The U.S. Bancorp Second Quarter 2024 Earnings Conference Call began with a review of the results, followed by a question-and-answer session. The call was led by Senior Vice President and Director of Investor Relations, George Andersen, and joined by Chairman and CEO, Andy Cecere; Vice Chair and CAO, Terry Dolan; and Senior Executive Vice President and CFO, John Stern. The company reported diluted earnings per share of $0.97, with a notable item related to the FDIC special assessment. Excluding this charge, earnings per share were $0.98. The quarter saw an increase in net interest income, continued fee income growth, prudent expense management, and strong capital accretion, resulting in a return on tangible common equity of 18.6%.

The company's revenue growth for the quarter was driven by improved spread income and growth in fee-based businesses. Non-interest expenses were down due to cost synergies and efficient management. Credit quality was stable and there was growth in consumer deposits. The company's tangible book value and capital ratio also increased. Fee income represented a significant portion of total net revenue and saw growth in various businesses. The company is focused on deepening client relationships and expanding their product set.

In the third paragraph, John Stern provides a balance sheet summary and discusses the trends in second quarter earnings. Total average deposits increased, driven by stable institutional and consumer balances. Noninterest-bearing deposits decreased, but at a slower pace as the company focuses on retaining and growing core relationships. Average total loans also increased, offset by lower commercial real estate and other retail loans. The company also increased its investment portfolio with short-term, high-quality securities, resulting in a higher average yield.

The article discusses the expected performance of the investment portfolio and credit quality metrics for the company. Delinquencies remained flat, while non-performing assets increased slightly. The net charge-off ratio also increased, but is expected to stabilize in the second half of the year. The company reported $0.97 per diluted share in the second quarter, including a $0.01 charge for an FDIC special assessment. Net interest income increased by 0.9% due to deposit growth, pricing stabilization, and other actions. However, net interest margin declined by 3 basis points due to elevated deposit levels and higher on-balance sheet liquidity.

Slide 11 shows that noninterest income increased due to higher fee income, but was partially offset by a decrease in commercial product revenue and losses on investment securities sales. Noninterest expense decreased slightly on a linked-quarter basis and decreased significantly on a year-over-year basis. Slide 13 highlights the bank's common equity Tier-1 ratio, which improved compared to last year and is well-positioned to manage potential industry stress. Slide 14 provides forward-looking guidance that is consistent with previous guidance.

The paragraph discusses the expected net interest income for the third quarter and full year of 2024, as well as the projected growth in noninterest income and expense management. The speaker, Andrew Cecere, emphasizes the resiliency of their business model and their focus on core competencies and investments. They are confident in their ability to continue delivering strong returns in the future and thank their employees for their contributions. A question from Scott Siefers is mentioned at the end.

The speaker, John, discusses the growth of net interest income and the actions taken to position the company for the future. He expects stable third quarter net interest income and growth in the following quarters, with factors such as deposit rotation, rate paid, and earning assets affecting the outcome. Loan growth is expected to be modest.

The speaker discusses the factors that will impact the company's performance in the next few quarters, including the actions of the Federal Reserve and potential loan growth. They also mention that the loan growth environment remains tepid, but there were pockets of growth in the corporate loan book this quarter. The speaker also mentions that the NII for the fourth quarter could potentially reach $4.3 billion.

John Stern, speaking about the potential trajectory of the NII in a rate cut scenario, explains that the bank is well positioned due to its mix of retail and institutional/corporate deposits. In a cut environment, institutional and corporate balances will decrease, but retail balances may take some time to reprice. This gives the bank an advantage as the curve steepens. On the fee revenue side, the bank expects solid growth driven by payments, trust investment management fees, and capital markets.

The company is seeing strong core competencies and positive developments in various areas of their payment business, such as merchant processing, tech-led services, corporate payments, and credit cards. They also have a strong market backdrop for their trust and investment management fees and capital markets. The company expects mid-single-digit growth in fees. They have seen a modest increase in utilization rates, which may be due to a combination of industries and new geographies.

The speaker believes that the recent increase in utilization investment is not a new trend, but rather a result of a shift in loan mix. The credit outlook for the back half of the year remains stable, with net charge-offs expected to approach 60 basis points. The company is appropriately reserved for their current book, but saw a slight increase in reserve build due to growth. The speaker believes that the recent increase in utilization investment is not a new trend, but rather a result of a shift in loan mix. The credit outlook for the back half of the year remains stable, with net charge-offs expected to approach 60 basis points. The company is appropriately reserved for their current book, but saw a slight increase in reserve build due to growth.

The speaker discusses their company's impressive balance sheet growth and unexpected stress test results. They mention the impact of MUFG and managing risk-weighted assets. They also address the recent increase in fee income and their priorities for capital distribution.

The speaker discusses the company's stress test and planned capital distribution, which includes a 2% increase in the quarterly dividend. The company's CET1 ratio is currently at 10.3% and they expect to continue to accrue capital each quarter. The final Basel III endgame rules will impact their capital and distribution targets, and they will provide updates on this at their upcoming Investor Day. Going forward, the company expects most of their capital accretion to come from normal earnings, with an expected increase of 20-25 basis points per quarter. The speaker also mentions the payments business, but does not provide further details.

The sequential math for the company's year-over-year growth in the first and second quarters seemed to slow down, but the company expects momentum to pick up due to easier comps in the second half. The merchant processing business has seen strong growth and margin expansion, while the retail card business has seen strong credit card spend. However, there have been some headwinds in travel volumes in Europe and risk mitigation around prepaid cards. The corporate side is also expected to see an inflection point as they start lapping freight and fleet expenses and their bank card is performing well.

The speaker believes that corporate payments will see strong rates in the fourth quarter due to the lapping of a fleet. They also expect NII to grow nicely, but the exact amount will depend on deposit behavior and the possibility of a Fed rate cut. The second quarter saw good trends in rotation out of DDA, but this pace has slowed and deposit growth is not expected in the next quarter due to QT and market liquidity. The speaker also notes that the competitiveness of deposit rates will be a factor to watch.

John Stern responds to a question from Mike Mayo about the bank's projections for rate cuts in September and December. He confirms that the bank has assumed these rate cuts and explains that they will impact the investment portfolio, which is about half floating rate. He also addresses Mayo's math regarding the fixed asset repricing on securities and mortgages, and mentions that these four items will offset any potential growth in NII from these assets.

John Stern, a representative from the company, discusses the potential impact of the Federal Reserve's interest rate cuts on deposits. He explains that while institutional deposits may shift immediately, retail deposits may take longer to adjust. The company anticipates a stable third quarter due to the gradual movement of rates within the quarter. Stern also mentions that the mortgage book is expected to reprice upward by 7 basis points per quarter, similar to the security. The ratio of noninterest-bearing deposits to total deposits has been decreasing, but the pace of this decline has slowed. The company's all-time low for this ratio is 16.2%. Stern explains that the behavior of clients will determine the future of this ratio. He also refers to a chart on Slide 7 that shows the slowing migration of deposits out of the company.

Gerard Cassidy asks about the decrease in yield for the money market savings category in the bank's average balance sheet. John Stern explains that they have been strategically pricing their deposits and utilizing their distribution network to grow deposits in areas with lower costs. Cassidy also asks about the utilization rate for C&I loans and what commercial clients are thinking about in terms of CapEx spending.

During a recent CEO survey, clients expressed a focus on defense rather than offense, prioritizing productivity, efficiency, and expense management. This has led to a modest increase in utilization rates for C&I loans. However, competition from both banks and non-banks remains strong, driving pricing but not significantly changing underwriting standards. In terms of payments, the company expects lower growth for the full year, but the medium-term outlook remains the same.

The company has not changed its medium-term growth rate outlook for its payment businesses. They expect high single-digit growth for merchant and corporate payments and mid-single-digit growth for credit and debit cards. They had 4% and 3% growth in the last two quarters and expect momentum to continue. The company is well-positioned in the market. They have chosen to mitigate risk in prepaid cards due to increased fraud. This may have a slight impact on growth in the third quarter. A question was asked about the impact and duration of this risk mitigation.

The speaker discusses the slow growth in merchant volume and attributes it to lower sales in the travel industry. They also mention that charge-offs are expected to increase to 60 basis points in the second half of the year, primarily due to one unique loan. The speaker does not anticipate any major issues in the C&I book.

The speaker discusses the company's charge-offs and mentions that they are not concerned about one specific charge-off. They expect charge-offs to look like the first quarter in the third and fourth quarters, with the majority in commercial real estate. The speaker also mentions that delinquency levels are stable, which drives stabilization on credit card. The company had one idiosyncratic loan in the second quarter, but it was manageable. The speaker also provides color on the company's capital and mentions that they are still on the sidelines for buybacks, but this could change depending on factors such as pull to par on the AOCI side, Basel III clarity, and rate clarity.

Andrew Cecere discusses the confidence in U.S. Bancorp's capital levels and ability to accrete capital. He also mentions seeking clarity on CCAR and Basel III endgame and plans to update on capital targets and distribution objectives at Investor Day. He reiterates confidence in achieving positive operating leverage in the second half of the year and provides insight into how to think about USB's operating leverage in the medium term.

The company's expenses were relatively flat this quarter and they expect moderate expense growth going forward. They anticipate continued momentum in fee growth and a potential tailwind from net interest income in the future. The company's automobile loan portfolio has decreased by over 30% due to unattractive returns in the current market, but they continue to monitor and participate in certain areas of the market.

A question is asked about the bank's growth in cards, and the CEO confirms that the difference between fee growth and sales is due to prepaid cards. He also mentions strong trends in credit card spend and partnerships. Another question is asked about deposit dynamics and the CEO clarifies that there was a 5% decline in noninterest-bearing deposits, but it is not a cause for concern.

The speaker discusses the volatility in NIB deposit levels due to corporate trust business and emphasizes the importance of looking at average balances rather than day-to-day fluctuations. The questioner asks about recent management changes and the speaker responds by saying that there will be a mix of familiar and new faces at the upcoming Investor Day. He also mentions the recent change in roles and the combination of two groups within the company.

The speaker discusses the positive impact of a previous leadership change and how the current leader is working towards the goal of creating a unified bank. They also address recent departures from the senior leadership team and clarify that it is a natural occurrence. The theme for the upcoming conference is "One USB," highlighting the goal of delivering the entire firm to clients. The speaker also addresses the increase in yields in the securities book and provides information on the percentage of floating bonds and the use of swaps in the book.

The company's securities book saw a 19 basis point increase due to investing excess liquidity in short-dated treasuries and treasury swaps. About 40% of the risk has been hedged, and the company has also put receive fixed swaps on their corporate book to protect against falling rates. This puts the company in a neutral position in terms of interest-rate risk. The company's expense outlook is $16.8 billion or less, and they are confident in their ability to manage expenses going forward.

The speaker, Andrew Cecere, thanks Ken Usdin for his question and the operator announces that there are no further questions. The call is turned back over to George Andersen, who thanks everyone for joining and invites them to contact Investor Relations for any follow-up questions. The operator then concludes the call.

This summary was generated with AI and may contain some inaccuracies.