Earnings Call Transcript
US BANCORP DE (USB)
Earnings Call Transcript - USB Q3 2024
Operator, Operator
Hello, and welcome to the U.S. Bancorp Third 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 be available for replay beginning today at approximately 10:00 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, Senior Vice President and Director of Investor Relations
Thank you, Ellie, and good morning, everyone. Today, I'm joined by our Chairman and CEO, Andy Cecere; CAO, Terry Dolan; President, Gunjan Kedia; 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 initial prepared remarks, Andy, Terry, Gunjan and John will take any questions that you have. I will now turn the call over to Andy.
Andy Cecere, Chairman and CEO
Thanks, George. Good morning, everyone, and thank you for joining our call. I'll begin on Slide 3. In the third quarter, we reported diluted earnings per share of $1.03, and generated total net revenue of $6.9 billion. The quarter was highlighted by strong growth in net interest income, good momentum across several fee business initiatives, and continued expense discipline, which supported modest, positive operating leverage on an adjusted basis compared with the third-quarter of last year. Our return on tangible common equity was 17.9% this quarter. Turning to Slide 4. Revenue growth on a linked-quarter basis was driven by improved spread income from a more favorable loan mix, continued fixed asset repricing, proactive and disciplined liability management as well as strategic actions taken on our investment securities portfolio. John will provide more detail on these actions in his prepared remarks. On the upper right-hand side of the slide, you will see that non-performing assets, the net charge-off ratio, and late-stage delinquency metrics were all relatively stable compared with the second quarter levels. At September 30th, our common equity Tier 1 capital ratio was 10.5%, an increase of 20 basis points from last quarter, driven by continued earnings accretion. Our tangible book value per share increased to $24.71, a 6.7% improvement linked-quarter and an 18.5% higher than last year. Slide 5 provides key performance metrics. This quarter, our return on average assets increased to 1.03%, the efficiency ratio improved to 60.2%, and net interest margin expanded 7 basis points to 2.74%. Turning to Slide 6, we continue to see good momentum across many of our fee businesses. This quarter, we achieved year-over-year double-digit growth in both commercial and investment products revenue, driven by underlying capital markets activity and wallet share gains across our targeted industry verticals. Additionally, we also saw good year-over-year growth in trust and investment management, payment services, mortgage banking, and treasury management fee revenues as we benefited from a combination of improved underlying market conditions, deepening client relationships, an expanded product set and expanded distribution channels. Let me now turn the call over to John who'll provide more detail on the quarter as well as forward-looking guidance.
John Stern, CFO
Thanks, Andy. If you turn to Slide 7, I'll start with a balance sheet summary, followed by a discussion of third quarter earnings trends. This quarter, total average deposits decreased 1.0% on a linked quarter basis to $509 billion as we continued to prioritize relationship-based deposits and maintained our pricing discipline. Average loans totaled $374 billion, a modest decrease of 0.2% on a linked quarter basis. Industry loan growth remains muted, and the decline we saw this quarter was driven by slightly lower commercial balances, given continued headwinds from capital markets-related paydowns and continued relatively low utilization rates. Within retail, higher credit card loan balances and improved revolver rates drove more favorable loan mix and margins. As Andy mentioned, in this quarter, we opportunistically restructured a portion of our investment portfolio to enhance our net interest income growth trajectory and to further strengthen our capital and liquidity profiles. At September 30th, the ending balance on our investment portfolio declined slightly to $167 billion with an average yield for the quarter of 3.20%. Slide 8 highlights our credit quality performance. Asset quality metrics continued to develop in-line with our expectations and reflected ongoing macroeconomic stability. This quarter, we saw a slight reduction in our exposure to the commercial real estate office portfolio, which remained appropriately reserved at 10.8%. Late-stage delinquencies and non-performing asset metrics were relatively flat on a linked-quarter basis, and the ratio of non-performing assets to loans and other real estate was unchanged at 0.49% linked-quarter versus 0.35% year-over-year. Our net charge-off ratio of 0.60% increased 2 basis points from a second quarter level of 0.58%, in line with our expectations. At September 30th, our allowance for credit losses totaled $7.9 billion or 2.1% of period-end loans. We expect our fourth quarter net charge-off ratio to remain relatively stable compared with the third quarter level. In the near-term, we expect changes to the loan loss reserve to be driven primarily by loan balance growth and mix. Slide 9 provides a more detailed earnings summary. In the third quarter, we reported $1.03 per diluted share, which included $119 million of net losses or $189 million after tax on sales and securities rebalancing actions within our investment portfolio. These actions were largely offset by tax favorability in the quarter, primarily due to settlements in various tax jurisdictions. Turning to Slide 10, net interest income on a taxable equivalent basis totaled approximately $4.17 billion, an increase of 2.8% linked quarter. Our net interest margin increased 7 basis points to 2.74%. Both net interest income and net interest margin growth this quarter benefited from a combination of earning asset repricing and mix, further supported by higher card revolve rates, investment portfolio actions, and disciplined deposit pricing. Slide 11 highlights trends in non-interest income. Non-interest income totaled $2.7 billion, and as mentioned, included the $119 million of net security losses related to rebalancing activity within our investment portfolio. Importantly, year-over-year, we saw good growth across our core business offerings, including trust and investment management, commercial products, mortgage banking, and investment products. As a reminder, last quarter's mortgage banking fees included an approximately $30 million gain on the sale of mortgage servicing rights. Service charges decreased 6.2% linked quarter, partly reflecting the impact of exiting our ATM cash provisioning business. The exit is now fully reflected in our run-rate for the third quarter of 2024. Turning to Slide 12, non-interest expense for the quarter totaled $4.2 billion, which was relatively flat to the prior quarter and 1.0% lower than a year ago as adjusted. The linked quarter increase of $16 million or 0.4% was driven by higher compensation and employee benefit expense, primarily due to higher performance-based incentives. On a year-over-year basis, the $42 million decrease as adjusted was driven by prudent expense management initiatives and the identification of operational efficiencies across the company. Turning to Slide 13, our common equity Tier 1 ratio of 10.5% as of September 30th increased 20 basis points from the second quarter. Looking ahead, we intend to balance our continued capital accretion of 20 basis points to 25 basis points per quarter with capital distributions, starting with a modest share repurchase in the near-term. I will now provide forward-looking guidance on Slide 14. We expect net interest income for the fourth quarter on an FTE basis to be relatively stable to this quarter's $4.17 billion. This guidance is reflective of our current expectation for more modest loan growth and continued QT impacts on deposits. Full-year 2024 net interest income on an FTE basis is expected to come in at the higher end of our $16.1 billion to $16.4 billion range. For the full-year, we still expect mid-single-digit growth in total non-interest income as adjusted, but likely at the lower end of the range. We expect full-year non-interest expense as adjusted to be $16.8 billion.
Andy Cecere, Chairman and CEO
Thanks, John. Third quarter results showcase the resiliency of our unique and differentiated business model, which featured solid top line revenue growth, supported by healthy linked quarter margin expansion as well as continued year-over-year income momentum and steady expense discipline. This quarter, we reported modest operating leverage, excluding net securities losses in prior year notable items, and consistent with our message at Investor Day. We expect to deliver expanding positive operating leverage in the fourth quarter that will continue into 2025. As recent industry headwinds become tailwinds, and we realized the benefits of our now run-rate investment spend on industry-leading digital capabilities, integrated payment solutions, and continued technology modernization, it will be the combination of our scale, our interconnected business model, and our deep and talented management team that will allow us to capitalize on the many objectives and targets at this important inflection point in our story. As always, let me close by thanking our over 70,000 employees for their everyday commitment to our clients, communities, and shareholders. We'll now open the call for Q&A.
Operator, Operator
Our first question comes from Scott Siefers from Piper Sandler. Your line is now open.
Scott Siefers, Analyst
Good morning, everyone. Thanks for taking the question.
Andy Cecere, Chairman and CEO
Hi, Scott. Good morning.
Scott Siefers, Analyst
Hey. John, I guess I wanted to start with NII. So, at least, relative to what I had anticipated, it looked like it came in better than you might have thought even as recently as a month or so ago at the Investor Day. I guess just in sort of simple terms, can you walk through what in your mind ended up coming in better than you might have anticipated?
John Stern, CFO
Sure, Scott, good morning. There are a few factors to consider here. First, the remixing of our portfolio has shown strength in our credit card sector, and the revolver rate has been favorable as we mentioned in our opening remarks. It's encouraging to see that our loan business has been growing at 8% year-over-year. Our fixed asset repricing is ongoing as well. Additionally, we were surprised by the Fed's decision to cut 50 basis points, which allowed us to effectively price our deposits. Overall, the combination of these elements has contributed to strong momentum in the third quarter.
Scott Siefers, Analyst
Okay. All right. Perfect. And then if I could switch gears to fees for just a second. Just wanted to chat about the sort of the implied fourth quarter number. So even if we get to the lower end of the full year fee guide, I guess that sort of implies that fourth quarter fees would get back up near sort of $2.8 billion, $2.9 billion level that might be more typical of one of your seasonally stronger quarters like typically, I think of you all doing best in the second quarter. Maybe if you could just sort of walk through the main puts and takes and where you would see sort of a reacceleration in momentum into the fourth quarter, please.
John Stern, CFO
Sure. I believe it's a combination of various factors. As we mentioned in our initial comments, the core business segments are performing well. We experienced strong growth in Trust at 6%, while commercial products grew over double digits at 12%. Mortgage saw a nice year-over-year increase of 8%. Although payments came in at around 3% this quarter, we anticipate growth in those specific areas in the fourth quarter. All of this contributes to some momentum from a fee perspective. However, we do face some challenges, such as exiting our ATM business and certain metrics related to prepaid cards. Nevertheless, this overall environment gives us confidence in achieving mid-single-digit growth in our fees.
Scott Siefers, Analyst
Perfect. Okay, good. Thank you very much.
John Stern, CFO
Thanks, Scott.
Operator, Operator
Your next question comes from John Pancari from Evercore ISI. Your line is now open.
John Pancari, Analyst
Good morning.
John Stern, CFO
Good morning.
John Pancari, Analyst
I know you cited the partial securities repositioning in the quarter, I wanted to see if you could give us a little bit more color on what you restructured in the quarter and the sizing of that in the yield? And then do you expect further actions on that front? And would further actions already be factored into your NII expectations? Thanks.
John Stern, CFO
Certainly. In terms of the securities repositioning, we recognized about $119 million in losses, with a total of approximately $10 billion in notional transactions. We believe this will have a payback period of around two years. For this quarter, the impact is estimated to be around $10 million, and we anticipate a bit more effect in the fourth quarter. Looking ahead, we don't foresee any similar actions included in our guidance. This was simply an opportunity that arose as interest rates dropped, and we leveraged it effectively. We are always exploring these possibilities, but currently, we have no additional plans in place.
John Pancari, Analyst
Okay. All right. Thank you. And then separately, on the expense side, you put up some pretty good positive operating leverage this quarter, and you implied that fourth quarter you'll see that as well. And I believe at the Investor Day, you expressed confidence in continued positive operating leverage. As you look at 2025, can you maybe help us get a sense of the magnitude of that operating leverage that you think is reasonable as you enter 2025 and longer-term, I believe the market is looking at about 150 basis points to 200 basis points operating leverage next year. Wanted to get your thoughts on that as we look at your return profile in the coming years?
Andy Cecere, Chairman and CEO
Yeah. Thanks, John. This is Andy. So as you saw, we reported positive operating leverage of approximately 30 basis points in Q3 here. The guidance that John provided would indicate that our expectation for positive operating leverage in the fourth quarter of '24 will be north of 1%, and we would expect it to continue to expand from there into 2025. So, building upon that 1-plus-percent into '25, exactly where we'll get, we'll give more guidance as we get the forward-looking guidance as we think about '25 across the categories.
John Pancari, Analyst
Great. Very helpful, Andy. Thank you.
Andy Cecere, Chairman and CEO
You bet.
Operator, Operator
Your next question comes from Betsy Graseck from Morgan Stanley. Your line is now open.
Betsy Graseck, Analyst
Hey, good morning.
Andy Cecere, Chairman and CEO
Hey, Betsy.
Betsy Graseck, Analyst
Just to follow up on that, in your guidance for the fourth quarter, you mentioned expenses of $16.8 billion. In the past, you had indicated $16.8 billion or less. Should we interpret anything from that slight change in guidance?
John Stern, CFO
Hey, Betsy, it's John. As we wrap up the third quarter and move into the fourth, we have a clear understanding of our expense base. We're providing a more accurate estimate for that specific number. Additionally, we've seen positive growth in our net interest income, which relates to our expenses. Given that we are at the upper end of our projected range, we believe $16.8 billion is the right figure for expenses this quarter.
Betsy Graseck, Analyst
Got it. Okay. Now that's helpful. And then, on the rate discussion earlier, you got the surprise 50, which you were able to pass-through onto the depositor side. So, as we're thinking about the next several quarters here, does NIM expand further as rates continue to come down, or is there a catch-up on the asset side that we should be skewing to?
John Stern, CFO
I believe that rate cuts are generally beneficial for us, as our deposit base is well-suited for such adjustments. We have an equal distribution of institutional and retail deposits, allowing us to lower institutional rates quickly. Currently, the beta for this rate cut is around 30%, and we anticipate it will rise to just over 50% as we progress through the cycle. This will be advantageous for us. Additionally, as rate cuts occur, they suggest a steeper yield curve, which should positively impact our future trajectory. These are the main points I would highlight.
Betsy Graseck, Analyst
Right. And the 30% and 50% that's on total IB deposits or total deposits, what's your denominator?
John Stern, CFO
Total IB, total interest-bearing deposits. Yeah.
Betsy Graseck, Analyst
Yeah. Super. Thanks so much.
John Stern, CFO
You bet, Betsy.
Operator, Operator
Your next question comes from Erika Najarian from UBS. Your line is now open.
Erika Najarian, Analyst
Hi, good morning. Just a few follow-up questions. First, on John's previous question.
Operator, Operator
Sorry, Erika, we’re having trouble hearing you.
Erika Najarian, Analyst
Can you hear me better now?
Andy Cecere, Chairman and CEO
Yeah, that's better. Thank you.
Erika Najarian, Analyst
Okay. I wanted to follow up on John's question. You mentioned that $10 billion of notional was sold. Could you provide the average yield of what was sold and what you invested in, so we can understand the impact for the fourth quarter? Also, following up on Betsy's question, you noted a 30% beta and mentioned the terminal would be above 50%. As we look towards the fourth quarter, do you anticipate a gradual increase to that 50%, or do you expect it to accelerate significantly from the initial 30% beta?
John Stern, CFO
Sure. So, maybe I'll just take those in pieces. The first one on the securities book, I think it was just an opportunity there to remix in a couple of different things. And it was really there to improve our liquidity profile as well as some lower-yielding securities that have seasoned to reposition those. So, it's just a number of different securities. So it's hard to just summarize it in one thing. But I would just say on the beta side of things, 30% or so terminal beta, I think that just is a gradual increase as we look forward. And the reason for that is on the institutional side, you're going to get that benefit on each cut. On the retail side, you're going to get that benefit, it's kind of as I mentioned in the past, kind of an arc to the retail pricing sort of thing. And so as CDs reprice and as the money market rates come down on retail, that's going to be kind of that glide path into the 50% terminal that I spoke to earlier.
Andy Cecere, Chairman and CEO
And John, everything you mentioned, which is absolutely correct, is reflected in your flat or stable net interest income projection for the fourth quarter.
John Stern, CFO
That's exactly right. Yeah.
Erika Najarian, Analyst
Got it. My second question is for you, Andy, and it’s a broader inquiry. You hosted a very comprehensive Investor Day, and I think the investor response, as reflected in the stock performance, was probably not as favorable as expected. Considering the feedback from investors, could you address this again during the call? You seem determined and have demonstrated positive operating leverage. Perhaps share some quick insights on 2025. The comments regarding the Southeast expansion were also mentioned as a potential concern. Lastly, you are now positioned to build capital, but loan growth hasn't returned yet. What would enable you to act more aggressively and quickly on that $5 billion authority?
Andy Cecere, Chairman and CEO
I'll address your points one at a time, Erika. First, I believe the team did an excellent job of explaining our strategy at Investor Day, which included a discussion about reaching an inflection point. This involves managing expenses, achieving operating leverage, and driving stronger revenue growth due to the interconnectedness of our businesses, and we are on track with all of these. I think both analysts and investors are looking for examples and evidence of execution, and this quarter has marked the beginning of that execution. As for operating leverage, we anticipate it will continue to improve into the fourth quarter and into 2025, and we are committed to delivering on that. Secondly, regarding the M&A environment, we are not prioritizing large bank mergers and acquisitions at this time; our main focus is on organic growth and the elements that Gunjan mentioned. I will now ask her to highlight some key aspects of that.
Gunjan Kedia, President
Good morning, Erika. As we shared during the Investor Day, we do have very meaningful organic growth opportunities in our portfolio. And as Andy said, our attention is very much on executing against those priorities, deepening our client relationships, enhancing our product interconnectivity and broadening our reach. We are very focused on delivering meaningful positive operating leverage and the execution that goes with it. We have optimized our distribution via investments in our digital capabilities and our Southeast expansion is very much focused on our partnerships and our digital capabilities. Thank you.
Andy Cecere, Chairman and CEO
Thanks, Gunjan. Finally, regarding capital, we expect to initiate some level of modest buybacks soon. We plan to build on that once we have more clarity on Basel III and the capital rules, as well as considering loan growth, which is also an important factor. Despite all of this, we still anticipate meeting our capital targets even under CAT II when we reach that threshold, which we previously mentioned is not expected until 2027.
Erika Najarian, Analyst
I would like to follow up on that. The Basel III regulations shouldn't have a significant impact on you, aside from the fact that everyone has already accounted for the effect of AOCI sooner than the eventual implementation of Basel III. As a regional bank, do you believe you're just being cautious and not taking aggressive steps ahead of the new revisions? Or are you also taking into account that the ratings agencies are curious about the situation? I understand you're planning to initiate buybacks in the first quarter, but it seems to be a crucial factor for long-term investors looking to increase their positions in U.S. Bank.
Andy Cecere, Chairman and CEO
Yeah. All those constituencies you talked about are factors in our thinking. Loan growth, the final capital rules, the rating agencies, those are all factors. But we're very confident in our accretion ability as you saw this quarter, 20 basis points, we've articulated 20 to 25. We're very comfortable with our capital position, and we're very comfortable with the ability to start to buy-back and distribute as well as accrete, the level of which we'll continue to determine and judge over time, given all those factors you talked about.
Erika Najarian, Analyst
Thank you, Andy.
Andy Cecere, Chairman and CEO
You bet, Erika. See you.
Operator, Operator
Your next question comes from Mike Mayo from Wells Fargo Securities. Your line is now open.
Andy Cecere, Chairman and CEO
Good morning, Mike.
Mike Mayo, Analyst
Hi. Good morning. I have a follow-up question. Are you considering acquiring a bank in the Southeast, given the recent discussions?
Andy Cecere, Chairman and CEO
No.
Mike Mayo, Analyst
Not even a small bank?
Andy Cecere, Chairman and CEO
Mike, the environment right now is just not conducive. There's too much uncertainty for M&A, and I don't want to focus all our efforts on that when we have so much opportunity on the organic growth front. So, in this role, what you do is prioritize against the opportunity set you have in front of you and our organic growth opportunities are far more important and much more tangible to us right now. And as you know, Mike, the M&A environment is just so uncertain right now that would not be a good place to focus our efforts.
Mike Mayo, Analyst
Okay. So my main question here goes back to the operating leverage, which is how much of this is expenses versus revenues? And on the expense side, your investments in the last three, five more years, it's all-in the run-rate as you said at Investor Day. And how much benefit do you get from being a scale player because some smaller banks say they can just buy a lot of these things off-the-shelf and compete with the likes of U.S. Bancorp. So that's the expense question. And then the revenue question is, Gunjan, I know you're leading the go-to-market strategy, kind of what stage of that go-to-market strategy, and are we seeing it in the results now or do we expect to see more of that in the results ahead? Thanks.
Andy Cecere, Chairman and CEO
So, Mike, I'll start and then Gunjan will add on. I think to answer your question, I would think about it on both components. I think it's going to be both increased revenue growth and managed expenses. So, as we talked about, we were flattish this time. We might have some modest increase as we go into next year, but we're not going to have expenses growing above revenue levels and I would expect growing revenue and those jaws widening from the expense revenue differential. The revenue will be driven by the activities that Gunjan is focused on, and I'll let her comment.
Gunjan Kedia, President
Good morning, Mike. The go-to-market is in its third and final year of our transformation. So, we are beginning to see the results in some of the areas like the consumer deposit. We built-out a lot of capabilities to manage deposit pricing, and we benefited from that in this downgrade cycle. We are seeing a lot of momentum with our multi-serve clients and deepening our relationships on the institutional side. We saw that with the capital markets growth over this quarter. So, the impact of a good scaled business model is delivering good positive operating leverage, including expense management. So this is what we would continue to focus on from an organic growth standpoint.
Mike Mayo, Analyst
All right. Thank you.
Andy Cecere, Chairman and CEO
Thanks, Mike.
Operator, Operator
Your next question comes from Gerard Cassidy from RBC Capital Markets. Your line is now open.
Andy Cecere, Chairman and CEO
Good morning, Gerard.
Gerard Cassidy, Analyst
Hi, Andy. Hi, John. John, regarding deposit pricing, can you provide insight on the loan to deposit ratios for both the industry and your institution, which appear to be lower than in past cycles? Do you believe this might allow you more flexibility to reduce costs, especially since you mentioned that institutional deposits are index-priced and tend to decrease rapidly? In terms of other deposit categories, do you think you will have the ability to lower those rates as well, given that the loan-to-deposit ratio isn't at 90% or similar levels?
John Stern, CFO
Sure, Gerard. So, I would say that we don't target necessarily loan to deposit ratios. What we look at is holistically just overall serving of our clients, making sure we have the right mix of deposits and loans. And loan growth is obviously going to be a driver or not of deposits and where they're at. This quarter, loans were flat to down just slightly. And so we took this opportunity to bring down some deposits that were at a higher cost side, and you saw that in the results here. And so if that continues, I would continue to expect that. Conversely, if loan growth continues to take up, we're going to be making sure that we have the deposit base to suffice that. The other thing we always try to manage around that is our liquidity needs as well as interest-rate risk profile as well. So, it's kind of more of a holistic nature as it relates to that.
Gerard Cassidy, Analyst
Very good. For Andy or Gunjan, regarding the organic growth strategy, some larger banks, in particular, have been expanding their branch networks across the country, and even a couple of regional banks have done this too. Can you provide insight into how you view the establishment of new branches in potentially new areas, along with your ongoing digital outreach?
Gunjan Kedia, President
Good morning, Gerard. Maybe I'll start here. So first, the branches are very critical to our business strategy. We see deep client relationships anchored around the branch. It really drives brand recognition. And we are very steady in investing in our branch network. Our strategy focus is to create density in the highest-growth areas within our current footprint rather than use branches to expand out of our footprint. And the reason for that is that we have built some very good strong digital capabilities that allow us to deliver our services nationally, and we are combining that with our very strong partnerships with other partners that have brand recognition and client reach in areas where we don't have. It's a powerful combination, it's a capital-light way of expanding into other markets. Second is our national businesses from the institutional side. There we are actually growing client centers in areas where we are not to expand our reach. So, you'll see us continue to invest in our branch network both inside digitally enabling them, but within our current footprint.
Andy Cecere, Chairman and CEO
Very good. Thank you.
Operator, Operator
Your next question comes from Vivek Juneja from JPMorgan. Your line is now open.
Vivek Juneja, Analyst
Hi. Thanks for taking my questions. Just wanted to understand on payments and delve a little bit into that. You had talked last quarter about corporate payments will be lapping this quarter because your tough comps with your trucking-related fees last year, but we didn't really see the benefit of that lap in this quarter. So, anything there that has caused it to be delayed, nor have we seen really merchant payments pickup in terms of year-on-year fee growth? So, any color on what's going on, and why the delay and what gives you confidence that it will actually materialize in the coming quarters?
John Stern, CFO
Sure. So, Vivek, I would start by saying that I think there were still a little aftermath here on the freight side in the third quarter, but we expect that to completely lap here in the fourth quarter. And then we do see corporate spend being stronger. We saw some nice momentum at the end of the third quarter and into the fourth quarter, and that's what's really giving us the confidence that, that will grow from the level that you saw in this quarter's results from a corporate payments perspective.
Gunjan Kedia, President
Maybe, John, I'll add. Good morning, Vivek. Just a little point on the long-term expectation for payments. Where payments is in the mix with the client relationship, it creates really sticky enduring relationships. We do see good core growth in many of the categories of payments. They are partially offset by some unique items, freight is one of them, which was very disrupted post-COVID and just is beginning to normalize and there are some others as well. So the long-term confidence question that you asked is we look at the client value, and we look at the core dynamics and you'll see that continue to improve over time.
Vivek Juneja, Analyst
Thank you for that. I have another follow-up for John. John, one of your earlier comments in response to a question caught my attention. You mentioned that expenses increased because net interest income rose. Is there performance-based compensation linked to the growth of net interest income, or is there something else that would cause expenses to rise along with an increase in net interest income? Can you provide any additional insights on that?
John Stern, CFO
Yeah, Vivek, there's no connection. What I was trying to convey is that in the fourth quarter, we have clear visibility on our expense levels. We're just being more accurate with that. I was comparing it to our net interest income, which has risen and is at the higher end of our range. I was simply making a comparison. There's no connection from a compensation perspective in that context. So, to sum it up, we'll just be more precise.
Vivek Juneja, Analyst
Okay. Thank you.
Operator, Operator
Your next question comes from Ebrahim Poonawala from Bank of America. Your line is now open.
Andy Cecere, Chairman and CEO
Good morning, Ebrahim.
Ebrahim Poonawala, Analyst
Good morning, Andy. I guess one question maybe first on fees, and I appreciate you're not talking about '25 right now. But just talk to us in terms of the linkage of the fee momentum accelerating from this mid-single digits into next year. And how much of that is dependent on loan growth picking up or how much of that can happen where even if loan growth or loan demand is fairly muted in the first half, we see better fee revenue momentum being a differentiator for USB?
John Stern, CFO
Sure. During our Investor Day, we mentioned that our financial metric performance would likely range in the mid-single digits. This quarter is a good illustration of that, especially when examining the commercial products, which have benefited from increased loan growth in the capital markets. We have also expanded our offerings with new products and capabilities in this area. The mortgage segment continues to experience healthy growth as well. Service charges will begin to reflect the changes related to the ATM exit starting in 2025. Corporate trust is showing very strong growth rates, partly driven by market conditions. As this sector develops, we are seeing good momentum. Gunjan also discussed our growth in the payments area. Overall, these factors combined give us strong confidence in achieving that mid-single-digit growth from a medium-term perspective.
Gunjan Kedia, President
Ebrahim, I would like to add that we have a well-diversified fee mix. Currently, we are experiencing significant growth in capital markets, which is impacting loan growth. However, our capital markets businesses are performing very strongly. Additionally, wealth management is having a great year due to the strength of the stock markets, which benefits our investment services. As the interest rate environment shifts, we anticipate that mortgages will gain momentum. As we look ahead to next year, it's not about any single factor but rather the diversified mix that interacts positively depending on different macroeconomic conditions.
Ebrahim Poonawala, Analyst
That's helpful. And I guess one follow-up, John. When I look at the 7 basis points NIM expansion, I think you mentioned $10 million lift from the bond book restructuring, that's probably 1 basis point. Should we expect the 7 basis point expansion as getting better as we move forward with a couple more rate cuts this year, the back-book repricing? Like, how should we think about the cadence of the NIM from your ex any kind of bond restructuring actions? And is it conceivable that we could be at a 3% NIM in the back-half of next year?
John Stern, CFO
Certainly. To elaborate on a few points, we anticipate relative stability in net interest income for the fourth quarter. Our earning assets are expected to remain flat, with asset and liability repricing essentially balancing each other out. This is our perspective on stability for the fourth quarter. Additionally, we have positive momentum as we continue to shift our assets towards higher-return areas of the portfolio and our ability to reprice deposits, both on the institutional and retail sides. Moreover, we have noted that our deposit rotation is slowing down and is effectively complete, which supports growth and ongoing expansion. While I can't specify when we will reach a 3% net interest margin, it's a reasonable benchmark to consider and is reflected in the medium-term guidance we shared during Investor Day.
Ebrahim Poonawala, Analyst
One last question, Andy. You mentioned at the Investor Day about the 2027 goal of becoming a CAT II bank. Does that create any constraints when considering loan growth? Is there any reason to think that USB might be at a disadvantage for pursuing loan growth next year because you are focused on reaching the $700 billion asset threshold? Please address this specific point if you could.
Andy Cecere, Chairman and CEO
No, there's no constraint on our loan growth. The loan growth activity right now is more a function of demand and consistent with the market overall and the HA data that you're seeing, and we have no constraints on loan growth. And again, as a reminder, Ebrahim, the way it works is, you are at that $700 billion for four quarters on average, so when we think about '27, that's four quarters of impact, so we have no constraints on our assets or our balance sheet.
John Stern, CFO
And we would expect that our growth will be in line with the industry.
Andy Cecere, Chairman and CEO
The industry, which is GDP, GDP-plus.
Ebrahim Poonawala, Analyst
Got it. All very clear. Thank you so much.
Andy Cecere, Chairman and CEO
Thank you.
Operator, Operator
Your next question comes from Matt O'Connor from Deutsche Bank. Your line is now open.
Andy Cecere, Chairman and CEO
Good morning, Matt.
Matt O’Connor, Analyst
Good morning. I think you guys announced that you were looking for a new payments head and were looking externally, and we're just wondering if you could update us on if there's any updates on that. And then I guess, what type of person are you looking for? And is it to kind of continue the strategy that you had or potentially re-evaluate some areas? I think there's the general view that maybe you could do more with payments, given what the revenue pool out there is overall, and that you kind of underpinned a little bit. So I don't know if you would agree with that, but what's the thought in terms of what you're looking for in the new leadership? Thank you.
Gunjan Kedia, President
Matt, good morning, it's Gunjan, and we are indeed excited to be out in the market looking for new leadership for payments. We have a lot of interest in our franchise. It's unique, it's different, it's very important for us, and we do have big aspirations for not just a standalone, sort of, payments franchise, but how much it embeds and integrates with the everyday lives of our customers. So with that, we are looking for someone who is talented from a payments perspective, but culturally embraces this concept of an interconnected set of solutions for our client base. And that's what we are looking for. And as just to reiterate what we shared, we have a long transition time, very grateful that Shailesh has given us enough time to plan a very smooth and careful transition.
Matt O’Connor, Analyst
And I guess just from a strategic point of view, and this isn't really trying to lead you one way or the other, but like, are you set on kind of the long-term strategic path that you have in payments or are you open to potentially fairly decent size changes one way or the other? Again, not really a leading question, but it seems like it might be an opportunity to take a fresh look and look for some opportunities that maybe you haven't before.
Gunjan Kedia, President
Thank you, Matt. We have deep conviction around the strategy and the path that we are on today. When you meet clients and you see the impact of the payments product sets on the relationships we have, you sort of build that conviction. So the question that we are focused on is how do you execute perhaps differently? How do you accelerate the execution? How do you stay current with the digital capabilities? And all of the strategies that we shared with you on Investor Day are really focused on accelerating the how, rather than sort of rethinking our strategy where we do have a lot of conviction that payments becomes the center point of how people manage their day-to-day lives, and it needs to be embedded in every product, every relationship that we have.
Matt O’Connor, Analyst
Okay. That's helpful. Thank you.
Andy Cecere, Chairman and CEO
Thanks Matt.
Operator, Operator
Your next question comes from Mike Mayo from Wells Fargo Securities. Your line is now open.
Mike Mayo, Analyst
Hi, just a follow-up to my earlier question related to the benefits of scale and specifically AI. Do you look to be an AI leader or a close follower, or do you think you can get those tools off the shelf and you'll just wait and see in the context of the benefits of scale, again, after your years of investing?
Andy Cecere, Chairman and CEO
Yeah, Mike. So as you know, we do have scale, we invest $2.5 billion a year in technology and technology initiatives. We did a great job with the digital capabilities, we highlighted those at Investor Day, and we're following that same model with the AI initiatives, which is the center of excellence and then the business lines surrounding them in terms of use cases. As we talked about, we have a number of use cases underway. I would say, traditional AI, we've been doing for a while, Generative AI is in the early innings, and what is important is we have a structure, expertise, leadership, and technology to deliver on it, but it is early innings.
Mike Mayo, Analyst
Okay. Just a quick follow-up from Investor Day regarding the digital strategy. You mentioned spending the entire day with management in New York City, and while more information is always better, I'm curious about the concept of moving into markets with fewer branches and implementing the digital strategy in that context. Are there any other banks or non-banks that have successfully used this approach? We've heard many stories over the past two decades, and they haven't always yielded positive results. Eventually, you might end up needing more branches than anticipated. So, that's just a brief clarification from Investor Day regarding the digital strategy.
Andy Cecere, Chairman and CEO
Yeah. I think for the strategy to work, I think you have to have a couple of key components. One is the digital capabilities to allow it to work with the other partner. The second is a partner who has the need from a banking product standpoint for their customer base, and then alignment in terms of how that gets done. And I think both with State Farm and certainly with Edward Jones, those pieces are in place, and we've seen good results on that. So opening up core banking products, checking accounts, savings accounts outside of our market through that partnership, we have strong conviction on, and we believe it will be successful because of those attributes. Gunjan, what would you add?
Gunjan Kedia, President
Mike, I want to emphasize that we've been engaged in the partnership business for quite some time. We have a robust franchise called Elan, which acts as a white label credit card provider for other banks. This requires a unique skill set to ensure these partnerships are successful. Many of these collaborations have limitations on the number of products we can offer. To your point, there may be an opportunity to consider expansion in the future. For instance, we have organically expanded in Charlotte and are in the process of establishing additional branches there. Regarding our core products, we have developed both the digital and operational capabilities needed to effectively service customers in new areas, and we are becoming adept at this. Currently, we are expanding our efforts with Edward Jones, and as Andy mentioned, we are experiencing promising early success and momentum, which serves as a solid foundation for increasing our presence in markets where we are currently absent.
Mike Mayo, Analyst
Thank you.
Andy Cecere, Chairman and CEO
Thanks, Mike.
Operator, Operator
There are no further questions at this time. Mr. Andersen, I turn the call back over to you.
George Andersen, Senior Vice President and Director of Investor Relations
Thank you, and thanks to everyone who joined our call this morning. Please contact the Investor Relations department if you have any follow-up questions. Ellie, you may now disconnect the call.
Operator, Operator
Thank you. This concludes today's conference call. You may now disconnect.