Q1 2022 U.S. Bancorp Earnings Call
Okay.
Welcome to you ask Bancorp's first quarter 2020 earnings Conference call. Following a review of the results by Andy Cecere, Chairman, President and Chief Executive Officer, and Terry Dolan, Vice Chairman and Chief Financial Officer, There will be a formal question and answer.
Shane.
If you would like to ask the question. Please press star one on your attach someone's phone and crashed the bounty to withdraw this call will be recorded and available for replay beginning today at approximately 11, a M central time through Thursday April 20, <unk> 2022, I've been 50 90.
M Central time.
I will now turn the conference call over to Jen Thompson had the corporate finance and Investor Relations for U S Bancorp.
Thank you, France and good morning, everyone.
With me today are Andy Smith, sorry, our chairman, President and CEO and Terry Dolan, our Chief Financial Officer.
During their prepared remarks, Andy and Terry will be referencing a slide presentation, a copy of the 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 risks and uncertainty.
Factors that could materially change our current forward looking assumptions are described on page two of today's presentation.
Our press release and in our Form 10-K , and subsequent reports on file with the SEC I'll now turn the call over to Andy. Thanks, John Good morning, everyone and thank you for joining our call. Following our prepared remarks, Terry and I will take any questions you have.
I'll begin on slide three in the first quarter, we reported earnings per share of <unk> 99 cents and total revenue of $5 $6 billion. The quarter was highlighted by strong loan growth continued momentum in our payments businesses, well controlled expenses and strong credit quality as expected mortgage banking revenue declined in the first quarter due to slower re.
Financing activity in the market. However, we saw good momentum in business activity and related revenue growth within other fee businesses, including payments Trust and investment management and Treasury management.
This quarter, we released $50 million in loan loss reserves, reflecting continued strong credit quality and at March 31, our CET one capital ratio was nine 8%.
Slide four provides key performance metrics in the first quarter, we delivered a return on assets of 1.09% and our return on tangible common equity of 16, 6%.
Slide five highlights trends in digital engagement.
Digital transactions account for over 80% of total transactions and total digital loan sales account for about two thirds of total loan sales.
We are pleased with the progress we have seen so far but believe there is further opportunity to increase customer engagement through digital adoption by helping customers consumers and business customers to understand the full scope of capabilities available to assist them in managing their financial lives.
We are continually adding and enhancing digital features and functionality and applying a digital plus human approach a great example of this is our do it together co browse technology through this tool interactions with our customers a key driver of engagements have increased in number and have become more inspection efficiency as well as effective.
Turning to slide six we believe our complete payments ecosystem as a competitive advantage for our company the opportunity to connect our banking customers with our payments products and services and our payments customers with their banking products and service says we will continue to drive meaningful profit and return differential for our company over the next several years are.
Our small business initiative is just one example of many that we see driving both account growth and deeper relationships.
We believe the suite of products, we offer to our small business customers will allow us to grow those relationships by 15% to 20% and related revenue by 25% to 30% over the next few years.
We are particularly encouraged by the trends we are seeing in the uptake of our talent point of sale functionality, which allows small business customers to manage their banking and payments needs in a simple easy to use format that we provide in the form of the dashboard.
On the right side of the slide you can see that the number of new tele customers increased five fold in 2021, compared with <unk> 2020, and that strong growth trajectory has continued in 2022 year to date, new tell customers or 1.5 times the full year 2020 level.
Now, let me turn the call over to Terry you provide more details on the quarter. Thanks.
Thanks, Andy.
If you turn to slide seven I'll start with a balance sheet review followed by a discussion of first quarter earnings trends.
Average loans increased three 4% compared with the fourth quarter, driven by 8.0% growth in commercial loans to 1% growth in mortgage loans and 1.0% growth in total other retail loans.
Commercial loan growth reflected slowing pay downs increased business activity.
And higher utilization rates across many sectors and most geographies client sentiment is stable and commercial lending needs are being driven by inventory building M&A activity and capex expenditures.
In the retail portfolio, we saw good growth in residential mortgage and other retail loans, including auto lending.
Credit card balances declined linked quarter, reflecting typical seasonality and the impact of certain loans being moved to held for sale in the fourth quarter, which impacted average balanced growth.
Turning to slide eight total average deposits increased 1.0% compared with the fourth quarter. Despite the typical seasonal.
A reduction in noninterest bearing deposits total average deposits increased 6.5% compared with a year ago.
Slide nine shows credit quality trends.
Credit quality continues to be strong across our loan portfolio the ratio of nonperforming assets to loans and other real estate was 0.25% at March 31, compared with 0.28% at December 31st and 0.41% a year ago.
Our first quarter net charge off ratio of 0.21% was slightly higher than the fourth quarter level of 0.17%, but lower compared with the first quarter of 2021 level of 0.31% our allowance for credit losses as of March 31 totaled $6 $1 billion.
Or 1.91% of period end loans.
Slide 10 provides an earnings summary in the first quarter of 2022, we earned 99 cents per diluted share. These results included a relatively small reserve release of $50 million.
Turning to slide 11, net interest income on a fully taxable equivalent basis totaled $3 $2 billion.
The 1.6% linked quarter increase reflected strengthening margins the strong loan growth in the quarter, particularly commercial loan growth.
Our net interest margin improved four basis points to 2.44% due to the change in yield curve investment portfolio actions and lower cash balances, partially offset by the impact of loan mix.
Slide 12 highlights trends in noninterest income.
Paired with a year ago noninterest income increased 0.6%, reflecting strong payments services revenue growth in trust and investment management fees and higher Treasury management fees offset by lower commercial product revenue and lower mortgage banking revenue.
The decline in mortgage banking revenue reflected lower refinancing activity in the market and tighter gain on sale margins given excess capacity in the industry.
In the first quarter total payments revenues increased 10, 1% compared to a year earlier, reflecting both continued cyclical post pandemic recovery as well as strong underlying business trends supported by investments we are making.
Credit and debit card revenue increased 0.6% on a year over year basis, as the impact of higher credit and debit card volume was offset by lower prepaid card activity, excluding prepaid card revenue.
<unk> and debit card Rev fee revenue would have increased nine 6% compared with the first quarter of 2021.
Both corporate payment products revenue and merchant processing fees increased at a double digit pace compared with a year ago with growth driven by both the cyclical recovery of pandemic impacted industries as well as underlying business momentum.
Slides 13, and 14 provide additional information on our payment services business.
In the middle of Slide 13, we provide a table, which illustrates the cyclicality that naturally occurs in each of our three payments businesses over the course of a typical year.
On the right side of the slide you can see that COVID-19 impacted industries continued to recover throughout the first quarter.
As in the first quarter of 2022.
Credit and debit card travel volumes exceeded pre pandemic levels in March of 2022 airline volume was flat compared to March of 2019. The first time, we have seen recovery and prepare to pre pandemic levels.
Although T N E related volumes in our corporate payments business are still below pre pandemic levels. They continue their upward trajectory in March corporate T. A knee volumes in C. P. S. We're back to 75% of the pre pandemic level.
Slide 14 provides linked quarter and year over year revenue growth trends for our three payments businesses because of the cyclical nature of our payments businesses. We believe year over year trends are the best indicator of underlying business performance in a normal environment.
Year over year credit card and debit.
Credit and debit card revenue growth rates continued to be negatively impacted by the decline in prepaid card revenue.
As the benefit of the government stimulus has dissipated we provide details on prepaid card fee revenue over the past five quarters in the upper right quadrant.
While prepaid card revenue was approaching a run rate on a linked quarter basis, it will impact year over year credit and debit card fee revenue comparisons through the end of 2022.
The bottom half of the slide illustrates the strong year over year growth rates in both merchant processing and corporate payments fee revenue over the past several quarters, which have partly reflected the the pandemic related recovery, while we expect the year over year growth rates to moderate from current levels. We continue to believe that both merchant processing and Corp.
But payments fee revenue can grow at a high single digit pace on a year over year basis in a post pandemic environment.
Turning to slide 15, noninterest expense decreased 0.9% on a linked quarter basis. The decline was driven by lower professional services expense marketing and business development expense and technology and communication expenses, partially offset by increases in employee benefit expense pre.
Merely due to seasonal seasonally higher payroll taxes and other noninterest expenses.
Linked quarter expense growth includes the impact of the act of act of the acquisitions completed in the fourth quarter of 2021.
Slide 16 highlights our capital position, our common equity tier one capital ratio at March 31 was nine 8%.
As a reminder, at the beginning of the third quarter of 2021, we suspended our share buyback program due to the pending acquisition of Union Bank.
After closing the acquisition, we expect to operate at a CET one ratio between our target ratio and 9.0%. We continue to expect that our share repurchase program will be deferred until our CET one ratio reaches 9.0% following the pending deal close.
I will now provide some forward looking guidance. The following guidance is for a U S bank on a standalone basis and does not include any potential impact from Union Bank.
Let me start with full year guidance, we have updated our interest rate expectations to be consistent with market expectations, given our revised interest rate assumptions. We now expect total net revenue to increase 5% to 6% compared with 2021, reflecting 8% to 11% growth in <unk>.
Taxable equivalent net interest income.
And stable fee income, primarily due to lower mortgage banking revenue and deposit service charges offsetting growth in other fee businesses.
We expect positive operating leverage of at least 200 basis points in 2022.
As it relates to the second quarter, specifically, we expect total revenue growth of 5% to 7% on a linked quarter basis benefiting from seasonal strength in many of our fee businesses continued loan growth in the second quarter impact of higher rates on net interest income and the recapture.
Fee waivers.
In the second quarter, we expect expenses to increase 1% to 2% on a linked quarter basis, primarily due to seasonally higher compensation related costs and business investments spend.
Credit quality remained strong over the next few quarters, we expect that net charge off ratio to remain lower than historical levels, but will continue to normalize over time.
For the full year 2022, we expect our taxable equivalent tax rate to be approximately 21% to 22%.
If you turn to slide 17, I'll provide an update on our previously announced pending acquisition of Union Bank.
In September of 2021, we announced that we had entered into a definitive agreement to acquire the core regional banking franchise of <unk> Union Bank, we continued to make significant progress in planning for closing the deal in the first half of 2022, while we await regulatory approval.
As you know regulatory approvals are not within the company's control and May impact the timing of the closing of the deal.
We expect to close the deal approximately 45 days after being granted U S. Regulatory approval conversion is anticipated late in the second half of 2022.
We continue to believe this deal as it is a compelling use of our excess capital from both a strategic and financial perspective, we feel comfortable with our initial financial deal assumptions, including an expectation that it will generate an internal rate of return of about 20%, which is well above our cost of capital.
Assuming a June 30th close date, we expect Union bank to contribute approximately $310 million to our pretax pre provision net revenue in 2022.
Before considering cost synergies.
We continue to expect to achieve approximately $900 million of total cost synergies related to the deal with approximately $85 million to $100 million of cost savings achieved in the second half of 2022.
We continue to target total merger and integration costs of $1.2 billion of which approximately $950 million will be incurred in 2022 with some charges anticipated in the second quarter as we prepare for system integration.
In addition, there will be day, one there will be a day one loss loan loss provision required at closing in accordance with the existing Cecil accounting rules of approximately $800 million to $900 million I'll hand, it back to Andy for closing remarks, Thanks, Terry our strong first quarter results.
This decision as well for the rest of the year and we are encouraged by the loan growth trends and business activity that we're seeing in the early part of the second quarter.
Quality remains strong nonetheless, we continue to approach credit decisions with a through the cycle lengths.
We feel good about the secular trends, we are seeing across our fee businesses. Our payments revenue continues to recover and we look to continued sickle recover in travel and entertainment as the year progresses more importantly over the near and intermediate term are multi year investments in this business and our strategic initiatives aimed at leveraging the power.
<unk> of our payments ecosystem will continue to pay off.
We are closely managing operating expenses, even as we invest in our digital initiatives, our payments capabilities and our technology modernization.
On that front I'd like to highlight a few of our recent announcements.
We enhanced the service that we call extend pay and offering which allows our existing consumer and business cardholders to it.
The buy now pay later option, where they can choose a flexible payment plan that suits their needs. We also rolled out a request for payment capability, which allows merchants to send bills directly to customers banks accounts those customers have the option to send payment immediately to the biller via real time payment rails.
In February we announced a meaningful investment in our cloud strategy, which is aimed at modernizing our technology Foundation. So as to further improve the security of our data financial assets and customer privacy, while allowing for the transformation of applications and infrastructure to create leading edge customer experiences.
We will continue to leverage our suite of products services and capabilities to enhance the customer experience, which we believe will support meaningful account growth and deeper relationships across our entire franchise over the next several years.
In closing 2022 is off to a good start and I'd like to thank our employees for all they do to support our strategic goals and continue our customer continue to serve our customers and communities. We will now open up the call for Q&A.
Thank you.
Yes.
You May press Star then the number one on your telephone keypad.
Star then the number one.
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Yes.
A question.
Yeah.
Your first question comes from the line.
Matt.
From Deutsche Bank. Your line is now open.
Good morning, I was hoping you could provide an update on our offer the sensitivity of USB standalone and that is.
The impact of U B I know at one point you had thought it was going to make it even more.
But all of it.
The rate environment changed I'm, not really sure what's happening to their balance sheet.
So from updates there on asset sensitivity.
Yeah.
Matt Let me kind of take that question.
With respect to asset sensitivity.
And I'm going to kind of refer back to maybe the disclosures we had in the 10.
Okay.
And probably the best way to look at would be kind of an upward a gradual 200 basis point movement I think that that is at least the environment that are that the market implied would expect at this particular point in time. So if you end up applying now that our rate sensitivity of about.
Five 4% to the fourth quarter I think it gives you a pretty good estimate of what sort of <unk>.
Benefit that we see in terms of net interest income kind of going forward.
Maybe kind of qualitatively are you know I think that are you know when we see early in the cycle deposit betas will be relatively low.
You know our portfolio when you look at loans, it's probably about 50, 55% is.
Is a floating rate and about 40, 45% to 50% is fixed rate. So that probably gives you some perspective with respect to kind of what we're expecting to see from a union bank point of view.
As we've said in the past it is a little bit more asset sensitive than us it should help us kind of a I would say 35 40 basis points.
You know when you end up looking at their portfolio.
And the assets that will be.
That will be acquiring.
It's it's a deposit heavy so we'll have a substantial amount of cash in.
The opportunity to be able to reinvest that.
As the as rates move up.
Okay, and then separately you gave the impact of.
Tangible book value I think it was just a 1% reduction.
Yep.
Our estimated impact on Q1.
One capital.
Both problem.
So acquisition.
You mentioned earlier.
Yeah. So when as we've said you know currently we're at nine 8% in terms of our CET one ratio, we would expect it'll be in the range of that eight 5% to 9% at the end of the closing.
Of course, it'll be dependent upon how much rates move between now and the actual closing time.
Our I talked a little bit about the the day one provision in terms of the credit Mark from an from an asset Mark you know I think it'll be a little bit higher than what we had originally anticipated or disclosed in at the time of the acquisition.
Simply because of the rising rates, but not significantly different.
Okay.
Awesome by the way lots of good guidance on the call that'd be great I think.
Why this is such a busy day and scrambling to jot it all down.
Some of your parents do that and that's really helpful for us on that.
Yeah.
I mean, we would anticipate will start to incorporate more of that as the deal moves forward.
Your next question comes from the line of Jim Carey of Evercore ISI. Your line is now open.
Brian John morning morning.
The.
On the card.
<unk> side, just curious if you can just give us a little bit more detail on what youre seeing in terms of our consumers.
Consumer spending behavior.
Are you seeing any signs of any pullbacks shifts in the type.
Type of spend that could point some softening there we're starting to see some shifts to.
Towards non discretionary from discretionary spend curious if youre seeing that in your business if that is impacting your outlook at all.
Yeah. So let me start and then Andy can kind of add to it certainly what we are continuing to see John you know through the first quarter is you know good strong both year over year growth in comparisons back to 2019 really across the board I think a couple of trends that we talked about is that travel.
Specifically airline was back to pre pandemic is so that's continuing to develop and grow.
And that occurred specifically in March and I think you'll see that you'll see that continuing as we think about the second quarter and beyond.
We do continue to expect in the Cps business the travel and entertainment is going to continue to strengthen and I think that that is a tailwind or an opportunity for us as we as we move forward I would expect that there's probably going to be a shift to some extent from what I would call.
Durable goods that are that people were spending their dollars on in the past to more service oriented sort of activities, but in terms of the overall level of spend I feel like.
You know that will continue at least for some period of time anyway would yet and I think that's a good summary, Terry you know John it's interesting because consumer spend on the merchant side. If we look at that data versus pre pandemic levels in the first quarter still up 9% to 15%.
Consumer credit card spend so still up versus pre pandemic, 35% and corporate payments still up 10%. The one area as Terry mentioned that is not back to recovery yet is corporate TNT, which is about 75% of what is normal or pre pandemic levels and we would expect that to continue to get better as we all start to get out on that.
Our road more so we're not seeing any.
Negative trends, thus far and it continues to be very strong.
Okay, great. Thank you that's helpful and then on the commercial side I know you cited in your prepared remarks that you are beginning to see capex.
That's the driver behind the loan growth dynamic from a commercial side do you expect that to.
To continue as we look out here or do you foresee a potential impact on borrower appetite amid still.
They'll be inflationary dynamics and supply chain issues in Ukraine.
Yeah, I think that the capital expenditures is probably driven by a couple of different things I think that you know.
Most businesses over the course last couple of years have been kind of holding back with respect to capital expenditure and so I think that there's a bit of a you know a.
Uh huh.
<unk> eight increase in that spend just related to that and then I do think that you know as companies see more and more inflationary pressure, they're going to look to business and business automation as ways of kind of offsetting some of the pressure that they see with respect to being actually to acquire talent and so I think that our expectation.
And at least in the near term is that capital expenditure will continue to be reasonably strong.
And our I think our utilization rates support that Terry you know, we have been running in that 19% plus or minus for a number of quarters and we saw an increase certainly not to normal levels, but in that 22% to 23% in last few months.
Got it okay. Thanks, that's very helpful.
Sure.
Your next question comes from the line of.
Betsy.
Again Stanley.
It is now open.
Hi, Betsy.
Hi, This is Ryan <unk> on behalf of about say good morning.
Yes.
Wondering if we could dig in a little bit more on deposit betas I know that you mentioned that earlier early in the cycle, you're expecting deposit betas to be relatively low. So on one hand, you have an industry with a lot of excess liquidity, but then on the other hand, you have consumers that might be a little bit more cognizant of rate hikes coming fast start with inflation on the headlines every day.
You have rising fintech competition, so putting that altogether I'm wondering how you're thinking about deposit betas.
Really over the first 100 bps and then the following.
Right after that.
Yeah. So maybe I think it is helpful to maybe have a little context.
When you end up looking at deposit business. Our balances are about 50% of it is consumer based and 50, 50% of it is institutional if you will.
And which tends to have a little bit of a higher beta but.
Our expectation, especially early in the cycles that.
Betas will move relatively slow and and then as we get.
Further into or further into the development of the cycle it'll start to start to accelerate a bit but to kind of give you. Some perspective, you know we would expect probably through the full cycle of 2022 there.
Betas on the consumer will be less than 10% and then maybe slightly higher that on a terminal basis on the institutional side. You know we would expect you know through the 2022 cycle somewhere between 50 and 60%.
You know with a terminal a level, that's maybe a little bit higher that higher than that couple of things to that you know as we are looking at it.
We believe that relative to for example, the last cycle that our deposit betas will be a little bit less sensitive.
For a couple of different reasons, one is the consumer balances are larger.
About 5% relative to.
The last cycle our.
Our corporate our corporate trust deposit balances are lower.
In terms, so that the mix of the deposit base has changed and then we have a we have moved.
Moved away from us.
All right.
Concentrations related to brokerage related type of deposits, which we had more of in the past we still have some but a lower concentration. So you know all of those things are going to drive lower beta growth than what we saw in the past.
Thanks, That's really helpful color and then just as a follow up wondering if you could dig into the book value per share decline of 9% linked quarter.
How much of that came from OCI drawdowns on the <unk> portfolio.
And is there anything you can do to mitigate the Aoc I had going forward if the rate outlook keeps moving higher.
The vast majority if not all of it was really tied to the change in the.
The change in the unrealized.
Gains and losses on the investment portfolio and then the driver when we think about the.
The future.
We started to change a couple of different things. So in the fourth quarter, we moved about $43 billion of our investment securities to held to maturity as we are reinvesting runoff associated with the investment portfolio will continue to move more and more of that into the held to.
[noise] maturity sort of category.
And then certainly as we are as we close on Union Bank, we have the opportunity after the mark to move a lot of that into held to maturity as well. So you know today.
About 30% of the overall portfolios and the held to maturity category and you know our expectation is over some period of time, we would move that percentage up.
<unk>.
Thank you.
Your next question comes from the line of Erika Najarian of UBS. Your line is now open.
Morning Erika.
Good morning.
Together the most recent question and also on that question.
Underneath the 811% NII growth.
Could you give us a little bit more of a breakdown in terms of what you're expecting for <unk>.
Gross given the strength in your loan book today.
Yes.
Short term borrowings, but period end by <unk> 10 billion.
And again you know.
Going back to the question I think everybody is trying to ask.
Remind us how much of your deposit base as corporate trust today and.
How much are indexed do they reprice immediately to the changes in underlying benchmark rates or do you have some ability in pricing power.
To be able to perhaps delay some of that re pricing.
Yeah. So let me start with the last question and kind of talk a little bit about the deposits and then you know to the extent that I don't cover everything just remind me, but in deposits in the corporate trust business or in the trust and institutional all the investment services group, which includes corporate trust represent about 15% of the total.
Interest bearing deposits now.
In the last rate cycle that was about 22%. So it's down it's down relative to the overall mix.
And then you know the vast majority of it is not indexed.
To any particular.
To any particular rate.
And so we do have the ability to manage that a you know a fair.
The amount of the deposits within corporate trust or noninterest bearing as well.
Which I think is helpful that percentage is probably a little bit higher than what it was in the past.
But you know the competitive pressure will be.
You know.
Will will really come as money market funds start to move up.
We do have the ability to lag relative to that but that's where some of that competitive pressure comes from.
Follow up on the.
Earning asset assumption that you have.
Yeah. So you know, where we end up looking at earning assets and our expectation is that the investment portfolio will be relatively flat or stable.
Really through the end of the year and the vast majority of the growth will come on the loan portfolio side of the equation as we look into the second quarter.
Our expectation is that loan growth will continue to be strong.
You know at this and as a reminder, it was up on a linked quarter basis about 3.4%.
And while it may not be at that level I think it'll still be it'll still be up on a linked quarter basis very nicely and we would continue to expect good solid growth in the C&I portfolio.
As well as you know credit cards will start to seasonally gets stronger etc.
Got it.
A question to ask question.
T line.
When you closed Union Bank I think I'm estimating your total asset size.
Just shy of 690 billion.
And you know how should we think about capital management.
Potentially approach hundred billion on asset Mark.
In two years, Andy and Terry and I'm, just wondering in context of that.
T C hit was obviously more than the CET, one hit because NCI does that runs through <unk>.
So I guess I'm wondering in terms of like.
Buybacks, even after you replenished and nine if you think about crossing the 700.
How that might influence your capital management and capital return potentially differently over the next two years.
You know Erika.
Thank your estimates with respect to the total size or reasonable our expectation is that are you know to.
Just kind of give you. Some perspective, you know when you end up looking at the rules. The rules say that you need to be able to you you need to be at an average of over a four quarter period above $700 million. So there's a bit of runway that exists between now and when we might become a category two.
<unk> sort of entity.
Some of the things that some of the actions that I talked about with respect to the.
Held to maturity com.
Composition of the investment portfolio I think will help.
Mitigate that.
Certainly will generate a fair amount of earnings between now and lets say six or seven quarters out and I think you know all of those things will kind of help us manage through that.
Timeframe. The other thing is that you know when we do close on Union Bank, it's deposit heavy.
In terms of the in terms of the mix will be a significant amount of cash and we would expect to utilize that to help us manage our borrowings down and things like that in order to be able to stay below that $700 million are $1 billion threshold for.
For an extended period of time.
Got it just to clarify as you close.
For the cash is not yet deployed.
Drink that pro forma balance sheet to be able to accommodate more.
Client growth rather than just raw balance sheet growth from exactly exactly.
Thanks, so much.
Thanks, Eric.
Your next question comes from the line of Ken.
<unk> of Jefferies. Your line is now open.
Hey, Thanks, Good morning, guys just a question on fees to start.
In your revenue guide.
You've fully contemplate the full recovery of fee waivers, which I think you said it had been running around $70 million. How much do you have that recovering in <unk> and I assume that's also fully recovered in the full year guide.
Yeah, so to answer the last piece, yes, it would be fully recovered certainly by the end of the year.
And you know just given kind of projections in the marketplace with respect to rates you will see a significant amount of that recovered in the second quarter with a residual amount kind of in the third quarter, maybe as a reminder.
We recover about 65% of it in the first 25 basis point movement, 90% of it in the next 25 basis point movement in all of it.
After the third 25 basis point movement. So.
Most of it in the second quarter, but some amount in the third.
70% of it can you speak in the second quarter.
Yeah.
Got it. Thank you Terry and then also just on the mortgage business. Obviously, the reset that you had given us the expectation for just your outlook from here, given where rates have gone.
The ins and outs of production and servicing.
Yeah.
Obviously, the mortgage banking businesses.
Going to trend along with at this particular point in time refinancings.
The mix of business is probably 70% home sales and 30% refinancing so the on a linked quarter basis, the impact of refinancings will be less than what it has been in the past. So it will come down to kind of home sale activity. I. You know, we continue to think that that'll be reasonably strong.
And our investment in kind of the retail channel will be good I think the things that'll be drivers can in the future on a linked quarter basis will really be where do our gain on sale margins go and how and that'll be driven based upon how fast the capacity comes out of the system, but at least so desperate.
Fair point in time, just looking at kind of industry.
Metrics I think is a good way of kind of thinking about how we'll perform as well.
Alright, thanks very much.
Your next question comes from the line.
Mike Mayo of Wells Fargo Securities. Your line is now open.
Hi.
Hey, Mike.
Just to.
Declare Fi so you improved 2022 guidance revenues from 3% to 4% to 5% to 6% NII from 5% to 811%.
Operating leverage from a 100 basis points to 200 basis points I just want to make sure I have my facts straight there is that correct.
You got it Mike.
Okay. So.
That improved guidance, how much of that is due simply to higher interest rates.
How much of that is due to better loan growth.
How much of that is due to payments or some other activities.
Yeah.
I think that again, we would expect that mortgage excuse me that our fee income will be relatively stable on a year over year basis. So when you end up looking at you know what's going to be the driver it'll be net interest income.
And from here on out I think I think it's going to be kind of a balance between loan growth and interest rates.
You know because I, if I had to kind of give you a mix and I don't necessarily have that with me, but it's probably 60% 65% rates in 30% to 35% on a loan portfolio growth side of the equation.
Okay.
So your loan growth is pretty good.
Commercial loan growth is kind of.
[laughter].
I'm just I think you said there might have been a onetime element in there, but what sort of commercial loan growth are you expecting is this the big pivot the recovery from the pandemic is it inventory builds as a capex is it by different by region. It's just this might wind up being for the best commercial loan growth that we saw.
On a linked quarter basis.
Percentage wise than any big bank, so just a little more color around that would be great.
Sure Mike I'll start this is Andy and Terry will add on it it's across all those categories I mentioned earlier and there is no one timer in there. So it is it is core growth.
One of the factors as our utilization rates as I mentioned have been hovering in that 19, or so percent and are up nearly 23%, which is a key component, which is again take downs to find.
Find all those things you talked about which is capex and inventory growth and other activities is fairly widespread it's true within our large corporate as well as our middle market and spreadsheet graphically as well. So it is a strength across many categories Terry what would you add.
Yes. The other thing I would just say is that you know we'll start to see some seasonal benefit associated with the credit card portfolio as we get into the second and third quarter.
Okay and then.
Other part of that question related to payments.
Payments was a little bit of a disappointment for a little bit of time and now it's come back a little bit this quarter, 10% year over year growth. So I guess is it.
Payments back or not back or is it performing to your expectations are there still are headwinds or the recovery from the pandemic, helping that business. Just how do you think about payments relative to your own expectations and the market's expectation.
Yeah, I mean, we're very excited about the payments business I think there's a number of dynamics that are taking place I think theres still cyclical recovery, that's going to continue on for some period of time and youre going to see that.
In the airline and the travel and entertainment and those sorts of areas I think that that is all that's all good.
Mike We've talked a lot about investments that we've been making in our payments businesses.
And.
Over the course of the last few years as an example within the merchant acquiring.
You know three years ago, or so you know our tech led sort of revenue represented about 15% of our overall merchant acquiring revenue today. It represents 30% and we would expect that to continue to accelerate because of investments that we're making we talked about the fact that the in a normal environment.
You know as the cyclical recovery kind of starts.
Starts to wane.
We would expect our.
Our merchant acquiring and our Cps business to grow at high single digits. You know that's you know two or three times, what we were seeing.
Let's say four years ago, when we started our investment so we feel really good about where we're at from a payments perspective at this particular point, Andy what would you add I think that's right and Mike when you asked about the guidance.
Gerry mentioned that.
These are relatively stable.
That is a mortgage coming down a fair bit as well as deposit service charges with some of the changes.
<unk> that we made in and overdrafts.
Which is offset positively by some of our payments businesses and the expectations that we now have for the full year as well as the trust businesses. So there's some value in the diversification of those revenue streams and it's coming through in payments and trust.
That was a detailed answer if I could just push my luck I saw any numbers around the payments growth should it be high single digits can you keep that 10% growth that portion it settled back down to a lower range.
Yeah.
Again, I I think if you end up looking at the components merchant and Cps on an ongoing basis high single digits I think credit card will be.
At a lower level than that but it will be consistent with way the rest of the industry is growing.
And part of that credit card part of that credit card comp Mike is the prepaid impacts of prior years, it's still impacting the comps year over year in 2022.
Okay. Thank you.
Sure. Thanks, Mike.
Your next question comes from the line of Vivek.
Jimmy <unk> of Jpmorgan. Your line is now open.
Exactly.
Good morning.
Terry just a clarification there so the high single digit on merchant processing and corporate payments are you, referring to the extra 22 or beyond.
And because the credit card should be hooked in 'twenty, two but after that those comps should get easier. So what do you think post 'twenty two of all credit cards.
Okay.
Again for.
Merchant and Cps, we think post 'twenty two high single digits.
And we believe that credit card will perform kind of consistent with the rest of the industry.
You know the comps as you say you know this year will be impacted by the prepaid.
Card revenue that is coming down.
But then that starts to normalize as you get into 2023.
And within this high single digits I are you expecting any more.
Big contract renewals that could impact us or is that.
In fact that MTO guidance or you're just not expecting much of that to come up.
We don't we don't expect that got all that much it yes.
Yeah, we don't we don't expect a lot of that.
The large contracts that got renegotiated were more on the Cps side of the equation about two years ago.
And that's kind of fully in the run rate at this particular point in time as you know that those contracts are.
Usually you know 10 12 years in length. So you know, we don't see anything on the horizon there.
Okay.
One request and that is FICO mix of your loan portfolios I know we've talked about this in the past could you you're looking to actively disclosing it peers do and I think given your.
Hi, Jim.
Mix of loans it to be very helpful to have that.
Alright, Thanks, Vivek, what it will take a look at that thanks for the feedback.
Thanks.
Your next question comes from the line of Gerard Cassidy of RBC. Your line is now open.
Morning Gerard.
Okay.
Terry following up your comments on the mortgage banking business.
With the rates, where they are possibly going higher probably depressing refinancing activity for the industry as well as yourselves because of the higher rates.
Is there any can you attempt or can you look too.
Growing your home home equity business home equity lines et cetera, you know this business of course for the industry and yourselves has been an industry or a line of business and it's been shrinking over the years, but could that be an alternative to people refinancing.
Moving into home equity lines.
I think that it certainly won't shrink at the same level. It has been shrinking Gerard just for the reasons you mentioned because of the refinancing people would have money out and that would be with caused would replace home equity. So to speak. So I think youll see a positive trend there. It certainly is not going to offset the mortgage impacts directly but I think it will be positive.
Is there any.
We plan on your guys' part to maybe be more aggressive in marketing those products or have you not really thought about that.
We're always looking at opportunities to serve the customers in areas. They need the other another sort of related is the whole buy now pay later component that we talked about it I mentioned some examples in my prepared remarks, but did you think about home equity improvements.
A new way of financing that is through a buy now pay later or financing or point of sale. So that's something we're also focused on.
Got it and then second obviously you must bankers distinguish itself over the years with having a very strong focus on credit and delivering very strong returns to shareholders.
And the question I Havent because credit obviously is not an issue today for most banks yours included when do you start to get nervous or do you get nervous.
In this interest rate environment. The fed comes through and we have 200 basis points of fed funds at the end of the year, possibly.
10 year, that's well above 3%.
You guys kind of think about that when you assess the risks for the business here in your sprinkler.
Yeah Fair question, and I think there's a lot more conversation around that in terms of whether or not there will be recessionary sort of pressures you know 12 to 18 months out.
I would start by just saying you know when we end up looking at the economic outlook right now and kind of what we're seeing we continue to see a pretty robust.
Environment that said Gerard I think it's a fair question because.
Credit issues that we decisions, we made today than a year ago or what's going to affect us and you know we never really changed our underwriting approach that we've always been very focused on.
As an example, you know.
On the consumer side, we focus on prime and Super Prime customers and are in our card business and our auto business etcetera.
The I think the mortgage just the underwriting associated with mortgages.
Is different today than it was 10 15 years ago.
Which which will help but then on the on the C&I side of the equation or the corporate side of the equation, we do very little leverage lending.
You know sort of activities.
And you know areas that have been kind of structurally impacted like retail et cetera, retail malls et cetera, you know, we've we've kind of.
Made a lot of changes to our portfolio of last several years. So I actually think that you know will perform quite well.
In the event that we were to see a recessionary pressures develop.
And Terry just to follow up there.
How about from a balance sheet standpoint, you talked about moving more of your available for sale to held to maturity in your bond portfolio. In this rising rate environment is that it do we start to see greater risks in.
In that part of the business not just for U S Bancorp, but maybe for the industry as well.
Within for example, the investment portfolio correct correct just the the marks that people may have to take I know held to maturity you don't mark to market, but I'm. Just wondering you know because we haven't had to focus on this.
Years, and I'm, just wondering if there's something there.
We need to keep our eyes open for.
Yeah, I mean, I think that I think it's worthwhile just kind of trying to understand the mix of the types of investment securities that people are putting into their particular portfolio when.
When you get into stress in the economy et cetera.
You know certain types of investments may not perform as well in terms of our own portfolio highly concentrated in treasury and and government backed mortgage backed securities. So we don't see a lot of credit risk in.
In our particular portfolio, but it is something I think you know from from an industry standpoint, it's worthwhile watching.
Great I appreciate all the color. Thank you.
Sure.
Your next question comes from the line of Terry Mcevoy.
From Stephens. Your line is now open.
Hi, good morning, Thanks for taking my questions.
If I go back to September I think you expected to realize 25% of the cost savings from Union This year, which was about $225 million.
Terry I believe on the call was at 85 to 100 million. This year and is that just simply a function of pushing out.
Two late in 2022.
Yes, it's all it's all really related to the timing, Okay and then your thoughts on 2023.
100% by the by the end of the year or any any kind of update on 2023, when the bulk of that savings will occur.
Yeah, I mean, I think that the bulk of that savings. We start we certainly start to realize some of it later this year, but the bulk of it does get realized.
In 2023, and certainly when we get close to the end of the fourth quarter.
And first quarter of 'twenty for the vast majority of it will be realized.
So I think the timing is very consistent with what we talked about just affected by the timing of the deal.
Understood. Thank you and then as a follow up the 6% decline in noninterest bearing deposits I think that was on an average basis in the release it was seasonal kind of factors coming into play.
Beyond that in terms of the decline or do you truly think that was just a seasonal component.
With our corporate trust business, we always see a ramp up in.
That type of deposit near the end of the year as deals trying to get closed.
And almost like Clockwork.
Around the 10th of January and through February we see a run off so it's it's all really seasonal from our standpoint.
Thank you Terry.
Yes.
Your next question comes from the line of Bill car Catchup of Wolfe Research. Your line is now open.
Hey, Bill Hey, Bill.
Hey, good morning Purion Andy.
I apologize.
If I. If this was talked about before I might've missed it but I wanted to ask if you could comment on as.
We think about the.
Run off of the fed balance sheet and.
Happening faster than when we exited the last Zurich cycle.
And the risk of noninterest bearing deposits out flowing perhaps a bit faster than perhaps impacts on deposit betas.
Could you comment on that and if you already have.
Just to go back to the transcript.
Yeah no.
It's a good question and you know as we kind of go through the modeling and we look at we look at the.
The information and kind of how we think it's going to end up affecting not only us, but I think the industry, so you're going to see.
Deposit growth is going to slow, but I do our expectation is yet it'll certainly that deposit levels overall will grow slowly.
And that'll be more in line with just the overall growth of the economy. So.
Our expectation is that our deposits continue to grow but at a lower at a lower rate.
Okay.
Understood.
And then following up on your commentary I believe Andy around new point of sale solutions that Youre looking at there seems to be a little bit of debate among some banks who appear willing to promote the use of zelle for retail payments versus others that would prefer to wait can you remind us.
We're USB stands in that debate and how you think about the risk of of product like zelle potentially cannibalizing.
Some of your payments.
Payments volume.
What we're focused on with zelle assist increasing utilization of zelle across our customer base I think it's a terrific.
If a product has a lot of use cases.
We're looking at different use cases, but but overall what we're trying to do is just increase the utilization.
Understood.
And then finally, if I may there's been this view.
Following up on.
The strength Youre seeing in the merchant acquiring side Theres been this view among some fintech investors that elevon as a legacy player using legacy technology, and losing share in merchant acquiring but Nielsen published its market share stats for the top U S merchant acquirers and it shows all about actually moved up from number eight in 2020 to number seven.
Based on dollar volume, so from where you stand.
The investments that Youre, making in Pelican other digital initiatives could actually help you continue to gain share in the acquiring space or or is it more.
Secondly, protecting your position.
Now, we do think though that can allow us to gain share I think it's a combination of never thanks, Terry talked about the investments we've made over the last three or four years, our focus on tech led initiatives and the selling points differently than it was four or five years ago, and then that that combination of bringing banking together with merchant processing into a comprehensive product set.
About <unk> and the dashboard I think all those things.
<unk> as well for future growth both growth within the customer base that we have but also also expanding and acquiring new customers.
Got it thank you for taking my questions.
Beth.
And speakers, we don't have any questions celebrate.
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Thank you for listening to our earnings call and please contact the Investor Relations Department. If you have any follow up questions that concludes today's call.
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Okay.
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