Q1 2023 US Bancorp Earnings Call
Okay.
Welcome to the U S Bancorp first quarter 2023 earnings conference call.
Following a review of the results there will be a formal question and answer session. If you'd like to ask a question. Please press. One then zero on your phone if you'd like to withdraw. Please press one zero again, just call will be recorded and available for replay beginning today at approximately 11 o'clock a M. Central time, I will now turn the call.
It's called the Georgia, Anderson Senior Vice President and director of Investor Relations for U S Bancorp.
Thank you Brad and good morning, everyone with me today are Andy subsidiary, our Chairman, President and Chief Executive Officer, 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 presentation as well as our earnings release and supplemental analyst schedules are available on our website at U S. Thanks.
Dot com I would like to remind you that any forward looking statements made during today's call are subject to risks and uncertainty.
Actors that could materially change our current forward looking assumptions are described on page two of today's presentation in our press release, our Form 10-K and its 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 in the first quarter, we reported earnings per share of dollar four which includes <unk> 12 per share of charges related to the <unk> Union Bank acquisition excluding.
Excluding those notable items earnings per share was $1 16, we achieved record net revenue of $7 $2 billion for the quarter.
Following our successful close of Union Bank acquisition in December of 2020 to first quarter results reflected a full year's benefit of the acquired franchise continued growth in earning assets net interest margin expansion and higher non interest income led by stronger commercial product and mortgage banking fee revenues.
Slide four details our reported and adjusted income statement results as well as the end of period and average balances and other performance metrics on the right you'll see the credit quality remains strong, but it's starting to normalize as it affected our charge off ratio of 30 basis points as adjusted is well below pre COVID-19 levels and reflective of our disciplined.
Risk management culture.
The CET one ratio our binding regulatory constraint was eight 5% at the end of the quarter and is consistent with our target capital ratio.
We expect to exceed 9.0% later this year as we accrete capital back quickly over the next few quarters and continue to focus on risk weighted asset optimization initiatives.
Slide five provides key performance metrics, excluding notable items our return on average asset was 1.15% and our return on average common equity was 15, 7% a return on tangible common equity was 24, 3% on an adjusted basis.
Slide six provides both a high level timeline and general update on our planned conversion of Union Bank in.
Integration efforts had been progressing well and we remain on track for a successful main systems conversion over the upcoming Memorial day weekend.
We anticipate a full transition of all accounts by the second half of the year.
Turning to slide seven the industry disruption early in March has reinforced the importance of maintaining a well diversified.
This wasn't an appropriate risk profile, we maintain a resilient and diversified deposit base over half of our deposits are insured and 80% of the uninsured deposits are retail or operational in nature or.
Our diversified funding sources ample liquidity levels and strong credit quality supported by disciplined underwriting standards are all hallmarks of our approach to risk management I'll now turn the call over to Terry who can provide more detail on the balance sheet strength and the first quarter earnings results.
Sandy.
Turning to slide eight a key strength for the bank as a well diversified deposit base, which remains a stable source of low cost funding.
As a reminder, following the completion of our acquisition of Union Bank last quarter, our end of period deposits totaled $525 billion, including approximately $80 billion of deposits from Union Bank.
As we discussed last quarter $9 billion of Union Bank acquired deposits were transitory in nature with 4 billion.
Dollars returned to <unk> in the fourth quarter and an additional $4.7 billion that moved back to <unk> in the first quarter of this year.
In addition, $1.1 billion of acquired deposits were included in the branch sale order related to pure point, a broker deposit gathering mechanism that we discontinued.
Importantly, prior to the events of March as we saw expected deposit outflow largely consistent with seasonal patterns reflective of our business mix, including our large trust business.
From March eight through the end of the quarter deposit balances were relatively stable down only 0.6% is inflows from new customers were slightly offset by the impact of our clients diversify their deposits, you'll see can yield in money market funds consistent with broader industry trends.
During this period, we saw an increase in money market funds of approximately $10 billion within our wealth management and investment services businesses.
We expect the competition for deposits to remain high for the industry in 2023, our cumulative deposit beta through the first quarter was approximately 34% and we expect that to increase to about 40% by the end of this rate cycle generally in line with our previous expectations.
Slide nine provides additional detail on the composition of our highly diversified deposit base as the slide shows our deposit balances are composed of a broad mix of consumer corporate and commercial customers that we support with an expansive Brad our branch distribution network.
And mobile capabilities across our national footprint, our deposit base reflects the wide range of customers and industries that are there companies serve.
At March 31st our percent of insured dip.
Deposits to total deposits was 51% <unk>.
Approximately 80% of our uninsured deposits are composed of operational wholesale trust and retail deposits that are stickier, either because they're contractually bound we're tied to Treasury management services and trust activities provided to corporate and institutional clients.
Combined with our consumer base deposits the stability of our funding sources sound.
Moving to slide 10 U S. Banks total available liquidity as of March 31 was $315 billion, representing a 126% of our uninsured deposits as of March as of December 31st our liquidity coverage ratio was 122%.
As mentioned, our strong debt ratings reflect our diversified business profile, well collateralized credit exposure healthy capital and liquidity profiles and disciplined asset liability management framework.
These attributes work in concert with our strong balance sheet optimization and management practices to ensure strength and stability of our balance sheet.
Slide 11 provides details on the composition of our investment securities portfolio.
Over the last five quarters and well ahead of the most recent banking disruption we reduced the size of our investment securities portfolio from 30%, 25% of total assets, while increasing cash levels.
Preparation for and as part of the completion of our acquisition of Union Bank, we repositioned our balance sheet by selling fixed rate loans and investment securities paid off borrowings and increased cash balances in response to economic uncertainty industry Diamond dynamics rising interest rates and increased market volatility.
At March 31, approximately 90% of those securities in our investment portfolio are backed Andrew sponsored by the U S. Federal government with 55% of securities designated as held to maturity and 45% designated as available for sale.
Further available for sale unrealized losses as a percentage of our investment securities portfolio improved in the first quarter in total ALC I improved by 11% on a linked quarter basis.
Yes.
Turning to slide 12, as a reminder, following the completion of our acquisition of Union Bank, Our CET one capital ratio declined from 9.7% at the end of the third quarter of 2022 to eight 4% as of December 31st which reflected the impact of balance sheet optimization and purchase accounting.
It means that we will accrete back into capital over the next few years strategically we continue to be encouraged about the financial merits of this deal and the synergistic benefits, we expect to realize as a combined institution.
As Andy mentioned earlier, our CET one capital ratio at March 31 was eight 5%. The 10 basis point increase from year end reflected 20 basis points of capital accretion offset by the transitional impact of seasonal.
Of 10 basis points as.
As of March 31st we expect to accrete approximately 20 to 25 basis points of capital per quarter as we complete the Union bank integration and realize cost synergies importantly, this does not include the impacts of planned R. W. A optimization initiatives mentioned earlier.
Turning to slide 13, total end of period loans were $388 billion, which was flat on a linked quarter basis and up 21.6% year over year.
Commercial real estate loans represent approximately 14% of our total loan portfolio with CRE office exposure, representing approximately 2% of total loans and only 1% of total commitments leverage lending balances are not not a significant component of the loan portfolio.
Slide 14 shows credit quality trends, which continue to be strong, but as expected or started to norm are starting to normalize across the portfolio.
The ratio of nonperforming assets to loans and other real estate was 0.3% at March 31, compared with 0.26% at December 31st 0.25% a year ago.
Our first quarter net charge offs of 0.30% as adjusted increased seven basis points versus the fourth quarter level of 0.23% as adjusted it was higher when compared to the first quarter of 2022.
Which was a level of 0.21%.
Our allowance for credit losses as of March 31 totaled $7 $5 billion or $1, 94% of period end loans.
As the chart on the upper right side of this slide demonstrates our credit performance through the cycle serves as a key differentiator for the bank.
Slide 15 provides a detailed earnings summary for the quarter.
In the first quarter, we earned.
$1.16 per diluted share excluding 12 cents of notable items related to the acquisition. The recent acquisition of Union Bank Slide.
Slide 16 highlights revenue trends for the quarter net revenue totaled $7 $2 billion in the first quarter, which included a full quarter.
Of revenue contribution from Union bank of $832 million, primarily representing net interest income.
Net interest income grew seven 9% on a linked quarter basis, and 45, 9% year over year, driven by earning asset growth and continued net interest margin expansion, which benefited from rising interest rates.
Noninterest income as adjusted increased two 7% compared to the fourth quarter driven by higher commercial product revenue mortgage banking revenue and trust and investment management fees, partially offset by losses of $32 million for the security sales.
Turning to slide 17, adjusted noninterest expense for the for the company towards a $4.3 billion in the first quarter, including $546 million from Union Bank.
Noninterest expense as adjusted increased nine 1% on a linked quarter basis, largely driven by the impact of two additional months of Union banks operating expenses core deposit intangible amortization and higher compensation and other noninterest expenses.
I will now provide second quarter and updated full year 2023 forward looking guidance on slide 18.
Starting with the second quarter of 2013 guidance.
We expect average earning assets of between 600 and $605 billion in the second quarter and a net interest margin of approximately 3%.
Total revenue as adjusted is estimated to be in the range of seven 1% to $7 $3 billion, including approximately $85 million of purchase accounting accretion.
Total noninterest expense as adjusted is expected to be in the range of 4.3 to $4 $4 billion inclusive of approximately $120 million of core deposit intangible amortization related to Union bank.
Our tax rate is expected to be approximately 23% on a taxable equivalent basis today.
To date, we have incurred $573 million and merger and integration costs and anticipated charges of between and anticipate charges of between 250 and $300 million for the second quarter. We continue to estimate total merger and integration costs of approximately $1 $4 billion consistent.
With earlier guidance.
I will now provide updated guidance for the full year.
For 2023 average, earning assets are now expected to be in the range of $600 billion to $610 billion.
We expect the net interest margin to be between a 3.0% to 3.05% for the full year.
Total revenue as adjusted is now expected to be in the range of $28 $5 billion to $35 billion inclusive of approximately $350 million of full year purchase accounting accretion.
Total noninterest expense as adjusted for the year.
It was expected to be in the range of $17.0 billion to $17.5 billion inclusive of approximately $500 million of core deposit intangible amortization related to Union bank.
Our estimated full year income tax rate on a taxable equivalent basis is now expected to be approximately 23.0% we continue.
And you do 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 events of the past few weeks have certainly raised questions about the overall health of the banking industry and the economic outlook.
Is this a banking involves taking balance risks and these risks must be carefully managed appropriately regulated and prudently mitigated at.
At U S Bank, we are focused on the strength and stability of our balance sheet, our investment and risk management practices is guided by our core principle that includes always doing the right thing for the many stakeholders communities and constituents we serve a.
A key strength of our institution as our high quality and diversified business mix and deposit base. The combination of a mix of consumer corporate and commercial customers with significant operational deposits broad geographic reach and our full breadth and depth of product and service offerings serves as a key differentiator for the bank.
Hi, dad ratings resilient liquidity profile available funding sources and strong earnings capacity enable us to deliver industry, leading regulatory stress test results and contribute to our resiliency during times of uncertainty.
As we continue to work to ensure a successful conversion of U N Union Bank next month, we are already seeing the benefits of increased scale and market share as we bring our enhanced digital capabilities and broad and diverse product set to the Union bank customer base.
Our reputation as a prudent risk manager has been earned through our performance over many cycles and we have never been more focused on the strength and stability of our balance sheet.
Let me close by thanking our employees for all that they do on a daily basis for our customers communities and shareholders. We have shown incredible strength and stability. During these challenging times and are more confident than ever in our ability to continue to deliver exceptional client service superior product offers superior product offerings in a rapidly changing environment.
Well now open the call for Q&A.
Thank you well now begin the question and answer session. If you have a question. Please press. One then zero on your phone if you wish to remove yourself from the queue. Please first one zero again once they are nice to have a question. Please press one then zero on your phone.
One of them occur.
Scott first Piper Sandler. Please go ahead.
Good morning, everybody.
Hey, Scott.
Hi lots of noise in the deposit flows in the first quarter I guess I'm moving forward what would your expectations be for total deposit flows are balances and then the mix of noninterest bearing to total as we sort of get through this cycle.
Yeah, you know our expectation is that if you end up just looking at the industry, there's going to be pressure on deposits and high competition. You know, we think we will fare.
Quite well with respect to that are you know to the extent that we see changes in deposit so it'll be kind of based upon that competition, so, but I would say relatively stable.
And then coming to your second question you know the the mix of N B's as an example in roughly the fourth quarter was about 25%, 26% in that ballpark is 25% and we think it's kind of hitting a that kind of a stable level are you keeping in mind that you know we have a lot of op.
<unk> deposits are tied to our both our corporate and our corporate trust business isn't that kind of helps to sustain it and so it's a combination of things Scott.
Okay perfect. Thank you and then was hoping we could talk for a second about I'm just.
Categorization and when you guys would expect to be a category two bank I think theres a lot of.
Going round and especially in light of that report for a couple of days ago.
So maybe it just didn't sort of clear in terms of when would you expect to be a category two bank will that be due to your asset size or okay. Thanks.
Adds flexibility to designate you wanted and then how would would you guys get there by that time.
Yeah, you know our our trajectory with respect to category. Two is no earlier than the end of 2024 Ah and until that will be I think that'll be more driven by whether the fed makes that decision or not.
Rather than asset size, you know again as we kind of manage the company. You know we're gonna be continued to be very focused on profitable loan growth and things like that.
So we get there when we get there, but that our you know our expectation right now is no sooner than the end of 2024.
Okay, perfect and you you guys feel like you're prepared to to get there by that time basically.
Yeah, it'll be a combination of a couple of things we talked about you know the you just the capital generation from earnings and of course that.
Is helped by the Union Bank transaction and then you know we're very focused on capital management, we have to be yeah I'll just.
Because of the category two and you know we will be very focused on risk weighted asset optimization and making sure that we're focused on profitable growth.
Perfect. Okay. Thank you very much.
Next we'll go to Erika Najarian with UBS. Please go ahead.
Hi, good morning.
The question for USB and I don't think your investors that like the I'm, sorry, the cycle credit out performance or even the P. P and our strength. It's well noted that you know the adjustment to your revenue outlook was very minimal relative to peers.
I think the big question that investors have is you know.
Starting from eight 5% for Q1, you know them, you know earnings power and capital organic capital generation of 20 to 25 basis points.
But as we anticipate cat, two and you're telling us that the fed could decide and not your asset sizes apparel I couldn't decide when that line is what is the what is the new endpoint.
One in your view.
Let me think about going into that new category I don't think investors think that Eaton has a 90%.
And if so how are you thinking about dividend growth this year.
Yeah.
So erika good good question and so I'm just going to go from the beginning I think that would be helpful. So as you know we were well above 9% and came down eight four as a result of the <unk>.
Bank transaction the Union Bank transaction is a terrific transaction, we're exceeding our revenue expectations, we are coming under on our expense expectations. The accretion is greater than we expected. So the value of the franchises positive for sure.
As we think about the category two I have three or four factors I think about number one is the earnings accretion that we talked about which is strong and growing and will become even more accretive as we get through the cost takeout component of the Union Bank integration number two is we have a number of initiatives across the board for risk weighted asset optimization those are things like credit.
Credit transfers risk transfers.
A number of things to optimize the balance sheet that I think we ought to be focused on and are very focused on to your question I think with those two things as I mentioned, we expect to exceed 9% by the end of this year that coupled with our ALC burned down and additional accretion as we go into 2024.
Makes me comfortable that we are prepared with whatever event occurs as it relates to category two and the timing as Terry mentioned no later no earlier than the end of 2024.
Yeah, a couple of things that I would maybe add them because that's right on coming back to a L. C. I you know that burn will be kind of a function of a lot of different things.
You know we have been very proactive in terms of repositioning in the F. S portfolio I'm looking at assets as our sales and securitization or asset sales are a security sales et cetera.
And I can give you some sense you know the duration of that investment portfolio of the F. S portfolio has gone from a little over 4.5% are in the fourth quarter to about three 8% in at the end of the first quarter. So we're going to continue to shorten the duration on that is going to help us with respect to manage at a L. C.
And then in addition to that you know.
We have been essentially reducing the volatility of a L. C I too up interest rate environments through hedging activities. So it's a it's a combination of a variety of things that we're going to go through.
And there's no need to have 10%.
[noise] appropriate new bogey as we think about the shift change for next year.
On cat too.
So Erika as you know the.
Yeah, the regulators are going through that analysis.
Process right now too to think about how capital levels ought to be in the industry across the board with a Basel four endgame and whatever changes to categorization that occur. So we are waiting for that.
To understand what the new environment will look like but the plan that we have in place is assuming what you what Terry just discussed.
And just if I could sneak in one last one and you know one of your your peer is closest to you and size that the T. Lac was pretty much done and dusted him. You know I noticed that you mentioned yard you know superior debt ratings several times.
Clearly the debt markets are still a little bit dislocated, but how should we think about.
Wholesale funding stack from here I noticed on a period end basis short term borrowings went up by 25 billion you know Terry.
Terry as you potentially anticipate yeah.
T lack.
How should we think about your senior debt issue and plan or.
Or will you sort of hold at that level of borrowings until there is a little bit more lessen dislocation in the senior debt market.
Yeah again T. Lack is one of those things that they were gonna learn more as we kind of go over the course of the next 12 months.
The real question is not whether or not T. Lack will exist because I do believe and we're expecting that it will be something that gets put into place, but how does that get calibrated for you know the regional banks are reflected in the risk profile that we have relative to the <unk> subs.
And you know there there's a wide range of estimates that are out there are you.
You know I would we end up looking at that I mean, maybe one a reasonable estimate would be based upon the.
The foreign bank operators and kind of what levels of T. Lack.
You know if that is the case for us I think it would be very manageable it would be.
Within a range that we would be able to manage to and then that just gives us flexibility with respect to how we utilize that within the bank.
Thank you.
Thanks, Aaron can actually go to Mike Mayo with Wells Fargo Securities. Please go ahead.
Good morning, Mike Hi.
Well your P E b belief and faster close to seven and the market's around 20, so you're.
Your relative P E. One of the lowest in history. So I would posit that the market's concerned about something other than earnings so going back I guess the simple question for you Andy.
Well U S bancorp need to issue capital and how confident are you about that and on the other side.
Our buybacks to casually adoption once you get to 9% CET, one and the reason I bring that up.
If you've seen the front page articles and papers.
If you're forced to recognize the unrealized securities losses, you'll have burned out.
And then people come up with all sorts of numbers and.
Would you be forced to realize that you heard Pat talk about these issues.
Could you be forced to incorporate that as part of the current stress test.
Could force your hand sooner.
Any color you can get what's your confidence that you might need to issue capital.
Over the next you know year or so.
Yeah.
Thanks, Mike So as I said I I'm I'm that is not part of our thinking as we sit today I am confident that our earnings accretion our R. W. A optimization, our Aoc burned down we'll all get us to a point that we will be at the appropriate capital levels and I can assure you that it's a high focus area for myself and the entire management team, including Terry So that is.
Something we're very focused on.
Now as it relates to buybacks I will tell you as we all know Theres a lot of capital changes that are likely to occur from a regulatory standpoint. So we're not going to do anything until we have more clarity around that which we hope to have in the in the second half of the year, but the focus on getting too.
The appropriate capital levels as quickly as possible are creating capital in building our capital base is priority one.
Yeah, Mike was the thing that I would add to that you know we're going to learn with respect to exactly how moving to a category two and you know the inclusion in unrealized losses gets incorporated into the CCAR process.
You know just as a reminder, we have a pretty significant amount of buffer that already exists just based upon our credit performance in our P. P and our performance because of the earnings capacity.
We continue to to reduce the volatility of LCI to rising interest rates and we're doing that through you know pay fixed our hedges and you know, they're just shortening the duration and things that I talked about earlier.
Earlier, I think there's very likely that they will incorporate a you know a higher rate environment into the CCAR process.
I will tell you that we've done lots of scenarios that look at a stagflation sort of environment and.
You know, we actually perform better in that environment, because the revenue streams tend to hold up.
Given our mix of business et cetera. So you know, we're taking a lot of that into consideration and like Andy said, we feel pretty confident that we don't have to go through a capital raise.
And the.
As part of this year stress test what they are.
Include the unrealized securities losses.
Since that would incorporate the nine quarter time horizon or now.
No that is not required in the CCAR analysis.
As a condition of the the way the deal was structured.
And then last short one here your noninterest bearing deposits I know you brought that up before it certainly went down more than average this quarter, but you're not guiding your margin down too much you said three to three 5% versus three one this quarter why wouldn't you be gotten that down even further.
Given the decline in noninterest bearing deposits quarter over quarter yeah.
Yeah. It's a couple of different things one is again, if you end up just looking at the mix of total deposits. We again think that total deposits will be relatively stable and that the mix of N. I b will be a relatively stable around that 25% you know up.
Up or down part of the decline in this particular quarter ties back to some of the seasonal flows which you know are part of our trust business, but also the deposits that we knew were going to go out the door.
Two M U F G.
Because of closing down the peer point et cetera.
You know all of those things kind of tie into the reason why we saw the decline this quarter.
Alright, thank you.
Hi.
Next we'll go to John Mcdonald with Autonomous Research. Please go ahead.
Hey, Jonathan it's Scott.
Morning, guys wanted to ask on the idea of getting above nine by the end of the year on CET. One does that rely on the order of UA mitigation opportunities or is that just kind of the 20 to 25 basis points that Terry mentioned before the <unk> is that something that will help you next year can you talk a little bit about that.
Yeah, we we think that the capital generation, though the accretion that we will see of the 20th twenty-five Ah is a core earnings capability. So it does not rely on those are Debbie ways for the RW optimization that we will go through.
We'll be above and beyond that it's a part of that overall capital strategy that Andy talked about earlier.
The benefits of that should happen and help you towards the end of this year maybe into next year as you work toward end of 'twenty four capital target.
Yeah, it'll it'll it'll help us both this year as well into next year absolutely.
As you know as you know John we've been kind of preparing for cat Chew for you know a well over a year. We've put a lot of things are in place in the third and fourth quarter. We took some actions in the fourth quarter and will utilize a lot of those tools. If you will as part of the Rd do a optimization process. So we're going to go through.
<unk>.
Yeah, and just to clarify Teri this hasn't happened prior to the end of 'twenty four even with the fed right. The fed would tell you on January 2024 that it would take effect.
By the end of 'twenty 'twenty four right. So it's not like they're not.
Correct.
It is correct.
Okay, and then any any idea of the piece of Aoc I burned out obviously, the OCI came down 11% this quarter with the help of rates, but in a world where rates are coming down what's the natural kind of burn off paint that you might expect for that over a year or two any help on that and just kind of reminding us what the duration again.
Yeah, the well again the duration of the <unk> portfolio right now is about 3.8 years.
So you know just if you kind of take that into consideration the burn down will still be fairly reasonable.
Even without interest rates and again, we've put some hedges into place in order to.
Dampen the effect of rising interest rates with respect to LCI.
Okay. Thanks.
Thanks, John .
Next we'll go to John from Carey with Evercore. Please go ahead.
Good morning.
Okay, Jerry Jon.
On the back.
Optimization could you maybe give us a little more color on what you're looking at there I know you mentioned credit transfer some of those transfers, but maybe if you can.
The flesh that out a little bit and maybe.
Good idea of the magnitude of them.
The benefit that you see potentially materializing as a result of the art of your reactions and then lastly is other business or portfolio sales or divestitures considered within there.
The second the second part of the question was.
Their business sales business sales yeah at least at this particular point in time and obviously, we'll look at we'll look at a lot of different things in terms of our businesses that we may look at to sell I mean, that's that portfolio optimization is something we're always doing and we've done that a number of different times over.
Last several years. So you know that obviously will be something we'll look at but you know we have a sizable mortgage servicing rights portfolio will take a look at.
You know selling portions of that where that makes sense, we will look at asset securitization like.
Like we did in the fourth quarter, you know there are a whole variety of risk transfer sort of structures that are both we put it we have put into place where you have on the shelf when we're ready to kind of start with.
Moving forward on you know when we can so I think it's a whole variety of different things that we will take a look at as well as you know balancing the mix toward a growth in our what I would say cat less capital intensive businesses as opposed to capital intensive businesses. So it's a it's a it'll be a whole combination of things.
<unk>.
As we move forward John .
And do you have a way to estimate the magnitude in terms of how you're thinking about that targeted contribution from the <unk> optimization strategies.
So the you know the strategies that we have in place are reflected in the guidance that we provided so there is that would that change that and we will continue to update that guidance with given the economic conditions in rates and the scenarios that we see but as Terry mentioned this is a priority for us and we have a number of initiatives underway, which is the.
Right thing to do.
Because I think capital for all banks is going to be more precious as we think about the forward regulatory environment.
Got it and then just one more from me and I know you mentioned in terms of other regulatory changes potentially.
Potentially coming down the Pike, you're already in the advance.
It's a proposed rule, making on the T. Lac and could you just talk about the other potential regulatory changes you see coming down the pike.
On the park I know you had mentioned the Ci efforts, but can you talk about the country run FDIC or stress capital buffer of liquidity rules anything on that front worth commenting on.
Yeah I mean.
It could be it could be a number of different things I mean, we talked about T. Lack I mean, just the levels of capital.
Did you hear them talking about domestically significantly important banks so.
Increase in the level of the stress capital buffer is another piece of it I think another one will be around LCR and then.
And then in the CCAR process I think that they will incorporate.
You know I would say multiple look kind of go back to what they used to do they'll have kind of multiple scenarios, but one will be kind of a what I would say a traditional sort.
Sort of.
Stress test, where you know.
Unemployment goes up when rates come down another one will be more I think some foremost take place where rates stay relatively high and and you know you experienced a credit loss stress.
And again, we've run a variety of different scenarios and I think we are.
Feel like we would be able to withstand either one of those just based upon our risk profile.
Okay. Thanks Terry.
Thanks, If I can go to chart Cassidy with RBC. Please go ahead.
Good morning Gerard.
Good morning, Terry Good morning, Andy.
I have a narrower question I think it was on slide eight you guys talked about the impacts of deposits following March 8th.
The inflows that you referenced when did that come primarily in the Union bank franchise because.
It was agreed located in California, I know you guys haven't been in California, as well and then second was it more commercial versus consumer or more interest bearing versus noninterest bearing.
Yeah, maybe its in terms of the mix. So you know right. After March 8th we actually saw a lot of account customer opening more so on the commercial corporate side I would say probably 70% on that side as opposed to on the consumer side of the equation we saw inflows.
But again that ended up getting offset by kind of seasonal flows within corporate trust as the as the rest of the month kind of progressed.
You know the the other thing that I would say is that are you know when I look at our deposit net new customer accounts in <unk>.
Specifically in California on the consumer side, we actually saw.
A nice.
Increase or pop in March.
Relative to previous months, so I think that we're actually probably seen some benefits associated with that.
Yeah, and I think that addresses the question that you had.
Thank you and then over the years you guys have always done quite well and you know underwriting your your loan portfolio you show up well in the CCAR tests over the years on credit and so you don't have a very big exposure to commercial real estate and I always find it interesting to talk to banks that don't have big X.
Sure so a potential credit area that could be a problem. What are you guys seeing in that commercial real estate area, particularly in the office portfolio any color would be helpful.
Sure Gerard so.
First of all the rest of the portfolio is very stable. If you look at our charge off rates.
Non accruals.
So forth and the numbers around credit metrics. The rest of the portfolio is stable and starting to normalize but normalizing as we expected I do think the area of focus for all of US as office within real estate.
And I do think there's some activity occurring there with tenants behavior changes sponsor behavior changes that is going to cause some pressure in the in the industry because of maybe an acceleration of what we thought was going to be a little longer process occurring more rapidly. So you can imagine that we're very focused on it as well we have not put on a lot of <unk>.
Our office over the last many years, we've been very very conservative around that so as you say, we don't have a large exposure, but I do think it's an area.
A lot of emphasis and focus because I do think there are going to be pressures occurring.
Thank you.
Next we go to Iran.
Her hand, putting a wallet with bank of America. Please go ahead.
Good morning.
Good morning.
Follow up question I think.
If he mentioned about.
I think you'll see a hedges against if any it spike I was wondering Gary if you can elaborate on that.
The five year come back again in the last few weeks just what's the downside here school.
Capital or just an increase in D. C. I spiked another 50 basis points and just talk to us in terms of the extent to which you expect to hedge against that.
Yeah, So again.
We've been taking a number of different actions in order to kind of dampen the effect as I said selling securities where appropriate shortening the duration.
Which you know we did a very nicely I guess in the first quarter and then putting in place you know pay fixed.
Swaps against the long end of the curve. So dampening the effect of you know I'll move I meant up all of our rates in both the you know for example in the five and 10 years sort of space.
You know, we if rates moved up 50 basis points, obviously, ALC I would be impacted to some extent, but we've dampen that quite a bit.
Over the course of last couple of quarters.
Understood.
Just going back to.
Deposit betas, I think you talked about 40%.
All 34 this quarter I mean I'm sure you do you all do a ton of analysis on where terminal betas might end up but what's the downside risk I mean, we've obviously had a shock to the system.
Funds being 5% plus what's the how do you handicap, the risk that 40% beta actually turning out to be something much higher than maybe closer to 50%.
Yeah, you know, we've we've done a lot of different analysis and you know I mean, you are right you know the competition.
For deposits is getting stronger we've kind of taken that into consideration.
We're seeing over 5% in some markets.
Generally it is a smaller banks are where that is occurring community markets those sorts of things and.
That's because for those entities that's their primary source of funding.
And and so you know that that's going to occur, but you know all of that has been kind of taken into consideration in terms of.
Looking at that 40% deposit beta.
If you end up looking at our business.
Again in terms of who we end up competing against et cetera.
But you know what we end up looking at and tracking is especially on the institutional corporate side of the equation is money market.
<unk> rates and those sorts of and and all sorts of things you know right now that's kind of in the high fours.
And our deposit pricing is very competitive with that.
Which is why it gives us confidence with respect to both flows and the deposit betas that we've articulated.
But I mean, you don't see a major shift in consumer and retail deposit pricing today versus maybe at the start of the year.
Yeah, it's gonna depend I mean, obviously it depends upon the the rates environment I mean, if the fed for example goes up another 50 or 100 basis points from here.
That would put more pressure on deposit betas, but you know if you end up looking at the market implied or.
Even even up a bit.
I still feel pretty comfortable with where we're at.
Got it thank you.
Mhm.
And next we'll go to Matt O'connor with Peoria Bank. Please go ahead.
Good morning, Matt.
It's Deutsche Bank.
You got a very strong reserves to loans on a stated basis I guess first can you remind us what the impact is if you adjusted for the Union Bank loans that were market fair value. When you took them on.
If you have that handy.
Yeah, I I missed the very first part of the question Andy to you I think Mike you are trying to understand are you trying to understand the union.
Union Bank has an impact on our reserve to loans ratio than what it is I don't think it has a major impact not a significant one.
Okay, and then just broadly speaking like as you think about that.
The rest of the year I mean, you're obviously, taking your best guess on reserves.
Hey, Matt and your thoughts on.
Okay.
Sorry, Yeah, sorry, yeah, it's hard to hear you.
Yeah.
Sorry can you hear me better now.
Thank you Matt.
Okay, sorry about that I was just asking about the outlook for the loan loss reserve.
I'm here.
Okay.
Yeah.
So you know our expectation is that again, Andy has talked about the fact that we're preparing for any economic sort of outcome that might exist.
They gave you end up looking at the consensus in the marketplace. You know some form of recession, probably a softer or moderate sort of recession late this year early next year.
If you look at the market implied I would kind of.
No tie into that where do we go through our reserving process, we looked at multiple scenarios.
We wait to the Conservative side, you know, we look at five different scenarios, we make.
Assumptions with respect to that.
Only 35% of its Oh.
Weighted toward what I would call the base case.
And the rest of it is downside so we feel pretty good about where we're in reserve levels or are you know obviously, if we saw economic shock are above and beyond kind of what is being expected that might be a little bit different but we feel pretty good about you know.
How we're thinking about it.
Okay, Great and then maybe if I could just squeeze in on a spending trends throughout <unk> you guys through your payments business, obviously see a lot just any observations on kind of trends throughout the quarter and maybe any comments so far in April . Thank you.
Yeah.
Our payments business you know, we continue to see a pretty strong sales you know.
10, plus percent for example in our payments our merchant processing business are very strong.
Mid to mid to high single digits with respect to our corporate payments business.
You know the if.
If you end up comparing any of these things to pre pandemic as you know through the rough.
So we continue to see a good spend in the business I would say that after the market disruption.
There was a bit more softness in retail sales, which we're going to continue to watch it's really too early to tell whether or not that's a trend or whether that was really.
Some of the concerns around the market disruption, but we'll continue to watch that Andy what would you add.
It's still growing a math, but it's just growing at a lower rate.
Particularly in retail airline spend continues to be very very high which is a little bit of the reason that we have a differential between sales growth and revenue growth because the airlines spread is a little thinner. So travel continues to be strong retail came down a bit but still growing.
Great. Thank you.
Sure.
Next we can go to Chris Kotowski with Oppenheimer Oppenheimer and company. Please go ahead, yeah. Good morning, Chris.
Thanks for taking my question.
You've given us a lot of good detail on the a F. S side I'm just wondering if you could discuss a little bit you know how are you.
You anticipate managing the held to maturity portfolio do you also.
Plan to let that kind of burned down.
And and shorten and I'm curious just given that it's a lot of mortgage backs and that their principal payments each month, how how quickly does that portfolio of burn down or do you see the need to maintain a lot lot of duration there.
In case, we get a another decline in rates.
Yeah, Yeah, I mean, obviously, we look at both sides of the equation the the burn down on the HTM side, just simply because of the nature of it is really more tied to you know how quickly you see payoffs and what the duration of that.
Ends up looking at Oh, I I think as we are as we look at.
The size of the investment portfolio et cetera will will take into consideration what level of duration, we want to have.
That in the in the HTM portfolio, but that's going to be more of a function of just paydowns and payoffs overtime.
Yeah, but I mean, just I guess question Directionally in the next couple of quarters there.
You you, probably let let the duration shorten and the size of the portfolio of burn down left here.
Yeah, Yeah, absolutely yeah, Okay alright.
Alright, that's it for me thank you.
Thanks, Chris.
Excellent can you spend with Jefferies. Please go ahead.
Yeah.
Oh, Hey, guys. Good morning first question I just wanted to ask you.
On credit on an adjusted basis your charge offs were 30 basis points this quarter and part of the comments you made earlier about CRE and some of the data we see in the release about delinquencies and NPA is increasing.
What's your outlook for charge offs as we go forward.
The 30 basis point that we saw in the first.
Yeah, I mean, our expectation is that that 30 basis will continue to normalize throughout the year and into 2024.
Probably on a similar sort of pace are you know.
I think it was 23 basis points in.
In the fourth quarter. So I think that that will continue to kind of move up as the year progresses.
Just the power of normalization.
Understood on that Okay, and then just coming back to the full year Guide obviously, you made a modest adjustment, which is well expected given the change in the rate outlook.
We we can back into that I think it's mostly on the NII side, just given that that's where it seemingly some of the changes were versus the prior outlook, but can you just kind of refresh us and just give us kind of just some underlying thoughts of NII growth versus fee growth and any changes you have if any on the fee side versus your prior outlook. Thank you.
Sure.
To your point most of the changes were in NII and it's a function of the rate curve the rate environment, the expectation about rate increases as well as the deposit pricing to Terry made reference to in the beta is approaching 40%. So most of the change was in NII.
Okay and then so just last follow up so then embedded in your fee outlook for the year is pretty decent growth. It would seem then and are you expecting that to still be mostly driven by.
By the payments business or are there other areas that youre expecting to see some good growth then.
We have a great diversity of revenue sources and they are all doing well so payments as you know.
Approaching double digits, 9% year over year basis, as Terry talked about spend levels are good we had a bang up quarter in our commercial products group across the categories and that is doing just terrifically in this environment and just driving revenue growth as well trust is doing well so and mortgage.
You know that's the value of a diverse revenue stream. There are many different sources of revenue and fee income.
Got it understood. Thanks, guys.
Thank you.
Next we'll go to Vivek <unk> with J P. Morgan.
Hi.
Hi, Andy had Terry a couple of just clarifications I think you had mentioned that accretion from the deal Andy is going better.
Than you had expected any I know you've talked a lot just trying to pull this all together, where you're seeing it better thus far.
Yeah, So and we talked about this or that came out in the fourth quarter that the expectation of that 8% garnered or 11%.
And the return the returns actually better so if I look at it in the Big picture when we initially thought about the deal.
Union Bank had a $2 9 billion dollar or so revenue base and a $2 six or so billion dollars $2 3 billion dollar expense base. So 600 P PNR and you'd look at the first quarter and it's double that so.
The revenues are stronger principally because of the value of deposits in this rate environment.
The expenses are a little less and our expectations on our efficiencies are continuing to be on plan. So all that adds up to a higher accretion.
Okay and that higher accretion that higher accretion is.
The net the net purchase accounting is actually negative given the right core deposit intangibles. So it's very strong.
Right and that's before you even finished the integration back to you.
That's locked in the second quarter anyway.
Yeah, that's right that's correct.
Alright, thank you.
Ooh.
Next we'll go to Erika Najarian with UBS.
Yes, sorry to prolong the call I just had one follow up question and Andy I I ask the question a compound way I apologize, but if you think about creating to over 9% in E. T line by.
By year end, and how would you stack rank dividend growth is a priority.
Dividend growth continues to be a priority Erika. So our expectation is we would have continued growth in the dividend the dividend growth numbers not hugely material to the capital accretion math.
If you go through the numbers on that that is a relatively small component of a negative.
Downturn in capital so.
That expectation that I talked about includes the expectation of a strong dividend.
Thank you.
Sure.
And next well go to Mike Mayo with Wells Fargo Securities.
Hey, Mike Hi, Hey, last quarter, you mentioned your reserves more for an environment with 6% unemployment I was wondering if you had an update for that and given seasonal accounting does that mean.
Your reserving done before the recession has even started or how do you think about that and what about the release of reserves and extend the stay that low charge off range, even with some of the normalization.
Yeah, well, I think well wait and see what ends up happening given the uncertainty that's in the economy regarding the last bit of it but yeah. No. We had said that it was the weighted average at the peak was a peak quarter was about a little over 6% it's.
It's about five nine today is kind of what are our weighted average case kind of comes up too so very similar to what we had before.
Okay and your.
Your outlook for the economy soft recession hard landing.
What's your thinking.
So Mike we expect a soft recession, a moderate recession later half of this year, but as Jerry mentioned our CSO.
Counting is assuming a sort of a two thirds downturn one third base case. So we are we have reserved to a little bit more downward scenario.
Okay. Thank you.
You bet.
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