Q4 2022 U.S. Bancorp Earnings Call
Speaker 2: Alright, ready to go.
Speaker 3: We are all set.
Speaker 4: Did you hear my introduction?
Speaker 5: No.
Speaker 6: We'll do that again. I apologize. Welcome to the US Bancorp fourth quarter 2022 earnings conference call.
Speaker 7: Following a review of the results, there will be a formal question and answer session.
Speaker 8: If you'd like to ask a question, please press 1 then 0 on your phone.
Speaker 9: If you'd like to withdraw, please press 1 then 0 again.
Speaker 10: This call will be recorded and available for replay beginning today at approximately 11 o'clock a.m. Central Time. I will now turn the conference call over to George Anderson, Senior Vice President and Director of Investor Relations for U.S. Bancorp.
Speaker 11: Thank you Brad and good morning everyone. With me today are Andy Cesari, our Chairman, President, and Chief Executive Officer, and Terry Dolan, our Vice Chair and Chief Financial Officer.
Speaker 12: 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 usbank.com. I would like to remind you that any forward-looking statements made during today's call are subject to risk and uncertainty. Factors that can materially change our current forward-looking assumptions are described on page two of today's presentation.
Speaker 13: in our press release, our Form 10-K , and in subsequent reports on file with the SEC. Following their prepared remarks, Andy and Terry will take any questions that you have. I will now turn the call over to Andy. Thanks, George. Good morning, everyone, and thank you for joining our call. I'll begin on slide three. This quarter, we completed the acquisition of MUFG Union Bank on December 1st, and we will be continuing to work with the National Bank of America to ensure the success of the U.S. and its partners in the U.S.
Speaker 14: optimization activity. Terry will provide more details on these notable items.
Speaker 15: Importantly, we ended the year with a common equity tier one ratio of 8.4%, which was just above our expected level at deal close, and we delivered positive operating leverage for U.S. bank or legacy operations of 230 basis points for the full year. Long year over year pre-tax provision income growth.
Speaker 16: as adjusted for notable items, was driven by net interest income growth and positive operating leverage.
Speaker 17: Credit quality remains strong, although credit metrics are starting to normalize as expected.
Speaker 18: Slide 4 details are reported and adjusted income statement results as well as end-of-period balances and other performance metrics.
Speaker 19: End of period assets for the company totaled $675 billion, reflecting the acquisition of Union Bank and certain balance sheet optimization actions.
Speaker 20: Slide 5 highlights key performance ratios.
Speaker 21: This quarter, we delivered a return on average assets of 1.2%, a return of average common equity of 16.8%, and a return on tangible common equity of 23.4%, each as adjusted for notable items.
Speaker 22: Turning to slide six, the completion of the Union Bank acquisition marked a significant milestone for our company. With double digit percent increases in loan and deposit balances, Union Bank adds meaningful scale to our business that enables us to better serve our customers and communities.
Speaker 23: Union contributes considerable small business and consumer market share in a demographically attractive California market, and we're excited about the potential to deepen existing union bank relationships by overlaying our leading digital capabilities and robust product set, including wealth management, consumer and business banking, and payments operating.
Speaker 24: across a loyal but under-penetrated consumer base. In many ways this deal underscores our commitment to creating a stronger, more competitive regional banking organization in a rapidly evolving environment.
Speaker 25: One of the more attractive aspects of this transaction is Union Bank's high quality, low cost consumer deposit franchise, which will support continued loan growth and margins.
Speaker 26: Let me turn the call over now to Terry who will provide more detail on the quarter.
Speaker 27: Thanks, Andy. If you turn to slide 7, as Andy mentioned, we reported diluted earnings per share of $0.57 for the quarter, or $1.20 per share, after adjusting for notable items related to the acquisition.
Speaker 28: Notable items related to union bank acquisition are comprised of three primary elements that are reduced earnings per share by 63 cents related to balance sheet optimization, balance
Speaker 29: merger and integration costs, and the impacts on provision expense related to acquired loans and actions taken to optimize the balance sheet.
Speaker 30: During the fourth quarter, the company recognized a one-time $399 million pre-tax loss on a net basis related to several actions taken to optimize the balance sheet, manage the interest rate volatility impact on capital levels, and position the company for future growth. Subsequent to obtaining regulatory approval for the transaction, we entered into interest rates of 0.5%.
Speaker 31: terminated at the time of closing and the losses recognized through earnings largely offset the interest rate marks recorded into the balance sheet through purchase accounting.
Speaker 32: In addition, the company optimized its balance sheet by selling certain loans and repositioning its investment portfolio on certain equity investments. Within non-interest expenses, we incurred merger and integration related charges of $90 million that primarily included the impact of specific deal closing costs.
professional services and employee related expenses.
We also incurred a $791 million charge to the provision for credit losses, which reflects an initial provision impacted by the acquisition of $662 million and a net loss of $129 million related to the securitization of approximately $4 billion of legacy.
indirect auto loans. Again, these moves enabled us to more effectively position the balance sheet for profitable growth and optimized returns.
Slide 8 provides a more detailed earnings summary. Union Bank, which was included in our consolidated results for one month, contributed $302 million of revenue.
$221 million of non-interest expenses, $81 million of operating income, and $44 million of net income to the company representing 3 cents per diluted share.
On slide 9, end of period loans increased 13.3% on a linked quarter basis to $388 billion, which included core loan growth and acquired loans from Union Bank. Union Bank contributed ending loan balances of $54 billion net of purchase accounting adjustments.
partly offset by a reduction in balances $15 billion related to balance sheet optimization actions, including loan sales and securitizations.
Slide 10 provides end of period deposit balance composition.
to $525 billion driven by the acquisition, which contributed $86 billion of lower cost
deposits and actions taken as a result of the deal to optimize our funding sources.
On a core basis, we saw deposit balances decline slightly this quarter.
Turning to slide 11, the investment securities portfolio grew 4.2% linked quarter to $170 billion. The additional securities from Union Bank were offset by balance sheet optimization actions.
Slide 12 highlights revenue trends.
Adjusted net revenue totaled $6.8 billion in the fourth quarter, which included revenue contribution of $302 million from Union Bank, primarily representing net interest income.
For Legacy US Bank Corp, net interest income grew 5.5% on a link quarter basis and 29.2% year over year, driven by strong earning asset growth and net interest margin expansion, which benefited from rising interest rates.
Results were partially offset by higher deposit pricing and short-term borrowing costs.
Non-interest income as adjusted for the legacy company declined 3.0% compared to the third quarter driven by seasonally lower payment service revenue and lower commercial product revenue offset by stronger mortgage banking revenue.
Year over year, legacy adjusted non-interest income declined 5.5% driven by lower mortgage banking revenue from reduced refinancing activity and lower servicing charges offset by stronger payments services revenue and trust and investment management fees.
Turning to slide 13, adjusted non-interest expense totaled $4.0 billion in the fourth quarter including $221 million from Union Bank.
Included in expenses was approximately $42 million of intangible amortization due to core deposit intangibles established at the time of the acquisition.
Legacy non-interest expense as adjusted increased 3.8% on a one-quarter basis, largely driven by higher compensation related expenses as well as higher expenses related to professional services, marketing, technology and tax credit amortization. Slide 14 shows credit quality trends.
We reported total net charge-offs for the corridor of $578 million. After adjusting for acquisition impacts and the balance sheet optimization activities, net charge-offs totaled $210 million, or 0.23% of average loans.
up from 0.19% in the third quarter, which reflected the continuing normalization of credit losses.
Non-performing assets for the Legacy Bank increased slightly, while Union Bank contributed $329 million to the total. On a combined basis, the reported ratio of non-performing assets to loans and other real estate was 0.26% at December 31st.
compared with 0.20% at September 30th and 0.28% a year ago, reflecting a continued strong credit quality.
The provision for credit losses was $1.19 billion, which included a provision of $791 million related to the acquisition and balance sheet optimization activities.
This provision includes an initial provision impacted by the acquisition of $662 million and $129 million related to our balance sheet optimization activities.
The allowance for credit losses as of December 31st totaled $7.4 billion or 1.91% of period end loans, which reflects increased economic uncertainty and the incorporation of the Union Bank portfolio.
Slide 15 highlights the drivers of our linked corridor common equity tier 1 capital position. As of December 31st, our CET1 capital ratio was 8.4%. Acquisition impacts
of 180 basis points, included an increase in goodwill and other intangible assets that reflected the impact of credit and interest rate marks, the initial provision for credit losses, balance sheet optimization actions, as well as the increase in risk-weighted assets with the addition of Union Bank.
These impacts were partially offset by an increase to equity related to shares issued to MUFG as part of the purchase price of Union Bank.
Slide 16 provides our current expectations of certain financial metrics related to the transaction.
The financial and strategic merits of the deal remain intact and are very attractive.
Earnings per share accretion is now expected to be 8 to 9% in 2023, which is higher than originally estimated.
While our tangible book value per share dilution is higher than initially estimated due to the significant impact of rise in interest rates on the interest rate marks at close, our estimated earned back period is only slightly longer than our original estimate at two years versus our original estimate of 1.5 years.
Slide 17 provides a comparison of credit and net fair value marks from the time of our announcement to closing. Credit marks are lower due to favorable changes in portfolio composition and credit quality, partially offset by economic deterioration.
interest rate marks inclusive of loans, securities net of sales, and debt are higher than anticipated at announcement due to higher interest rates. But we expect that to accrete quickly back through earnings.
The core deposit in tangible is also higher than originally estimated, reflecting the increased value of lower cost core deposits in a higher rate environment.
I will now provide first quarter and full year 2023 forward looking guidance which is provided on slide 18.
starting with the first quarter 2023 guidance. We expect average earning assets of between 605 and 610 billion dollars in the first quarter and a net interest margin that is five to ten basis points higher than the fourth quarter unequal.
Total revenue is estimated to be in a range of $7.1 to $7.3 billion, including approximately $100 million of purchase accounting accretion during the quarter.
Total non-interest expense, as adjusted, is expected to be in the range of $4.3 to $4.4 billion, inclusive of approximately $125 million of core deposit and tangible amortization related to Union Bank.
Our income tax rate, as adjusted, is expected to be approximately 22 to 23 percent on a taxable equivalent basis.
We anticipate merger and integration charges of between $200 and $250 million for the quarter.
I will now provide guidance for the full year.
For 2023, average journey assets are expected to be in the range of $610 to $620 billion with net interest margin expansion of between 5 to 10 basis points compared with the fourth quarter of 2022.
Total revenue is expected to be in the range of $29 to $31 billion, inclusive of between $350 to $400 million of full year purchase accounting accretion.
Total non-interest expense as adjusted for the year is expected to be in the range of $17 to $17.5 billion, inclusive of approximately $500 million of core deposit and tangible amortization related to Union Bank.
Our estimated full year income tax rate on a taxable equivalent basis as adjusted will be approximately 22 to 23 percent.
We expect to have $900 million to $1 billion of merger and integration charges in 2023.
I will now hand it back to Andy for closing remarks. Thanks, Terry. We accomplished a lot this past year, including the completion of the Union Bank acquisition and a strong legacy PP&R growth supported by positive operating leverage on an adjusted basis.
Union Bank adds significant scale to our business and deepens our commitment to serving customers in creating economic opportunities for communities across the West Coast.
We continue to target the Memorial Day weekend systems conversion, incorporating a lift and shift approach to our applications.
which mitigates risk and allows us to more quickly capture meaningful cost energies.
There is still a tremendous amount of economic and geopolitical uncertainty, and we are preparing for any scenario. I believe we will perform well because of the strength of our business, a strong balance sheet and the great team we have.
As we've proven during previous economic downturns, our business model is resilient and recession ready, in large part due to our disciplined, through the cycle, credit underwriting standards and robust risk management infrastructure.
Our consumer clients are predominantly prime, super prime, and our commercial book is generally investment grade. And we have very little leverage lending commitments.
We are focused on prudent balance sheet growth, high return, high margin opportunities, and the prudent allocation of capital to lines of business and products best served to deliver on our strategic objectives.
Our growth strategy is focused on creating value for our customers, communities, and shareholders which allow us to generate industry leading performance.
Let me close by saying thank you to our 77,000 employees across the company, including our newest colleagues from Union Bank. Your dedication and commitment are what make U.S. Bank special and the destination of choice for all the constituents we serve. We will now open up the call for Q&A.
We will now begin the question and answer session. If you have a question, please press 1 then 0 on your phone. If you wish to be removed from the queue, please press 1 then 0 again.
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and then zero on your phone.
And we can first go to Scott Seifers with Piper Sandler. Please go ahead. You
Ready, Scott? Got it.
I have a question for you. Just sort of at a top level, I was hoping you could speak to what sort of balance sheet and capital management will look like for you. So you're still under $700 billion in assets, but any thought on sort of limiting growth or will there be additional sales or securitization to help keep you under there?
And then I guess on repurchase, I know we're on pause until we get back to the Common Equity Tier 1 target, but with the sort of looming category move up would there be any thought to hold off longer than that just to sort of see what happens? Just any any thoughts on either of those would be great, please.
Scott, I'll start. This is Andy and Terry will head in. So first of all, we're not limiting growth in the company. One of the reasons we positioned the balance sheet and took the optimization actions we talked about Terry went through was to allow for profitable growth. It also was related to the credit box that we manage within as well as the returns that some of those categories of assets that we...
And if we have any further balance sheet optimization ASHGINS securitizations, they would be very nominal and not material in nature. Terry, what would you have? Yeah, no, I would just, again, reiterate, we're ready to be able to adopt category 2 by the end of 2024. But, you know, we're ready to be able to adopt category 3 by the end of 2024.
There's no real cap. We wouldn't expect any real significant balance sheet optimization from here. We spent a lot of time positioning the balance sheet for growth as we go forward.
Wonderful. And then just sort of thoughts on repurchase as well. No, we're on pause for now, but it's still sort of a question mark. So I would be curious to hear your thoughts.
Yeah, Scott, so as we've said and we continue to expect that we are starting at a good spot, about 8.4% CET1. We expect that to create up to at or above 9% by the end of next year and it continued to accrete in 2023.
and continue to move up from that particular point. So one of the things we'll do is, once we get to above 9%, we'll have to make an assessment as to all the different things that are happening out there from a regulatory perspective. I mean, you have.
You know, the regulators looking at Basel III and, you know, are, you know, having to think about category two and those sorts of things. But I think it's really going to be based upon, you know, what the landscape at that particular point in time looks like. But, you know, certainly in terms of our core CET1, it'll create nicely throughout 2023.
Wonderful. All right. I appreciate all the thoughts. Thank you. Thanks, Scott.
Next we can go to Erica Najarian with UBS. Please go ahead. Hi, good morning and thank you for all the detail that you gave us on the slides. My first question is on the cadence of the cost synergies as it relates to your expected Memorial Day weekend conversion.
So first clarification question, the 35% cost synergies, is that a target for full year 2023? And what is that cadence like? Do we expect very little in cost synergies until Memorial Day weekend, and then an acceleration in cost synergy? 5
capture as the systems converge? Yeah, Erica, great question. And just to confirm, our expectation is that of the $900 million of cost energies, we'll see about 35% of that next year in 2023. And so from a cadence standpoint,
You know, with the Memorial Day conversion, the vast majority of those cost energies will start to really kick in subsequent to that system conversion. So smaller during the first half of the year, much more significant of that 35% in the second half of the year.
Got it. So, in other words, we should anticipate an exit rate by 4Q23 of well above 35%.
Yeah, by the time we get to the end of the fourth quarter, you know, we will have incorporated the vast majority of the cost energy such that by the time we get to 2024, you know, we will be in a good position to have achieved 100%.
Got it. And my follow-up question is, you know, on the economic outlook, you know, if you could remind us what is being captured in the legacy U.S. bank reserves in terms of, you know, the GDP outlook and the unemployment outlook, and how are you thinking, you know, based on that outlook?
charge offs for Legacy US Bank would trend, you know, as we anticipate, it seems like a lot of your peers are anticipating a mild recession from here. Yeah, I would say that, you know, our expectations are probably consistent with that sort of a thought process.
You know, when we are thinking about the reserve, you know, our base case is that, you know, there is a mild recession probably in the second half of the year and that unemployment ticks up and GDP is either relatively flat or down a bit. You know, when we go through the reserving process, as we said in the past, you know, we end up looking at.
five different potential scenarios all the way from a base case to a severe sort of recession. And I would say that from a reserving perspective, we're a little bit weighted toward that downside scenario, so a little bit more conservative. From a charge-off perspective, our expectation is kind of using the...
baseline of about 23 basis points in the fourth quarter, you know that that will continue to normalize. You know, throughout the year, you know, we'll see both delinquencies and charge offs, you know, moving up. But, you know, to kind of give you some perspective, you know, our pre-pandemic was at 50 basis points. You know, we probably don't see that until.
2022 over 200 basis points. If you back into the numbers, I'm getting positive operating leverage year over year all in somewhere between I don't know a hundred nine hundred base points I'm not sure if that's correct.
If you back in the numbers, what do you get? And why there's such big variance in the revenue guide, that's 29 billion versus 31 billion, and why is the margin still increasing five to 10 base points in the fourth quarter? It's more of an improvement versus others.
So I'll start on a couple of things, and then Terry will add in. So let me sort of go backwards on your questions. The margins increasing, principally because of the value of the low-cost deposits that Union Bank brings on. We talked about that a lot, Mike. And $85 billion of principally consumer low-cost stable deposits in this environment is very valuable.
driving up that margin on a quarterly basis and that's reflected in that five to ten basis points. We did achieve 230 basis points of positive operating leverage in 2020.
little bit of background.
Hey Mike, we're getting a little background. Can you mute your line? Thanks.
we did achieve 230 basis points, a positive operating leverage in 22. We would expect to achieve continued positive operating leverage into 23. But 23 is going to have the merger related charges in it as well, so I'm looking at it on a core basis. And Terry, what would you add? Yeah, I just, maybe kind of coming back to the NINJA's margin, you know, we expect...
are going to accelerate a bit in 2023.
And as a follow-up, look, US Bancorp had been a low-cost producer for a long time. It looks like you're going to trend back in that direction. So it sounds like you still have no change in expected synergies. I get it, Union Bank is performing better and that's why the increase in you had brought higher.
being a drag for the last five or so years. If you could elaborate on that, thank you.
Sure, Mike. And you're right, we still are projecting, as Terry went through, $900 million of cost savings, 35% in 2023, 100% fully implemented in 2024. Importantly, we have not, in the guidance that we provided, provided any revenue synergies. So it's without revenue synergies, which we think there are going to be.
particularly after the integration and conversion process. We are past the heavy spend on tech, you're right. We're more of at a flat line and starting to gain the benefits of that. And part of the benefit of this transaction is leveraging the investments we've made in the company over the last three or four years to allow us to lift and shift to our technology platform in a very low cost way. So that benefit is driving.
On the credit metrics, I know you indicated that you're starting to see normalization and charge-offs and delinquencies. I want to see if you can elaborate a bit more on what income cohorts are you seeing the normalization we're hearing from some of the consumer finance players that they are seeing some.
normalization impacting or moving beyond just the non-prime and low income but into prime and super prime? And also what asset classes are you seeing the normalization most obviously? Is it just on the card side or in other asset classes? Thanks.
Yeah, I mean, this is Terry. So, you know, maybe to address your first question in terms of where we're seeing it, and maybe as kind of a reminder, you know, from an underwriting perspective, we focus on prime, super prime, really, in all of our consumer portfolios. You know, to the extent that we're seeing delinquency starting to tick up, you know, it's...
of fairly significant that is coming down. As that's coming down, people are revolving more on their credit cards. And I think it's just kind of a natural progression that we are seeing. And again, starting more with the unsecured and the credit card portfolio, not as much with respect to the other.
the other portfolios yet, but as things continue to normalize, we would expect that too.
Okay, thanks, Terry. That's helpful. Then, I guess related, how does this development in consumer behavior and your macro assumptions as well, how does that impact your expectations for your payments revenue and your card revenue and...
and merchant processing revenue as you look out through the year considering the macro dynamics. Thanks.
Yeah, so the payments revenues you saw still is well above pre COVID levels. The card spends 25% above on a year over year basis were plus 5%. So spend continues to be strong, the categories of spend are shifting a little bit. And we would expect continued strong spend but moderating a bit as we go into the rest of 2023 for the reasons that Terry mentioned, but still expect growth.
but again, probably more moderate in nature as we go forward, and the savings levels start to normalize, and consumer behavior starts to change.
Yeah, the thing that I would end up adding, John , is that one of the things we've talked about in the merchant processing is that we think that business is kind of a high single digits.
And, you know, when we look at 2023, you know, that's kind of our expectation for that particular business. You know, relative to 2022, you know, we anticipate that our credit card revenue will strengthen a bit in terms of year-over-year comparisons.
And, you know, that is primarily because prepaid sales and prepaid revenue, which has been a drag, kind of starts to moderate. And then, you know, on the corporate payment card business, you know, we continue to think that that's going to be a big deal.
reasonably strong, certainly high single digits, if not low double digits. And that's, you know, we're continuing to see travel and entertainment recover very nicely in that particular space. So, you know, we feel pretty good about the payment revenue trends for 2023.
Thank you, Terry. Appreciate it.
Great. Thank you, Terry. Appreciate it.
Next we go to Abraham Poonawalla with Bank of America. Please go ahead.
Hey good morning.
I just want to follow up one on credit. So you talked about consumer looking at the CRE slide. Just if you don't mind talking, sharing your perspective around the CRE book, if you're beginning to see any softening either in certain markets, maybe California or within the office CRE book, which is about 10% of loans.
Yeah, you know, maybe at a high level, you know, certainly from a CRE perspective, you know, valuations I think are moderating to some extent. You know, the areas that we have had probably the, you know, greatest focus on, if you will, is really office space and that is really probably as much tied to return to office sort of behaviors or patterns.
And I think that that is probably a longer term sort of structural adjustment that's going to end up happening. We're just going to have to watch it over time. But you know when we just kind of look at the core CRE, you know portfolio, it continues to perform pretty well from a credit perspective at this particular point. I guess it was just one separate question around
Thank you for seeing this business.
As you mentioned, we've made a lot of investments in tech-led activity and our tech-led investments have led to that being the principal area of growth for the merchant processing categories. And then on the card side, the partnerships component continues to be an important strength for us and a point of growth as we look forward. So those two areas, tech-led on merchant and partnerships on card are...
are doing well and it's partly due to the investments we've made over the past few years.
Is this strategy there to just build this in-house or do you see more kind of bolt-on acquisitions within that business?
Many of the investments we've made are internal investments that we've developed our capabilities and our platforms to allow for different activities and allow for integration with some of the software that the companies use to run their business. We've added as well, as you know, miscellaneous M&A acquisitions that you said bolt ons like italic or bento that add capabilities around the edges.
Terry, on the balance sheet optimization where you guys decided to, you know, sell off certain loans that were required, can you give us some color on what types of credits were in those sales and why were they chosen? You know, I know they didn't meet your credit profile but what was the driver of that? I mean, some of the details of the credit profiles.
Yeah, maybe as a starting point, when we thought about the balance sheet optimization, the things that we were thinking about is really repositioning the balance sheet to position ourselves for growth going forward.
to be able to optimize or improve profitability and looking at profit margins across various portfolios and returns and then the risk profile. So maybe from a risk profile perspective, we ended up looking at Union Bank portfolios that we ended up acquiring. There were a couple of different areas that we focused on.
One is that they had acquired a number of loans related or through a lending club channel, if you will. And that was something that we had planned to run off over time originally when we looked at the deal. And we made a decision that when we looked at the credit risk profile, how it has originated, etc., that we thought that taking care of that.
more on the US bank side, we ended up looking at lower margin indirect auto loan portfolio. We securitized about $4 billion associated with that particular portfolio. And then the other things that we ended up looking at in the C&I book of business and across kind of our corporate space.
It's just relationships that maybe had lower returns associated with it, where we could optimize that. So we allowed some of that to run off, so to speak, during the quarter. And those were the primary areas of focus with respect to the balance sheet optimization. The last thing I would maybe say on the investment portfolio side...
is that we end up selling about $15 billion of securities, the vast majority of that coming from Union Bank. And that was really to kind of think about it from a interest rate risk perspective, HTML expect, HTM expect of perspective, et cetera.
But that was the other area where we did some balance sheet optimization.
Terry, were there in the corporate loans, were there any shared relationships, meaning you had an exposure to XYZ company as the Union Bank, and the total was maybe too much, and you guys decided to take that down as well? Yeah, exactly. So maybe from a risk perspective, looking at hold levels or...
reported number at 64 BIPs versus your core legacy number of 23 basis points. If I pull out the 189 from the optimization, it looks like the net charge-RF ratio is around 43 basis points, including the union bank numbers. Is that kind of the level we should kind of gear ourselves to for 2023 now that union will be fully implemented?
that you articulated. But then under CECL, what you end up having to do is you have to recapture loans that they have charged off, you have to make an assessment, and then if you believe that that charge off was appropriate, you have to charge that off on day one, so to speak.
And there was about $173 million of charge-offs related to that kind of day one effect associated with CECL. So there's really kind of three components, but 64 on a reported basis, 23 on a core basis. And when we think about going forward, we're really looking at the
I would use the 23 basis points as kind of the start point. And that's about $210 million worth of core charge-offs. Thank you for clearing that up. I appreciate it. Yep. And next we can go to Betsy Grisak with Morgan Stanley . Please go ahead.
Hi, good morning. Hi and congratulations from IAN2. And the deck is super clear. I really appreciate all the effort to make it simple and straightforward. So a couple questions for me just to follow up on the discussion we just had. Could we also talk a little bit about how we should think about the reserving level as we go throughboring around IANAh, is the? yes
into 24 because, like you said, you've got the fair value marks, you had to do the add as per the CECL rules. So does reserve ratio stabilize from here? Does it actually inch down? Is there a scenario in which it would move higher? Could you just frame out how we should think about that? Thanks.
Yeah, I mean, obviously it is impacted by a lot of different things in terms of how economic uncertainty ends up changing and the mix of the portfolio, how it might change. But as we kind of think about 2023, I think that that 191 basis points is probably a good metric throughout the year.
It might inch down a little bit, but you know, I think that by and large we feel pretty comfortable with that as we think about 2023 based upon our kind of base case, so to speak.
inch down a little bit, but you know, I think that you know by and large we feel pretty comfortable with that as we think about 2023 based upon our kind of base case, so to speak. Okay, and then.
I have one other question on the growth of the balance sheet. I know you addressed this a bit before, but when I look at the 23 guide versus, you know, 1Q23, it's a slower growth rate than I think we're used to seeing at USB. So maybe you could help us understand.
you know, is this a moderated growth rate during the integration phase and maybe second half, you know, that should accelerate up, or is this the level of growth that we should anticipate? And then if you don't mind, I have just a couple of ticky tackies on the purchased accounting and the CDI and how we should expect that steps down.
into 23 and 24. Sure, Betsy, this is Andy. So first on the growth rate, I think 22 had exceptional loan growth across many categories led by commercial as well as CRE. So what we would see is that more normalizing. You're starting to see that in the fourth quarter.
And I think the other fact is that the growth rates are impacted by average balances and some of the application activity that we took down in the fourth quarter. You know, it was a partial quarter in the fourth quarter, full quarter in the first quarter, and the rest of 23. But the principal driver is a function of loan demand, which is moderating a bit across most categories. So it's still growing, but a little less than what we're seeing.
It will amortize into income over about a 10-year period. It will step down and probably a good way of just modeling it is assuming kind of a sum of the years digit sort of approach.
And same thing for PAA or how should we think about that? I mean, I know it's different. Yeah, so that's tied obviously to the life of the loans and it'll end up being impacted by prepayments and all sorts of things. If you end up looking at their portfolio that we acquired, about half of it is residential mortgage and half of it is...
corporate in shorter term. So, you know, probably if you ended up looking at an average life of, you know, four or five years, four to six years, that's where our time frame, and of course that will also, you know, accrete probably a little bit faster on the front end.
corporate in shorter term. So probably if you ended up looking at an average life of four or five years, four to six years, that's our time frame. And of course, that will also accrete probably a little bit faster on the front end. Thank you for that.
So probably if you ended up looking at an average life of four or five years, four to six years, that's where our timeframe, and of course that will also accrete probably a little bit faster on the front end. Okay, thank you for that.
and next we'll go to Vivek with JP Morgan. Please go ahead. Morning Vivek. Hi, good morning, congratulations. A couple of questions. The tangible book value, recovery, the crossover, and the fact that you'd...
recover that back quickly. Can you just...
give any color on sort of what's the key driver of that is just simply earnings or is there something else underneath that also that's going to help that come back so quickly? Yeah it's principally the accretion effect that we're going to see with respect to Union Bank, the marks and the earning the underlying earnings of company. Okay so the accrete because I just heard you say
the accretion, the question that Betsy asked, the purchase accounting accretion, that half the loans are mortgages, so that will come down, I guess, more slowly. So is that part of it, that pre-purchase accounting accretion is going to stay high for longer? Yeah, no, I really think it's just, it really is the kind of the 8% to 9% accretion levels that we're expecting.
of yours and which types of deposits?
Yeah, it's a great question. You know, it's from a deposit standpoint, you know, when you think about kind of the optimization that we went through, you know, we had kind of a focus on a couple of different things. We ended up looking at...
The LCR ratios, we ended up looking at higher cost deposits, whether that would be brokerage type deposits or euro dollar deposits, those sorts of things. We made a very conscious decision after getting regulatory approval to kind of reposition that. On the union bank side, the one thing that I would point out is that
You know, there's about eight to nine billion dollars worth of deposits that came over that were more transitionary. And over time, those will transition back to their global investment bank as those customers kind of migrate. So about half of that migrated in the fourth quarter.
And I would expect probably the other half of that to migrate in early 2023. But those were kind of the things we ended up looking at with respect to deposit and deposit flows. So I was really looking at trading out low-cost deposits.
or high cost deposits for low cost deposits that were coming over from Union Bank and then some of the Union Bank effect. And what was the OCI number at the end of the year? So, as we think about...
where, you know, going to category two, how quickly do you expect that to come down so that you can be in better shape? Yeah, so OCI at the end of the year is about $8 billion. And, you know, the duration of the portfolio is a little over five, you know, so you can kind of take a look at that.
Obviously, that's assuming that rates don't move from here. Our positioning from an investment portfolio perspective is about 52%, 53% HTM. We've also entered into some pay-fixed swaps that in effect kind of get that up to the high 50s. We'll probably have another market retail, But we've still got a long way to go! We'll be right back. Thanks for watching!
So we feel like we're in a pretty good position to be able to deal with, you know, if rates move up a bit or if rates come down, we have some flexibility there as well. So we feel like we're in a pretty good spot.
All right, thank you.
All right, thank you.
Next we can go to Matt O'Connor with Deutsche Bank. Please go ahead.
Good morning. Can you talk about the pace of the capital build from the 8.4 to around 9 by the end of the year? And then also, you know, if the macro is worse than expected and you have to build reserves more, I realize that doesn't move the capital that much.
But you know, obviously everyone else is starting at a higher point of capital and there is focus on how quickly you can get to that nine or even higher. So I guess the question is like what numbers can you pull that kind of aren't that painful if you need a little bit more such as issuing preferreds or some other assets that you could kind of exit without.
getting earns that much. Thank you. Yeah, I mean obviously Matt from a balance sheet optimization perspective, you know We're going to be very focused on you know profitability, returns and You know capital is precious. So, you know, we want to make sure that we are dedicating our resources from an asset growth perspective in the right spots.
You know, the pace of growth from 8.4 to a little above 9% by the end of 2023 is fairly rateable across the four quarters. Obviously, first quarter is going to be a little bit lower simply because we will not have seen the childhood growth from 12.1 to 18.3 in act disrespectful.
cost synergies and we will be going through and incurring more merger-related costs probably in the earlier part of the year simply because of the timing of the system conversion. So the pace is probably a little bit more weighted toward the back end, but that hopefully kind of gives you some perspective. Again, I'd kind of come back from a reserve point of view...
You know, we feel like, you know, we look at a lot of different scenarios. We look at the five different approaches, one of which is, you know, a severe recession. We take that into consideration. You know, we can see unemployment move up to, you know, around 6, 6.5%, and we still feel like we would be in a pretty good spot.
from a reserving point of view. So if it ends up being at a level that's higher than it, then we'll have to kind of focus on other balance sheet optimization activity.
Okay, thank you very much.
Thanks, Matt. Thanks, Matt. Thanks, Matt. Thanks, Matt.
And we'll go to Ken Osden with Jefferies. Please go ahead. OK, bow again.
Hey, good morning, guys. First question I just wanted to ask is just to follow on the outlook for the year, can you walk us through just your underlying assumptions for kind of how NII just projects, if we just think about kind of the core business in terms of what deposit costs and betas do and how that impacts the kind of underlying trajectory from the...
because of the full quarter kind of effect of Union Bank. And then again, our modeling is that the margin is reasonably moderates from there, reasonably flat, maybe up just a little bit. From a deposit point of view, clearly deposit betas are going to accelerate. I think that's the reason why.
You'll see the moderation in terms of net interest income or net interest margin expansion in the second half of the year. But keep in mind, and again, this is kind of, we see that in the first quarter, the union bank effect associated with the value of those deposits that we're bringing on, and we'll continue to look at.
opportunities to kind of optimize the deposit portfolio. Okay and then just one follow-up on the deal impact, just remind us what type of like amortization period you're using for both the purchase account increase and the CDI in terms of like is this the run rate that we keep around for a few years or does that change as you look past.
it steps down over time. But if you use kind of a 10-year assumption and some of your year's digits, I think that'll get you, from a modeling perspective, pretty close to how I think it'll end up amortizing off. The purchase accounting is really going to be tied to the asset lives because about half of it is...
and half of it is, you know, corporate and commercial, etc., and shorter lived assets. I think you can think about kind of that four to five year sort of timeframe and it probably accretes down in a kind of a similar sort of fashion, a little more front end weighted.
Okay, got it. Thank you, Terry. And next we can go to Chris Kotowski with Oppenheimer. Please go ahead.
Hi, following up a bit on Mike and Ken's questions, if I look at your very helpful slide 18 on the guidance and I take the midpoint of the $7.1 to $7.3 billion revenue range and I kind of dayweight that to the full year, I kind of get the lower range end of the full year guidance.
Act 29.2 is actually what I get. So that implies like a couple percent growth in the back half of the year which I again I guess is
better than what a lot of banks are saying. And I'm wondering, is that just underlying loan growth or the income growth, or is it the tag ends of the benefits of rising rates, or what do you see driving that?
Well, again, I think you do see kind of the full year effect associated with rising interest rates kind of come into play. You know, fee revenue on a legacy basis as an example, you know, we should see, you know, a little bit more of a tailwind next year as opposed to what we experienced this year. So I think that those are kind of coming into play. And then I think that, you know, just.
in the early quarters. Yeah, well it's interesting because if I do the same analysis on the non-interest expense side you're at the high end of that so it implies kind of nice growth in pre-provision earnings through the course of the year.
Yeah, well it's interesting because if I do the same analysis on the non-interest expense side, you're at the high end of that. So it implies kind of nice growth in pre-provision earnings through the course of the year. But anyway, that's it for me.
And our last question in queue will come in please
Hey Mike. Hi. Hey. I was there with you before. ASCI was it?
I'm just going to remember here 12 billion now it's 8 billion and where is it as of today?
OCI overall is at 10.
at the end of the year and expected to come down from there. And at a lower level today, Mike.
And then Andy, just can you pull the lens back a little bit? It's been a rough three, five, and ten years when you look at operating leverage and stock, not last year on the operating leverage. But that comment you made in December and you addressed briefly, but you've been in this investment cycle multi-years.
and now you said that you're coming out of it or the drag less or Maybe the spending is less and the payoffs are more You just give us more color on both the spending side and the payback side And where you've invested the most in and really expect that that payback because it sounds like you're crossing a line Based on your comment from December and that you reiterated today. Thanks
Yes, thanks, Mike. I think that's a fair representation. So our spend levels on pure CapEx grew from about $8 to $900 million to $1.2 billion, and that growth has been in the run rate for the last couple of years. So you would not expect to see additional continued expense increase related to CapEx.
Importantly, we also migrated that spend from about 60% defensive to 60% offensive. So the spend is on activities like digital capabilities, reaching customers, products and services and so forth. So all of that is what's coming through right now. So a level set on the expense side plus a return on the investments from a revenue side.
That coupled with overlaying all that on the Union Bank customer base is why we're projecting the numbers that we're giving you.
Okay, thank you. Thanks Mike. We do have time for one more question. We'll go to John McDonald with Autonomous Research. Please go ahead. Morning John . Morning guys. Hey, just a couple quick follow-ups. So Terry, where does the balance sheet repositioning and the merger leave you in terms of interest rate positioning? How would you describe it here? Fairly neutral, a little bit acid sensitive.
Okay, and then on the fee income, you said some more tailwinds this year. So some helpers on Legacy US Bank Corp. What are those on the fee income front? What are the helpers this year that you can grow fee income, maybe just put some takes on fees real quick? Yeah, well, if you just kind of look at the different components, I think the payments revenue continues to be reasonably strong. I think that the...
think it'll be kind of a combination of things, but probably one of the biggest ones is just mortgage banking revenue. That has been a pretty significant drag, especially on a year-over-year basis. And in the fourth quarter, we actually started to see that inflection point with linked quarter revenue starting to come up. And we would expect that to be a little bit stronger as we go into 2023.
Okay, got it. And then the last clarification, I think on reserves you said the 1.9 ratio looks pretty good for this year and even if unemployment went to 6.5 you'd be okay?
Yeah, again, we go through a lot of different scenarios and we take that downside into consideration and as part of that weighted average process.
You know, we think 6.5% unemployment is already incorporated into our reserving process.
But again, it all is going to depend upon what ends up happening, how severe the economic recession is, if there is one at all. So I think there's just a lot of moving parts.
Got it. Thank you.
And we have no further questions at this time. I will now turn it back to George Anderson. Please continue. Thank you for listening to our call. Please contact the Investor Relations Department if you have any follow-up questions. That does conclude today's conference. Thanks for participating. You may now disconnect.
Thank you.