Q2 2021 U.S. Bancorp Earnings Call
Welcome to U S Bancorp second quarter, 'twenty 'twenty, 1 earnings conference call.
Let me give a review of the result by Andrew says theory, Chairman, President and Chief Executive Officer, and Terry Dolan, Vice Chair and Chief Financial Officer, there'll be a formal question and answer session. If you would like to ask a question. Please press star 1 on your Touchtone phone and press the pound key to withdraw.
This call will be recorded and available for replay beginning today at approximately 11, a M. Central time Zone Thursday July 22nd 'twenty 'twenty, 1 at 10.59 P M central time.
I'll now turn the conference call over to Jen Thompson director of Investor Relations and economic analysis for U S Bancorp.
Thank you Ashley and good morning, everyone with me today are Andy So sorry, our chairman President and CEO and Terry Dolan, Our Chief Financial Officer also joining us on the call are our chief risk Officer, Jodi, Richard and our Chief Credit Officer, Mark Runkel.
During their prepared remarks, Andy and Terry will be referencing a slide presentation.
Copy of the slide presentation as well as our earnings release and supplemental analyst schedules are available on our website at U S Bank Dot com.
I'd like to remind you that any forward looking statements made during today's call are subject to risk and uncertainty factors that could materially change. Our current forward looking assumptions are described on page 2 of today's presentation in our press release and in our form 10-K, and subsequent reports on file with the SEC I'll now turn the call.
All over to Andy.
Thanks, John Good morning, everyone and thank you for joining our call. Following our prepared remarks, Terry Jodi, Mark and I will take any questions you have.
I'll begin on slide 3 in the second quarter, we reported earnings per share of $1.28, released $350 million on loan loss reserves. This quarter supported by our outlook on the economy and continued improvement in credit quality metrics, the pace of which has been better than expected.
Net revenue totaled $5.8 billion in the second quarter.
As expected net interest income grew in the second quarter, while our fee businesses benefited from improving consumer and business spending trends.
Notably as of late June total sales volumes for each of our 3 payments businesses credit and debit card merchant acquiring and corporate payment systems. We're above 2019 levels for the first time since the beginning of the pandemic.
Our expenses were relatively stable compared with the first quarter.
Turning to capital our book value per share totaled $31.74 at June 30th which was 4% higher than March 31.
During the quarter, we returned 79% of our earnings to shareholders in the forms of dividends and share buybacks.
Following the results of the Federal Reserve stress test in late June we announced that management will recommend on our board of directors approved a 9.5% increase in our common dividend in the third quarter payable on October.
Slide 4 provides key metrics, including a return on tangible common equity of 29%.
Slide 5 highlights continued strong trends in digital activity.
Now, let me turn the call over to Terry will provide more detail on the quarter. Thanks.
Thanks, Andy.
Turn to slide 6 I'll start with a balance sheet review, followed by a discussion of second quarter earnings trends.
Average loans were stable compared with the first quarter in line with our expectations strong demand for installment loans drove other retail loan growth, while C&I loans increased 0.9% supported by strong growth in asset backed lending, partly offset by continued pay down activity in other C&I categories.
We saw a decline in residential mortgage loans.
The increased paydowns.
Average credit card loan balances were stable compared with the first quarter as the payment payment rates remained high at 38%, reflecting the significant level of consumer liquidity. However period end balances increased 4.5% on a linked quarter basis as we saw.
Some pickup in activity toward the end of the quarter.
Turning to slide 7 average deposits increased 0.7 per cent compared with the first quarter and grew by 6.4 per cent compared with a year ago, reflecting the significant level of liquidity in the financial system.
Our overall deposit mix continues to be favorable in the second quarter, our noninterest bearing deposits grew 5.9% linked quarter, while time deposits declined by 8.1%.
Time deposits now account for 6% of total deposits compared with 11% a year ago.
Slide 8 shows credit quality trends, which continued to be better than expectations. Our net charge off ratio totaled 0.25% in the second quarter compared with 0.31% in the first quarter the.
The ratio of nonperforming assets to loans on other real estate was 0.36% at the end of the second quarter compared with 0.41% at the end of the first quarter.
We released reserves of $350 million this quarter reflective of better than expected credit trends and a continued constructive outlook on the economy.
Our allowance for credit losses as of June 30th totaled $6.6 billion or 2.23 per cent of loans the.
The allowance level reflected our best estimate of the impact of improving economic growth and changing credit quality within the portfolios.
Slide 9 provides an earning summary in the second quarter of 2021, we earned $1.28 per diluted share.
These results include the reserve release of $350 million.
Slide 10, net interest income on a fully taxable equivalent basis of $3.2 billion increased 2.4% compared with the first quarter, primarily driven by higher yields and volumes in our investment securities portfolio and favorable earning asset and funding mix shifts partly offset.
Net by lower loan yields.
Our net interest margin increased 3 basis points to 2.53%.
The impact of lower loan yields was more than offset by a favorable mix shift in both our investment portfolio and funding composition as well as lower premium amortization expense.
Slide 11 highlights trends in non interest income.
Compared with a year ago noninterest income was relatively stable as the expected decline in mortgage banking revenue in commercial product revenue was offset by higher payments revenue Trust and investment management revenue Treasury management fees and deposit service charges.
On a linked quarter basis non interest income increased 2.
10.0% driven by higher business and consumer spending activity, reflecting broad based re openings of local economies.
Both year over year and linked quarter mortgage banking revenues were negatively impacted by slower slowing refinancing activity and reduced gain on sale margins linked quarter mortgage revenue growth of 15.7% was primarily driven by the favorable linked quarter impact of a change.
The fair value of mortgage servicing rights net of hedging activities.
Slide 12 provides information on our payment services business in the second quarter total payments revenues increased 39, 5% versus a year ago and was higher by $16.4 per cent compared with the first quarter.
Each of our 3 payments businesses saw strong revenue growth on both a linked quarter and a year over year basis reflective of the strengthening economy and the increased spend activity.
Credit and debit card revenue increased 39.4% on a year over year basis, driven by stronger credit card sales volumes and higher prepaid card processing activities related to government stimulus programs.
Sales volume trends, which are the primary driver of payments revenues are encouraging the bottom charts on slide 12 indicate that as of the end of June total sales volumes across each of the 3 payments businesses exceeded comparable 2019 levels CERN pandemic impacted spend categories continue to lag.
In particular corporate T N E. However, consumer travel and hospitality spend volumes are rebounding faster than we expected and the pace of improvement in recent weeks has accelerated a bit.
Turning to slide 13 noninterest expenses.
Was relatively stable on a linked quarter basis as expected.
Slide 14 highlights our capital position, our common equity tier 1 capital ratio at June 30th was 9.9% compared with our target CET 1 ratio of 8.5 per cent.
Given improving economic conditions in the second quarter, we bought back $886 million of common stock as part of our previously announced 3.0 billion dollar repurchase program.
I'll provide some forward looking guidance.
For the third quarter of 2021, we expect fully taxable equivalent net interest income to be relatively stable compared to the second quarter.
We expect total payments revenues to be relatively stable compared to the second quarter, but we'll continue to track favorably on a year over year basis, while we expect sales volumes growth in each of our 3 payments businesses to continue to improve sequentially prepaid card volumes are expected to decline towards pre pandemic levels.
As the impact of government stimulus dissipates.
We expect noninterest expenses to be relatively stable compared to the second quarter credit quality remains strong over the next few quarters. We expect the net charge off ratio to remain lower than normal for the full year of 2021. We expect we currently expect our taxable equivalent tax rate to be approximately 22.
Percent I'll hand, it back to Andy for closing remarks.
Thanks, Terry our second quarter results came in as expected and there are many reasons, we are optimistic as we head into the second half of the year.
The economy continues to recover towards pre pandemic activity levels, and the consumer and business spending activity continues to improve.
Credit quality trends had been had been a positive surprise and our payments volumes from come back a bit faster than we expected as recently as a few months ago.
We are well positioned for the cyclical recovery that we expect to play out over the next several quarters more importantly, we are well positioned to deliver on superior growth and industry, leading returns on equity over the next several quarters, given our business mix, our comprehensive and holistic payments and banking capabilities and our expansive distribution model supported by World class digital capabilities.
I'd like to thank our employees for their hard work and dedication throughout the year, we will now open up the call to Q&A.
At this time you have a question. Please press Star then the number 1 on your telephone keypad.
And your first question comes from that secrecy with Morgan Stanley.
Hi, good morning.
Okay.
Hi, I just wanted to dig in a little bit to the guidance on some of the discussion there around the payments business I think you mentioned that.
Hmm.
Payments came in a little faster than I expected I know you were expecting that the payments revenues would accelerate into Q.
So you know it came in a little faster than you were expecting but then I think you were mentioning that you've got it flat expecting it to be flat Q on Q, but I just wanted to dig into that.
Is is that because the acceleration rate you think is slowing down here or are you being conservative with the guide for for 3 true.
Yeah, and you know I think it's a combination of things Betsy and maybe just if I kind of talk a little bit about payments again overall I think our 3 themes to kind of keep in mind in terms of the payments businesses in total net as you know the sales.
Volume our momentum continues to be very strong and especially when you exclude the airline and T. Any sort of activities Airlines and <unk> continued to be lagging but are getting stronger in fact, if you listen to any of the airline sort.
Sort of our quarterly results.
The leisure travel is really back to pre pandemic levels and business travel is starting to pick up pretty nicely there.
Other thing I would just say is that you know corporate teeny continues to be the 1 area that is still down quite a bit but it is improving.
But a little bit faster than maybe what we had expected.
The 1 area I would just say or highlight us let me talk a little bit about maybe the 3 components.
If we first take a look at credit and debit card revenue again sales volumes are particularly strong in that area as an example on.
Credit sales in the second quarter, and we would expect it to continue maybe a slightly lower rate but.
Our credit sales in are about 20% when you exclude <unk>.
Travel and entertainment, a debit card sales or about 27%. So you know the second quarter was particularly strong and we expect that type of momentum to continue the 1 thing that I would say, though is that our third quarter of last year was the peak with respect to our.
Prepaid card processing revenue.
And you know that has been slowly normalizing, but we really are kind of expect third quarter to be.
Back closer to what would be a normal level.
The second thing that is going to end up impacting credit and debit card revenue for the third quarters that you know we are taking the opportunity to invest in gross so we're giving up some near term growth opportunity in order to be able to generate.
Customer account acquisition.
The other thing that I would just mention maybe from a prepaid card perspective on a normal basis. It represents about 10% to 11% of that overall credit and debit card revenue category.
And you know, it's that bad factor of it normalize and plus the investment that's really going to cause the overall payment revenues to be fairly stable relative to the second quarter.
Okay. So even though you've got a teeny that is ramping prepaid is really offsetting that as you go into <unk>.
That's really the conclusion, yes.
That's right Alright got it and then maybe you could talk a little bit about the credit box and how youre thinking about that with regard to you know not only the card space, but the overall loan book.
Yeah. So I think we mentioned this last quarter, but you know we're now back to fundamentally the credit box that we had on a pre pandemic level are.
Really across all the product categories.
And your C&I was.
Good.
If I consider the P. P. P. So just wondering what's going on there to generate.
Strength that you saw on the quarter.
Yeah, you know there's a couple of different things you know, we mentioned that our asset backed securitization London.
<unk> has been strong and it's been continuing to improve I think that's 1 of the things that you know we are seeing in that particular category.
The 1 thing, though that we're continuing to watch us that.
The payoffs or Paydowns continue to occur and that's simply because the rate environment are you know the capital markets activity has continued to be fairly strong and I also think it's going to take a little bit of time for our C&I to develop simply because of the amount of liquidity that customers have and are continuing to generate.
Got it okay. Thanks, so much Terry.
Thanks Betsy.
Your next question comes from Matt O'connor with Deutsche Bank.
Good morning, Matt.
<unk>.
So good to see costs flat linked quarter, even though you had a beat and fees and you guided to kind of similar in the third quarter, but you know I asked last quarter as the fees pick up hopefully different by payments and if rates rise on loan growth picks up can you get outsized operating leverage in last quarter you thought.
Your card and that was a plan to hope.
I know you don't give formal guidance beyond 1 quarter out, but <unk> is that still the case that while there's investments to make you would hope for outsized operating leverage as our revenues pick up.
Yeah, I mean, we certainly have that expectation I'm you know I mean, we've made some very nice investments across many different categories within our business, whether it's in the mortgage business, we see the benefit, especially as that starts to shift toward refinance on away from refinancing towards the purchase mortgage on our digital capabilities there will be a.
Will be very beneficial.
I I I think that we continue to see strong growth with respect to.
Auto end of term gains on you know the payments businesses.
Where we've made investments for example in Treasury management sort of capabilities and things like that that is starting to pay off. So the answer is yes, I think we feel very confident that the investments that we have been making are going to allow us to generate some nice fee growth as we think about the future.
And Matt we're going to continue to manage expenses relatively stable with net with the headwinds we have in revenue like you talked about the flat yield curve and margin on loan growth being a little bit challenged but.
Well managed flat in this environment, and then positive operating leverage and a more normal revenue environment.
Okay, and then just separately you recently announced a deal to acquire a part of this.
Hum.
Maybe just.
What is that exactly how does it fit into the U S. B and I had to remind myself I think he had owned an asset management company that you saw it about 10 years ago.
So is this kind of a debt back into a certain business exit or a different part of the investment and wealth management segment.
Yeah, Matt So like you referenced a few years ago, we did sell but that was equities and bond bond business. We continue to retain the money market business and in fact have about $161 billion of assets under management and so this essentially doubles that base with a particular focus on government.
Is the space around government investment pools, and it fits very nicely into our government banking business, our treasury management, and particularly our corporate trust business. So it's a nice add on to a business we're already in but gives us additional scale on customer acquisition.
Okay. That's helpful. Thank you.
Sure.
Your next question comes from John <unk> with Evercore ISI.
Hi, John Good morning, good morning.
On the back on the payment side.
Just as we continue to see the rebound that you're flagging play out.
Could you help us think about how you view the long term growth potential that business.
Perhaps beyond beyond this year, what is a reasonable growth rate to expect out of out of the various payments business.
Then separately.
Are you viewing the attrition in the space any differently today than a couple of years ago and certainly it seems like it's intensifying and and so how do you view that as a dynamic as well thanks.
Yeah. So let me just talk about maybe how we think about it on a longer term basis, certainly when we think about the payments businesses. You know we are we believe that mid single digits us a good target for us to be able to achieve in that particular space. You know we have been making some as I said, it's really nice investments you know the tech led.
Fees for example, within Elevon or a merchant acquiring space today represent about 20, <unk> 28 per cent of the overall elevon revenue on merchant acquiring revenue and it's growing at about that pace as well. So it's a nice business investment that we've made in the tech.
Glad will will.
<unk> contribute to the overall investment as we go.
And then you know I do think that our investments in the Rps digital account acquisition and our Treasury management space in all of those different types of investments on the B to B real time payments are going to.
We're going to have a real opportunity for growth in Treasury management as an example about half of that revenue today represents what I would call it digital or forward leaning type.
Type of revenue products as opposed to legacy products and you know they grow.
At about a 10% to 11% clip. So you know I think that there's some real opportunity for mid single digits or.
Net ballpark anyway, Andy I agree Terry and I think you know in addition on what you said, which is sort of the current case I would I would.
0.2, our focus on business banking and this weaving together of the banking and and payments capabilities into a comprehensive product set and as a reminder, we have on just over 1 million business banking customers with less than a 40% penetration I think presents a lot of opportunity and we've talked about the fact that we expect to grow that revenue base, you know 25 to 30.
Were sent over the next few years. So I think that's an additional opportunity. In addition on what Jerry talked about.
Alright, great. Thanks, that's helpful and then separately on the capital from the CET ratio at 9.9.
<unk> targets fulfilled a half percent.
How should we think about migration down towards that level in terms of timing.
What type of factors are influencing the piece that you that you migrate back towards that target.
Yeah, Great question and you know currently I think we have capacity under our buyback program. It's about a $3 billion program and we have purchased about half of that thus far. So we'll continue to purchase on under that buyback program and then we certainly have the opportunity to be able to expand that or replace it.
In the future.
We think about you.
You know deploying or utilizing capital and kind of along the various priorities organic growth being the.
Really the top priority in the dividend as Andy talked about earlier, then we look at inorganic sort of opportunities you're on to the extent that they might present themselves or a product sort of capabilities and then the buyback program. So that's kind of how we ended up prioritizing. It you know from a timing standpoint, I think we're going to continue to watch.
Watch.
Both from an economic standpoint, but we're just going to be opportunity on opportunistic in the market when it makes sense to be buying back shares.
Got it alright, thanks Derek.
Uh-huh.
Your next question comes from Scott <unk> with Piper Sandler.
Good morning, guys. Thanks for taking the question.
Sure.
I was hoping to start revisit theres nothing of the sort of competitive competitive positioning in payments I think 1 of the big things that I hear on a USD is that the payments businesses. It's just such a wonderful differentiator vis vis other banks, but the sort of the volume trends versus some of your fintech competitors arent as striking now a lot of them are you know.
Much newer companies and stuff like that so it makes it makes sense, but would just be curious to hear your thoughts on sort of competitive competitive positioning overall and what do you think youre doing, especially well, but would might need some some mark down virtually as well.
So Scott this is Andy we I should tell you talked about the investments, we're making on the digital front and the capabilities around software and Tech led and I think that is a really put us.
In a great spot, but I think even more important is this weaving together like I referenced earlier on the banking and payments into a comprehensive product set to help these companies run their businesses. So that that banking payments combination I think is particularly important in the fact that we have strong banking capabilities and strong payments capabilities as I think how good we're going to differentiate.
It ourselves and it's on 2 fronts 1 is to extend.
The current.
Our capabilities to current customers, but more importantly to achieve customer acquisition at a higher growth rate. So that's where we're focused on okay.
Okay, Alright, perfect. Thank you and then maybe separately Teri you can.
Talk about maybe the degree to which you're seeing sort of institutional deposit inflows related.
If at all to like the largest banks may be turning them away given their own sort of thresholds.
And so what what's the way youre thinking about the potential for a sort of kind of customer acquisition on the deposit side, there on the institutional area, but particularly when there's not necessarily a ton.
On a robust loan growth to immediately.
And kind of utilize those funds with us.
Yeah, Great question in on it's a little hard to know exactly what the implications are of other actions that it has on us, but you know maybe when I end up looking at where our growth is occurring that that the strongest growth is really coming from our consumer and business banking segment, rather than on the institutional side you know the institutional is actually.
We probably had been staying relatively flat or even.
Coming down based upon.
You know rates that are being offered et cetera, but you know the strong growth is really on the consumer side and we think that that's because of our digital capabilities and customer acquisition sort of strategies and then the liquidity that customers have.
Okay, Alright, perfect. Thank you guys very much for taking the questions.
Okay.
Your next question comes from Bill cash with Wolfe Research.
Hey, Bill.
Hey, good morning, Andy and Terry I wanted to follow up on on the comments you just made on asked maybe a little bit more specifically, if you could sort of juxtapose for us the growth outlooks in consumer and commercial and talk a little bit about maybe where you see the greater potential for inflection given all the moving parts that we're seeing around the supply chain dynamics and pent up demand and all of them it would be going on.
All of that.
We'd love to hear your thoughts as you kind of look at those businesses next to each other.
Yeah. So so.
So there'll be the opportunity on the consumer side I think continues to be the economic recovery thats occurring and the strength in payments and Terry talked about the trans across all 3 of the payments categories, particularly card spend and even things like travel entertainment, while still lower or weaker than pre pandemic levels coming back strong.
And rapidly so that that's a positive and then we have sort of this secular trend that I talked about which was in the business banking side, which is this combination of payments on business and so those.
The economic recovery on the consumer side, and there's a secular focus on the business side would be the 2 areas I would emphasize.
Got it thank you.
I was hoping that you could give your thoughts on the open banking aspect of buying the executive order, making it easier and cheaper to switch banks by requiring banks to allow customers to take their financial transaction data with them to a competitor just curious if you had any any.
Broad high level thoughts on that.
Yeah, you know 1 of the reasons, we're investing in all of these digital capabilities, because we want to be the very best in terms of digital and have great capabilities to serve our customers and that combined with the human element.
It's complicated and having people. In addition of digital I think is critically important so.
That's how we think we're going to effectively compete in long run and that's what we're focused on.
Got it and if I could squeeze in on 1 last 1.
Any concern around the child tax credits and.
I guess you talked about.
On the improving.
No.
Revenues sort of stable, but improving and like there's been this whole dynamic with payment rates being elevated but hope that they get better.
Through the child tax credits sort of expand there.
On a recovery push it further out or maybe any thoughts on how you guys.
Sir.
Doing that.
Yeah, I mean, I think maybe 1 of the ways to think about it as you know that the child tax credit you know they typically end up getting it on 1 great Big lump sum and now you know when you spread it out kind of on a quarterly basis or a more throughout the year I think it just gives people the opportunity to be able to utilize that maybe a little bit more effectively in terms of pain there.
Their lifestyle sort of bill so I don't think.
I mean, I don't it might change in terms of timing as much as anything but I don't think us necessarily a major driver Andy do you have a different perspective retail you know, we actually we've talked about the payment rate being a high thirties was 38%.
Second quarter, but it's also stabilized it was growing for a number of quarters and which has put pressure obviously on the card balances but stabilization.
Nation on that payment rate combined with increased spend I think will perhaps on me to growth in the next few quarters from the current site.
Thank you for taking my questions sure.
Your next question comes from John Mcdonald with Autonomous research.
John Hey, John Hey, good.
Good morning.
Jerry was wondering if you could unpack a little bit the outlook for next quarter NII, just kind of thoughts on puts and takes on margin versus volume as you look at the stable outlook for net interest income.
Yeah, you know I mean, a big part of that is just you know what rates have done, but you know let me kind of step back I mean, we had a really nice quarter in terms of.
On the growth that was driven in part by the investment portfolio growth that we had in the second quarter. We were opportunistic in investing when the 10 year was kind of a net 175 range.
And we put some cash to work at that particular point in time. We also saw some benefit associated with the premium amortization expense being a little bit lower when.
When we think about you know the second or the next quarter are you know.
I think maybe the puts and takes are going to be we expect loan growth to be relatively flat, but modestly stronger than what we saw on a linked quarter basis on the second quarter.
We are you know our expectation is that the long end of the curve comes up a little bit, but you know is not.
Not much.
And then.
I think that the margin is relatively stable.
So I think when we end up looking at the various components of it you know that's kind of how we think about it loan loan growth.
You know we are seeing it in that asset backed securitization lending.
We do expect consumer lending to get a little bit stronger because of the consumer spend activities are taking place Andy talked about the.
Payments rates have kind of hit we think are high in the credit card space. We saw some nice growth rate at the end of the June timeframe.
And you know while they will continue to be at elevated levels I think that the.
And the fact that they're not increase and there may be coming down a little bit will help credit card balances as well and then maybe when we also think about loan growth on auto lending continues to be very strong and I think it's kind of it's really kind of a combination of all of us different types of things.
Okay, and I'm not sure if you touched on it yet, but any thoughts on the outlook from our mortgage banking volumes and revenues in the near term sorry.
Yeah and on mortgage banking, obviously it hit its high in second quarter of last year.
And then it's been coming down simply because the refinancing activities have been slowing over time, when we think about the mortgage banking business you know.
It.
It has been influenced by that refinancing but.
Today, the mix of purchase versus refinancings about 60% purchased 40% refinance.
Mortgage banking revenues are kind of back to what I would call pre pandemic sort of level that we saw in the fourth in our fourth quarter of <unk> 29.
19 first quarter of 'twenty 'twenty kind of in that ballpark. So you know I actually think that our mortgage banking is kind of back to that pre pandemic level on the investments that we've made in.
You know our digital capabilities, our retail mortgage business in all sorts of things will help.
Help us compete we have been taking market share, especially in the purchase.
Mortgage side of the equation I think that's all kind of beneficial.
Okay. Thank you.
Thanks, John.
Your next question comes from Ken <unk> with Jefferies.
Okay Alright. Good morning, guys I was wondering if I could follow up on PFS and I know details weren't released in the press release, but can you help us think about just what type of contribution that might bring to revenues pre.
Pre tax income earnings et cetera on use of capital.
Yeah.
Again, we have we haven't necessarily disclosed all of that I mean from a capital usage perspective, it would be relatively insignificant.
You know I think that are what are the 1 of the benefits may be of acquiring at this particular point in time is that you know if we do start to see rising rates.
You know the the benefit of recapturing some of the fee waivers that that business has been experiencing that's all upside to how we were thinking about the business. When we ended up acquiring it. So again, a nice a nice acquisition for us because it gets us into that local government investment pool market, we will have a number 1.
Market share in that particular space.
But you know overall from a company perspective, you know it's it's.
It's just complementary to the as the money market asset management business that we have.
And on that point, Terry do you know what your second quarter fee waivers were in the core trust and investment management business and how much that might have changed sequentially.
70, <unk> should improve.
73 million was Q2 are up a little bit from Q1 on I think 73 is going to be the peak.
Right. Okay last 1 you mentioned in the press release that the first quarter.
Our second quarter on I was helped by a higher loan fees I'm. Just wondering you know how much was out of a helper and also if you have any color on what the Delta in just PPP loans was as you exited the quarter. Thank you.
Yeah, I mean, the Delta first or second quarter wasn't significant and when we think about second or third quarter. We don't think that that is going to be significant in terms of for example fee recognition.
For PPP, specifically or P. P. P. Specifically yeah okay.
And where loan fees meaningful on the second quarter, not really I mean, there are no I mean anytime you have recoveries you have a little bit of a benefit associated with us with that but nothing of significance.
Okay understood. Thanks card mhm.
Your next question comes from David Long with Raymond James.
Good morning, everyone.
The loan growth for your auto portfolio, it's been pretty strong and just wondering if you can provide some color on the split between growth in making loans to a new new vehicles versus used vehicles.
Yeah.
Most of our activity is.
From our dealer finance business and its mostly new activity. There is some used in there, but I would say the majority is new.
Got it got it Okay, and then as it relates to the mortgage banking.
Do you have the dollar amount of the favorable impact from the MSR valuation adjustment in the second quarter.
Yeah, I'm trying to remember in the first quarter I think the the net impact was about a $140 million kind of in that ballpark so that would be.
Kind of a benefit that we ended up scene.
So in first quarter, the first quarter it was a 1.
$120 million and it was it's probably about $100 million of differential I think I think that's right. Terry is about 120 in the first quarter negative and about 28 this quarter.
Got it thank you.
Ooh.
Your next question comes from Vivek <unk> with J P. Morgan.
Good morning, Vivek, Hey, Vivek.
Hi, Terry.
Couple of questions first 1 you mentioned.
I'd be giving up some near term growth on the card side Deirdre investments can you talk a little bit about.
What investments and for how long.
Why that would slow down on your card growth.
Yeah, well anytime youre going through both the customer account acquisition as well as the volumes are expanding etcetera. Your rebates residuals. Your card acquisition costs all of those sorts of things are part of that revenue line and so you know to the extent that debt is ramping up its going to.
It's going to moderate the <unk>.
Quarter over quarter sort of growth.
I mean, vivek, we're always constantly sort of investing in that business is just kind of relative from 1 quarter to the next.
How much were.
Investing at any particular point in time, we just think that given the strong sales momentum on the opportunity at this particular point in time to make those investments. We just think it's the right thing to do.
And then that would.
Quarter, but on that ship from our compares on staff standpoint.
Not to be a drag on flip the other way in the fourth quarter is that how we should think about that Terry from a timing standpoint, as we model out quarter to quarter I don't think that the amount of the drag increases in the fourth quarter relative to the third quarter, but us right.
Yeah.
Different.
Topic.
You said lower MBS premium amortization on helped a little in second quarter.
Any color on water clause on.
How we can compare where you all of us as pre pandemic, so how much more room for that to come down.
Yeah, I mean, I would expect that the.
The reduction in premium amortization in third quarter will be kind of similar to what we saw on the second quarter and.
You know the the margin impact over time as it was going up with somewhere between 2 and 4 basis points.
On a on a linked quarter basis. So I think that you could kind of expect that same sort of benefit.
You know in for example, the third quarter you know it it starts to dissipate or moderate as we kind of get out into <unk>.
Late late fourth and into 2022.
Okay great.
Thank you.
Thanks Richard.
Your next question comes from Mike Mayo with Wells Fargo Securities.
Hey, Mike.
Hey.
On your tech spend is up 20% year over year. If you look at the year to date numbers. So the question is.
Hum.
How much do you think you'll spend this year what percent increase do you expect what are you spending on and any more meat on the bones, you can give on combining the banking and payment businesses.
Yeah, So maybe from a from an overall tech spend you know we've talked about the fact that we make investment of about $2.5 billion in technology kind of broadly about half of that is capital expenditure about half of that is what I would call kind of run rate if you will.
You know we have been running at that level for some period of time and you know the increase that you're seeing.
Mike is really as you're making those investment it takes a little bit of a time for it to kind of get into the run rate.
If you will the you know I would expect debt you know, we don't anticipate when we think about going forward.
Debt that tech spend amount will change a lot.
The what we ended up focusing on I think has been changing over time for example, if I were to step back 3.4 years ago.
It was less.
Less offense more defense and today, it's probably 60, 65% offense related around our digital initiatives.
Tech stack modernization on those sorts of things as opposed to a plane having to play defense. So I think the shift is good because it's more forward leaning in more revenue generating sort of activities as opposed to defense.
And I think he.
Go ahead I'm sorry.
Oh, just clarify would run.
Run the bank change the bank you'd say you know now change the bank is like 60% versus 40% run the bank.
Yeah, I think that's a good way of describing it.
Okay, and then you guys I guess I ask this question every quarter and you seem to be playing it very close to the vest you clearly have been investing a lot in combining the payments and banking businesses together. Thank.
He said on 1 call to be more chime, Mike or go after time not them, specifically, but the concept.
Can you give us any more meat on the balance as far as what the strategy is when we're going to see it you said you wanted to serve existing clients better, but also capture a lot more new customers and I don't know where to look for that and the external releases or when we should look for.
Yeah, Mike Sandy, where we're spending a lot of time on that internally and I'll tell you what we're going to put something in the earnings release and deck by the end of the year to give you more information on this we are looking at it on a regular basis. Its 1 of our top priorities I think it's a huge opportunity both from our increased penetration to current customers as well as a customer.
<unk> and we'll give you more on this before the end of day here.
Alright, I'll look forward to it. Thank you sure. Thank you.
Your next question comes from Scott <unk> with Piper Sandler.
It's a mulligan.
Yeah.
I'm just curious.
On the.
President Brightens Executive order last week, you know some language regarding increased scrutiny on.
Bank transactions just curious if you have any.
Sort of early thoughts on on.
Kind of ramifications or how it might or might not change your calculus on thinking about any opportunities that might come up.
Sure Scott So as we've talked about we want to be disciplined and have been about and opportunistic when it comes to M&A in any deal that we would look at would need to make strategic and financial sense in and consistent with our guidelines and I think the executive order will mean that there'll be additional attention for bank M&A, but we believe ultimately decisions will be driven.
By what's best for all stakeholders and that's how we're thinking about it.
Okay perfect Alright, Thank you guys very much sure.
Your next question comes from Gerard Cassidy with RBC.
Hey, Gerard.
Hi, Jerry Hi, Andy Good morning.
Jerry you touched on in your opening comments about loan growth on you mentioned about the C&I growth increased slightly driven by asset type of lending, but it was partially offset by the continued pay down activity.
9 categories.
<unk> is on the pay down activity.
We know that many of the commercial borrowers have elevated liquidity levels, which may be contributing to this.
But can you maybe further elaborate on what your customers are telling you is it the supply chain problem, where they just like your automobile insurance simple.
Just don't have the inventory and therefore, they have this extra cash flow when they are able to pay down and would this then change as the supply chain issues for all companies not just auto starts to get ironed out in the next 6 to 12 months, which could lead to accelerated commercial loan demand.
Yeah, I mean, I do think that the commercial loan demand will start to pick up I think it's just it's a matter of timing when does that actually occur and I do think that they have to get through.
That excess liquidity or at least some of it and they also I think that they need to start making those capital expenditures and we're starting to see that I mean, when we talk you know across our.
Markets are you know I think that the for example, middle market customers are.
Certainly much more optimistic today than they were even a quarter or 2 quarters ago, and you know that usually translates into making longer term sort of business investment.
And you know on so I think that will we'll continue to kind of see that I do think that.
You know, we're you know I do think that supply chain is impacting us.
It to some extent, but.
But I think that that's more transitory I think that that will dissipate over time in terms of the impact.
Jerry I agree on an E. A key factor I think as many companies are awash in liquidity they have strong balance sheets, they've been they've been becoming more efficient in their balance sheets are strong which was reflected on our deposits on the lifts on the ratio of the balance sheet. So I think that's another factor.
And just as a follow up on this commercial customer.
Discussions that you've been having with these customers what's their view about inflation or are they concerned that they're not going to be able to pass on higher prices to their customers or any color that you guys are picking up in your discussions with these customers about the outlook for inflation and what it means to them.
Yeah, I think Gerard on a number of our.
Manufacturing companies in particular are passing on some of the increased supply costs out there.
<unk> net and it is a.
Factor in their pricing as well so I do think some of it is being passed on a lot of it is being passed on and I think this question around how transitory. This is 1 that is often debated but I can tell you right now it's it's impactful how long it lasts I'm not sure.
Very good and then just as a follow up Andrew you touched about the liquidity, helping on the deposit side.
We also all understand or quantitative easing has done to the deposits on the banking system.
Think that when tapering takes place probably end of the year, let's say.
There may be some pressure on deposit growth for you folks or that you really havent been impacted that materially by the quantitative easing by the fed because that's more wholesale oriented and maybe hitting.
Hitting their money center banks, maybe more so than you folks.
So I think.
<unk> U S banking, we the industry have certainly benefited from a deposit growth standpoint, because of the fed balance sheet I don't think theres any dispute around that I do think as that starts to diminish you'll see some impact on deposits, but I also would point out that some deposits have also or some funds have also moved off balance sheet to money market funds. This is again this.
Mix, we have on this opportunity to go either on balance sheet or off balance sheet. So some might migrate more to the on balance sheet component in that environment.
Very good thank you sure.
Your next question is from Mike Mayo with Wells Fargo Securities.
Hi, just to follow up a bit.
Picture question Andy.
And he had 6 years of negative operating leverage and we all know the reasons for that from the regulatory to the investing to the pandemic and everything else, then and I guess technically a year over year, it's still a little negative but quarter over quarter. This is on the best positive operating leverage you've had in a while and it seems like it.
Not going negative ahead. It seems so are you willing to call a turn in that 6 years of negative operating leverage or is it too early or is that kind of a next year event I know I'm getting ahead of where you maybe want to go but it's been a long wait for revenues growing faster than expenses. It seemed like you might be there, but I'm not sure.
Yeah, Mike So I think what Mike.
Like I mentioned before we're going to manage expenses flat in this challenging revenue environment.
And the challenging revenue environment as a function of the things we've talked about which is this lower than normal loan growth is flat and low yield curve and the function of still returning to normalization on things like travel entertainment and so forth. So flat until we get normal and then positive operating leverage when we start to get to a more normalized revenue environment. That's how we're managing the company.
Got it thank you.
Net.
Your next question is from Belka cash with Wolfe research.
Thank you. Good morning, just wanted to ask 1 follow up you guys have historically.
Historically, we've been very deliberate about your use of M&A to create value. As you look ahead is there an opportunity to think differently. For example by taking the strength of your existing franchises to expand into new markets and when customers without having to acquire legacy branch infrastructure work or sort of bank M&A likelihood on book the same as it has.
Traditionally.
We're on that topic would be helpful.
Yeah, Bill So we've talked about the fact, there's a few ways that we continue to grow and expand from a from a consumer and retail on business standpoint..1 is continued acquisition with our core organic initiatives around digital acquisition and focusing on that which we're making great progress on the second is this concept of.
Digital first branch light expansion like we were doing in Charlotte, North Carolina, where we have fewer branches and really leveraging data and digital capabilities. The third is partnerships like what we've done with state farm 19000 agents, who are really working to refer our card and deposit products. It's just an extension.
Nationwide, if our capabilities and the fourth would be more traditional M&A and you know we look at all those opportunities depending upon what's in front of us.
Got it thank you very much for taking market share.
At this time there are no further questions I will now hand, the call back for closing remarks.
Thanks for listening to our earnings call. This morning, please contact the Investor Relations Department, if you have any follow up questions.
Okay.
That concludes today's conference call. Thank you for your participation you may now disconnect.