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. This call will be recorded and available for replay beginning today at approximately 10 A.M. Central Time. I will now turn the conference call over to George Andersen, Senior Vice President and Director of Investor Relations for U.S. Bancorp.

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

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

Thanks, Andy. If you turn to Slide 7, I'll start with a balance sheet summary followed by a discussion of second quarter earnings trends. Total average deposits increased $10.8 billion or 2.2% on a linked-quarter basis to $514 billion, driven by stable institutional deposit balances and continued consumer balance growth. Average noninterest-bearing deposits decreased $1.4 billion or 1.6% on a linked-quarter basis, as we continue to emphasize stickier relationship-based deposit generation. The pace of decline in noninterest-bearing balances continued to slow this quarter. 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 increased spend volume and increased commercial loans from growth in corporate banking. Loan growth this quarter was partially offset by lower commercial real estate and total other retail loans. With elevated deposit levels, we opportunistically increased the size of our investment securities portfolio with short-dated high-quality securities to optimize cash levels. As a result, the ending balance on our investment portfolio was $168 billion as of June 30. Actions taken 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. Non-performing assets increased approximately 3.7% linked quarter, reflecting a slower pace of change. 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. Turning to Slide 9, 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 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 3 basis point decline in net interest margin this quarter to 2.67%. Slide 11 highlights trends in noninterest 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 securities sales of $36 million. Noninterest 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, noninterest expense as adjusted, decreased $6 million or 0.1% on a linked-quarter basis. The decrease was primarily driven by lower compensation and employee benefit expenses, which were partially offset by higher net occupancy and equipment as well as marketing and business development costs. Year-over-year noninterest 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. 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. 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 conditions. 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. 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 billion to $16.4 billion. For the full year, we expect to achieve mid-single-digit growth in noninterest income as adjusted. We continue to expect full year noninterest expense as adjusted of $16.8 billion or lower.

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

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

Good morning, everyone. Thanks for taking the question.

Good morning, Scott.

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

Sure, Scott, and good morning. First of all, we're pleased to see our net interest income grow, and we like the actions that we've taken to position ourselves for the future. Deposit rotation and rate paid have stabilized. Loan mix has improved. Our fixed asset repricing and earning asset repricing continues to march on, and we've been opportunistically working with the investment portfolio to deploy excess liquidity. So, if you think about some of these things going forward, the higher and lower end of the range, I'd say a couple different things. First of all, I would just say, as I mentioned, we expect stable third quarter net interest income. And then from there, we do expect growth. We would anticipate that the pluses and minuses are going to depend 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. In terms of rate paid, that's going to be dependent on the market. But as you can tell, that has slowed as well. We feel good about our positioning for rate cuts as we move forward should they occur. Our earning assets, we know are going to be formulaic and continue to reprice, whether that's the investment portfolio or the mortgage book. We expect kind of in that 6 basis point to 8 basis point range on average, given current levels. And then, loan growth, we assume to be very modest in our forecast kind of going forward just 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 think about the next couple of quarters.

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

Sure. So, I think on loan growth, we did see pockets of loan growth occur in the corporate loan book, but I think our overall thesis really hasn't changed over the last several quarters. The loan growth environment remains tepid. There's caution among clients, but 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.

You bet.

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

Good morning.

Good morning.

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

Sure. Thanks, Ebrahim. So, the way I think about potential rate cut shifts and changes in the market there is that we are well-positioned given the mix of our deposit base. Approximately 50% of our balances are retail-based and about 50% are institutional or corporate-type balances. In a cut environment, those institutional corporate balances, the beta, if you will, of those are going to go down as quickly as they came up. So, we feel very good about the repositioning of that. On the retail side, I would just say that there will always be some arc to the retail, so there'll probably be some repricing that occurs at the still current higher levels, but over time those balances will come down. Overall, it gives us an advantage as the curve, in theory, should start to steepen, allowing for continued earning asset favorability on the repricing side.

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

Sure. I think on the fee side of things, we had a solid quarter, but we continue to expect momentum in various categories. It's going to be a combination of all the main ones. It's going to be payments, trust investment management fees, and the capital market space that I would point you to. On the payment side, we continue to see strong core competencies. On credit, credit card, we continue to see strong spend levels. So, those are all positive things for us as we move forward. The trust and investment management fees and capital markets continue to see a very strong market backdrop. These will be kind of the tailwinds that position us well for continuing our guidance here for mid-single-digit growth for fees.

Got it. Thank you.

You bet.

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

Hi, good morning.

Good morning.

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

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

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

Well, I don't think our guidance really has changed from a credit standpoint. It continues to stabilize as expected. From a net charge-off perspective, we came in at 58 basis points. We would anticipate approaching 60 basis points in the back half of the year. But metrics like delinquencies and non-performing loans have stabilized and come in nicely, giving us confidence in our credit outlook.

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

Yeah, we feel very much appropriately reserved for the book that we have. We saw a little increase in our reserve build this quarter just due to growth, particularly in cards.

Okay, super. Thanks so much.

You bet.

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

Hi, good morning.

Good morning.

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

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

So, Andy, just as my follow-up, it doesn't seem as if, as we think about the rest of 2024 and the CCAR years, '24 October 1st and September 30th of next year, we should expect similar active balance sheet management in terms of growth as we saw in '23.

As we've discussed, I think most of the capital accretion going forward will be through normal earnings. We expect that to be 20 to 25 basis points. We had a little 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 Jefferies. Please go ahead. Your line is open.

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

Sure. So, thanks, Ken. I do agree; we expect momentum. Part of that is comps, but we're not relying on that. On the merchant processing side, we have seen good core growth in our tech-led initiative. That's about a third of our sales now and has been growing at a very strong rate. The margins on that business have expanded, and our non-travel categories are seeing very good growth. We did see some headwinds this quarter, particularly on travel volumes in Europe, but that is something we hope will reverse. Overall, we feel like we're positioned well in the merchant side. On the retail card side, credit card spend is strong and constructive. The Union Bank client acquisition is increasing the penetration rate, but we did see a decrease as well because of risk mitigation around prepaid cards. There has been strong growth on the retail side as well. Regarding the corporate side, we are nearing an inflection point with lapping freight and fleet, so we expect strong performance there as we think about the fourth quarter. Overall, we have momentum that will drive growth nicely.

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

Sure. I think it just comes down to the questions earlier about the range of outcomes. What's going to drive it is really around the deposit behavior. We saw good trends in terms of rotation out of DDA, but the pace has slowed. We expect it to slow moving forward, but it doesn't mean it's over. On the rate-paid side, we're monitoring the competitiveness of the deposit rates, and we don't expect a lot of deposit growth in the next quarter due to liquidity pressure from QT. Those are the primary factors I would call out.

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

Okay. Got it. Great. Thank you.

You're welcome.

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

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

Sure, Mike. Happy to. In terms of the math, the mortgage market, that’s going to continue given it's a very much a fixed-rate book. As for the investment portfolio, given current rates, we expect a 6 to 8 basis points increase. However, in our projections, we anticipate a cut in September; and about half of our book is floating rate or swapped to floating. So, that impacts the investment portfolio. The deposits, on the other side, will start to shift as well. The institutional side would start to move right away, but retail will take longer to adjust. That’s part of why we anticipate a stable third quarter.

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

Yes, that's right. The mortgage book is also in that 6 to 8 basis points range.

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

On the mix of DDA to total deposits, I think it was 16.2% or so this quarter, down from 16.9% the prior quarter, which was 18% or so in the quarter before that. So, that pace is changing and slowing. In terms of where it goes, it’s just how clients behave, but it is an all-time low for us as we look back at our data.

And Mike, there is a chart on Slide 7 that shows the migration out 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.

Okay. Thank you.

Sure.

Sure.

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

Hi, Andy. Hi, John.

Good morning, Gerard.

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

Sure, Gerard, no problem. If you look at that category, it's, as you mentioned, our largest category for deposits. It's a mix of wholesale and retail as well as small business. In light of loan growth, it grew a little, but not tremendously. We had the chance to look at our relationships across the bank and price things appropriately. We took opportunities to exit some high-cost deposits and utilized our distribution network, whether that's on the retail side or our app capabilities to grow deposits in areas with a lower cost. That's the positive rotation you're seeing in that specific category.

I got it. I don't want to put words in your mouth, but when the Fed starts to cut rates, from this line item, at least, you guys could potentially benefit from lower rates, and the balances continue to grow, which would be beneficial.

Correct.

Just a more macro question. John touched a little bit on the utilization rate on the C&I loans. Can you share with us when you guys go out and talk to clients, what are they thinking about CapEx spending, which would enable them to draw down lines? And then second, are you seeing any increased competition from alternative lenders, whether it's private credit or other, that may be affecting C&I loan growth?

Yeah, Gerard. I think our clients are focused more on defense than offense right now. We recently conducted a CEO survey and found that clients are emphasizing productivity, efficiency, and expense management. The investments they are making in lending activity are primarily aimed at amplifying efficiency opportunities. Overall, it's still a very tepid market. There is significant bank and non-bank competition driving pricing a bit, but we are continuing to seek full relationships with appropriate returns to drive volumes.

Are you seeing aggressive underwriting from banks that want to grow their balance sheets?

I'm not sure that the underwriting is changing significantly, but pricing is.

Okay. Thank you, Andy.

Sure.

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

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

The medium-term outlook has not changed for the payment businesses. We expect high single-digit growth for merchant and corporate payments and mid-single-digit growth in the credit and debit card area. As mentioned, we've had 4% growth in the first quarter and 3% in the second. We would expect momentum moving forward to approach those medium-term levels. The factors we mentioned earlier can drive this, and our positioning in the market remains strong.

Okay. Could you remind me about the prepaid card risk mitigation you referred to? Maybe I missed that in the past, but can you just remind us what that is and how long it might drive for?

It's related to fraud and similar issues. We just want to mitigate those risks, so we've chosen to step away from some areas. It might be a drag for a quarter or so.

Sure. Thank you.

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

Hi. Thanks.

Good morning.

A couple of follow-ups. One on payments. Trying to understand why, despite your tech-led initiatives and other efforts, merchant volume growth slowed so much to only 1.7% year-on-year, the slowest in six quarters. What would cause that to turn around?

On the merchant processing side, the sales component was about 2%. We saw volume decreases related to travel, especially in Europe. As we start lapping those aspects and same-store sales come in, we expect momentum to return in the second half.

Okay. Shifting gears, you're talking about charge-offs going to 60 basis points in the second half. Delinquencies are down, so that should help. But your C&I losses are running high. Focusing on C&I, where are you seeing these losses? Which industry sectors, and overall, which categories might drive that charge-off rate to increase?

On C&I, the increase was primarily due to one unique loan that went through, an NPA from a couple of quarters ago. We don’t anticipate issues in the C&I book outside of that. In terms of charge-offs, we're seeing commercial real estate being a bit volatile, but manageable.

Okay. Thank you.

You bet.

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

Good morning. Andy, I appreciate the color you gave on capital. Looking at it, I know you sound cautious regarding buybacks as you walk through priorities and future expectations for capital. What changes that? Is it continued pull to par on the AOCI side? Basel III clarity? Clarity on rates? What gets you to the point where you become confident in buyback outlook?

I'm confident in our capital levels and our ability to accrete. We continue strong capital accretion with a CET1 ratio of 10.3%. Our capital distribution priorities remain focused on business investment, dividends, and buybacks. We'll update our targets at Investor Day on September 12.

Thanks. I appreciate that. Then, regarding operating leverage, you reiterated your confidence in achieving positive operating leverage in the second half. What does that mean as we look into quarters through 2025? Consensus estimates are at around 300 basis points positive operating leverage. How should we think about USB's medium-term positioning?

To summarize, our expenses were relatively flat, with a target for full year '24 of $16.8 billion or lower. We're past the point of investment and are now realizing benefits from those expenses. We expect to maintain moderate expense growth going forward, coupled with momentum in fee growth, which will drive positive operating leverage into '25.

Okay. Great. Thanks.

You bet.

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

Yeah, good morning.

Hey, Chris.

A small item, but I'm curious. I noticed your automobile loan portfolio is down by more than 30% year-over-year. How did this category suddenly become a no-fly zone? Is it because of short-duration assets, as there seems to be opportunity given current spread?

We haven't been as active in the auto loan market because the spreads and returns haven’t met our standards. The competitors we're facing aren't banks and have a different return profile. That said, we haven't exited the market. We've maintained a strong position in leasing and are closely monitoring that market. Should the spreads and returns become appropriate, we will engage actively as we have in the past.

Okay. All right. Thank you.

You bet.

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

Hi, good morning, guys.

Good morning, Saul.

Just a follow-up on card growth at 1.4% year-on-year, credit at 4.3%. Would the reduction in prepaid be the only reason, or have you seen any weakness in debit as well? This is somewhat unusual, as usually debit tends to outperform during economic downturns. Just any additional context.

The difference between fee growth versus sales is primarily about prepaid. Our strong trends in credit card spend and Union penetration have remained robust. Our partnerships are still strong as well. It’s all related to prepaid.

Got it. And as a follow-up on deposit dynamics, you’ve talked about a slowing of rotation. If I look at period-end noninterest-bearing, it fell close to 5% sequentially – significantly different from the average decline. Could you explain that and if it's transitory?

We have a lot of volatility in day-to-day noninterest-bearing deposit levels, mainly from our corporate trust business that has payments coming in and out daily. Depending on where the quarter ends or holidays, there could be volatility, so we're focused on average balances, which is a more stable measure.

Got it. Thanks very much.

Sure.

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

Hi. During the last quarter, there's been a few management changes. As we prepare for the September 12th Investor Day, we might see many different presenters than before. Can you share your time horizon for remaining CEO? And who are the contenders to be the next CEO of U.S. Bancorp? Would you consider looking outside the organization for your successor?

Thanks, Mike. You'll see some new faces at Investor Day, but also familiar ones. One change was putting Gunjan in the President’s role. The combination of institutional wealth with corporate and commercial groups was terrific for customer focus. Gunjan is tasked with doing the same with the entire bank, taking advantage of diverse businesses to drive growth. She has already begun making good strides. I look forward to sharing that story on September 12.

Okay, and the departures? Anything there?

I would say that these changes are natural. We've had stable senior leadership for years; sometimes change is necessary, but there’s no particular messaging in that.

So the theme is 'One USB' for better client delivery across the whole firm, which sounds simple, but is really tough to execute?

Exactly.

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

Thanks, guys. I just had a follow-up on the securities book. Could you help us understand the meaningful increase in yields that happened this quarter? You mentioned 50% of the bond book is floating. Is that total bond book?

Regarding the securities book, the 19 basis point increase was mainly due to taking excess liquidity and placing it into securities, such as short-dated treasuries or treasury swaps to floating. This gives us a measure of exposure.” Approximately 40% of the AFS risk is hedged, and another synthetic floating through swaps brings us to about 50%. This positions us neutrally to interest-rate shocks.

Okay, cool. Just one last thing, is $16.8 billion for costs after the second quarter results still your trajectory moving forward?

$16.8 billion or less remains our expense outlook. We’ve been consistent and believe we’re in a good position to manage expenses going forward.

Thanks, Ken.

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

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

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