Q2 2022 U.S. Bancorp Earnings Call

Speaker 1: Welcome to the US Man Corp. 2nd, 2022, earnings conference call. Following your review of the results by Nandice Seary, Chairman, President, and Chief Executive Officer, and Terry Dolan, Vice Chair, and Chief Financial Officer, there will be a formal question and answer session. If you would like to ask a question, please press 0-1 and your touchstone phone. This call will be recorded and available at the beginning of today at approximately 11 o'clock in the next virtual time. The

Speaker 1: I will now turn the call over to Jen Thompson, head of corporate finance and investor relations for US bank corps. You make all head, Jen. Thank you, Cheryl, and good morning, everyone. With me today, our Andy Ciceria, our chairman, president, and CEO , and Terry Dolan, our chief financial officer. And Terry Dolan, our chief financial officer.

Speaker 2: During their prepared remarks, Andy and Terry will be referencing a slide presentation.

Speaker 2: A copy of the slide presentation, as well as our earnings release and supplemental analyst schedules are available on our website at usbank.com.

Speaker 2: I'd like to remind you that any forward looking statements made during today's call are subject to risk and uncertainty.

Speaker 2: 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 10K and subsequent reports on file with the SEC. I'll now turn the call over to Andy.

Speaker 3: Thanks Jen, good morning everyone and thank you for joining our call. Following our prepared remarks, Terry and I will take any questions you have.

Speaker 3: I'll begin on slide three. In the second quarter, we reported earnings per share of 99 cents, which included 10 cents per share of merger and integration charges related to the planned acquisition at MUFG union bank.

Speaker 3: excluding these notable items we reported earnings per share of a dollar night. We achieved record net revenue this quarter totaling $6 billion.

Speaker 3: Second quarter results were highlighted by strong revenue growth, during robust net interest income and fee revenue and stable credit quality.

Speaker 3: Revenue growth was driven by strong growth in earning assets and the benefit of rising rates as well as good underlying business activity and customer acquisition trends across our B-Businesses.

Speaker 3: Additionally, our multi-year investments in digital payments and technology are paying off in the form of strong top-line growth and enhanced efficiency. And enhanced efficiency.

Speaker 3: This quarter, we added $150 million to our loan loss reserve, reflecting strong, long growth, and our consistent through the cycle approach to risk management.

Speaker 3: Our credit quality remains strong, and we are not seeing any trends in early stage metrics that cause us concern.

Speaker 3: At June 30, our CET-1 Capitol ratio was 9.7%.

Speaker 3: Based on the results of the Federal Reserve's 2022 stress test that were published in June , we announced that we expect to be subject to a preliminary stress capital buffer of 2.5%. On change from the current level.

Speaker 3: We believe our industry leading results demonstrate our ability to withstand a severe economic downturn, which is a testament to the strength, quality, and diversity of our balance sheet and our prudent approach to managing risk.

Speaker 3: Slide 4 provides key performance metrics.

Speaker 3: Excluding notable items, our return on average assets was 1.16% and our return on average common equity was 15.3%.

Speaker 3: Our return on tangible common equity was 20.5% on a core basis.

Speaker 3: Slide five, highlights digital trends.

Speaker 3: in engagement.

Speaker 3: I'll now turn to slide 6.

Speaker 3: We believe our digital capabilities in our complete payments ecosystem are competitive advantages that will drive meaningful profit and return differentiation for our company over the next several years.

Speaker 3: Our state-of-the-art digital capabilities have not only created a more effective and valuable experience for our customers, but they have allowed us to expand our distribution reach beyond our physical infrastructure while optimizing our existing branch network.

Speaker 3: On the left side you will see the success we are having with our State Farm Partnership, which is driving more customers, more loans, and more deposits to our platform in a cost-effective way.

Speaker 3: The chart in the middle highlights the strong trends, 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 a dashboard. The chart in the form of a dashboard. The chart in the form of a dashboard.

Speaker 3: And on the right, you'll see the momentum we are gaining in real-time payments transactions.

Speaker 3: which through the mid-year 2022 are 10 times higher than the total number of transactions we saw for the entirety of 2020. As of March 2004 March 2nd 2021 I'm with you today to telefehle tree delete the contract for past his death appeals and dummy contract ?? to Englishmnlungs? ____aterial Tortell????? Law

Speaker 3: We are excited about the secular growth opportunities we see across all of our business lines, but I like it. We are excited about the secular growth opportunities

Speaker 3: One area I'd like to highlight on slide seven is our business banking initiative, which is really starting to gain traction. On the left chart you'll see that the opportunity we've had previously discussed to connect our banking customers with our payments, products, and services, and our payments customers with our banking products and services.

Speaker 3: The chart on the right shows the progress we are making in growing accounts and expanding wallets year. Growth in relationships with both banking and payments products has meaningfully outpaced growth and total relationships over the past 12 months. The chart on the right shows the progress we are making in total and the growth of the future. The chart on the right shows the progress we are making in total

Speaker 3: And it's worth noting we are still in the early nineties.

Speaker 3: Now let me turn the call of a deteriorate, provide more detail on the quarters.

Speaker 3: detail on the quarter. Here we go.

Speaker 4: If you turn to slide 8, I'll start with a balance sheet review followed by a discussion of second quarter earnings trounds.

Speaker 4: Average loans increased 3.6% compared to the first quarter driven by 6.9% growth in commercial loans, 4.1% growth in credit card, and 3.6% growth in mortgage loans.

Speaker 4: Commercial loan growth reflected increased business activity and higher utilization rates across both large corporate and middle market portfolios.

Speaker 4: Pipelines are strong going into the third quarter and working capital needs remain elevated.

Speaker 4: In the retail portfolio, we saw good growth in credit card balances, reflecting strong spending activity. In credit card balances, reflecting strong spending activity.

Speaker 4: and typical seasonal trends.

Speaker 4: purchase mortgage market share gains and lower pre-payment activity continue to support residential mortgage balance growth.

Speaker 4: Turning to slide nine.

Speaker 4: Total average deposits increased by 0.5% compared with the first quarter.

Speaker 4: Growth in interest-bearing deposits, more than offset the impact of lower balances of non-interest-bearing deposits, reflecting the rising interest rate environment.

Speaker 4: Total average deposits increased by 6.4% compared with a year ago.

Speaker 4: Slide 10 shows credit quality trends which continue to be strong across our loan portfolios.

Speaker 4: The ratio of non-performing assets to loans in other real estate was 0.23% at June 30th, compared to with 0.25% at March 31st and 0.36% a year ago.

Speaker 4: Our second quarter net charge operation of 0.20% improved slightly versus the first quarter level of 0.21% and was lower compared with the second quarter of 2021 level of 0.25%.

Speaker 4: Credit performance across our commercial and retail portfolios continues to be strong. On a link quarter basis, both early and late stage to link and seize G-CREAST for the total portfolio.

Speaker 4: Our allowance for credit losses as of June 30th totaled $6.3 billion, or 1.88% of period end loans.

Speaker 4: for credit losses as of June 30th totaled $6.3 billion or 1.88% of period end loans.

Speaker 4: Slide 11 provides an earning summary.

Speaker 4: In the second quarter, we reported $1.09 per diluted share, excluding $0.10 per share of merger and integration charges related to the planned acquisition of MUFG Union Bank.

Speaker 4: Turning to slide 12, net interest income on a fully taxable equivalent basis totaled $3.5 billion representing an 8.3% increase compared with the first quarter and a 9.5% increase from a year ago. <expletive>

Speaker 4: Linked quarter growth was driven by strong earning asset growth and a 15 basis point increase in the net interest margin.

Speaker 4: Slide 13 highlights trends in non-interesting come.

Speaker 4: Not interesting come grew 6.3% on a link quarter basis, but declined by 2.7% from a year ago. As lower mortgage banking revenue, more than offset strong performance and other fee businesses. In other fee businesses.

Speaker 4: The decline in mortgage banking revenue primarily reflected lower refinancing activity in the market, which continues to pressure total application volumes and related gain-on-sale margins.

Speaker 4: In the second quarter, total payment fee revenue increased by 9.7% compared with the year earlier reflecting strong underlying business trends supported by investments we are making.

Speaker 4: Slide 14 provides linked quarter and year-over-year revenue growth trends for our three payments businesses.

Speaker 4: Because of the cyclical nature of our payments businesses, we believe year-over-year trends are a better indicator of underlying business performance in a normal environment. Credit and debit card revenue increased 0.8% on a year-over-year basis as the impact of higher credit and debit card volume was offset by lower prepaid card activity.

Speaker 4: Excluding prepaid card revenue, credit and debit card revenue, fee revenue would have increased 10.1% compared with the second quarter of 2021. The second quarter of 2021 is 10.1% compared with the second quarter of 2021.

Speaker 4: Year-over-year credit and debit card revenue growth rates continue to be negatively impacted by the decline in prepaid card revenue as the benefit of government stimulus has dissipated.

Speaker 4: We provide detail on prepaid card revenue over the past five quarters in the upper right-hand quadrant.

Speaker 4: While prepaid card revenue is approaching a run rate on a linked quarter basis, it will impact your over your credit and debit card revenue comparisons through the end of 2022.

Speaker 4: The bottom half of the slide illustrates the strong year-over-year growth rates in both merchant processing and corporate payment fee revenue over the past last several quarters.

Speaker 4: While we expect the year-over-year growth rates to moderate from current levels, we continue to believe that both merchant processing and corporate payment fee revenue can grow at a high single-digit pace on a year-over-year basis in a post-pandemic environment.

Speaker 4: Slide 15 provides some additional information on our payment services businesses.

Speaker 4: On the right side of the slide, you can see that the strong momentum we are seeing in tech-led revenue growth within our merchant acquiring business.

Speaker 4: In the second quarter, TechLED Merchant Revenue, which accounted for 27% of the total merchant acquiring revenue, was 13% higher than a year ago, and 43% higher than the comparable 2019 period. And 43% higher than the comparable 2019 period.

Speaker 4: A key to that trajectory is the strong growth we have seen in new tech led partnerships.

Speaker 4: In the second quarter, New Tech led partnerships totaled 1.6 times the number of new partnerships we acquired for the entire year of 2019. And we continue to add to that customer distribution baseline.

Speaker 4: Turning to slide 16, noninterest expense increased by 0.7% on a linked quarter basis, excluding merger and integration costs associated with the pending acquisition of Union Bank.

Speaker 4: The change in expense was driven by higher compensation expense, marketing and business development expense, and other non-interest expenses partially offset by lower employee benefit expense and other expense categories.

Speaker 4: The higher compensation expense was driven by the impact of seasonal merit increases and one additional day in the quarter, as well as variable compensation tied to revenue growth.

Speaker 4: Slide 17 highlights our capital position. Our common equity tier one capital ratio, the June 30th was 9.7%.

Speaker 4: 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.

Speaker 4: After the closing of the acquisition, we expect to operate at a CET-1 capital ratio of approximately 8.5%. We continue to expect that our share repurchase program will be deferred until our CET-1 ratio reaches 9.0% while in the pending DO clause.

Speaker 4: On slide 18, I'll now provide some forward-looking guidance for US Bank on a standalone basis.

Speaker 4: This guidance does not include any potential impact from Union Bank.

Speaker 4: Let me start with the full year of 2022 guidance.

Speaker 4: We have updated our interest rate expectations to be consistent with the market expectations.

Speaker 4: We continue to expect total net revenue to increase 5.6% compared to with 2021.

Speaker 4: Given our revised interest rate assumptions, we now expect low to mid-teen growth.

Speaker 4: low to mid-team growth and taxable equivalent net interest income compared with our previous estimate of 8-11%

Speaker 4: We expect higher rates to pressure mortgage application volumes more than previously anticipated, which will negatively impact our mortgage banking revenue.

Speaker 4: We now expect fee income to be slightly lower for the full year of 2022, compared with our previous expectation that fee revenue would be stable. The fee revenue would be stable. The fee revenue would be stable.

Speaker 4: We continue to expect positive operating leverage of at least 200 basis points in 2022, excluding the impact of merger and integration related costs associated with the union bank transaction.

Speaker 4: For the full year of 2022, we expect our taxable equivalent tax rate to be approximately 22%.

Speaker 4: Now, I'll provide guidance for the third quarter. We expect total revenue to grow 3% to 5% on a linked quarter basis.

Speaker 4: In the third quarter, we expect linked quarter non-interest expense growth of 2.3%, excluding merger and integration related costs as we prepare for the Union Bank transaction.

Speaker 4: Credit quality remains strong. Over the next few quarters we expect the net charge off ratio to remain lower than historical levels, but we'll continue to normalize over time.

Speaker 4: Adjustments to our loan loss reserve in the near term will primarily reflect loan growth and changes in the economic outlook. And changes in the economic outlook.

Speaker 4: If you turn to slide 19, I'll provide an update on our previously announced pending acquisition of Union Bank.

Speaker 4: In September of 2021, we announced that we had entered into a definitive agreement to acquire the core regional banking franchise of MEFG Union Bank. In September of 2021, we announced that we had entered into a definitive agreement to acquire the core regional banking Union Bank.

Speaker 4: We continue to make significant progress in planning for closing the deal in the second half of 2022 while we await regulatory approval.

Speaker 4: As you know, regulatory approvals are not within the company's control and may impact the time and the closing of the deal.

Speaker 4: As a reminder, we expect to close on the deal approximately 45 days after being granted US regulatory approval.

Speaker 4: Because this timing would likely indicate a late third quarter or early fourth quarter close, we believe it is prudent to shift the system conversion date to the first half of 2023. The financial merits of the deal remain intact. Our original EPS accretion estimates are unchanged and we continue to estimate the acquisition will generate an internal rate of return of approximately 20%, which is well above our cost of capital.

Speaker 3: I'll hand it back to Andy for closing remarks. Thanks Terry. Our second quarter results were supported by solid account growth, deepening of existing relationships and strong business activity across our banking and fee business lines and we are well positioned as we head into the second half of the year.

Speaker 3: Credit quality remains strong and we continue to prudently manage operating expenses even as we invest in our digital initiatives, our payments capabilities, and in our technology modernization.

Speaker 3: In closing, I'd like to thank our employees for all they do, and we look forward to welcoming Union Bank employees to our company.

Speaker 3: I remain confident in the strategic and financial merits of this transaction and the meaningful benefits that will accrue to our customers, our communities, as well as our shareholders.

Speaker 3: We will now open it up to call the Q&A.

Speaker 1: Thank you. We will now begin the question and answer session. If you have a question, please press 0-1 on your touch tone phone. Once again, if you have a question, please press 0-1 on your touch tone phone. Our first question comes from Scott Cepers from Piper Sandler. Your line is now open.

Speaker 5: Thanks for taking the question.

Speaker 5: Apologies if I missed any of this in the prepared remarks. So it was nice to see overall deposits up a bit. You know, the mix is changing just a bit as you go forward I guess. But maybe thoughts on major sort of what you would expect in overall deposit balances as we go forward, how the mix might change and any thoughts on what you're seeing with pricing pressures on funding costs.

Speaker 4: Yeah, Scott, certainly with the quantitative tightening that's taking place, I think the growth rates with respect to deposits in the industry will be relatively stable or maybe even down a little bit. But our expectation, at least in the near term, is that overall deposit balances will be fairly stable for us. We have a lot of sources of deposits, including our corporate trust and the mix between our money market funds and our on-balance sheet.

Speaker 4: You know, from a mixed standpoint, as you would expect and what we have seen both for us and in the industry is that the mix starts to change when rates rise. And so we are starting to see the mix between non-interest bearing and interest bearing start to change with a shift out of non-interest bearing balances into interest bearing sort of categories as people are looking and seeking sort of yield.

Speaker 4: And then when we think about deposit pricing, it's been relatively low for the first rate cycle, or rate hikes that we have seen. And in fact, it's for us that we've actually outperformed our expectations, which is good to see. And which is a reflection in part because we have a higher level of consumer balances today than we did, for example.

Speaker 4: four or five years ago, et cetera. But when we get into the next 125 basis points, so if you think about the next two rate hikes that the market is expecting, our expectations, deposit baters, will probably be in that low to mid 30s, kind of in that ballpark.

Speaker 5: Okay, that's terrific, Halleran. I appreciate that. So thank you very much, Sherry. Maybe a separate question. Can you walk through any updated thoughts on sort of the capital ramifications from the pending transaction? I guess just a lot has changed in terms of both possible credit and certainly rate requirements. Just curious to hear any thoughts that you have insofar as you're able to give them while it's still pending. Thank you.

Speaker 4: Yeah, you know, I think that right now, you know, the capital implications are in line certainly with the rise in rate environment. The market is a little bit more than what we maybe had modeled in the original deal. But you know, once you close that transaction, it creates back an income pretty fast. You know, our expectation, as I said, is that, you know, CET1 will be somewhere around 8.5% at the time of closing. So that will be dependent upon, you know, where rates are at that particular point in time.

Speaker 3: You know, the transaction accretes pretty quickly, so we do expect capital to continue to grow and accrete after the transaction. Andy, what would you add? The only thing I'd add, Terry, is that as you talked about on your comments, we're making significant process in planning for the closing of the deal, which we, as we talked about now, expect in the second half. We targeted a second half conversion last time we talked, and it was going to be Veterans Day. Even now that we're coming upon a...

Speaker 3: a little later close, we're moving the conversion date to President's Day weekend. So that's what our planning assumption is for all the teams working on this. That's that next three-day weekend. And as Terry mentioned, our financial targets that we initially articulated are still intact. Although the timing of the cost savings might be a little different, the synergies are still $900 million. And Terry, maybe you can talk about, given the rate environment, the accretion dilution for this group. Again, the accretion.

Speaker 4: will probably achieve 50 to 60% of that next year. But what's offsetting that is, you know, with the rise in rate environment, we're going to see a stronger revenue that will help to offset that.

Speaker 5: All right, that's perfect. Andy and Terry, thank you guys very much.

Speaker 1: Thanks Scott. Thanks Scott. Thank you. Our next question comes from John Pankiri from Evercore. Your line is now open.

Speaker 4: Good morning, John .

Speaker 6: On the payments revenues and the merchant revenue, I know you had indicated that you do expect those revenues on a year-over-year basis to moderate here, but you see high single digit year-over-year growth as reasonable post-pandemic. So just to understand that a little more, in terms of the coming quarters, or the next several quarters, that moderation that you see, is that going to put you in that high single digit range, or do you expect growth to be lower than that high single digit year-over-year range in coming quarters?

Speaker 4: the cyclical recovery occurred. But think of payments in the single high single digits.

Speaker 6: Okay, so got it. So then in the moderation, is there a way you can maybe help characterize what type of level you think is reasonable in coming quarters without the moderation takes hold?

Speaker 4: Yeah, you know, I think part of it in terms of moderating the growth rates, you know, part of it is, you know, we'll start to see from 22 to 23 kind of getting into a more normal environment. So, you know, I think that, you know, it's still probably a little bit of a higher level when we think about, you know, the third quarter or the near quarters, but certainly as we get into 2023, I think it moderates to that high single digits. that yeah keeps coming back up. Okay, I don't have any, I don't have any later if you want to, do I, just go back to 30

Speaker 6: Okay, I gotcha. Got it. And then just on the credit front, clearly, you guys are certainly in a more generally historically more conservative standpoint. How can you maybe talk a little bit more about how you're thinking about the low loss reserve here, particularly from a CECL perspective, as you're dialing in the scenarios, you have to assume the economic scenarios are going to get worse incrementally here given Fed actions. So how do you see that impacting your

Speaker 6: you're reserving here just from a scenario standpoint and given the CECL requirements.

Speaker 4: Yeah, maybe as a reminder, when we end up looking at scenarios, we look at five different potential scenarios, from a baseline to something that's slightly better, to something that's worse and as severe maybe as a more severe recession. So think about that range. For some time, there's been uncertainty, if you think about Ukraine now. And when we end up looking at the different economic and we weight those assumptions, we're really weighting that.

Speaker 4: growth in or changes, I think, in the loan loss reserve will probably be driven more by loan growth than anything else.

Speaker 6: Okay, got it. So you don't necessarily over the next couple of quarters see an outright build related to the economic backdrop based upon the forecast that you're looking at now.

Speaker 4: I think it'll be more driven by loan growth than, you know, our scenarios waiting is getting worse.

Speaker 4: At least not measurably worse.

Speaker 6: Right, right. Okay. And then one more related to that, I guess just as the, as economic scenarios do intensify and you think if the bill does, you know, begin to moderate, I mean, any way to just longer term help us think about the magnitude. I mean, we just had another one of your competitors talk about how the pandemic related reserve levels may not be applicable to where the banks built the pandemic related reserves to. Would you agree with that, that the pandemic related reserve?

Speaker 4: as we see the next economic recession kind of develop, you know, again, John , we we tried to manage through the cycle, you know, and, and, you know, our underwriting is strong and all those sorts of things. So while they'll be reserve built, certainly from an economic outlook point of view, you know, I don't think it's going to be anywhere near what it was as a result of a pandemic.

Speaker 6: Got it. Thank you so much Terry, that's helpful.

Speaker 1: Thank you. Our next question comes from Gerard Cassidy from RBC. Your line is now open.

Speaker 7: Good morning, Terry. Good morning, Andy.

Speaker 7: Good morning Terry, good morning Andy. Good morning Jared.

Speaker 7: Terry, to follow up on credit quality, can you share with us, you know, certainly

Speaker 7: I'm with you. I don't see the reserves needing ever to get close to what you guys had to do during the pandemic when Unemployment went to 14 and a half percent and we had an annualized rate of decline in the second quarter GDP in 2020 of over 35% but can you share with us? In the rate in a rate stress testing for your commercial customers or anybody on variable rate loans Well at what point do rising rates really start to give you guys a little discomfort is it to?

Speaker 3: at cash flows under different rate scenarios as we think about putting those loans on the books. So I'm less concerned about rising rates impacting credit. I do think rising rates as that impacts the economy will impact loan growth at some point.

Speaker 7: No, okay, very fair. And then I guess as a follow-up, sticking with credit, it seems like in past cycles, excluding 2020, there was a gradual lead-in to the downturns and I think many of us could have seen what was going on in the aggressive lending of 06 going into 08, 09 or 88, 89 going into 90. We don't seem to have that this time.

Speaker 7: Can you guys I don't know if you can give us any further color on what is it that the market is? So it seems like so concerned about what banks that we're going to hit a brick wall or go off a cliff on credit Possibly in six to twelve months any further thoughts there?

Speaker 3: Yeah, I do think it's the, you know, banks are a reflection of all the customers that we serve and to the extent the recession impacts those customers that will impact us. And I think that's why you're seeing banks stocks. Usually when rates go up, banks stocks perform, banks rates, you know, we've been waiting for a while for rates to go up, they're finally going up and bank stocks are going the other way. And I think it's that fear of recession for all the reasons we've talked about. And as I've talked about Gerard, I think we're, we are preparing for any scenario because...

Speaker 3: The range of scenarios, and I talked about this before, is as wide as I've ever seen it in my career. The probability of different events occurring, there's a lot of uncertainty out there, a lot of inputs into things that we've never had before. And I think all that uncertainty just translates into people being careful and a little prudent in terms of their investments.

Speaker 7: And with that, are your customers seeing any clear evidence of, you know, the slowdown from the tightening that's already gone on, or is it still, the customer is still in pretty good shape in terms of their businesses, generally speaking.

Speaker 4: Yeah, maybe a couple of different things that we watch. From a consumer spend standpoint, it continues to be very strong. And that obviously is what businesses are seeing now. That consumer spend is shifting a bit in terms of where it's occurring. It's less discretionary, certainly more non-discretionary on food and fuel and those types of things. It is probably shifting away from...

Speaker 4: a lot of the retail purchases toward service-related type of activities, but the overall level of spend is still pretty strong. I would also say that the consumer balance sheet is strong. They still have deposit balances that are in excess of where they were pre-pandemic. I think that in part that's allowing, at least on the average, for that consumer to spend to continue. And then they're willing to draw down on their credit.

Speaker 4: I would say though, Gerard, is that I think that business owners, especially in the middle market space, are just more cautious today. And it comes back to what Andy said. It seems like a strong economy today, but the range of possibilities is very wide. And so people are trying to take that into consideration when they think about running their business.

Speaker 7: Fellows, thank you very much as always and good luck on closing the deal in the second half.

Speaker 3: Thanks, Gerard. Appreciate it.

Speaker 1: Our next question comes from Erica Nanjiren from UBS. Your line is now open.

Speaker 5: We're in Erica.

Speaker 8: Just a few clarification questions for my first one. Terry, you mentioned that deposit beta could be in the low to mid-30s for the next 125. Can we interpret that in terms of the cumulative beta by fourth quarter? Does that mean that will be the cumulative beta by the fourth quarter, or does that mean that the...

Speaker 8: cumulative beta would be lower than that range by fourth quarter because we have to take into account the first hundred.

Speaker 4: It would be lower. I mean, they had the average obviously be less. So what I'm really talking about is the next.

Speaker 4: two rate hikes and what we would see in terms of deposit betas in reaction to that.

Speaker 8: Got it. I'm just comparing it to a peer that reported also today. I think they mentioned that the cumulative beta would be in the low 30s by year end, and it sounds like based on the math, you could outperform that?

Speaker 4: Certainly in terms of what we are experiencing, the deposit betas in the first rate hikes has been lower than what we had expected. I think from just in terms of the industry and where we were starting from, the betas for us at least have been lower. The betas for us at least have been lower.

Speaker 8: Got it. Okay. And Andy, maybe taking a step back and asking more of an industry question. You know, clearly the market's very worried about a recession. And clearly the market accepts that U.S. Bank has one of the best quality balance sheets out there. The bank has spent a lot of time building their corporate market share.

Speaker 8: I guess my first question to you is, as you think about the relative resilience of banks potentially in a recession like Gerard alluded to, and the amount of sort of lost market share to non-banks, do you see some of that market share coming back to the industry generally and US banks specifically, or was some of that credit quality never something that you wanted to underwrite and put on the books to begin with?

Speaker 3: That's a good question, Eric. I think there is a little bit of a shift already occurring in what you're seeing in some of the non-bank competitors. First of all, the banking industry is in terrific shape from a capital liquidity, just from a defensive standpoint, much better than we were during the last downturn, and that includes U.S. Bank. And you saw our results of the stress test, which showed us performing very well in a very stressful environment, and I think that's a reflection of all those things, including our diversity and our credit underwriting discipline. That's a good question. I think there is a shift already occurring in what you're seeing in some of the non-bank competitors. And I think there is a shift in the

Speaker 3: I do think, you know, traditional credit models work through cycles. Sometimes new credit models work when things are going well and are a little more challenged when things aren't going so well. So we'll see how those new credit models and new ways of doing underwriting will work in this downturn. But I do think that banks and certainly U.S. banks models have been proven through multiple cycles.

Speaker 8: My third question is, I think that most of the street subscribes to the idea that payments is going to be a secular winner for US Bank. There's clearly a debate right now on how weak does the consumer get in a downturn. Nobody's worried really about credit surprises in the consumer with US Bank, but how should we think about the range of outcomes in payments activity.

Speaker 3: dollars that they've not spent over the past few years. And as you know, the unemployment numbers are very good. So I think there's enough cushion. And I do think that, at least for the near term, that cushion will allow continued spend activity, albeit, as Terry mentioned, a little bit different category, certainly from goods to services and a little bit more in terms of non-discretionary. But we're still seeing strength there. And again, how that ultimately comes out will depend upon that range of outcomes that I talked about that's pretty wide.

Speaker 8: And just one last one. By the fee income guide, you said lower than 2021. Could you quantify how much?

Speaker 3: I'm sorry related to what? We didn't we did.

Speaker 3: So Terry, she's asking if we quantify the fee income guide, and we quantify total revenue in that 5% to 6%. Yeah, we did. Yeah, exactly.

Speaker 8: Sorry, I'm too much going on. Thanks guys.

Speaker 9: No problem.

Speaker 1: Thank you. Our next question comes from Mike Mail from Wallsparco Securities. What's your line is now open?

Speaker 10: Hey Mike. Hi, good morning.

Speaker 10: Hey Mike. Hi good morning. You know, so I look at slide.

Speaker 10: seven trying to look at I'm squinting on that and that's the number of your joint

Speaker 10: joint business banking and payment customers relationship growth. And you have that index at 100 starting at March 2021. Looking at a blue line versus a green line.

Speaker 10: And this is your big effort.

Speaker 10: And this is your big effort. Um, and so I guess you're up.

Speaker 10: with my squinting here, you're up 5% year over year in the growth in accounts that use both banking and payments.

Speaker 10: Is that correct?

Speaker 3: That's right, Mike. Sorry for the squinting, but yes, so if you give next back to 100, we're up just under 6% on those combined relationships that have both banking and payments products, and that's almost 2X what just just the total relationships are, which would imply just single service relationships are below that green line.

Speaker 10: Okay.

Speaker 10: And so how much is this contributing to your growth? I mean, you have outsize growth in payments, slide 14. You have outside growth in commercial loans, slide eight.

Speaker 10: So can you kind of disassemble this? Like what percent of the growth is due to this? Like what percent of the growth is due to this?

Speaker 10: business banking and payment initiative and how much is just due to the environment the onboarding of the economy post pandemic.

Speaker 3: You know, I think it's a little bit of both. We're still, as I mentioned in the early innings of all this, but I will tell you, Mike, that we have a tremendous focus on this on both the business banking segment as well as the commercial segment. And I think this concept of weaving together banking and payment services into a comprehensive offering is going to be meaningfully important to our growth rates, both acquiring customers and providing more products and services to the current customers. And it is one of my top priorities. It's one of the company's top priorities across the state.

Speaker 11: nearly as much.

Speaker 4: Yeah, I think that Mike, in the commercial side, corporate loan side of the equation, it's still pretty competitive from a pricing point of view. And so I would tend to agree in the sense that credit spreads haven't widened maybe as much as we might have expected at this particular point in time. And I think part of that kind of comes back to what economy are we looking at? Again, today it looks pretty good. What is interestingly for people thinking that debt is, always depends how you want

Speaker 4: My expectation is if you have this type of loan growth and the economic outlook that people are kind of expecting, you would expect those credit spreads to be widening and spreads to be widening on loans more.

Speaker 4: naasiniato.

Speaker 10: So does that, I mean, you're, you know, you're the most conservative bank in the industry based on, you know, several metrics, bond spreads, you know, credit rating agencies, all that sort of thing. So as the most conservative bank in the industry, among the largest, does that mean you forego some of this lending or you just plow ahead, you know, with the assumption that we're not going into any sort of hard landing?

Speaker 3: You know, Mike, it's a good question as well. So Terry and myself and our leaders are being very disciplined about what we're putting on our balance sheet. And I will tell you that while we had strong loan growth, it could have been a heck of a lot stronger. But it wasn't, because we are not putting those deals that are either not appropriate from a credit standpoint, certainly, or from a spread standpoint or return standpoint. So we are growing good loans.

Speaker 3: You know, Mike, it's a good question as well. So Terry and myself and our leaders are being very disciplined about what we're putting on our balance sheet. And I will tell you that while we had strong loan growth, it could have been a heck of a lot stronger. But it wasn't, because we are not putting those deals that are either not appropriate from a credit standpoint, certainly, or from a spread standpoint or return standpoint. So we are growing good loans. We could have grown more, but we didn't. And they got even worse that we think they're not gonna win it and that, because of formerAPH. Today we said Bern34 was losing 19th, our thighs are looking a lot stronger. And Audrey and I are feeling more confident about Niko very well. So just come along if you have any thoughts. It could be because they are very fluent in Hillavi remediation, that we are seeing some huge, great investments that have been underway. Jamie, and then</p><p begin="00.5</pTest

Speaker 4: Yeah, a perfect example if you end up looking at the growth in auto lending for us over the last quarter or two. You know, those spreads have been very competitive. They have not been responsive to the rising rate environment and we're willing to give up some of the volume there simply because of the fact that returns are not as strong as they should be given the current environment. So that would be an example of the discipline we're talking about.

Speaker 10: Okay, thank you.

Speaker 10: Okay, thank you. Thanks, Mike.

Speaker 1: Our next question comes from Matt O'Connor from Deutsche Bank. Your line is now open.

Speaker 6: Good morning. I wanted to ask about the credit marks related to

Speaker 6: the credit marks related to the pending

Speaker 12: UB deal. Obviously spreads have widened as was just discussed.

Speaker 12: I would think that means kind of more marks and maybe just frame, you know, how meaningful that might be. I would think that the CET1 is below 8.5.

Speaker 12: And then of course on the flip side, if you're marking that book down a little bit more aggressively, maybe you're essentially done building reserves in that portfolio, even if you do get the hard landing.

Speaker 4: Yeah, well, maybe from a credit mark standpoint, I think it's pretty consistent with what we had expected. I mean, that portfolio performs pretty strong. In terms of the mark to market from a rate point of view, it certainly is higher than what we had originally modeled out. That will put a little bit of pressure, as I mentioned earlier, on the day one closing CET1 ratio, which we still expect to be around 85. It might be a little bit lower than that, or a little higher. It kind of just depends.

Speaker 4: will offset that. So from an overall earnings accretion point of view, we still feel very comfortable with 6% in 2023. And then just to summarize, so the credit marks aren't really impacted by kind of

Speaker 12: macro forecast and what we're seeing in public markets, it's more what you're seeing in the actual portfolio as we think about the credit marks themselves.

Speaker 4: Yeah, I mean obviously we have to take into consideration what our assumptions are from an economic outlook point of view. But as I mentioned earlier, those haven't changed a lot yet at this particular point in time. And so again, it depends upon the timing of the closing and what happens between here and then. But at least at this particular point in time, the quality of the portfolio is good, it's performing well, et cetera. So …

Speaker 12: Okay, and then just separately, you talked about mortgage fees being weaker than expected in your full year guidance. Obviously, we're seeing that for the industry overall. But any signs of the gain on sale margin stabilizing? And then in the servicing book, it doesn't feel like we're getting the full benefit of the slower prepayments. I know there can be a little bit of a delay as we look across from the banks. I'm not seeing that. Is there still some benefit from the servicing book to kick in? Okay, thank you very much.

Speaker 4: Yeah, so a couple of different things. You know, as we talked earlier, you know, there will continue to be pressure on mortgage banking revenue. We think about on a linked quarter basis, you know, third quarter fee revenue in that area is probably going to be pretty similar to the second quarter. But you know, that's going to be a combination of things, Matt. I do think that there continues to be a little bit of pressure on the volume side of the equation simply because of rising rates. We are seeing, at least for us, the gain on sales starting to stabilize and improve a little bit. Ok, thanks Matt.

Speaker 4: rates, and I do expect there's probably opportunity from a servicing income point of view.

Speaker 1: Great, thank you. Thanks, Matt. Thank you. Our next question comes from Bill Kirkutche from Wolf Research. Your line is now open.

Speaker 13: Thanks. Good morning. Assuming the Fed hikes eventually lead to slower growth and higher unemployment as many hiking cycles have historically, could you help us understand at what point you'd be required to increase your reserve rate because that increase in unemployment would fall under your reasonable and supportable forecast period under CECL? Does it just need to be more visible before you can act on it?

Speaker 4: Yeah, I think there's a lot of uncertainty out there which direction it's actually going to go. I think there just needs to be more certainty around what that economic outlook is. Again, kind of coming back to what I mentioned earlier, Bill, we look at a whole variety of different economic outlooks and then we weight them and we have been for some period of time kind of weighting them a little bit more on the downside expecting because of the uncertainty that we've been talking about in the past.

Speaker 4: If a recession hits, we will have to adjust it, but that's something we'll have to take into consideration at that time.

Speaker 13: And maybe following up on that, how much of an impact would you say management overlays are having currently? Many banks have had their reserve rates fall below their day one levels already and there's a view that the macro outlook today is not as favorable as it was on January 1st, 2020. Just curious to what extent overlays are being used and to the extent to which you'd consider using them.

Speaker 4: Yeah, I mean I can't speak for what other people are doing. What I will speak to is that if you end up looking at the reserve rate on day one versus today, the change in that is really probably a couple of different factors but it's principally the mix of the portfolio today versus what it was two years ago, both in terms of the quality of the asset but also where we have seen growth over the last couple of years. ABS securities as an example, security lending.

Speaker 13: understood that's helpful. If I can present one last one. You guys have a unique view given the depth of your consumer and commercial businesses. Maybe could you parse out for us what a mild recession you think would look like maybe where you see the greatest risk on both the commercial and consumer sides and then specifically within USB.

Speaker 3: what that looks like. Yeah, I think the greatest impacts will be on the.

Speaker 3: low and moderate income customer base starting there. And that's where inflation impacts the most. And that's where we're already starting to see some shift in spend, as we talked about from discretionary and nondiscretionary. And I think as that continues, you'll see more of an impact there. But the spend levels continue to be good, as we talked about. I will tell you, one change that we are seeing for the last 2 and 1-1-2 years, every month consumer balances, checking and savings account balances, have risen every single month.

Speaker 4: So I think some of those early indicators or early impacts will not be seen in our balance sheet Yeah, and then on the corporate side, you know, we have Very little leverage lending, you know, that's just not an area that we get into our corporate customers are Good investment grade customers. So, you know, they have they have certainly the ability to withstand it especially a mild recession That's super helpful and Andy maybe going back to your comment around the

Speaker 3: that we're seeing things in today's environment that we haven't seen in other downturns or recessionary impacts, and I think this is one of them. So we had trillions of dollars of government stimulus on employment and the fact that people weren't spending given the pandemic for a number of quarters and years, and that built up a cushion. And that cushion certainly is impacting spend levels because now they are using it. And that's that 2.5 trillion of excess savings. And for us, it is that high balance that we're seeing across the country. That's the high balance that we're seeing across every level of deposits, zero to 500, 500 to 1000 at the...

Speaker 14: Good morning, Abraham. Good morning. Good morning. Just one quick question on slide 15 on the payments business and the entity. So you talked about just what might happen in the next few quarters, but talk to us, when we think about the business in the medium to longer term.

Speaker 14: A lot of the digital native companies are struggling right now. What this means in terms of the investments you made over the last few years to gain market share? Should we anticipate any kind of strategic M&A that helps you further your footprint within the payments business? And just how that business should evolve relative to the pie chart and the breakdown you provide us like 15. Let me know your thoughts. Thank you.

Speaker 3: So I think what we've talked about is building this capability, this ecosystem of banking and payments. And we've already made a number of smaller acquisitions, TALEC being one of them, Travel Bank being another, that have built our capabilities and thinking about helping companies manage their entire business from a receivables, a payable standpoint, money movement, lending to the cash flows and such. The acquisitions that you've seen us make is to do exactly that. Coupled with the investments we've made, we've made a number of smaller acquisitions,

in terms of where we're at right now.

And would you expect that over the next year or two you're gaining market share in the business? What I'm trying to do is just handicap disruption risk to that business. It's something that's on the mind of investors. It seems like you're making good progress but would love to hear how you think about where your market share would be if you had to draw out over the medium term relative to today.

Yeah, I do think we have the opportunity. I think we have two great opportunities. One is we have a big slew of banking customers, and I sent another chart to, don't have our payments capabilities yet, and we have a half of our payments customers don't have our banking. So we have a great opportunity to provide more products and services to those customers. That's number one. And number two is given the capabilities in this ecosystem we're building, we have the opportunity to acquire more customers, which we believe will take share.

Thank you.

Thanks. Thank you.

Any speakers? We have no further questions at this time. I will turn the call back to Jen Thompson. Thanks everyone for listening to our earnings call today. Please contact the Investor Relations Department if you have any follow-up questions.

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect. This concludes today's conference.

I'll see you next time.