Q3 2022 U.S. Bancorp Earnings Call
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Ladies and gentlemen, thank you for standing by and welcome to the U S. Bancorp third quarter 2022 earnings conference call.
Following a review of the results by Andy So Sherry, 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 one then zero on your Touchtone phone.
You may remove yourself from the queue by repeating the one day zero command.
This call will be recorded and available for replay beginning today at approximately 11, a M central time.
I will now turn the conference over to Georgia, Anderson Director of Investor Relations for U S Bancorp.
Thank you Alan and good morning, everyone with me today are Andy <unk>, our chairman, President and CEO and Terry Dolan, Our Vice chair and Chief Financial Officer.
During their prepared remarks, Andy and Terry will be referencing a slide presentation, a copy of the slide presentation as well as our earnings release and supplemental analyst schedules are available on our website at U S Bank Dot com I would 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 in 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, George Good morning, everyone and thank you for joining our call. Following our prepared remarks, Terry and I will take any questions.
Yeah, and I'll begin on slide three.
In the third quarter, we reported earnings per share of $1 16, which include two cents per share of merger and integration charges related to the planned acquisition of <unk> Union Bank. Excluding these notable items, we reported earnings per share of $1 18 for the quarter during the third quarter, we achieved record net revenue totaling $6 three.
Billion.
Third quarter results were highlighted by strong revenue growth well controlled expenses and stable credit quality.
This quarter, we added $200 million to our loan loss reserve, reflecting loan growth and our consistent through the cycle underwriting approach to risk management.
At September 30th our CET, one capital ratio was nine 7%.
Tangible book value per share totaled $20 73 at September 30th or three 2% lower than the prior quarter driven by the impact of rising interest rates on our available for sale securities.
Slide four provides key performance metrics.
Excluding notable items, we delivered a return on average assets of one point to 4% and our return on average common equity of 16, 2%.
Our return on tangible common equity was 21, 4% on a core basis.
Slide five highlights continued positive trends in digital engagement as consumer and business customers gain a deeper understanding.
Of our digital capabilities and benefit from our digital plus human approach.
Slide six shows progress across our digital and payments initiatives that are both deepening our core competencies and expanding our competitive advantage, which we believe will drive meaningful profit and return to you for penetration to our company. One example of our digital initiatives is our launch of Calix Register a next generation all in one payments and business analytics platform.
That is helping to bring greater simplicity convenience and efficiencies to the point of sale, where our business banking customers.
On the right side of the slide you can see the continued momentum we are gaining a real time payments transactions year to date through September 30, the total number of transactions or 17 times higher than the full year 2020.
Recently, we introduced an innovative real time payment solution to auto dealers, where we provide long funds instantly. After a long contract is finalized this gives our participating dear dealer clients greater control of our cash flow and helps to improve their day to day operational efficiency.
Turning to slide seven our business banking initiative continues to gain traction with steady progress both in growing accounts and expanding wallet share growth in relationships with both banking and payments products has continued to meaningfully outpace growth in total relationships over the past 12 months looking.
Looking ahead, we expect recently launched an innovative offerings in development to help further deepen our existing relationships between business banking and payments customers.
Now, let me turn the call over to Terry who will provide more detail on the quarter. Thanks Andy.
If you turn to slide eight I'll start with a balance sheet review followed by a discussion of third quarter earnings trends.
Average loans increased three 9% compared with the second quarter, driven by six 5% growth in commercial loans.
7% growth in mortgage loans, and 6.0% growth in credit card balances.
Commercial loan growth reflected increased business activity and higher utilization rates across both large corporate and middle market portfolios.
Underlying demand remains healthy as we continue to focus on appropriate return opportunities to prudently deploy our capital.
In the retail portfolio, we saw solid linked quarter growth in year over year growth in credit card balances, reflecting the strong spending activity and lower payment rates.
Purchase mortgage market share gains and lower prepayment activity continuing to support residential mortgage balance growth.
Turning to slide nine total average deposits increased slightly compared to the second quarter.
Growth in total interest bearing deposits more than offset the impact of lower total noninterest bearing deposit balances as customers respond to the rising interest rate environment.
Total average deposits increased by five 9% compared to a year ago.
Slide 10 shows credit quality trends, which continued to be strong our costs across our loan portfolio.
The ratio of nonperforming assets to loans and other real estate was 0.20% at September 30, compared with 0.2%, 3% at June 30th 0.32%.
A year ago.
Our third quarter charge off ratio of 0.19%.
Improved slightly versus the second quarter of 2022, and third quarter of 2021 levels. The allowance for credit losses as of September 30th totaled $6 5 billion or 188% of period end loans the $200 million.
Increase in our reserve this quarter was primarily reflective of loan growth and to a lesser extent uncertainties in the economic outlook.
Slide 11 provides an earnings summary.
In the third quarter, we reported $1 18 per share excluding <unk> <unk> per share of merger and integration charges related to the planned acquisition of <unk> G Union Bank.
Turning to slide 12.
Net interest income on a fully taxable equivalent basis totaled $3 $9 billion, representing an 11, 3% increase compared with the second quarter and a 26% increase from a year ago Lynne.
Linked quarter growth was driven by strong, earning asset growth and a 24 basis point increase in the net interest margin, which benefited from rising interest rates, partially offset by deposit pricing and short term borrowing costs.
Slide 13 highlights trends in noninterest income.
Noninterest income decreased three 1% on a linked quarter basis as declines in mortgage banking and Treasury management revenues were partially offset by stronger corporate payments revenue and an increase in other noninterest revenue.
Compared with a year ago noninterest income declined eight 3%, primarily due to lower mortgage banking revenue reduced deposit service charges, reflecting changes in our policies and lower treasury management fees due to rising rates, partially offset by higher payments revenue and trust and investment management fee.
Yes.
The decline in mortgage revenue, primarily reflected lower refinancing activity in the market, which continued to pressure <unk>.
Total application volumes and the related gain on sale margins given excess industry capacity.
In the third quarter total payments revenue increased by four 9% compared with a year earlier.
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 a better indicator of underlying business performance in a normal environment.
Credit and debit card fee revenue increased or decreased <unk>, 5% on a year over year basis as the impact of higher credit card and debit card volume was more than offset by continued lower pre paid card activity excluding.
Excluding prepaid card activity, which was elevated last year in connection with supporting unemployment programs credit and debit card fee revenue would have increased 3.0% compared with the third quarter of 2021.
The bottom half of the slide illustrates the year over year growth rates in both merchant processing and corporate payments fee revenue over the last several quarters third quarter merchant processing revenue increased three 6% year over year growth was negatively impacted by unfavorable foreign currency exchange rates given <unk>.
<unk> had volatility in Europe , and specifically in the U K, excluding the FX impact year over year growth in merchant fee revenue was approximately 9.4%.
Slide 15 provides some additional information on our payment services business on the right side of the slide you will see the continued strong momentum we are seeing in our tech led revenue and partnerships within our merchant acquiring business.
The key to that trajectory is the strong growth we have seen in new Tech led partnerships through the third quarter, New Tech led partnerships year to date were two five times the number of new partnerships. We had acquired in the entire year of 2019 and these partnerships are continuing to grow.
Turning to slide 16, noninterest expense increased one 9% on a linked quarter basis, excluding merger and integration costs associated with the pending acquisition of Union Bank.
The change in expense.
It was driven by higher compensation professional services and marketing and business development expenses.
Slide 17 highlights our capital position, our common equity tier one common right.
Our common equity tier one capital ratio at September 30 was nine 7%.
On slide 18, I'll provide some forward looking guidance for U S bank on a standalone basis.
This guidance does not include any potential impact of Union bank.
Let me start with full year, 2022 guidance, which is consistent with our previous expectations. We continue to expect total net revenue to increase five 5% to 6% in 2022 compared to 2021.
We expect mid teen growth in taxable equivalent net interest income, which has slightly improved from our previous outlook of low to mid teens growth.
We continue to expect a decline in fee revenue for the full year, primarily due to the impact of higher interest rates on mortgage revenue due to lower refinancings in the market lowered.
Lower deposit service charges due to pricing changes and a decline in other noninterest income.
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 acquisition.
For the full year of 2022, we expect our taxable equivalent tax rate to be approximately 22%.
I will now provide guidance for the fourth quarter, we expect both total revenue and total core expenses, excluding merger and integration costs to increase by approximately 2% on a linked quarter basis net.
Net interest income will continue to be supported by earning asset growth and higher rates. However, our fee revenue will be lower reflecting typical seasonality in some of our fee based businesses.
Credit quality remains strong.
Over the next few quarters, we expect the net charge off ratio to remain lower than historical levels, but to normalize over time.
Changes in the allowance for credit losses near term will primarily reflect loan growth and changes in the economic outlook.
If you turn to slide 19, I will 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 Mfg Union Bank, we continue to make significant progress in planning for the closing of the deal in the fourth quarter 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.
As a reminder, we expect to close on the deal approximately 45 days after being granted U S regulatory approval.
As previously discussed we are targeting a conversion date in the first half of 2023.
The financial merits of the deal remain intact, our 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.
The company's target CET, one capital ratio is eight 5% based on interest rates as of October 13th our CET one capital ratio at close what approximately would approximate eight 3%, we expect the CET ratio to increase towards 9% as the.
Purchase accounting valuation adjustments accrete into capital through earnings I'll.
Hand, it back to Andy for closing remarks, Thanks Terry.
We have made and continue to make across our business lines are paying off in terms of improved customer experience, new customer acquisition and deeper relationships expense management is a priority and we continue to target target positive operating leverage in 2022 and beyond.
We look forward to closing on the Union Bank acquisition pending regulatory approval. This is a unique opportunity to add scale in one of our core markets and we remain confident in the strategic and financial merits of the deal.
The credit in the current credit environment is benign in fact, our net charge off ratio in the third quarter remained near historic lows and we are not seeing any meaningful early stage metrics that causes concern that being said we recognized the pressure points are building several areas of the economy that could be distressed in the future.
Borrowing costs are increasing inflation is high savings rates are starting to decline in the stock market is well off its highs.
So while the backdrop is favorable today it would not be surprising to us to see an economic slowdown develop at some point driven by lower confidence levels, which may lead to reduce spending and business investment.
There are a number of scenarios that may play out over the next several quarters. We are preparing for a range of possible outcomes by prudently managing credit liquidity and capital. So that we continue to grow within our through the cycle risk management framework and deliver industry leading returns.
In summary, our investments are paying off we remain diligent stewards of capital our balance sheet is strong and our focus is firmly fixed on managing the company for the long term.
I'll close by saying, Thank you to our employees your hard work and focus and doing the right thing for our customers and communities every day is recognized and appreciated.
Yes.
We will now open it up to Q&A.
We will now begin the question and answer session. If you have a question. Please press. One then zero on your Touchtone phone you may remove yourself from the queue by repeating the one that's zero come out once again, if you have a question. Please press one then zero on your Touchtone phone.
John Penn carry with Evercore is online for a question go ahead.
Good morning, John .
On your commentary around the CET one.
Paul.
Close but need to get back up to the 9% before you resume buybacks can you will have more color on that in terms of timing.
When do you think you can reach that 9% would be.
PAA accretion and how we should think about the magnitude of our buybacks at that time.
Yeah. Thanks, John .
So again, our expectation is that closing up eight 3%, but we do expect that.
That will get to roughly 9% was in about four quarters.
And you know a big part of that will be obviously earnings growth driven by the accretion of the mark to market that will.
Impacting earnings during that particular timeframe. So you know our.
Patients on what we have been signaling in the past is that we would start our share buyback program once we get to that 9% so about four quarters.
Okay Alright. Thank you that's helpful. And then just separately can you just give any.
More color on the on the payments trends that you're seeing both on the merchant processing and corporate payments businesses.
And maybe if you could just talk about the potential moderation in activity there that you could see in the economy.
Reacts to that fed action.
Yes, John this is Andy and it's interesting from a credit card spend standpoint, while.
While the categories of spend as we've talked about before have shifted a bit the level of spend is still fairly strong.
About 10% on a year over year basis, and about 30% above pre COVID-19 levels.
We did get impacted as Terry noted in his prepared comments by the FX rate of the <unk>.
Talent in our merchant processing and excluding that our revenues would have been up just up over 9%.
We can we as well sort of a related topic, we see for two years, we have seen our consumer deposit levels by account increase and as we mentioned last quarter, it's been flat and it's been flat for the second quarter and it's relatively flat not down modestly here in the third quarter. So.
So we would expect some moderation of spend but we're not seeing it yet.
Okay. Thanks for taking my question.
Thank you.
Matt O'connor with Deutsche Bank is online with a question.
How are you this morning.
Hello. This is Nathan Stein on behalf of Matt O'connor I, just wanted to follow up quickly on the payments outlook I think previously you've talked about a higher than normal year over year growth in the.
Second half of this year before moderating to high single digits next year.
Just to follow up on what you were just talking about is that guidance still makes sense in this environment.
Yes.
Our expectation is with respect to.
Our payments revenues high single digits, and we think that based upon what we are seeing.
With respect to consumer spend at this particular point in time that that.
It's still very realistic.
And as Andy said.
Now relative to pre Covid volumes are continue to be very strong and while there is a bit of a shift with respect to where that spend is occurring it's still continuing.
The thing is that we're in.
If and when the transaction levels start of.
Tail off I think the impact of inflation will have an offsetting effect. So we still feel pretty confident about it.
Okay, great. Thank you so much that's that's helpful and then one quick.
Follow up question can you just touch on the plan to manage the balance sheet post the deal closing whenever that is I think total assets were just about 600 billion at the end of this quarter and with Union Bank it'll push you above $100 billion threshold. So how are you thinking about that going forward.
Yeah, you know our expectation is that we'll continue to manage the balance sheet in a very prudent way looking for and supporting relationships that are higher profitable sort of relationships.
Our expectation is that because.
Because I think where you are heading is really related to cat two our expectation is that the earliest that we would get into that category as the end of 2024, but our ability to manage risk weighted assets in and balance sheet levels.
May extend that to some extent.
Thank you.
Mike Mayo with Wells Fargo is online with a question.
I Wonder why.
Well I think at a.
A recent conference you said that you will not achieve as much synergies from Union Bank.
Next year as you originally thought but no change in EPS guidance did I hear that correctly.
Yes that is correct and if you think about the dynamics.
Nick.
While the timing has changed and the synergies associated.
Associated with the $900 million $900 million of synergies that we expect to achieve.
When fully implemented.
You know the timing will be offset to some extent by the accretion of the mark to market will be a little bit stronger. So we still feel pretty confident with respect to the accretion levels that we have guided in the past.
Right. So instead of 75% you said, 40% to 45%, yes, 40% to 50%.
40% to 50% and 6% EPS accretive so if youre getting less.
Merger synergies next year than you originally thought and you have the same EPS guidance are you de facto increasing the end result of expected accretion from Union Bank.
Yes, I don't think that were moving off of our estimates that we have provided in the past at this particular point in time, I think we need to get beyond the closing of the approval and then the closing.
We would I think.
<unk> change any estimates at this point.
Okay and any early guidance for next year. Some other banks are giving some general.
Kind of guidepost for 2023 in terms of operating leverage in.
Your guidance is saying this would be the you know from the best offering leverage in over five years, I guess and just trying to figure out how confident you are in that continuing I know you invested for a number of years in the tech infrastructure and that you hope to capitalize on that at a time when business is coming back, but now how much follow through should investors expect.
This positive operating leverage.
Yes, Mike we're focused on positive operating leverage on a core basis and will continue to achieve that next year has a fairly large moving part with Union bank coming on so that is going to be our top priority is to make sure we successfully.
<unk> and integrate that in this company, which will allow for more positive operating leverage, but we haven't provided any guidance update on that yet.
Alright, thank you.
Mike.
Erika Najarian from UBS is online with a question.
And Eric.
Good morning.
Yeah.
Terry.
I have to ask you about the eight 3% pro forma CET. One that you mentioned you are estimating at close.
I think I didn't realize that there has been a significant conversation.
In the market that perhaps it has contributed to them.
The three months of underperformance with concern about the widening of the interest rate marks I think that at announcement you were looking at you know a 50 basis point loan Mark up on UBS.
The portfolio that you're bringing over.
Given that you know a significant portion of that portfolio is rising I think there was a lot of math being done and the buy side, Yeah that was let's say 100 basis points lower.
What you are giving us.
My question here is you know how.
How is the street getting the math wrong or are there protections that are built into the deal or you know are there hedges on ub's balance sheet. It seems to be protecting your pro forma CET one from a greater day, one mark relative to how interest rates have moved since announcement.
Yes, I think it can be a kind of a combination of different things I mean for example, there is there is a.
An expectation that they will deliver.
A certain level of tangible book value and to the extent that they're available for sale portfolio as is impacted prior to the acquisition. You know there is kind of a make whole provision within the agreement related to the available for sale securities. So that is part of it.
Some of it could be just a you know what the assumptions are related to the duration of our you know the resi portfolio and then again, we'll end up looking at and managing in this rate environment.
The balance sheet as prudently as we can to ensure that we are allocating capital to the appropriate businesses. During this timeframe. So it's a combination of a different a variety of different things Erica.
Got it so I guess, that's a good question.
As a follow up question.
That 625 billion that they have to deliver.
There's a make whole provision on the SaaS portfolio, but not on the loan portfolio I'm I'm presuming.
What you are saying Terry.
As true Yep.
Got it is there and I'm presuming also theres a potential C D I offset.
Closures yeah.
That could help offset but obviously that would be a higher amortization cost.
And day two and after.
Yes, I mean, it's a combination of a whole variety of things I mean, not only the the interest rate marks but it's what is what is the loan portfolio look like in terms of overall quality relative to kind of what our original estimates where are we think that that is slightly better the CDI and you have to look at all of the different moving parts.
In terms of coming up with what we think the final impact of the Mark to market is going to be.
Got it thank you so much.
Uh huh.
Bill car Kochi with Wolfe Research is online with a question.
Thank you good morning, Andy and Terry how are you.
Bill.
Hi.
We've got a nice remixing out of available for sale to held to maturity I wanted to follow up on that and more specifically, whether there's room for you to take the mix of available for sale higher it would be helpful. If you could just give some color on what guides your decision on how high the HTM Mexico.
Yes, Great question Bill. So you know today, we're currently at about 53% held the maturity versus <unk>.
<unk> available for sale.
And we moved some securities in early July when rates dipped that allowed us to be able to kind of increase that percentage.
That we take into consideration is the fact that you know with respect to the <unk> portfolio.
There is also floating rate securities that have very little impact with respect to <unk>. So when you end up combining that together it's about <unk>.
60% that is protected.
Substantially protected from movements in interest rates, so think about it almost as a 60 40 sort of split in terms of the sensitivity to interest rates.
Is there opportunity I mean, we'll continue to look at whether that makes sense relative to our balance sheet positioning, but at least right now we feel pretty comfortable with that mix.
It gives us the ALC eye protection as well as some flexibility with respect to managing the balance sheet.
Oh, and then you'll find it.
And then the other thing you have to kind of think about is that we have union bank.
You know that hopefully will be closing on here in the fourth quarter and.
That ends up influencing decisions that we make with respect to the positioning of the balance sheet.
And then in excuse me of the Securities portfolio and then.
Also with respect to deposits, we're going to have a significant amount of deposits coming on and that's going to help us as well.
Very helpful. And then separately I wanted to follow up on funding and more specifically the decrease in noninterest bearing deposits is it reasonable to expect that your mix of noninterest bearing deposits is going to gradually revert.
To pre COVID-19 levels as deferred proceeds with Q T.
Maybe if you could address that if you have any view sort of at the industry level and then and then specifically for USB.
Yes.
Certainly I think that Q T is going to put pressure on deposits overall and.
As interest rates rise, you'll continue to see a shift out of noninterest bearing toward interest bearing whether.
Think that you know the assumption with respect to pre Covid.
They make sense, depending upon how much they bring their balance sheet down et cetera, how much liquidity they leave in the system.
With respect to us.
Probably if I had to if I had you make estimates I would say that it probably stays a little bit better than.
Then where it was pre pandemic in part because we've we've grown our consumer portfolio.
She tends to tends to offset that and then we've also worked hard to focus within our corporate trust business.
On.
On retaining those deposits that are more operational in nature and as because there are more operational in nature. They tend to be more interest bearing noninterest bearing as opposed to interest bearing.
That makes sense and sticking with that theme you know in terms of the mix of debt relative to your overall funding that's still well below fourth COVID-19 levels can you speak to the likelihood that we should expect that to gradually remix to pre back to pre COVID-19 levels.
Again, I think the broad assumption would be fair, but again keep in mind that Union bank is going to be coming on and you know they have a significant they actually have a higher percentage within their deposit base. That's consumer based and so I think you have to kind of look at the entire mix and I think we're gonna be.
U S Bank I think.
Specifically, it's probably going to be in a better position than we were pre pandemic.
That's great finally, if I could squeeze in one last one could you speak to your ability to bring off balance sheet money market funds back on balance sheet, maybe some of the dynamics surrounding that.
Yeah. Great question. So currently we have about 100 and roughly $130 billion in money market funds.
And that is a business that's very tied to our in our institutional investor services business.
Based upon what we need to do from a funding perspective, we have the ability from a from a pricing point of view to bring that back on balance sheet or off balance sheet, but it's you know it's pricing decisions at that influence customer behavior and it is a it is a great source for us from.
From a funding standpoint, you know as as there is more pressure on deposits going forward.
Great. Thank you for taking my questions.
Gerard Cassidy with RBC is online with a question.
You can mine Gerard.
Hi, Gary Hi, Andy.
Gary I think in your comments you talked about the residential mortgage business and the gain on sale margins were lower and I think you referenced there's still excess capacity in that line of business can you share with your outlook.
See some of that capacity coming out in the fourth quarter if rates remain elevated for the project or the refi activity and of course being negatively affected by elevated long term rates.
We certainly are seeing capacity come down in the industry I think you've seen various announcements of bank and non bank mortgage operations kind of pulling back or reducing capacity.
I think it probably still needs to reset to some extent, what's happening with rising rates and the impact that it might have on both refinancing as well as home sales.
But we do see it coming down I, our expectation is that gain on sale margins stabilize and probably for us improve a bit.
In the third quarter, our gain on sale was was down maybe a little bit more than what we had anticipated but.
About half of that excuse me about half of that is really driven by the mix between correspondent and retail and the other half of it was it was really more a revenue recognition some timing issues and some secondary kind of market valuation issues, which we think will reverse a bit.
Very good.
I saw when we looked at your average loan portfolio. Obviously, you had some very nice growth in C&I and very strong growth year over year, we're hearing some market chatter and I don't know if its just the equity Reits are squawking, but apparently the commercial real estate mortgage business might be a little more or less liquid.
Any color that you guys can offer on what you're seeing in commercial mortgage real estate is it an area that you are pulling back from I know you had growth, but maybe some color and insights on what you're hearing and seeing and what your views are for that business.
Certainly with respect to commercial real estate you know, it's an important business for us and one that will continue to be very focused on and I think part of it is just dynamics in the marketplace. You know if you end up looking at.
Large corporate REIT sort of financing.
We continue to lend in that particular space, we actually probably saw some growth in the third quarter, but we.
We do know homebuilders are starting to pull back.
And even making decisions to maybe pull out of.
Out of potential projects that they were planning on doing and then in the middle market space in terms of commercial real estate.
Actually still from a pricing standpoint pretty competitive.
And and.
People are extending terms associated with that and that's the space that we're not comfortable with at this particular point in the cycle. So we're seeing a little bit of.
Of our pressure maybe in the middle market space, but we're fine with that.
Very good thank you.
Sure.
Ken Houston with Jefferies is online with a question.
Ken.
Hey, good morning, Terry.
Thanks.
Wanted to just ask a little more on the on the whole outlet for deposits I know you talked about the mix and I was just wondering what you guys are seeing given.
Fact that you have a little bit of a different.
Mix versus most of the peers in terms of any updates on what youre thinking about where where betas. Eventually go to just given that we're in a completely different rate regime than we might have.
Six months ago.
Yeah.
Well, maybe I'll start just by reiterating if we end up looking at the mix of our deposit base. It has changed a little bit relative to maybe what we were three four years ago et cetera, and certainly when we went through the last.
The rate rising cycle, a little stronger consumer a little more focus around operational deposits within our trust business et cetera.
<unk> is also.
On a relative basis represents only about 15% of our deposit base today.
And again think about Union bank coming on and some of the dynamics that that will we'll bring but coming back to deposit betas than maybe with that context.
You know, we're actually outperforming probably better than what we might have expected I think deposit betas were about.
In the second quarter about 30%.
You know coming up from about 20%, we would expect that to be maybe in the high thirties, as we get into the fourth quarter, but.
But certainly as rates continue to rise and if the fed continues to be very aggressive it's going to migrate to higher percentages.
Our through the cycle estimate right now is still kind of mid thirties, though when you kind of think about the entire rate cycle that we're going through.
Okay, and then as a follow up to that so as that plays forward, you're still expecting good NII growth into the fourth quarter. Okay can I know, you're not giving 'twenty three guidance, but just can you help us understand like what is the gives and takes to make can you still grow NII post the fourth quarter sequentially or is it just a.
Reality check about some of these mix and beta functions that make that tougher.
Yeah, well I, just I think that we can continue to grow NII as we get beyond the fourth quarter, what I would what.
What I would say, though is that probably the pace of growth changes in the industry and that'll be a function of a it'll be a function of.
You know the the deposit betas changing and.
The loan growth that certainly the industry has been experiencing I think is is very strong I don't know whether it'll keep that particular base.
You know as we kind of continue to move forward.
Alright understood. Thank you Terry.
Betsy <unk> with Morgan Stanley is online with a question.
Hi, good morning.
Hey, Betsy.
On your own securities. It would be helpful. Maybe you could give us a sense as to how we should be thinking about the pull to par in the AFL spark like if I know, it's a big ask but if rates don't change from here you know how many how many quarters or years is that that we should be breaking into our models.
Yeah, well I think what we have said is that the duration of the portfolio is a little over five years. So if you think about if you think about that.
I think that probably gives you some guide with respect to how.
<unk> kind of comes into it.
Into the capital equation.
Okay. So it should you know, it's like a longer than five year period.
Yes, a little a little bit longer but not much okay.
And is there anything youre thinking about with regard to restructuring the books once.
Union Bank comes on.
Yeah.
Again, we'll take a look at all of the balance sheet and kind of see where it makes sense, we do expect that we.
We might remix the securities portfolio when it comes on.
We may end up increase in H T M. As a result of of what we bring over et cetera. So it is definitely something we will take a look at.
And then just separately on the consumer lens that you have in the payment side could you just give us a sense as to what you saw on <unk> I know <unk> tends to be a relatively strong quarter for you any any changes in behavior any insights as to how you think <unk> will end up shaping up.
So Pat TV.
<unk> spend levels overall continue to be strong they were up and credit card spend about 10% on a year over year basis about 30% above pre COVID-19 levels. The mix of categories has changed a bit consistent with what we've talked about before a little bit away from hard goods to more services and a little bit away from.
Non discretionary.
Non discretionary from discretionary so that that shift in spend that we have been discussing continues but the overall levels are also still very strong.
And then on the savings levels of the consumers are hanging in there.
Yes, Betsy so.
I mentioned that we saw increases across all strata is our balances for about two years, but the last two quarters have been stable.
Across all the categories. So so not growing anymore, but not shrinking dramatically as well alright. Thanks, So much you bet.
Hey, Ken I, just wanted to clarify something.
With respect to deposit betas, just to make sure that I've got the percentages right.
Deposit betas in the second quarter were about 20% deposit betas in the third quarter were just shy of 30% and we would expect that you know that increase to continue as rates rise and to accelerate a bit.
And again, probably in the high.
<unk>, when we get into the fourth quarter.
We have no further questions at this time I will now turn it back to George Anderson. Please continue.
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