141: You want to call out what drove that? Is this, you know, and is it something that's, you know, somewhat transitory or not?

Andrew J. Cecere: 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 trend. Got it. All right. Thanks very much.

Speaker Change #144: 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.

Speaker Change #141: 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.

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

Speaker Change #145: Got it. All right, thanks very much. Sure.

Speaker Change #141: Your next question comes from the line of Mike Mayo with Wells Fargo. Please go ahead, your line is open.

Michael Lawrence Mayo: Hi, during the last quarter, there's been a few management changes, people leaving, and people getting repositioned. And I think as we get ready for September 12th Investor Day, we might look at the presenters. Transcripts provided by Transcription Outsourcing, LLC, what the tea leaves are saying. And maybe you can just tell us directly, Andy, and, you know, in terms of what your time horizon is for remaining CEO. And I only ask, given the Unknown Attendee, just a little more color on all the moves that have taken place. Thanks.

Speaker Change #142: During the last quarter, there's been a few management changes, people leaving, people getting repositioned.

Michael Lawrence Mayo: 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.

Michael Lawrence Mayo: [inaudible]

Andrew J. Cecere: What the tea leaves are saying and maybe you can just tell us directly Andy and You know 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 US Bancorp? And would you consider looking outside of US Bancorp for your successor?

Andrew J. Cecere: 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 people that you're very familiar with and some new. You know, one of the things that we made a change with was putting Gunjan in the president's role.

Speaker Change #146: Just a little more color on all the moves that have taken place. Thanks.

Andrew J. Cecere: 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 some and some new.

Speaker Change #147: You know, 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 the Institutional Wealth Group together with the Corporate and Commercial Group.

Andrew J. Cecere: And about a year and a half ago, we combined what was then called WSIB, which is 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 were 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, you know, 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 sets 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, you know, to do it with the entire bank.

Andrew J. Cecere: and the synergies and the activity and the customer focus that evolved from that was just terrific.

Andrew J. Cecere: So, Gunjan has that same objective to do that with the entire bank, with the payments organization, with the consumer and business banking organization.

Andrew J. Cecere: and, you know, pulling together the leadership.

Speaker Change #148: The business is 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.

Andrew J. Cecere: And I'm looking forward to sharing that story on September 12. Okay, and the departures. Anything related to that is an, Unknown Attendee. No, that might, Yeah, Mike, I would just say that's natural activity. We've had a very stable senior leadership group for years and years.

Speaker Change #149: 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.

Speaker Change #150: Okay, and the departures...

Speaker Change #150: Anything related to that?

Speaker Change #150: No, that might...

Speaker Change #151: 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.

Michael Lawrence Mayo: And sometimes change happens, but there's no messaging in that. Okay, and so the theme and not to front run your conference too much is it's one USB, you know, so you've done more 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. Exactly. Okay. All right. Thank you. Thanks, Mike. Your next question comes from the line of Ken Usdin with Jeffreys. Please go ahead.

Speaker Change #152: Okay and so the theme and not to front-run your conference too much is it's one USB you know 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

Speaker Change #153: Simple statement that's easy to say, tough to execute.

Speaker Change #153: Exactly.

Speaker Change #153: Okay. All right. Thank you. Thanks, Mike.

Kenneth Michael Usdin: Your line is open. Hey, thanks, guys. I just had a follow-up on the securities book. Can you help us understand the meaningful increase that happened this quarter in yields? And then also, you mentioned 50 percent of the bond book is floating. Is that the total bond book?

Speaker Change #154: Your next question comes from the line of Ken Usdin with Jeffreys. Please go ahead. Your line is open.

John C. Stern: And then can you help us understand how much of that book is swapped and what you do with that going forward, given the rate outlook? Thanks. Sure, so on the securities book, you know, 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 an interest rate risk perspective versus cash. It's just a kind of simple way to think about it.

Kenneth Michael Usdin: Hey, thanks guys. I just had a follow-up on the securities book.

Kenneth Michael Usdin: 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, given the rate outlook? Thanks.

Speaker Change #155: Sure, so on the securities book, you know, 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 an interest rate risk perspective versus cash, is just kind of a simple way to think about it. Thank you.

John C. Stern: In terms of the book itself, I would say that, you know, I made that comment because, you know, in terms of AFS risk and all that sort of thing, we have hedged approximately 40 or so percent of the risk component. And then that coupled with just natural floating rate securities that we have within the book, you know, that are already floating, that gets you to about 50% that are either floating or synthetically floating through swaps.

Speaker Change #155: In terms of the book itself, I would say that, you know, I made that comment because about, you know, in terms of AFS risk and all that sort of thing, we have hedged approximately 40 or so percent of the risk component, and then that coupled with just natural floating rate securities that we have within the book.

Speaker Change #155: 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

John C. Stern: So that's kind of the details of it. Now, on the other side of that, we have put on hedges to put and 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.

Speaker Change #155: put on hedges to put received 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.

John C. Stern: Okay, so just so you're saying that that's, I get you to around half of the total book, AFS and HTM. Yes, that's correct. Okay, cool.

Speaker Change #156: Okay, so are you saying that that gets you to around half of the total book, AFS and HTM?

Kenneth Michael Usdin: And sorry, just one last one. Under $16.8 billion for costs after the second quarter result, can you just remind us what that means for the trajectory from here? And thanks again for the follow-up. Yeah, 16.8 or less.

Speaker Change #156: Yes, that's correct.

Speaker Change #157: Okay, cool. And sorry, just one last one. Under $16.8 billion for costs after the second quarter result, can you just remind us what that means for the trajectory from here? And thanks again for the follow-ups.

John C. Stern: That's that's our fee, or excuse me, that's our expense outlook. You know, where we have been over the last couple quarters is very consistent with where we're at. As Andy talked about, we've hit that point on the investment curve, and we continue to feel like we're in a very good spot in terms of managing expenses going forward.

Speaker Change #158: Yeah 16.8 or less that's that's our fee or excuse me that's our expense outlook.

Speaker Change #159: You know, 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 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.

John C. Stern: Thanks again. Thank you. And we have no further questions in our queue at this time. Mr. Anderson, I have turned the call back over to you. Thanks to everyone who joined our call this morning. Please contact the Investor Relations Department if you have any follow-up questions. Chrissy, you can now disconnect. This concludes today's conference call. Thank you for your participation, and you may now disconnect.

Speaker Change #160: Thanks, Ken. Thank you.

Speaker Change #161: And we have no further questions in our queue at this time. Mr. Andersen, I turn the call back over to you.

George Andersen: 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.

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