Welcome to the U.S. Bancorp First 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 the number 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 8 a.m. Central Time. I will now turn the conference call over to George Anderson, Senior Vice President and Director of Investor Relations for U.S. Bancorp.

Thank you, Rochelle, and good morning, everyone. Today, I'm joined by our Chairman, President, and Chief Executive Officer, Andy Ciceri, our Vice Chair and Chief Administration Officer, Terry Dolan, and Senior Executive Vice President and Chief Financial Officer, John Stern. Together with some initial prepared remarks, Andy and John will be referencing a slide presentation, a copy of the presentation, our earnings release, and supplemental analyst schedules are on our website at usbank.com. 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 two of today's presentation, our press release, our Form 10-K, and its subsequent reports on file with the SEC. Following our prepared remarks, Andy, Terry, and John will take any questions that you have. I will now turn the call over to Andy.

Thanks, George. Good morning, everyone, and thank you for joining our call. I'll begin on slide three. In the first quarter, we reported earnings per share of $0.78, which included $0.12 per share of notable items. Excluding notables, earnings per share totaled $0.90. Our balance sheet remains strong. We are maintaining our through-the-cycle underwriting discipline and seeing the benefits of our multi-year investments in digital, technology, and payments ecosystem in the form of strong fee growth across our business lines. Importantly, we continue to accrete capital this quarter. Our CET1 ratio ended the period at 10.0%, and our return on tangible common equity ratio was 17.4% on an adjusted basis. Slide four provides additional performance metrics on both a reported and adjusted basis. On slide five, I'll provide some additional high-level observations for the quarter. Starting with the balance sheet, credit quality metrics continue to develop in line with our expectations, and we achieved healthy growth in tangible book value per share on both a linked quarter and year-over-year basis. Loan and deposit growth remains under pressure for the industry, and that dynamic impacted our net interest income this quarter. Our NII, on a taxable equivalent basis of approximately $4 billion, was within our guidance, albeit on the lower end of the range. We are seeing good opportunities for loan growth in targeted portfolios, and notably, we continue to see consumer deposit growth despite the impact of QT on industry deposit levels. Over the past few weeks, the outlook for potential rate cuts in 2024 has meaningfully changed as long-term rates have backed up. High behavior across the industry is adjusting in response to the potential higher-for-longer interest rate environment that has impacted our deposit mix and pressure deposit costs. As a result, we now expect our NII for the full year to be lower than anticipated. However, we are taking a closer look at our expense base given these near-term NII headwinds and plan to take actions to mitigate the impact of lower-than-expected NII to our overall profitability. John will go into more details on these topics, but importantly, we believe this is a near-term phenomenon. Turning to slide six, we continue to feel good about the momentum across our differentiated fee businesses. Fee income represents about 40% of our total net revenue, which stands to position us well in a lower interest rate environment. Overall, we are encouraged by our current trends in our client growth and penetration rates, as evidenced by the continued strength we have seen across many of our FIT revenue businesses this quarter. Slide 7 provides an update on our differentiated payments ecosystem. Over the past few years, we have made good progress to both expand our business banking and payments relationships and grow related revenue associated with these relationships. You may recall we discussed an opportunity to grow small business relationships by 15% to 20% and related revenue by 25% to 30% a few years ago. As you can see on this slide, we're making good progress and see even greater opportunity to further expand these relationships and related revenue in the medium term. Let me now turn the call over to John who will provide more detail on the quarter as well as provide forward-looking guidance. Thanks, Andy.

On slide eight, we provide an earnings summary. This quarter, we reported diluted earnings per share of 78 cents or 90 cents per share after adjusting for notable items, including the last of merger and integration costs of $155 million following our acquisition of Union Bank and $110 million related to anticipated increase in the FDIC special assessment. Turning to slide 9, total average loans were $371 billion, down 0.5% linked quarter as growth was impacted by slow industry loan demand in the current higher interest rate environment. Despite tightening monetary policy and ongoing pressure on industry-wide deposits, our total average deposits of $503 billion were stable, link quarter, as we continue to see our efforts to grow consumer-related deposits materialize. End-of-period deposit growth was a little higher than we would typically see in the first quarter. Trust and corporate deposit inflows are seasonally higher at the end of the first quarter. However, the impact of holiday timing at quarter end delayed planned outflows of institutional deposits, which resulted in temporarily higher cash levels. We expect deposit outflows to move in line with more typical seasonal patterns. Importantly, we continue to proactively manage the balance sheet by prioritizing opportunities that exceeded our cost of capital and further optimized our funding mix. We continued to limit our reliance on short-term borrowings and remain disciplined on deposit rate paid as we focus on relationship-based deposits. Turning to slide 10, net interest income on a taxable equivalent basis totaled approximately $4.0 billion, down 3.1% linked quarter, and net interest margin declined 8 basis points to 2.70%. Both net interest income and net interest margin declines were driven by continued unfavorable deposit mix shift and deposit pricing pressure, as well as slower loan demand. Slide 11 highlights trends in non-interest income. Non-interest income increased 7.7%, or $193 million on a year-over-year basis, driven by higher payments revenue, continued strength in underlying capital markets activity, and stronger mortgage banking fees. On a linked quarter basis, non-interest income, as adjusted, decreased 1.4% or $38 million reflective of seasonal declines in payments volume and previously discussed impacts related to the exiting of our ATM cash provisioning business, which pressured service charges, and lower tax credit syndication fees, which impacted other revenue. Turning to slide 12, reported non-interest expense for the quarter totaled $4.5 billion, which included approximately $265 million of notable items. Non-interest expense, as adjusted, decreased $10 million, or 0.2 percent, on a linked quarter basis, and $117 million, or 2.7 percent year-over-year, driven by both cost energies with Union Bank and our continued focus on operational efficiency. Slide 13 highlights our credit quality performance. Asset quality metrics continue to develop in line with our expectations. Link quarter, non-performing assets increased 20%, reflecting continued stress in our commercial real estate office portfolio and one idiosyncratic commercial loan. The ratio of non-performing assets to loans and other real estate was 0.48% at March 31st, compared with 0.40% at December 31st and 0.30% a year ago. Our first quarter net charge-off ratio of 0.53% increased four basis points from a fourth quarter level of 0.49% and was higher when compared to a first quarter 2023 level of 0.3% as adjusted. Our allowance for credit losses as of March 31st totaled $7.9 billion or 2.1% of period-end loans. Turning to slide 14, our common equity Tier 1 ratio of 10.0% as of March 31st was reflective of a 10 basis point increase from year-end, which included 20 basis points of net capital accretion, offset by a CECL transitional impact of 10 basis points. We remain well above our regulatory capital minimum requirements. I will now provide forward-looking guidance on slide 15. We expect net interest income for the second quarter on an FTE basis to be relatively stable with the first quarter level of approximately $4.0 billion. Full year 2024 net interest income on an FTE basis is now expected to be in the range of $16.1 to $16.4 billion. Our revised guidance reflects a shift in commercial client deposit behavior in a higher-for-longer rate environment and heightened competitive industry dynamics. For the full year, we continue to expect mid-single-digit growth in non-interest income. Given the pressure we are seeing on net interest income, we are reducing our expense guidance for the year. We now expect full-year non-interest expense of $16.8 billion or lower, which compares to $17.0 billion in 2023. Let me now hand it back to Andy for closing remarks.

Thanks, John. We have been preparing for a wide range of economic scenarios for some time now, and we continue to deliver industry-leading returns despite the current industry stress. Our diverse business mix is allowing us to differentiate in a competitive market, and we are seeing the benefit of the investments we've made and continue to make in our digital capabilities, our technology modernization, and our payments ecosystem. The message I'd like to leave you with is that we will successfully navigate through the near-term challenges the industry is facing, but more importantly, we are well-positioned for the future and continue to manage the company with a long-term lens. Let me close by recognizing the many dedicated employees for all they do to support the constituents of our national banking franchise. It is because of our exceptional talent pool that we remain poised to execute on our capital-efficient growth objectives and continue to deliver the financial performance our shareholders have come to expect. We will now open up the call for Q&A.

Thank you. At this time, I would like to remind everyone, in order to ask a question, press star, then the number one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. Your first question comes from the line of Scott Seifers with Piper Sandler. Your line is open.

Morning, Scott. Thanks for taking the question. Thank you for taking the question. I was hoping either, Andy or John, you could talk just in a little more detail about sort of the nuance in the Tupper NII guide for the full year. So I guess at an industry level, we've got a couple dynamics at play, whether it's the challenging long-growth environment or, of course, the impact of hire for longer on, you know, deposit costs and beta. So maybe the main one or two kind of pressure points you saw, and then I guess the follow-up, it doesn't feel like there will necessarily be a lot more pressure on NII. It's just that it might not advance in the second half. Is that the best way to think about it?

Scott, good morning. Thanks for the question. So, you know, maybe just take a step back just to answer your question. You know, in January when we talked about our guidance, we looked at – we expected our 2024 net interest income to be in line with the annualized fourth quarter number, given that was past MUB actions that we had taken throughout the course of the year. So to your point, we're 1% to 3% lower than that with our new guidance here. And the outlook really speaks to, you know, changes or the dynamics that we have in the economy, the interest rate environment, the dynamics in the deposit environment, those sorts of things. The conversation, of course, has shifted. At the beginning of the year, there was multiple cuts. Now we're shifting to more hire for longer. And what we've witnessed over that time is that our client behavior, particularly in the corporate and mid-market sections, you know, have been shifting their behavior. And clients are continuing to rotate out of low-cost deposits into higher-cost deposits. And the pace of this action is slowing. We absolutely see that. It's just not slowing as fast as what we would have anticipated. So to boil that all together, what we do see now with our guidance is that we have the second quarter net interest income will be relatively stable, and we should see growth in the second half of the year. And we've provided a range given that uncertainty in terms of client behavior and things of that variety. And the final thing I would just say is that we recognize this up front and we're taking action. We are looking at our expense base and taking action and pulling some levers that we have been looking at. And so that's kind of how we think about the guidance from a big-picture perspective.

Thanks, John. And, Scott, I just add that, you know, we continue to look for opportunities to improve efficiencies, particularly in this higher-for-longer rate environment. So we benefited from the $900 million cost takeouts from the union bank transaction, and we continue to focus on additional efficiencies in areas like procurement and third-party spend, our workplace management and our properties and real estate, and probably the area of greatest emphasis is operational efficiencies as we centralize our operations activities and technology investments we've made to really improve the effectiveness and efficiency in how we deliver our products and services. So that will continue to be a focus and a lens for us, and those are the actions we're taking.

Perfect. Thank you very much, Andy, John.

You bet.

Your next question comes from the line of Ebrahim Poonawalla with Bank of America. Your line is open.

Hey, good morning. I guess maybe just following up on NII, John, if we could drill a little bit into it. One, the securities yield went down one basis point sequentially. Just remind us of the dynamic, both in terms of the security book and fixed rate assets repricing that we should be mindful of going forward. And then non-increditing deposits, I think, saw a big surge at the end of the quarter. Again, what's the right way to think about NIB balances and mix as we look forward? Thank you.

Sure. So maybe I'll start with your first question. You know, on the securities yield, you know, it was relatively flatter down one basis point, as you cited. You know, this quarter is a little bit different. We had taken some hedging actions that actually offset some of the asset churn that we typically would see, and so I would view this as more of a temporary thing. As I look forward, the typical churn that you see in asset repricing of that book, as a reminder, It's about $3 billion per quarter that is rolling off at the lower level and we'll replace. And so that's really going to be what we're looking at kind of going forward. So I just look at this as an anomaly. On the deposit side, yeah, we did – I believe your question was on the surge in deposits. We did see a surge at the end of the quarter. There was a holiday in there. A lot of customers placed balances with us, very much temporary. A lot of those balances kind of hung on in and out here through tax season. And so we typically have that. It's just higher than what we would typically see for various reasons. And so, as we mentioned in our comments, we expect that to get to more seasonal levels. And then just your follow-on was really on the non-interest bearing side of things. You know, it's continued to trend down that mix of NIB versus total deposits. You know, we're kind of in that 17% category right now. You know, as we're in a higher for longer, it's possible that that continues to drift lower just based on the dynamics that we're seeing in the marketplace.

Got it. And I guess just separately around outlook for fee revenue. So I think Andy addressed that in his prepared remarks. But give us a sense of what areas you're seeing momentum on the fee revenue side and whether there's any room for sort of upside surprise if we get additional negative guide downs on NII.

Yeah, sure. So, I mean, overall, we feel very pleased with the quarter one results. We've talked about account growth. We're deepening relationships. We continue to see progress on union and the growth opportunities that we see there. consumer spending metrics, all the underlying metrics are strong, capital markets activities are strong, and that is supportive of our continual view on mid-sigital digit growth on the fee aspect of things. Areas that we see growth, you know, we particularly have seen that in the capital market space. We have extremely strong fixed income capital markets activity, a lot of issuance that came to market, and our franchise absolutely benefited from that. Mortgage has continued to be strong in terms of, even though applications and production has been lower on a year-over-year basis, we're actually seeing much wider spreads just given the areas that we're focusing on. And that's just the constant theme of how we're focusing on more return on equity or higher returns overall. And then, you know, the payments business continues to do well and be in line with our expectations. And so that helps us support the payment ecosystem that we have and all the initiatives and investment that we've made over time. So all that is very much coming together, and we feel very, very comfortable about our fee outlook.

Thank you.

Thanks, Ibram.

Your next question comes from the line of John McDonald with Autonomous Research. Your line is open.

Good morning. Good morning, John. How are you thinking about the outlook for kind of the credit trends you saw this quarter? John, you mentioned there was the one idiosyncratic commercial. Other than that, you know, kind of what are you seeing? And you're still kind of thinking about a mid-50s kind of net charge-off.

Yeah, John, this is Terry. You know, let me take that question. So when we end up looking at credit, you know, again, credit generally is pretty strong. I think that we're continuing to see in non-performing assets that that will continue to tick up and did tick up in the first quarters. It's primarily related to commercial real estate office space. And, you know, I think when we think about kind of the rest of the year, you know, probably in the second quarter it's going to tick up a bit more, but then that growth rate is going to really moderate quite a bit. You know, the thing to keep in mind with respect to, you know, you know, the commercial real estate office space is we've aggressively reserved for that. We feel like we've adequately covered the lost content that's in that portfolio. So, you know, even though NPAs are likely to tick up, you know, we don't see that as, you know, a real impact from a P&L standpoint. From a charge-off point of view, you know, in the first quarter, that's principally driven by just credit cards. And, you know, our expectation is that that will probably in the second quarter also come up. But then, you know, on a full-year basis, you know, the charge-off rate that we would expect in credit cards is probably going to, you know, move up a bit in the second quarter and then start to moderate downward again. On a full-year basis, we would expect, you know, that charge-off rate to be pretty similar to the charge-off rate that we see in the first quarter, about 425. Yeah, I would say mid-50s, maybe closer to the 60 basis points. And, again, I think that it's going to be a little bit lumpy because of, you know, just timing of commercial real estate charge-offs that will occur through the year. But, again, we feel like we've adequately reserved for it.

And then, Andy, how are you thinking about the expense flex? You mentioned, you know, offsetting the NII.

Yeah, John. So it is an environment that it's always important to look at efficiencies, and that's something we're very focused on. And it is in those areas we talked about we'll continue to flex where we see opportunities. We've centralized operations. We have other opportunities to spend. It's a company-wide initiative, and we'll continue to focus on that. Again, importantly, though, I want to tell you, John, that we're still investing, but we're looking at operational efficiencies as we deliver our products and services while continuing investments because the investments we've made is helping us with the efficiencies on a go-forward basis.

Your next question comes from the line of Betsy Gracek with Morgan Stanby. Your line is open. Hi.

Good morning.

Welcome back, Betsy.

Oh, thanks so much. So I had a follow-up on the comments around corporate behavior in the deposits shift from NIB. I just want to understand two things. One, do you see your corporate deposits shifting from NIB to IB, or is it more NIB to MMF? And then separately, you know, typically corporates are in NIB because, you know, it's compensating balances for other services. So as this shift is going on, does it suggest that we're going to see an uptick in, say, for example, Treasury services or any of the other fee lines?

Hey, that's it, John. Thanks for that. So, you know, in terms of the behavior, I think what we're seeing is, you know, the trends are slowing. The rotation is going, maybe to first answer your question, more from NIB into more IB. And it's more of the tradeoff for the client. And what we're seeing really there is clients are just optimizing and being as just looking at their balance sheet, looking at their balances, especially in this higher rate environment. And now that they know it's going to be here for a longer period of time, they're taking a closer eye to it. We're just seeing that more and more. So the trends have been slowing of that mixed shift. It's just taking longer than what we would have anticipated. So, you know, in terms of compensating balances, those are the things that are on a case-by-case basis with the clients. You know, we look at the ECR rates that we pay, and customers will then make decisions based on that. And so, you know, those are kind of the tradeoffs that we see relative to that right now.

Okay, so Treasury Services potentially could see a little pop-up in growth as how you pay for services changes, or is that an overreach?

It's possible, but, again, the dynamic is pretty fluid is kind of how I would describe it.

Okay, and also folks are staying on your balance sheet as opposed to going off balance sheet into MMS.

Yeah, a lot of this is defending clients and making sure we're there for them. Again, we view this as a temporary phenomenon. and this is just a timey thing. It's really just the churn here is continuing. It's just being the pace of it is taking a little bit longer for it to stabilize than what we would have anticipated, and that's really what's going on here. We want to make sure we're here for the long run for our clients and serving them as we kind of transition through this great environment.

Got it. Okay, that's super helpful. And then just, you know, kind of a 30,000-foot question here. Could you help us understand how you are currently thinking about the asset sensitivity of U.S. Bank Corp. at this stage? How should we think about what hire for longer means for you, for the whole organization?

Yeah, sure. So I think, you know, in terms of, you know, asset sensitivity, from a risk management perspective, we are as neutral as you can be. You know, we've taken a lot of different actions to make sure, because we just don't know where the rate environment is. I mean, it was seven cuts at the beginning of the year the market had. Now it's closer to zero. So we just want to make sure we are prepared for different type of rate environments. And, you know, so I think, you know, as we think about, you know, the asset sensitivity, that is really, you know, how we're positioning ourselves. As we think about, you know, hire for longer and what that means, you know, the drivers there are going to be, you know, clearly deposit betas and rate and paid and all that sort of thing may creep up. You know, the offset to that is we're going to have asset churn on the loan side as well as the investment portfolio side. And over time, those things will offset and turn ultimately in our favor. You know, but it's going to be that timing that's really going to matter in terms of what do those things move and shift over time.

So, Betsy, as John said, this is Andy, we've tried to narrow the corridor of volatility given the uncertainty and the outlook, and so we are about as neutral as we can be given all the puts and takes John talked about.

Super. Thank you so much. Really appreciate it.

Thanks, Betsy.

Your next question comes from the line of Ken Yudin of Jeffries. Your line is open.

Hey, thanks. Good morning. If I could add a couple of questions on the fee side. One, can we just talk a little bit through the payments businesses? It looks like the overall year-over-year growth rate was 4%. I think you're aspiring for upper single digits. It looks like corporate was down year-over-year, and maybe the rate in merchants slowed a little bit. So can you talk us through some of those dynamics and then how you'd expect that to project going forward?

Sure. Yeah, I think – thanks, Ken. I appreciate that. that we can look at, maybe I'll take them in order. Merchant, you know, was kind of in that 4% area, as you mentioned, on the fee side of things. You know, on that side, this quarter, we saw travel being a little bit down, but the other underlying metrics really have strong growth. We saw our tech-led initiatives really continue to propel very nicely. We saw high single-digit for virtually all the other categories in that space. So we think the travel is just kind of a short-term nature thing here, and we're well-positioned and continue to feel good about high single digits there. On the corporate side, corporate payment side, as you mentioned, that was negative over this year-over-year basis, but we are lapping the freight weight that has happened over the past year, and that will really churn. There might be a little bit more than that in the second quarter, But we see, you know, strong momentum as we look. Again, the fundamentals of business spend and things like that are continuing to be in case that we feel good about high single digits. And then on the card side, really strong fee growth, good spreads, payment rates, payment spend trends, constructive for how we're thinking about it. So all that, we feel good about all the underlying trends from a payment standpoint.

Okay, got it. And then just in terms of some of the other lines, you know, corporate services and mortgage did a lot better. I think you mentioned DCM and corporate and better gain on sale. Just wondering, are those, you know, both sustainable or was there any pull forward on both of those areas this quarter?

I think it is. I think the underlying strength may have had a little bit of positivity here in the first quarter. But underlying all that, I think the gain on sale in the markets that we're playing is legitimate, even though the market has been slower from an application standpoint, a production standpoint. It's still kind of double-digit, almost 20% down from year over year. So there's a lot of the volumes are lower, but the spreads are wider, and we anticipate that to continue going forward.

Okay, great. And last cleanup on just that ATM business, it didn't look like service charges changed. Did that close it? I know it's not a net profit. I know it's neutral net profit, but can you just update us on that?

There was some of that in this quarter, and so they'll kind of fully run off here in the second quarter.

With an offsetting cost?

Yes.

Thank you.

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

Morning, Mike.

Another one on net interest income. You know, Andy, you used the word temporary in your opening remarks, talking about either the decline or the worst guide, and I didn't know what you meant by temporary.

So what we're saying, Mike, is that this pressure that, as John described, we believe is going to dissipate and has dissipated is just dissipating slower than we thought, and we expect a relatively stable end of the second quarter and then growth in the back half of 24. So that's what I meant by temporary.

Do you have any expectations for 2025 and where the floor is for non-interpreting deposits or, you know, any other color?

So I would expect that 2025 would continue the momentum that we see in the second half of 2024. We're not going to give a 2025 guide right now because it's so volatile in terms of what rates could be. But, you know, importantly, Mike, we see the second half of 2024 even in a lower rate cut environment and higher for longer to start to go up.

And I know I've asked this before, but it still applies, I think. So the big picture here is you've got $900 million of savings in the union bank acquisitions. That's good for the expenses. The revenues, you highlight in your slide, business banking is up one-third over three years in terms of revenues and relationships. You have mortgage. You have capital markets. You have payments. The revenues are working. The expenses are working. And then we look at the efficiency ratio for this quarter, and the core number is like around 62%. for a company that for so long had an efficiency ratio under 60%. Now, I know you're investing a lot nationally. We heard that at the BAD conference, but it's just like, when do you get under 60%? And I get the NII effect that distorts things, but you do have some peers that are under 60% now. So, how should we think about efficiency at U.S. Banquirt?

Yeah, Mike, that's why we're pulling these expense levers and looking to continue to create efficiency. So I feel very positive about our fee categories. We have a diversified set of businesses. A lot of businesses that other banks don't have, like payments and commercial products, fund services, corporate trusts, that helps us drive fee revenue. That's the strength that we talked about, that 7.7%. There are some headwinds on margin for the industry and for ourself. We'll get past those headwinds, and we'll continue to operate efficiently and look for expense levers to get that efficiency ratio downward, and that's an objective of ours.

All right.

Your next question comes from the line of John Pencari with Evercore. Your line is open.

Morning, John.

Morning. On the deposit growth in the quarter, the surge in growth you saw at the end of period, can you maybe size up the impact that was more seasonal and more tied to the holiday dynamic and how much that could pull back? And then separately, also on your NII commentary, you did mention the competitive landscape shifting. Is that just regarding the deposit mix and pricing, or are you also seeing some competitive dynamic impacting you on the loan front?

Hey, John, thanks. Maybe to answer your second question first, it's more of a deposit mix and rate paid. It's not necessarily the loan side. I think actually on the loan side we see, you know, even though loans are soft at this point, We do see decent momentum on the commercial side. We saw a good period end growth there. Spreads are good. The asset churn is positive all there. I think it's just, again, it's back on the deposit side of things in the mix. And I would say even on the mix, I would say on the commercial side, it's just a rotational thing. The rates environment really hasn't changed on the commercial side. On the retail side, sometimes rates go up, sometimes down, depending on geography and market and all those sorts of things. But, you know, we're competitive there, and we want to make sure that we're growing, and we have been growing. We've been growing consumer deposits, as we mentioned. Back on your first question on the deposit surge, you know, it's probably in the area of $15 to $20 billion that we received. You know, we get a lot of inflow at the end of the quarter as people prepare for outflowing payments, you know, end-of-the-month type payments or first of the month as well as fifth of the month. And then sometimes they just hold it all the way through the tax season. And that's exactly what we've seen here is that you get this kind of surge up at the end of the quarter. It holds for the duration through tax day, and then it starts to wind down. And that's been very seasonal. It's just a bigger number than what we have typically seen.

Okay, thank you. And then separately, on the expense efforts where you're taking a closer look, and you mentioned some of the areas, are those measures that you're taking fully reflected in that updated expense outlook of $16.8 billion for the year, or could your efforts drive a somewhat lower number as you evaluate the opportunity?

So, John, they're reflected in the efforts. That's why we brought it down to $200 million. And in the note, you'll see that's a $16.8 at least. So we could pull additional levers as we continue to focus on this, but it is reflected in the guidance.

Okay, thanks for taking my question.

Thank you.

Your next question comes from the line of Vivek Duneja with J.P. Morgan. Your line is open.

Hi, thanks. I just want to probe, Andy, a comment that you expect net interest income to go up in the second half of 2024. Could you talk a little bit about what you see as the drivers of that?

I'm going to let John start now, Adam.

Yeah, you know, the driver is really, you know, Vivek, as we talked about, it comes down to the deposit side of things really first and foremost. And, you know, again, we're seeing the migration and rotation slow. It's just, again, it's just taking some time. So eventually as that goes, that will stabilize. And then you're going to have the continual asset churn on both loans as well as massive portfolio, things like that. But I would also say that, you know, we've taken a lot of action to enhance return on equity. We're looking at capital-efficient ways to grow that. Those underlying themes continue. The union growth, the opportunities that we see, and loan spreads have been favorable. So those are kind of the reasons that we see a positive nature and bend to the net interest income that Andy talked about.

So as John said, it's the repricing of loans, the expectation of stabilization of the flow of deposits, and the securities portfolio churn that we talked about.

And the hedge that you did, which you said was an anomaly this quarter, could you talk a little bit about that? Was that for, you know, that's not going to have an ongoing impact? Was that just something that you put on for capital protection, or what was it?

Sure, yeah. Yeah, so it really was more to get our asset sensitivity to continue to be neutral. So those are actions that we took kind of as a one-time matter. So it's in the rate and go forward. That's why I called it as a temporary measure here in this quarter. Going forward, again, the driver here in an investment portfolio is the $3 billion or so that's rolling off at lower yields and will be replaced at now current higher interest rates.

Got it. Because you'd always said you were neutral, so that's what I was trying to understand, what sort of change that you had to do to make it go to you.

Yep. Those are part of the actions that we take to get neutral, and those are the things that the team looks at on a frequent basis. We're actively managing that on a daily basis. We're looking at markets. We're taking actions, and this was just the result of that.

And is that just receive fixed swaps you added or terminated, or what did you do?

Well, specifically, they were pay fixed swaps that we had terminated. They were shorter, dated in nature, but it reduced the yield because the pay fixed carry had been gone, but that just neutralized our interest rate sensitivity.

Question comes from the line of Gerard Cassidy with RBC Capital Markets. Your line is now open.

Good morning, Andy. Good morning, John. Good morning. John and Andy, can you share with us, obviously you had a nice move up in your CET1 ratio is now at 10%, and we all know the Basel III endgame is coming. Nobody knows for certain when that final proposal will be in place, but it seems like, you know, for the category two and three banks that the unrealized securities losses will be carried through regulatory capital, which is not the case today, of course. So with that as a backdrop, can you update us on where you want that CET1 ratio? And historically, you guys have been so good at giving back, you know, 75% to 80% of your annual earnings and dividends and buybacks. And when do you think we could possibly get back on that kind of track?

Sure, Jared. I'll start. You know, first of all, just to give an update on the unrealized loss. So, you know, from a positive standpoint, part of the hedging and activities that we do that I just talked about in prior questions really help here because we have, even though rates went up 30, 40 basis points throughout the quarter, our AOCI was fairly neutral. And so the impact to the AOCI from the investment portfolio and pension right now is about 220 basis points versus the 10-0 that we have on common equity tier one. You know, you're right. The Basel III endgame and all those sorts of things, that along with I would call CCAR results for us are two important milestones we need to see before we, you know, make any grand declarations on what our capital ratios will be going forward. In the meantime, we'll continue to build our capital levels. And, you know, what we'll also do is focus on our returns. Obviously, the dividend is a large priority. Additional priority is investing in the company. And so we're pausing on share repurchases at this time as we build the capital. Over time, that will normalize back to kind of where we were. But this is kind of that transitional period that we're in.

Very good. And coming back to stepping back for a moment, now that the union bank, I assume, is fully integrated, obviously that has been your focus since that acquisition. Can you share with us your thoughts about DeNovo expansion? You had that expansion down in the Charlotte area. You know, is there more to come now that, again, the acquisition is behind you? What's your thoughts there as you look out over the next 12 to 24 months?

You know, Gerard, we're focused on building our core customer base and deepening the relationships with the customers we have through those set of products and services that we offer. We do that through a number of mechanisms. One of them is through our brand system. One of them is through our relationship managers and working together. And that DeNovo effort is doing well. We also have partnerships with State Farm, which increase our distribution base. So we'll continue to look at all those levers. But the bottom line is that we continue to focus on more customers, deeper relationships across the diverse set of businesses that we have. And a lot of the opportunity, Gerard, is providing more services to customers who already are customers of U.S. Bank and could benefit from some of the other products and services that we offer.

And Andy, just a quick follow-up on that deepening, that customer relationship that you just identified. When it comes to your middle market commercial or your core commercial account, if they only have a loan relationship versus one of your preferred accounts that have multiple relationships, you know, that deepening you just mentioned, what kind of profit differential would you estimate there is between a customer that only has a loan versus your customer that has multiple products?

It's significantly higher. The more relationships, the higher the return, the more revenue, certainly. So if they have a loan only versus a loan plus deposit plus treasury management plus commercial products plus payments, it all adds up.

Yeah, no, I agree. Okay, thank you. Appreciate it.

Again, if you would like to ask a question, press star, then the number one on your telephone keypad. Your next question comes from Matt O'Connor with Deutsche Bank. Please ask your question.

Good morning. There's obviously a lot of puts and takes, like as you think about the net interest margin over time. But we've seen a number of banks put out kind of this medium-term NIMP target. and wondering if you have any thoughts on, you know, what a more sustainable NIM is for you guys. You talked about the securities kind of cash flowing, $3 billion. I don't know if there's any kind of underwater swaps that are chunky and roll off, but I guess the question is what do you think about NIM kind of medium term versus where you are right now?

Yeah, you know, I'll start here, Matt. You know, in terms of the net interest margin, you know, it's going to obviously track net interest income over time, but it may bounce around. Some of the drivers of that obviously could be some of the things you just mentioned, the asset churn on the investment portfolio, the creep on deposit costs and things like that. But cash levels and liquidity mix and things of that variety can also, you know, drive it as well. So, you know, we don't really have a call or a base of, you know, here's where our net interest margin. We're more focused on net interest income.

And then are there any, again, the securities book, you're pretty clear on the cash flow there, and I think that's a fairly long duration from a cash flow perspective. Any swaps that we should be mindful of that, you know, could go either way looking at the next couple of years?

I'm sorry, Matt. I didn't.

Swaps. So, again, you, go ahead.

The swap activity that we have. Yeah, so just as a, you know, our hedging, while we're very active in our hedging activities, there's really no fundamental change. We continue to focus on pay fixed swaps that hedge the investment portfolio. Obviously, we took some off that impact. It's a temporary thing. We still have well over a third, actually, of our risk hedged on the securities book. And then we have been adding received fixed swaps as well, some of that spot, some of that forward starting, depending on the nature. Here, you know, as the curve has come up here and the curve is flattened and higher, that's an excellent opportunity for us to add some protection for the downside, if and when that does occur. And all that adds up to be kind of that net neutral interest rate risk position that we're in.

Okay. Thanks, Matt.

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

Hi. I guess another one on NII. Your guidance does assume some modest reacceleration of NII in the back end. I think the second half NII is at the midpoint 2% higher than the first half. But what's embedded in – even more specific about what's embedded in the – through the cycle deposit beta assumption. And, John, you mentioned, you know, non-interest bearing could continue to move down a little bit from 17%. How far could – what's your best guess now as to how much more deposit migration and where that ultimately could land at and what's sort of embedded in the guidance for those measures?

Sure, Saltz, John. So on the beta side specifically, you know, that has continued to slow. I think we're only up one or two points here this quarter, and, you know, it was three the prior quarter. So, you know, it clearly has slowed, and as I mentioned, deposit rates in the commercial side are very flat. They have not changed. Retail bounces around a little bit, and we're going to be competitive and follow the market there, of course. But, you know, all in, if you're higher for longer, it may creep up a point here or two, but we feel like the low 50s is probably the right place for that to be as we kind of look forward.

Okay, and in terms of non-interest-bearing, the total liability, there's total deposits?

Yeah, I think that, like, I think, yeah, as I mentioned a little bit on the non-interest-bearing side, you know, we're at about 17%, you know, customers are being more efficient and things like that. It could go down a couple points as we stay a little bit lower at this higher for longer type period. Okay, great.

And I guess a follow-up on just a clarification on the deposit surge, your response to an earlier question on the deposit surge. Forgive me if I missed this, but the $15 to $20 billion surge, that's a normal surge in non-interest-bearing deposits. But I guess the question is, what's sort of the incremental to the normal surge? What was incremental this quarter to what you normally see? I'm just trying to get a base on which to forecast non-interest-bearing deposits going forward.

Sure. So in terms of the surge, the surge in absolute terms was like it was about $20 billion or so. It's probably $10 or so billion above and beyond what we typically see for this type of the quarter.

Okay. That's helpful.

thank you. Thanks. Your next question comes from Mike Mayo with Wealth Fargo. Your line is now

open. Hi. Just kind of still a cleanup on NII. Just in very simple terms, if you're neutral to rates, why the guide lower for NII? I just want to make sure I have that to rate. Did something happen that you didn't expect or you weren't fully neutral before this quarter? Yeah, sure,

Mike, John. So the, yes, we are neutral, to answer your question, to shocks to interest rates. I think what we're explaining is the behavioral aspect of it, which sometimes can be a little more challenging to judge at that point in time. And so, again, it's a little bit, the pace of rotation is a little bit, it's slowing down just not as much as what we had anticipated. So, again, rate shocks moving up and down, we continue to feel very good from a neutral standpoint. It's just that behavioral aspect that we've been talking about here.

And do you have a number for fixed asset repricing, say, to the end of next year? Because I think that's what's driving your higher guide to the second half this year and into next year. So you talked about $3 billion of securities. But by the end of next year, how much do you have in fixed assets that should repriced? Do you have, like, one grand number for that?

Well, I think the way I would think about it is about half of our loan book is fixed rate component. The other half is floating rate component and spreads are widening. So you can see some of the floating rate components perhaps improve over time. We're seeing decent growth in payments or, excuse me, credit card. And so some of the mix is also working at play here. And so commercial loans are coming on. They're coming on at wider spreads. So that's kind of how I think about that from a big-picture perspective.

And then last one, loan spreads. I mean, for a while there, it looks like we're heading to the recession, and loan spreads were not widening. Now it looks like we're not having a recession, and you have tight spreads in the capital markets, and loan spreads are widening. Why are loan spreads widening now? I guess that would be an incremental positive.

Yeah, so I think it's just different markets. So I think some of the drag you're seeing in the commercial volume side is capital markets spreads have been, and the access has been very good. We saw that reflected in our fixed income capital market fees and things of that variety. But I think that has taken away volume to a certain extent. In other areas where access to capital markets isn't as pronounced, I would say there has been a decent opportunity for spreads there.

All right. Thanks, Mike.

Your next question comes from the line of Ibrahim Poonawalla with Bank of America. Your line is open.

Hey, John, just a quick follow-up to make sure we get this right. The surge deposits that came in, I think you mentioned you expect about $15 billion to leave. Is all of that going out of non-interest bearing? So the $91 billion number, does that go into the mid-70s as we think about the second quarter?

No, some of this is temporary. So the surge that happens, it can be a mix of both money market as well as NIB. It may surge the NIB for a brief period of time, but it's not going to be material to the quarter. So the surge that we've been talking about can be a mix of both.

Mix of both. And so you do expect just from a very dollar balance standpoint, NIB is saying north of $80 billion. Is that fair?

Yeah, I would expect, you know, as we said, the rotation is continuing, so I wouldn't expect growth necessarily in DDA. But deposits overall, we do expect to basically be stable.

And just a separate question. Given all these questions on NII, I think, would love to hear the degree of conservatism baked into your NII outlook, because I guess the concern you're hearing is whether we see another downward guide three months from now. And, yeah, so in terms of what would go wrong in order for us to see another guy down on NRI and for you to be surprised. Thank you.

Yeah, Ibram, I don't look at it as conservative or aggressive. It's just the range. It's just the range that we provided just given the uncertainty that's just in the market, given all the factors that we've talked about here today. Thank you.

There are no further questions at this time. Mr. Anderson, I turn the call back over to you.

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