Okay, good morning. Thanks, everyone. We're very happy to start today off with U.S. Bancorp joining us again. From the company, we have CEO, Andy Cecere, and CFO, John Stern. Thank you both for coming.
Thanks for having me.
Morning.
Great to have you guys. Andy, you know, let's put things in perspective here. We're approaching two years since the close of the Union Bank transaction. I think a year from the conversion, maybe to the weekend?
Exactly a year, yes.
What's the report card on the deal? How has it benefited growth so far, and what are the opportunities in the new markets?
Thanks, John, and good morning, everyone. It's great to be here. So it's a great place to start, John, because it fits very well into our overall company strategy, which is about our diverse business mix, the scale that we have, taking advantage of the digital investments we made, and cost takeouts and efficiency. So and Union Bank hits on all those marks. So first of all, from a scale perspective, it made us a player in California. You know, we were in the 10 and 11 market share range, and now we're 4, 5. It increased our step function and scale 15%-20%, depending upon the category you look at.
It really provided the opportunity to leverage those investments we made in technology and in digital to allow us to lift and shift in one weekend, about a year and a day, this last weekend. A very successful conversion allowed us to exit the consent order they've had for a while, very quickly, and importantly, achieve $900 million of cost takeouts, which was fully in the run rate at the end of the fourth quarter of 2023. So it hit on all those marks. And while we didn't put it into the model, the opportunity to take 1 million customers on the consumer side, 200,000 on the business banking side, and leverage the banking and payment products that we have to those customers is tremendous.
So one example, the card penetration of the consumer base at Union Bank was about half of U.S. Bank. So they were about 20%. We're at about 40%. We're already at 28% at Union Bank after one year, so it really hit on all those marks, and it was a positive deal, both strategically as well as financially.
Great. And then on the commercial side, additional opportunities in terms of penetration, what are some other examples?
Yeah. One of the benefits of our, our company is our diverse business mix. So we derive about 40% of our revenue from fee income, which is important in times like this, where loan growth is a little tepid and deposit costs are pressured. So it is, to have this great diverse set of businesses. And it's interesting because we have about 37% is consumer and small business, 30% is institutional, corporate, commercial, and 26% is payments, which serves all those customers. And, we have all the traditional businesses that most big banks have, which is consumer banking and corporate banking. But we have a unique set of businesses that are very fee-oriented, capital efficient, high return, high barriers to entry, like our corporate trust business, our fund services business, our capital markets business.
Our ability to penetrate the Union Bank customer base in those is also tremendous, sort of like that card penetration I talked about on consumer.
Mm-hmm. Any areas of business mix, Andy, where you might be undersized and looking to tweak?
No, you know, again, we are a corporate trust. We're a number one or two market share across all the categories. $65 billion of deposits that come, operational deposits that flow through there. Huge fee business, allows us to penetrate municipalities and corporate businesses to serve as their trustee. Fund services, a unique business, very fee oriented. Also, deposit flows that come from it. So, payments is another great business where we have a high capabilities across merchant acquiring and card issuing, as well as corporate payments. So I think we have the right set of businesses, and really, our focus is on penetrating and cross-selling more customers because we can benefit from the businesses we have, and they can benefit from the capabilities that we have.
Mm-hmm. So we think about across the fee income opportunities, what are the kind of the top ones across wealth and commercial?
So, I'll start with commercial products, which is a great story. You know, 2008, 2009, that was a $400 million business, and now it's a $1 billion business. And that's providing bond underwriting, FX, interest rate derivatives to our customers that are lending customers that we really can expand the relationship. So that's a great opportunity. Our payments business is another one. So, you know, we have a tremendous merchant acquiring business, so we're very focused on penetrating the business banking together with payments in this overall ecosystem. You know, in today's environment, John, companies are really trying to meld together what they need from a payments perspective, together with what they need from a banking perspective to help them run their business. And we talked about this before, but we have this tremendous opportunity.
We have, we had a thousand small business customers. We said we were going to grow at 20%-30%. We're already at 30%, which is about half of the growth came from Union Bank, about half of it organic, because we're really trying to come to this ecosystem, which helps them run their business. That includes our Bento, our talech capabilities, helping them run receivables and payables. So it's interesting, again, stepping back, this diverse set of businesses, many of which many banks don't have, really allows us to penetrate, serve more, drive the income, and drive returns.
Mm-hmm. On that small business opportunity, how much of that is in the new markets and some of the acquired areas, and how much is kind of just legacy U.S. Bank?
It's a little bit of both.
Mm-hmm.
I would say almost half and half.
Mm-hmm.
Part of the penetration comes from the Union Bank customer base, which again, is very affluent, loyal customer base, but they just didn't have all the products and services that we did. That's why that opportunity on the revenue drivers is so substantial.
Yeah. I think you recently launched a private capital business.
Yeah, private capital is another great example. So, you know, I, I think of it more as a partnership than as a competition. So we provide a lot of service that private capital doesn't or can utilize in part of their business. So we can provide FX and derivatives, we can provide the bond underwriting, we can provide the fund service components to really partner those private equity firms and really be part of the banking relationship as they expand their business.
Mm-hmm. Yeah, on the payments, Andy, just to follow up, what are the ongoing needs for tech investment in the payments business, and how much ongoing spend does it take just-
Yeah. So we're at the point of the curve that we've leveled out in terms of the spend. That's tremendous focus for us for the last five years. A lot of it was in tech-led. If you think about traditional merchant processing, it is now becoming part of the software that helps and runs our business, and that's where we put most of our investments.
Mm-hmm.
But we're at the level point on that investment spend right now. So, it was a key area of emphasis for us, and it's now over 30% of our activity is tech-led processing and tech-led sales. So, at the point of the curve where it's flattened out, but it's been a tremendous focus.
Mm-hmm. So, also just kind of rounding out this discussion around the business mix. When you think about M&A, and how big is big enough in banking, one of your peers, Bill Demchak at PNC, has kind of pointed to the size advantages of the GSIBs, the mega banks, Bank of America, JPMorgan, and their ability to kind of really grow market share. How do you feel on that? Do you feel like you have the right size, super regional banks like yourself or virtually national, in your reach? Is that big enough, and how do you think about-
So-
that over time?
No, we're $650-$660 billion, so we are the largest non-GSIB, so I think we have sufficient scale. But I agree with Bill. Scale never been more important than banking. The scale around technology, investment, marketing spend, the ability to have your brand leverage. So I do think M&A would be an outcome of them because all those things plus regulatory changes. However, I don't think it's imminent because of the marks on the balance sheet, but I think we're well positioned. And importantly, you have to have the technology framework to do integration in a successful way, which is what we did with Union Bank.
Mm-hmm. And for now, it sounds like you're internally focused. You've got a lot of opportunities-
We're focused. We have tremendous organic growth opportunities across so many categories that I talked about, but we are also would be well positioned for M&A when that is when and if that does occur.
Okay. So, John, let's get you involved here a little bit, we'll dive into the obligatory NII questions. But before we do that, you know, any comments in terms of quarterly trends, update to guidance for the year or the quarter, or maybe just kind of level set us there?
Sure. You know, since last time we've all talked, there's really no change in our view of the economy. The view of the economy is it's resilient, it's strong, it's constructive, and all those sorts of things for growth. In terms of how the quarter is coming in and our guidance that we provided, there's no change in terms of the quarter. Things are coming in as expected.
Okay. Okay, well, let's drill in a little bit there. At the first quarter earnings, you lowered the full year outlook to NII, gave us a range. The main driver that you talked about was the kind of continuation of yield-seeking behavior among commercial customers. You know, what are you seeing that's a little different than your original expectations when it came in the year on NII? And what are the assumptions to kind of get you to the low end of your range, you know, kind of the mid and the upper end? Maybe just kind of help us, give us-
Sure
... an idea there.
Yeah. So, you know, maybe just backing up to where we were at the beginning of the year. So, the beginning of the year, clients, as well as the market, was looking at multiple cuts. Our commercial clients, if you... and particularly, if you look at our DDA balances, it's all commercial, it's institutional and corporate, type deposits. None of the retail is really in there. And so those accounts were, were positioning for a different interest rate environment, different interest rate environment, excuse me. And so when, when everything shifted to more higher for longer and that sort of thing, we saw more sensitivity with those clients to, to be more efficient with their cash, all those sorts of things. And so that's really what drove us, the decisioning on, on changing, the range that we have.
And so now, you know, the range, you know, we provide a range because it accounts for a lot of different factors which can come into play. Meaning, there may be, even though we continue to see stabilization and slowing of our DDA migration, you know, if that were to be a little bit more not stabilized as fast as we would have thought, then that's on one end of the range. But if it stabilizes quicker, it's gonna be on the higher end from an NII guidance of range.
But, you know, it's not just about the deposits, it's gonna be about loans and you know, in terms of loan mix, in terms of, you know, how their assets are repricing on that side of the balance sheet, particularly as rates continue to be high on the longer end of the curve. And then a little bit of modest loan growth we have built into the forecast as well. So all those are kind of factors and, you know, different interest rate environments. So we try to incorporate all those things into the range, is kind of how we thought about it going forward.
Yeah. Is the base case, though, allows for a little bit more mix shift down and, some moderate loan growth, would you say? And then kind of the lower end is more severe?
Yeah, I mean, in our base case, we have, you know, a couple of cuts right now, and really, I think it's, you know, at the end of the year, so it's really, it's not really consequential to 2024, if you think of it that way. So if you're thinking about, cuts and things like that, I mean, those are gonna be, you know... It's really more about, the deposit behavior, loan growth, as you mentioned, but the loan growth, again, very modest in our forecast-
Yeah
our base case.
You know, John simply stated that, we're comfortable with the guidance because the math makes us comfortable with the guidance.
Mm-hmm.
The security portfolio turnover, the increased yield on the new purchases, modest loan growth and deposit migration flowing, all those things lead us to be comfortable with it.
Yeah. And it kind of, you talked about NII being relatively stable for the second quarter and then some moderate pickup in the back half.
Yeah. Yeah, so I can go into that a little bit-
Yeah
- of detail. So again, on the deposit side, you know, we-- you know, there is some migration and rotation, but that is out of DDA and into interest bearing. But that is stabilizing and slowing. We very much see that, particularly in many of our different client bases. You know, on the loan side of things, as we mentioned, we have a little bit of loan growth, and that will be favorable because the loans that are coming on should help our mix profile. So if you think about cards are growing, commercial a little bit, and auto loans and, well, auto loans and commercial real estate are probably more less stable or are dropping. And so that loan mix will be beneficial to us as well.
You know, Andy mentioned, and I'll maybe go into a little more detail here on the repricing, you know, characteristics of the book. So, you know, we have, obviously, about half of our loan book is a fixed rate variety, and we have obviously the investment portfolio. So if you can think of the investment portfolio, that's kind of churning 7-8 basis points on average per quarter positively. You think about the mortgage book that's growing anywhere from, you know, 5-6 basis points on per positively, and then we have the fixed rate assets, such as retail leasing, auto loans, things of that variety, that are all helping in that regard.
So, the deposit costs are diminishing, you know, in terms of rate paid and rotation, and the assets repricing will be beneficial. And so it kind of gives us that tailwind-
Yeah
... for the growth going forward.
In an effort to simplify a really complicated thing, at a high level, John, would it be fair, like, kind of relatively stable means that the reprice on the asset side is kind of enough to offset a little bit more mix shift?
Yeah.
Um-
That's a simple way to say it.
And then in the back half of the year, the whole card growth and a more reprice, if you get stability in the next, you get a little bit of growth?
Yeah, and I would say the loan growth component, obviously it's important, we want to grow, but it's not going to be as consequential to-
Mm-hmm
... to the views that we have. It's not going to be as impactful. It's going to be more about the impact of deposit rate paid, as well as mix, that impact decreasing over time and ultimately stabilizing as well as then on the offset, that continual repricing that we're going to get on the fixed rate asset side of things.
Yeah. Has anything surprised you on competitive pricing around deposits? It seems like bigger banks have been being able to hold the line for the most part.
Yeah. You know, it's been quite stable for a period of time here, and we anticipate that to be the case going forward. You know, the Fed has, from a quantitative tightening standpoint, has really started to slow that down a bit. I think that's conducive to continued stabilization of pricing. Loan growth has been pretty meager in the industry, and so, you know, there's not as much fight over the deposits from that side. So we just, we see stability pretty much across the board from a rate paid standpoint.
Okay. One more on this topic here. Just in terms of the yield curve shape, John, and your efforts to be relatively neutral. Maybe you could just explain that a little bit, how you've used some hedges to kind of keep a relatively neutral-
Sure
... position, but ultimately, even within that, rate cuts could be a little helpful.
Yeah. So you know, what we try to aim for is being relatively neutral from an interest rate risk standpoint. So we're using our balance sheet, which is relatively neutral just as is. We have kind of a 50% mix in terms of fixed and floating assets. Our deposits are relatively 50/50 in terms of retail versus institutional. So it gives us a nice starting point from a balance standpoint. So what we're doing from a hedging standpoint is, how do we need to work around the edges and maybe some of the portfolios to get the overall stability or neutrality that we're looking for from an interest rate risk perspective?
So, for an example, in our investment portfolio, you know, to, to protect against up shocks and rates, we're going to put on pay fixed swaps, to help protect that, the valuation of the investment portfolio. To offset that a little bit, but also to protect ourselves in a down rate, a sudden down rate scenario, we're going to put on receive fixed swaps and have put on receive fixed swaps, both, currently spot starting as well as forward starting, to help with that, going forward in case rates were to suddenly fall. So that, those are kind of the different places where we utilize hedges to help us weather those sorts of storms.
That's why the cuts versus no cuts is not that meaningful to the outlook relative to, say-
Yeah
... the deposit mix and loan growth.
That's right. And I would say we aim for from a, you know, we're looking at our base curve, and we're protecting ourselves from shocks up and down, is the point of the hedges and everything. That all said, we would still be more favorably tilted if the curve would be more at a regular shape, right? More upward sloping.
Mm-hmm.
And so that's where cuts will probably be on the margin, be more beneficial to us because it relieves the pressure on the deposit side. As you know, we have a quite a bit of institutional corporate type deposits that we can immediately reduce rate on, if the Fed cuts, and that's going to be helpful, versus a higher for longer.
Yeah.
Those are kind of the puts and takes to it.
Okay, great. And Andy, where do we stand on commercial loan growth? And thinking kind of from the industry right now, what's holding clients back? And then also underneath the surface, what's going on at USB in terms of account growth and maybe some precursors to loan growth?
Yeah. So, you know, it... We just had our financial reviews the last few days, and utilization, first of all, I'll say, is relatively flat, flat. It's been flat for the last few quarters. So customers are being a little careful because of the uncertainty in the environment of pulling down more of their client utilization. That being said, you know, pipelines are firming up in a positive way, but I would expect loan growth to be modest, as we've talked about, and that's baked into the guidance we provided. But versus where we were 90 days ago, I would say it's a little bit better, as sort of perspective, attitude, confidence level is still a fair bit of uncertainty out there, and that's true of both middle market as well as high-end corporate.
Mm-hmm. And John, one follow-up on the revolving credit card book. What are you seeing in terms of payment rates and revolve, and where are you on kind of the seasoning of new accounts that you've added?
Sure. You know, on the payment rate side, it's kind of interesting. It's been as flat as a pancake over the last several quarters. You know, we kind of went through the change in the during the COVID timeframe, but our payment rate has very much settled in kind of a, I'll call it a 33%-34% range, and it's been very stable, and we expect it to be stable going forward. And so, that was that level was probably in the low 30s, you know, prior to COVID, and had some spikes and things of that variety. So, you know, the same is true in the revolve rate, just in the opposite format. So we're kind of in the low 60% from the revolve rate standpoint.
So it's those are kind of the puts and takes. So we really see that not being as much of a factor to NII, it's more going to be account growth and putting on new balances and certainly spend levels have been constructive. And so that's continuing to add to balances and things of that variety, as well as what Andy talked about with the penetration rate improving and things like that from our Union acquisition. So all those factors are really give us a positive bias on the card side of things.
Okay. So shifting gears over to the fee revenue side of things, John, you've given an outlook for fee revenues to grow in mid-single-digits this year. Can you talk a little bit about the main drivers of that, and, you know, what gives you confidence in the ability to meet that?
Sure, yeah. Andy talked a little bit about some of those things, but just to paint a picture of why we feel confident in that is, you know, we have a lot of different products. And obviously, we're seeing really nice, strong growth, core growth in our corporate trust areas, in our capital markets areas. Clearly, you know, mortgages is continued to show some good trends as well, in our payments business are all, you know, areas where we expect to see growth over the timeframe that gives us the confidence. I think putting some of these pieces together, along with the Union transaction, you know, and Andy talked about the commercial products group and how it's grown from $400 million to $1.4 billion in that area.
It's really about putting the pieces together for our clients and growing share and wallet. So if you think about the life cycle, just to give you an example, if you take a life cycle of how a client might approach an M&A transaction, for example. So we can do the bridge financing upfront for that to help out with that. Eventually, that client will want to take their transaction public and go do a debt offering. Well, we can underwrite that. They're going to need a trustee for that, that sort of activity, and so we can provide that sort of capability. And then after the transaction is settled, then we can hold the balances in escrow for a period of time, which is very beneficial to us from a deposit standpoint.
And then or we can have it invested, or the client can direct it to invest it, and we can utilize our U.S. Bank Asset Management standpoint. And then along the way, if they have hedging capabilities or needs, you know, through foreign exchange or derivatives or whatever the case may be, we can provide that. So it's kind of all the years of investment that we've put in, in terms of systems and people and technology, are really starting to pay off. Now, we can kind of pull it all together. And so that's just one example.
You know, the same thing can be said, as Andy talked on the payments ecosystem, in terms of tech lead on the merchant side of things, and how we can be beneficial to our business banking clients in putting product together in a simple form. So you put all those things together, John, you know, it's not just about the actual business lines, but the capabilities that we have in pulling it all together for the benefit of the client is really what gives us the confidence.
All those unique aspects of the categories that we have. Again, you know, we're not just dependent upon deposit service charges and traditional categories. We have all these unique sets of businesses. John mentioned a number of them. Fund Services is another one where we could provide accounting, fund admin TA funds. That is a great business for us, very capital efficient. So all these things drive that fee growth by expanding the business set to the customers we serve.
Mm-hmm. Great. That's very helpful. So on the expense side, you recently indicated in the first quarter that expenses are likely to come in better for this year than your previous forecast, $16.8 versus the prior $17. What got better? Is that kind of a pull-through of the cost savings achieved through Union at the end of the year? And does that demonstrate that you've got further flex, if needed, on expenses?
Sure. So maybe just to you know, kind of give the context around that. You know, as we were kind of going through the year and I mentioned, you know, the challenge on the net interest income side of things. You know, as we go through our review processes, as Andy talked about, you know, we just had one a couple of days ago, but we do these regularly. As we were talking through that, what we found is that you know, a lot of different groups had different ideas on how to continue to pull in the expenses. That was around a variety of topics. It wasn't one core thing or another, so it had to do with third-party spend.
That could be like procurement-related or consulting areas, and things like that. We've been more active on the real estate side, so we've been going into more of a hub strategy in terms of where our people are located and things of that variety. So that allowed us to close areas in different locations that provide us savings on a go-forward basis. And then on the operations side and technology side, we've spent a lot of money and investment in our processes and improvements and things of that variety. And that those things that are coming to fruition, we're able to reduce process time and the amount of people that it needs to complete processes.
We've also centralized our operations team, and we've been able to find efficiencies with call centers and things of that nature. You know, so it's just a variety of things. And so, you know, you know, as we kind of go through that, we wanted to announce that at the same time with the change in the net interest income component. But we also think that as we go forward, those additional levers that need be in, that's just going to be kind of a game time decision.
Yeah.
As we go through the year and we look at our forecast of revenue and things like that, that's where we will decide the trade-off between, should we take cost action or not? Because sometimes you do want to invest, you do want to continue to move forward on certain projects. And so those are the sort of trade-offs you have to weigh as you kind of go throughout the course of the year.
You know, John, I keep it really simple. We've we've invested a lot in the company in digital and technology capabilities over the last five years.... that are starting to pay off. We're at the part of the curve now that those are no longer investment increases, but return payback. And that allowed us to get the $900 million of cost savings from Union Bank. We're able to shift their entire network onto our platform in one fell swoop, and that allows us to continue to drive efficiencies as well as new products on a go-forward basis.
Yep. So yeah, I should, you know, clarify it was 16.8 or better.
Yeah.
And as you said, you'll kind of manage that throughout the year of doing this flex without cutting into muscle, and-
That's right
... you feel like you do have some optionality to manage that and still make all the investments-
While making the-
Yeah.
That's an important point you're making, while making the investments.
Mm-hmm. And Andy, I think one way you phrased that is that for years you were kind of doing some defense catch-up spend, and that's kind of crossed over the midpoint line, and-
Yeah. So back in, you know, early 2010 to 2015, we were spending 60% or more on defense in terms of capabilities. We shifted that in the last five years to offense, and when I call offense, that's increased product capabilities, but more, it's also increased efficiency. So, and that shift has continued, but the level of spend is stable.
Yeah. The offense is stuff to grow the bank, change-
Grow the business. I talked about the tech lead on payments, the commercial product capabilities, the ability on cards, you know, extending the product set, platforms, our cloud migration. All these things, either add to revenue opportunities, capabilities, and/or efficiencies.
Yep. How about new market expansion? Is that part of the plan as well?
So we've entered a couple new markets in a couple ways. If I think about expansion, we could do it a couple ways. One is entering, adding branches in new markets. We did that in Charlotte. That does well. It takes a little longer than a traditional M&A transaction, but it does well. Partnerships, we partner with State Farm, 19,000 agents across the country, selling our products and services. That's another benefit, and so partners is one of the strategies. And then thirdly, in our institutional corporate commercial, we can add offices, and we're doing that in the Southeast to provide services to those customer bases, which are faster growing and can leverage some of the capabilities that we, myself and John talked about.
Okay. Maybe you could talk a little bit on what you're seeing on the asset quality front.
Yeah. So, John referenced this a little bit. So I would think it's—I would say it's migrating to what we would expect, and so the pre-COVID normalization levels. Card is going back to pre-pandemic levels and sort of stabilizing—delinquencies are stabilizing. We talked about the card level getting to that 4.25 or so charge-off levels. That's fairly consistent with what we saw, a little bit above pre-COVID levels. I think the only area that we're all focused on is CRE, particularly CRE office. And again, as a reminder, that represents about 2% of our ... Just under 2% of our outstandings, 1% of commitments. We're reserved at it over 10%. So it's going to be lumpy and bumpy, but I think we're well reserved for it, and we'll manage through it.
But that's the only category that I would say is showing any level of stress.
Yeah. Yeah. And your, your cadence in charge-offs for the year, and maybe John, you could talk a little bit about the mix between what trend you expect on the commercial side versus the consumer side, where you maybe got some seasonality in the back half of the year.
On the loan growth side or on?
Just in terms of charge-offs.
Oh, charge-offs.
Yeah.
Yeah, I see. I mean, and Andy mentioned, so on the card side of things, we have a little bit of seasonality. We'll have a little bit probably of moving up in the charge-offs, but then we expect that to come down, and that's reflective of delinquencies.
Yep
... and other trends that we're starting to see being on the positive side. So, you know, we're as expected, you know, at this point of the game. We're a little bit above pre-COVID levels, but that's a reflection of the environment. We're in a higher interest rate, we're in a higher inflation market, and so that's going to put, on the margin, a little bit more stress in that portfolio. But in terms of other areas, we're just not seeing any sort of credit issues in any of the other commercial or mortgage or anything like that. It's been. It's very stable.
Mm-hmm.
I think what is important to note, John, is, we anticipated and talked about delinquencies and charge-offs on card in particular, sort of migrating back to pre-COVID, pre-pandemic normal levels. So they were increasing, or seen as that stabilization-
Yep
... which is what we expected, but it's good to see.
Yep, for sure. And you've been traditionally conservative about reserving, and you, lo and behold, today you have the highest reserves.
We do
... you know, among the banks. We've seen some banks start to utilize some of the reserves, especially those in commercial real estate. Is that something you could expect to do? You've mentioned the high reserves.
Well, that's why we're reserved at our appropriate levels, just over 10%. We are conservative in our approach. We've taken more of a downside perspective in terms of the way we think about CECL. So I think we are well reserved for whatever would happen. It'll play out. It'll play out for us, it'll play out for the industry, but I think we're in a good spot.
Yeah. And what we're hearing from some of the other banks around office is, it's bad, it's a tough environment out there, but, incrementally not worse than kind of what you've built in. You've built in some pretty harsh stuff into the reserves. Is that a fair characterization?
I think it is, and it's very idiosyncratic as well. So some markets and some buildings are doing great, and some markets and some buildings are not. And so you'd have to really focus. You talk about that 1.8% of our loans, but it's really a subset of that, that we're very focused on and making sure we're reserved appropriately, and we are.
Yep.
Yeah. It's really on a case-by-case basis. Every situation is unique, and so I think the reserve process really takes into account the total in terms of portfolio, but the team has to really manage it on case by case, client by client sometimes, you know, impact.
Mm-hmm. So how about capital? Obviously, we've got some variables out there in terms of the Basel III rules, and the phasing that'll happen to that over a couple of years. How are you thinking about kind of managing to these different definitions of capital? You've got over 10% of the current rules now, but how do you wrap all that together?
... Yeah, I mean, you know, as we sit here today, we're waiting, of course, for the Basel III Endgame, as you referenced. For us, going through the CCAR process with the new kind of Union Bank, U.S. Bank, kind of, you know, and that lens for the Federal Reserve. You know, we want to see those results from the Fed's viewpoint. Those are very important pieces for us to look at a capital standpoint. So in between here and there, we're in a mode of just continuing to build our capital.
You know, and I think the difference between where we are today versus where we were a year ago, is we were building our capital, but we were also doing things with transactions and risk transfer-type transactions in order to help aid that acceleration of capital. We're at a place now where we don't necessarily have to rely on that. That is something that we may do on a one-off basis if a transaction comes around that seems reasonable. But what we really want to focus on is our organic growth, powered by all the different things that we just talked about: diversified business mix, the growth in our net interest income, and then the expenses being stable.
And all those things will help us continue to grow our capital while we await these rules, and then we kind of, at the same time, we can burn down the investment portfolio and the AOCI. That's something that we're obviously monitoring. And that, along with the, you know, whether we're going into Cat 2 or whether we're going into, you know, using the Basel III transition, you know, those are the things we all have to kind of weigh.
Yeah. But again, from a priority standpoint, John, internal reinvestment, dividends, and buybacks are all part of the mix. We'll get more clarity on all these categories, but the company generates a lot of capital. We have a high return on tangible. We have great businesses. And the team did a great job going from 8.4% to 10% in a very short time frame. These things will all give us clarity, but those are the priorities, and those continue to be priorities.
Yeah. When we think about the build rate you're putting on, it feels like about 100 basis points of capital a year, 25, 20 to 20-
20-25 beforehand. Yep.
John, you talked about the burn-off. Is it, you know, 25%? What are we thinking that would burn off on AOCI over the next year or two?
Yeah, you know, I mean, it's all rate dependent and just kind of how the market goes. But a good rule of thumb is to think about 25% or so burn down between here and the end of 2025-
Mm-hmm
... is kind of a good way to, to start or to think about that. So that's kind of where we are from this, the current mark that you have today, to, to where-
Yeah
... where we will end up eventually.
With that kind of organic growth, Andy, a little help from burn-off, will you be able to leg into some buyback, even as you build capital at some point?
Once we get more clarity, we'll probably make that a plan.
Mm-hmm.
But it's part of the list of things that we're focused on. So internal investment, dividends, and buybacks are all part of the mix.
Sure. Sure. John, the Cat 2 discussion, you know, it's obviously calmed down, and you're not contractually-
Sure
... going in there. You think about where you are now, it's still quite a ways away. Loan growth is not ripping for anyone here.
Sure.
You'd have to kind of be above that 700 for, I think you said four quarters on average. So that, that seems to be a ways off as, as a-
Yeah, I think that's the right way to think about it. We think about, you know, our loan growth over a period of time should be GDP to GDP plus. So that, you know, if you think about where that should take you versus where we are, kind of at $655 billion or so in assets. Again, you have to be over $700 billion on average for four quarters in a row, and then you become in the Cat 2. So it is some length of time between here and there. So we do have time for the transition, which is appropriate, and we'll use that time to make sure we're focused on capital-efficient growth and growing out and investing in the businesses, just as to the extent that we just have all talked about.
It's years away, and it's not a constraint for the company's growth characteristics.
Yeah.
The likelihood is we'll probably be bound by the Basel III transition rules, and we are in Cat 2.
Yeah.
But we'll have to see both of them.
Yeah.
Andy, how do you think about some of the long-term financial aspirations for the company? When you think about ROTCE, should that kind of be in the high teens, low to mid-fifties on efficiency ratio? What are some of the key metrics that you hold the team to-
Yep
... and investors should hold you to?
So most important in my mind is the return on common tangible common equity, which has been in that high teens category of 17%-18% the last few quarters. So once we get the clarity on the capital levels, which comes with the Basel III endgame and the stress test process, CCAR, we're going to actually set guidelines and targets as part of our Investor Day, which is in September of this year. But I would expect high teens return on tangible in the 50s in terms of the efficiency ratio, and then we'll go through the ROA and all the other components. But that most important one is that return on common tangible.
Mm-hmm. When we think about overearning, underearning kind of thing, John, the interest margin's down 40 basis points or so over the last few years.
Yep
... you know, to 2.7 or so. Do you feel like you're underearning on NII, and as you've kind of grown off some of the low-yielding stuff, that you can get kind of back to a 3% NIM over time? And is that a part of the driver?
Yeah, I mean, you know-- Yeah, we have changed quite a bit in just a short amount of time. So obviously, the NIM does go through cycles, as you can see through-- if you go through decades at a time. It is, it's done that. And I think the things that are positive for us is that asset repricing churn that's going to continue for, as you know, over a long period of time. That'll be beneficial. The deposits components is, as we've talked about, stabilizing and, in theory, should get better as the Fed starts to normalize in terms of rates. And so, we do think that, you know, kind of that 3% area is very, you know, doable over kind of a period of time.
So we talked about the first half of this year being a low point in NIM, and we still think that.
Mm-hmm.
And so I think as we think about normalization of all the things John talked about, it would expand from that level.
Okay.... Just a couple questions around the P&L. What are the important regulatory items besides Basel III, which we just talked about on capital? When we think about liquidity, maybe John can comment on the CFPB late fee rules in particular , whether that's how relevant that is for you?
Yeah. So, capital would be at the top of the heap, and we talked about that. Liquidity, second, we're in a good spot from a liquidity standpoint. The long-term debt rule is not gonna be consequential to us. We have almost all of it in place already. Some of the new rules around late fees, Durbin II, are gonna impact us, but they're all manageable. John, maybe you can talk about that.
Yeah, I mean, I, I think just the liquidity rules, there's gonna be new ones. We know that. But we feel like we're very well positioned. We have a lot of cash, we have a lot of investment portfolio, we have a lot of ways to access the liquidity. You know, we're, we have operationally set up a number of different facets to kind of help us without all those sorts of things. So I think those are, those are really meaningful on the liquidity side of things. You mentioned, you know, on Durbin and you know, late fees.
Obviously, late fees is kind of in limbo, given, the, the legal, matters and things like that, but that's gonna be, you know, about $100 million or $50 million or so annualized basis that go through net interest income. But, you know, that's as we understand the rule and but we don't know the timing and things like that, but that's incorporated into how we think about our guide and build and all those sorts of things.
that $150 is before mitigation-
Right.
There are things that we can do to offset.
Yeah, that's right.
So obviously, there's a lot of uncertainty there, as you mentioned on the late fee, but you've incorporated some changes into your NII outlook. That's what it sounds like?
Yeah, there's some mitigation in there for sure. And I think, you know, there's a number of different ways you can kind of go through that. There's a lot of different levers that the team can pull, but it takes time. It doesn't all happen at once, and sometimes it happens over the fullness of time as you're adding new accounts and things of that variety.
And John, this, you know, sort of looping back to where we started. As you think about some of these pressures on the more traditional banking products, overdraft charges, NSF charges, late fees, Durbin II, having these other sets of fee businesses is really important and really valuable.
Mm-hmm.
That's, you know, this balance and having this componentry that is unique is very helpful at this point.
Yeah.
Andy, question here on two of your consumer businesses. Any changes to both the sizing and how you approached and do approach the auto and the mortgage business over the last few years relative to what you've done?
Yeah. So mortgage has been an important business to us. We have a great platform, we have great leadership, and it's done really well. As you know, about three or four years ago, we actually exited the brokerage business, and we're focusing on the retail core consumer business and our customer base. We still have a correspondent business, but it's diminished. So that focus in the core retail mortgage base will continue, and that's what we think on a going-forward basis. On the auto business, we've migrated that a little bit to more focused on leasing and some of the ancillary components, marine and such, because the pricing on auto is very volatile, and right now the returns just don't meet our hurdles.
Mm-hmm.
So still in the game, but we're very moderate in terms of activity because of those returns, and we're gonna continue to be disciplined around that.
Yep. And John, how has securitization played a role in both auto, and mortgage, both in terms of capital management, but just the core way you think about managing the business?
Well, I think, you know, in terms of securitization, we haven't really utilized that. We have the tools and capabilities, but it's not gonna be really meaningful for us going forward. You know, it's more, in that sense, it'd be more of a funding vehicle, and we don't have necessarily the funding needs for it. But it is a lever for us to pull in case we do utilize it, in case things get worse than what we had expected and things of that variety. I think what also has helped us, maybe going back to the fee and capabilities and everything, is we've been pulling all these different programs together on risk transfer, some of the securitization.
That's also helped our internal capital markets team be more thoughtful and have better talent and capabilities to help other banks that are going through the same line of things. And so we've been able to kind of transfer that knowledge to our banking clients and other constituents. So it's really helps us have different levers at different parts of the cycle, and I think that's really beneficial for us going forward.
You know, last part of the consumer business I mentioned is the branches. Branches are still really important, but we used to need fewer of them. So we had, you know, 3,200, 3,300. We have 2,200, 2,300 today, but they're better branches. They're in the right place. The technology has improved. They're more sales-oriented and consultation as opposed to transactions. So that was also a big component of the redo as you think about the last five or 10 years of the branches.
Mm-hmm. So Andy, as we wrap up, we talked a little bit about this before, we got on stage. At a generalist conference, it's sometimes hard for folks that aren't financial specialists to see how banks compound value over time. So I guess, what do you hope folks take away about the ability of a bank like yours to compound value over time? And what might be underappreciated about U.S. Bancorp amid all of the macro stuff going on, and you hope people kind of see?
Yeah, I think we all get caught up in the short term. What did the Fed say today? What is the likelihood of rate cuts versus rate increases? The shape of the yield curve, the uncertainty in the economy, the uncertainty in the global markets. Those are all, for sure. But, you know, from my perspective, U.S. Bank is a high return business, a tangible return, I say, is in the upper teens. Compounded growth that we can achieve by extending and deepening relationships. I think the underappreciation is the return levels and diverse business set. It's not just a traditional set of banking businesses, it's a unique set of businesses, and that drives the returns, the capital efficiency, which makes it a good investment.
Great. We'll leave it there. Thanks so much.
Great. Thank you.
Great. Thank you.
Appreciate it.