U.S. Bancorp (USB) Earnings Call Transcript & Summary

Moving right along. Everyone, take their seats. Very pleased to have U.S. Bancorp up next. While people find their seats, let's maybe put up the first ARS question and we're going to start with the same question with every company. And then at the end of the day, we'll rank them and compare them. So what's your current position in USB? [Voting]

Interesting. All right. We usually have more companies to compare these 2. So I was criticized in the last presentation that it took me 3 questions to get to the guidance question. So...

You kind of make that mistake...

And for those listening, from U.S. Bank, we're very pleased to have Andy Cecere, CEO; and Terry Dolan, CFO.

So for my first question, let's jump right into it. A few weeks left to go in the quarter, maybe you can provide an update to maybe third quarter guidance. Things playing out as expected. Maybe talk to the full year guidance as well while we're at it.

Sure. Good morning, Jason. It's great to be here. Great to be in person again, so it's nice to see you. And as you said, Terry is joining me today. I'll start by saying our guidance is consistent with what we talked about on our earnings call back in July. And maybe, Terry, you can give some of those details.

Yes. So our expectation is that from a revenue perspective, we'll continue to see, on a linked-quarter basis, about 3% to 5% growth. In terms of expenses, we continue to expect linked-quarter growth of about 2% to 3%. And then when we end up looking at loan momentum, very consistent with what we had expected. Consumer spend is very consistent with our expectation. The one area that I would say that we're seeing a little bit of pressure is just on the mortgage banking business. I think that's kind of in line with what's happening in the industry at this particular point in time. So our expectation is that on a linked-quarter basis, mortgage revenue will be about 30% to 35% down from the second quarter. Then the last thing I would just mention in terms of the quarter is that our merger and integration costs, we had given some guidance with respect to that. Currently, we are expecting those onetime costs for the third quarter to be about $50 million, kind of in that range, plus or minus. On a full year basis, again, our guidance is consistent with what we had mentioned. So total revenue up 5% to 6% on a year-over-year basis, and net interest income will be probably in that low to mid-teens. That will be offset by lower fee income, and that pressure from a mortgage perspective is the primary driver of that. And then our expectation is positive operating leverage of at least 200 basis points. So very consistent with what we talked about on a full year basis.

So I guess, just to be clear, so mortgage down 30% to 35%. I think prior expectations, more flattish. But despite that, you're still kind of keeping the overall revenue guide of up 3% to 5%?

Yes. Yes, I think that -- so if you think about maybe on the loan growth side of the equation, again, in line. But where net interest income might be a little bit better; mortgage banking, down a little bit. So -- but still very much in line with that guidance that we gave.

And I guess maybe -- and we will delve into this more, but just the overall driver of the -- and maybe NII coming in a touch better than expected would be...

Well, I think the -- just in terms of interest rates during the quarter and the loan growth being just a touch better.

Helpful. We're going to probably delve into all of that, but maybe just bring up the next ARS question. Why do we have the shares of USB have lagged since March of 2020? [Voting]

So [ for ] acquisition concerns with half the people. All right. At least we know what the next question will be.

Yes.

Obviously, you announced the acquisition of MUFG, I think, a week after this conference last year.

We did.

You did, in hindsight, foreshadowed it a little because everything you kind of said you were going to do, you did. But maybe talk to why you think that's a good fit. And maybe importantly, why is the closure process taking a bit longer than expected? And just maybe any update in terms of timing and how that impacts your deal assumptions.

Sure. So Jason, as you mentioned, we announced this September 21, about a year ago, so just after the conference. And at the time and then consistent with what we believe today, in an environment that scale is so important, this opportunity increases our scale by almost any measure, 20%. So you think about loans, deposits, 1 million customers, 190,000 small business customers puts us in a meaningful market share in California. And importantly, also, while we didn't project any revenue opportunities, the customer base of Union Bank is higher deposit balances, but really less other products and services. So underpenetrated in card, for example. We have a more robust set of digital capabilities. So I think this will be a terrific deal from an investor standpoint. $900 million of cost savings, a 20% IRR. But it's also a good deal from a customer perspective because we have a broader set of products and capabilities. And California is an important market, obviously, in the United States. So it's a great deal from that perspective. We've been working diligently with our partners at Union Bank on the integration process. We still continue to expect this to be approved in the second half of 2022, like we talked about. Our conversion date, we need a 3-day weekend. And we're targeting Memorial Day for conversion, Memorial Day of 2023 for conversion, which is a little later than what we talked about last time when we had talked about Presidents' Day. But in spite of that, the economics are going to be very similar to what we talked about. Maybe, Terry, you can mention that.

Yes. And maybe just as a reminder, when we talked about the deal economics, as Andy said, we anticipate about $900 million of the cost synergies. Now from a timing standpoint, that will shift a little bit. We had expected that we probably would have achieved in 2023 about 75% of that. Right now, because of the timing, it's probably 40% to 50% of that cost saves will happen in 2023 and the rest of it in 2024. But despite that, given that interest rates are probably a little bit higher than what we had originally anticipated, we still expect 2023 to be, from an earnings per share standpoint, about 6% accretive to the stand-alone or core of U.S. Bank. So very much in line with that expectation. As Andy said, the IRR of about 20% for the deal. So from a financial standpoint, it's a really good transaction. And again, no revenue synergies were incorporated into that, and we certainly think that there's opportunity.

I guess with no change to expect at close, why the pushout of the integration?

We -- our expectation on the approval is a little later in the second half as opposed to a little earlier. And we just need a time frame for the data conversion to ensure a successful conversion. And so to be prudent about the timing, we moved it to Memorial Day.

And I guess -- but what -- I guess, why is this approval taking longer than expected? And I guess, what gives you confidence you can actually get approval by end of the year?

Yes. Well, I think there's been a lot of changes with the Fed, and the Vice Chair supervision is now in the seat. I think that was an important component of the approval process. I think for all the reasons I talked about, this is a good transaction, not just for the shareholders of U.S. Bank, but for the customers of Union Bank. And I think it's also a great transaction from the regulator standpoint in terms of our compliance frameworks and our technology and so forth. So that gives me confidence that this deal will get approved.

Okay. And one of the things we've heard about from the OCC, potentially acquiring particularly Category III banks, maybe issuing TLAC or having to do more in depth living wills to get deals done, the Fed has been -- well, [ Boris ] spoke last week and vaguely touched on it. Just what are your thoughts about this whole kind of reduced tailoring for your kind of bank?

Yes. Jason, I know it's something that the regulators are kind of talking through, and it's part of the consideration. Certainly, anything that is done will be done kind of on an industry-wide basis for the larger regional banks. And it will be -- if there is something that's done, there'll be a transition period of probably 3 to 4 years. So -- but when we end up looking at the things that are part of the conversation, it's really around resolution and concerns about the ability to effectively resolve a bank if it goes into bankruptcy. We've had resolution plans that have really stood the test of time for a decade. When you end up looking at us versus a GSIB, as an example, we're much less complex in terms of the structure. I mean they have a lot of things under their bank holding companies that we just do not have. And we're 90 -- 98%, 99% of the bank holding company is the bank. So it's a fairly simple straightforward. Union Bank doesn't really complicate that because the structure of Union Bank and what we're buying is very similar to what exists today, and it will all get folded into our bank. So whatever comes along, we'll end up being able to deal with it. We'll be able to manage it. We have a strong balance sheet. We have strong liquidity. We're in a really good position from a capital standpoint. So we'll end up managing through, whatever it is.

Okay. Just maybe shifting gears to kind of the other topic we get, the CFPB. So in July, they took action against you in terms of opening, I guess, credit reports and checking and savings accounts. $37 million fine -- or $37.5 million fine, so obviously not a big number in dollars. But I think there are just still concerns out there in terms of kind of other implications, other regulatory bodies. Is this impacting the UB approval process? Maybe just kind of flesh that out for us.

Sure. So we have been working with the CFPB for 5 years on this agreement and settlement. It dates back to 2010, so it's a legacy issue. And the $37.5 million fine, we felt, was in the best interest of just getting this behind us and moving on. There's nothing more that we have to do. In fact, our compliance plan that we agreed to is only to continue the framework that we put in place since 2016. So there are no other considerations in terms of that, and there are no deal or M&A considerations as well. So this puts it behind us.

No restrictions with respect to our ability to grow or anything with respect to the acquisition that we're aware of.

Helpful. And maybe kind of shifting gears back to kind of the day-to-day stuff. Let me just kind of give you kind of view of the general environment, right? We hear -- you kind of gave guidance, Terry, that was good for a bank. Yet, we keep on hearing about recessions and concerns out there. You obviously talk to your clients on a day-to-day basis. Kind of what are you hearing and seeing? And maybe just how do you think about this cycle relative to past cycles?

Well, it's interesting. I think if I were going to summarize, things are good. From a consumer standpoint, they're strong. They continue to have high balances. Deposit balances are still well above pre-COVID levels. They are not growing anymore, but they're still -- they're stable, but well above 1 to 3x pre-COVID levels across all stratifications of deposits. Spend is still strong, Jason. So across our credit card spend, 10% above last year's spend, 30% above pre-COVID levels. Now they're in different categories. Discretionary is down, nondiscretionary is up. So there's a shift occurring, for sure. And corporate T&E, travel is already back to mid-90% versus pre-COVID level. So I think things are very strong, and credit quality is particularly good. We continue to expect it to normalize, but that normalization continues to get pushed out. So that's very solid. I think the fear is a slowdown. And while we're not seeing it yet, I think things are stabilizing, and that's what I would say. Loan growth continues to be strong. Deposit is relatively stable. So there's no indication that we have right now of recession. I think the most impactful thing that's occurring with our customer base and I think across the industry is the labor environment. Labor costs are higher and pressures are higher in terms of employee costs. But I think other than that, things are pretty stable.

Got it. I guess in that backdrop, Terry, you kind of gave overall loan guidance. Maybe you could just delve into a bit, well, the last 2 years, this year is actually pretty good. Maybe talk about the drivers where you're seeing commercial retail kind of quarter-to-date.

Yes. And again, loan growth momentum has been good and pretty much in line with what our expectations are. I mean we saw strong growth in the second quarter. I think it was 3.6% on a linked-quarter basis, and a lot of that was driven on the corporate and commercial side of the equation. We continue to see that. And a lot of that, I think, is both utilization rates continuing to improve. There's been a fair amount of volatility in the capital markets space. And so bank financing, as an alternative, has been more attractive. I think that, that is a driver for it. And then I also think that in the inflationary sort of environment, corporations are pulling forward some of their purchases related to inventory to try to get ahead of some of that inflationary pressure. And so that's driving a lot of the growth with respect to corporate and middle market on the commercial side of the equation. Other places where we're seeing growth, if you think about the credit card space, payment rates were very high during the pandemic. Those are now starting to moderate. They're coming down. I think there's still room for them to come down further, and therefore, room for credit cards to continue to expand and grow. The mortgage banking balances are growing nicely. A big part of that, I think, is more that prepayment speeds have slowed down. And therefore, you're seeing a lot less runoff than what we were seeing, let's say, a year or 2 ago. The one area where we're probably seeing pressure, and it's probably more so decisions that we're making on the pricing side of the equation, is just in the auto lending. The numbers of auto -- new autos being produced is down. But we would expect to probably still see some pressure in terms of loan growth in the auto space. And it's as much us making pricing decisions to make sure that we're maintaining the returns that we expect.

Got you. And I guess just any change in terms of standards and thoughts about lending into the potential or [ like this ] economic downturn?

Oh, yes, we were consistent going into the COVID pandemic. We're consistent coming out. We haven't changed our standards at all. We continue to be very disciplined and prudent around that. That's one of our long-term strengths, and we haven't changed that. I think the only thing that -- as Terry mentioned, pricing is a real consideration. So it's not our credit quality, but maintaining the returns that we expect.

Yes. And as you know, Jason, we underwrite really through the cycle. We try not to expand the box or contract the box as we go through different points in the cycle. A big part of that is if you think about on the consumer side, we are a prime/super-prime lender. So whatever prime -- whatever sub-prime we do have is simply because of customers may have migrated down, and that's pretty limited. On the corporate and commercial side of the equation, we don't do a lot of leverage lending and things that oftentimes gets you into trouble when you go into a recession. And then we tend to bank the investment-grade sort of customers. And so from a credit standpoint, I think we feel pretty good about where we're at.

Helpful. And I guess maybe on the deposit front, U.S. Bank is actually one of the few -- I think of my 24 banks, only 1 of 3 to grow deposits in the second quarter. Maybe talk about kind of what differentiated you there. And I think more importantly, just how you're thinking about deposit, I would say, levels, mix and beta in the back half of the year.

Yes. So maybe overall, from a deposit standpoint, we expect it to be relatively stable, at least in the near term. The mix of deposits is -- and this is -- these are things that we fully expected when we are putting together our guidance, but we do expect that mix will continue to shift from noninterest-bearing to interest-bearing as people are seeking yields. So -- but that's very much in line with our expectations. In terms of deposit betas and pricing, it's actually probably a little bit better than what we had expected and certainly better than the last cycle we went through. Our expectation for the third quarter is that it's probably going to be around 30% in terms of deposit betas. And as the rate cycle continues, that will move up a little bit. The other thing that I would just kind of maybe talk a little bit about is just kind of the deposit mix that we have and maybe some of the things that differentiate us. If you end up looking at the mix of our deposits, about half of it is consumer, the other half -- about half is corporate and corporate trust. The corporate and commercial represents about 30%. Corporate trust represents about 15%. Very stable core deposits on the consumer side. The -- on the corporate and commercial, it's a very relationship-based sort of business. And so we feel like that's pretty stable. And then one of the things on the corporate trust side of the equation, people view those as being more sensitive, but the vast majority of those are what I would call operating type of funds, either within fund structures or whatever. So they tend to be fairly sticky. The other thing to keep in mind is that about 1/3 of our corporate trust business is municipalities, and that tends to be stickier business. And then the other thing I think that differentiates us is we have a very sizable money market fund. And so depending upon what's happening with respect to deposits, we have the ability to bring those on balance sheet or off balance sheet in order to be able to manage the deposit levels. And so those are things that end up differentiating us that create that stability from a deposit funding point of view, and it enable us to be able to fund the balance sheet growth.

Helpful. And then reading your 10-Q, it looks like you moved another $20 billion of securities from AFS to HTM. You did a $17 billion in the second quarter. So you've gone from 1/4 of your securities book in HTM to now like 50% listed at the 10-Q filing. I get this reduces AOCI risk. But can you maybe talk to, are there any kind of negative implications for this? Or just how you're just thinking about the overall securities portfolio?

Yes. So it's about 50-50, as you say, in terms of HTM versus AFS. Within the AFS, there's a fair number of floatable -- floating securities as well. So when you combine HTM and floating securities, represents about 60% of the portfolio. And so that, I think, gives us the protection or at least the level that we feel really good about from that particular standpoint. The other thing, Jason, that we have in the back of our mind is Union Bank closing will have a significant amount of deposits that will come on balance sheet as well as an investment portfolio. And we have the ability at the time of that acquisition to make determinations based upon where interest rates are as to whether or not we classify those as HTM or available for sale. Part of the reason why the positioning that we have is we want to be able to maintain as much flexibility as we can from a hedging standpoint given the current rate environment, but also to manage the interest rate risk that comes with unrealized losses in the portfolio that you want to be able to manage against.

So 50-50 is a good place to be, Jason. It's consistent with what we think is the right balance in terms of giving consideration of those 2 components.

Helpful. And then I guess, when we kind of maybe -- we talked about loans, deposits, securities. Maybe net interest margin, we did see a nice pickup in the second quarter as a benefit of kind of higher rates. [ Shine-through ] rates, obviously, have gone up this quarter, expected to go up again next week. Just how you think about kind of managing the NIM looking out in terms of just the all-changing interest rate environment and...

Yes. Well, given where we're at in rates and the expectation of these short-term rates will move up, our expectation is that the NIM will continue to expand probably as we get into later in the year, but into certainly 2023, that expansion will moderate. A big part of it, though, it really depends upon what happens with the path of short-term interest rates, and that's a little bit hard to be able to predict out. But certainly, we expect some expansion at least through the end of the year and into next year.

I guess maybe bringing this together, you talked to low to mid-teens, I guess, NII growth for the year. I guess, how should we start thinking about 2023? And then you've seen some banks kind of take actions to kind of lock in higher rates assuming the Fed maybe stops in the next several quarters. I guess, any color you could provide there?

Yes. Certainly, we expect net interest income to continue to grow into 2023. But again, it will probably be at a more moderate level as the Fed kind of gets to the top of the interest rate cycle. We continue to look at and just managing the balance sheet in order to be able to position ourselves as best we can based upon what happens with interest rates. But it's a little too early to tell for 2023 at this particular point in time. So we're not really providing any guidance into next year at this point other than the fact that we do expect some expansion.

Got it. And maybe shifting to -- on the fee income side. Andy, you gave some payment metrics earlier. Maybe just kind of talk bigger picture. Obviously, it's a business you're looking to grow and invest in. Maybe just talk to kind of what you're doing there or how U.S. Bank just kind of differentiates itself from other kind of super regional banks and just where you kind of see the bigger opportunities.

Yes. So one of the key differentiations is 28%, 29% of our revenue pie is from payments, and that includes merchant processing, card issuing and corporate payment system, which is differentiated. I think one of our great opportunities, Jason, is this weaving together of banking products and services together with payments, and that is taking hold. In fact, we're seeing twice the growth of payments and banking customers than banking-alone customers. Our talech acquisition from a couple of years ago is really taking hold, 3.5x the number of new customers versus 2 years ago. Our tech-led activity in merchant processing is up 50% versus a couple of years ago. And our whole focus is providing a tool, a mechanism for small businesses, in particular, which we have, 1.5 million (sic) [ 1.1 million ]. Another almost 200,000 will come with Union Bank to run their business, managing payables, receivables, travel, cash flows, payments. And weaving that together in a comprehensive offering is a tremendous focus for us, and it's taking hold.

Got you. And I guess, Terry, on mortgage, you talked about being down again. I guess maybe just talk to kind of -- I know you picked up kind of some share in the purchase market. Just let me talk to origination activity again, that sale margins have been under pressure. Are they still under pressure? And how do you see that playing out as you would think at some point, we'd be seeing more aggressive moves for capacity to come out of the system?

Yes. I mean I think that we're -- I mean when we think about the mortgage business, number one, it's a business that's very important to us. We think it's got a lot of potential and opportunity. Refinancings have really kind of come out of the market. They're at very low levels today in terms of the overall volume. We have -- Jason, as you know, we've talked about this in the past, we have been investing more on the retail side and more on the purchase money side of the equation. That side continues to hold up really nicely. I think the one thing, as you mentioned, is that gain on sale margins have been under pressure now for the better part of the year. But I think that we're also kind of getting to the point where a lot of the capacity is starting to come out of the system. You're starting to see nonbank entities pulling back and some bank entities pulling back with respect to the mortgage business, and that's going to help take the capacity out of the system. That's going to enable the gain on sale margins to start to stabilize. So as we think about going forward, whether it will be next quarter or exactly what the timing will be, but we certainly see that there is an opportunity from a mortgage banking perspective going forward.

Helpful. Let me maybe throw up the next ARS question. I meant to ask this one earlier, but I want to get to one after this. So I'm going to go with this one for now. How do you view the acquisition of UB? Andy already told you his answer. I've asked this before. [Voting]

Pay the fair price. All right, that's right. And then if we can go to the fourth -- the next -- the last ARS question. For 2022, what do you expect U.S. Bank's operating leverage to be? [Voting]

So Andy, people weren't necessarily listening.

I see that. Yes, we still expect an...

Only 7% expected to be over 200 basis points. And Andy, your answer would be, my guess is...

We expect 200 basis points, at least 200 basis points operating leverage full year 2022.

So 5, 6 or 7.

Yes, yes.

I guess maybe more big picture, just how you think about managing expenses. I get you don't want to talk about 2023 NII guidance for next year, but you obviously are kind of entering the budget room process for next year. Kind of what role does operating leverage play in that and just managing the overall cost base against an uncertain economic backdrop?

Yes, I'll start, and Terry will jump in as well. A couple of years ago, Jason, we increased our investment spend for some of the things I talked about, our payments capabilities, our digital capabilities, which have all really moved forward quite dramatically in terms of what we're able to do right now. The good news about that is that is all on the run rate, so we do not expect an increase in that spend. And we also, at that time, in the last few years, moved a lot of the spend from defense to offense in terms of capabilities and away from some of those compliance activities. So the costs are in the run rate. So we would not expect the same level of cost increase on a go-forward basis that we may have experienced in the last few years. And we always manage the company for positive operating leverage. We'll continue to focus on that going into '23. And we have the expectations of revenue growth, as we talked about. And we'll manage expenses consistent with that revenue growth to achieve positive operating leverage.

Yes. The one thing that I would end up adding is that, as Andy said, with Union Bank, it represents about 20% more scale. And we really don't believe that because of our strategy, it's basically a lift and shift. We're going to be moving off of their systems onto our systems. And so we really don't think that we need to increase any of the investment on an ongoing basis relative to the Union Bank. So we're going to be able to get more scale and the revenue synergies that should come along with that. So I think there's a number of different reasons why that wedge associated with revenue and expense should expand.

Got it. And just maybe on the branch front. After kind of initially, I think, being slower to close branches a year or 2 ago, you kind of went for more, I guess, aggressive branch closure process. Just where are you in that? And then secondly, we've seen other banks, whether it's Bank of America, JPMorgan, PNC, more aggressively, I think, open branches in new markets. I know you kind of did the Charlotte expansion, but we haven't really seen you take that approach to other markets. And just kind of your thoughts around opening and closing.

Yes. So because 82% of transactions are now done digitally, over 55% of loan sales are now open digitally. So the purpose of the branch has changed quite dramatically. It's more of a place where a consultation advice and sales activity occur, combined with the digital platforms that we have. So we did reduce our branch footprint to about 25%. We're at about 2,200 branches right now. And as you think about increasing our distribution, we really have 3 ways to do that. One is M&A, like the Union Bank transaction, which will add a whole new set of markets and branches as well as increased market share in California. The second is opening up new branches with our digital-first, branch-light strategy like what we did in Charlotte. And that is, in fact, exceeding expectations in that opportunity. And the third is our partnerships, like what we're doing with State Farm, which actually adds thousands of agents who really are referring our products and services across the country. And it's like adding a new metro market or a new -- a number of new markets from card sales and deposit acquisitions. So we really think about all 3 of those vehicles to increase distribution.

And I guess it seems like you've been more hesitant to kind of add new markets like a Charlotte than some others. Is that something we should expect going forward given you said you're having...

It's 1 of the 3 mechanisms we have. I think Charlotte, again, is exceeding expectations. We've grown loans, customers, deposits, it's doing well. We'll continue to expand in Charlotte and we'll look at other markets. But again, it's 1 of the 3 ways we can do it, and a lot of focus right now in MUFG.

And Jason, one of the things that we end up looking at is when we're thinking about markets for the digital-first, branch-light sort of strategy is where do we have other products and services that are -- we are already penetrated in that particular market? It might be on the card side, it might be on a mortgage. Oftentimes, it's both. And then where do we already have a presence from an employee perspective? And there's a number of very attractive markets where we could see expanding into that would kind of fit that criteria. And we think that, that's important because like -- that's similar to Charlotte and we are seeing nice success with respect to Charlotte.

Got it. And maybe just on the asset quality front, right, charge-off, delinquencies at historic lows...

Continue to be good. And you need to expect normalization, and it continues to get pushed out. So we would -- and there are no early warning signs, Jason, neither on the commercial corporate side nor on the consumer side. Charge-off levels are near all-time lows. Delinquencies are holding in at lows. Our criticized categorization continues to be very solid. So no early warning signs.

Yes. And the only thing I would add to that is that I think oftentimes, people, because of recency, think that this recession is going to be like the last recession. And then of course, with the pandemic, we pretty much kind of fell off a cliff. And so in that particular situation, you saw very large reserve builds in a relatively short period of time. If we are moving into a recession or we move into that sort of recession, I think you'll see it will progress a little bit over a period of time. Probably still front-end loaded, but you don't have -- unlike the pandemic where you saw everything being shut down and unemployment skyrocketing, in a typical sort of recession, that progresses over time and you don't have perfect foresight. And so the reserve build is probably over some period of time. Right now, though, based upon what we're seeing in the economy and our own portfolio and those sorts of things, whatever reserve build we have will be really driven by loan growth more so than anything else.

And that reserve build that we had during the pandemic was quickly released in subsequent quarters. So it was a very volatile -- given CECL, there's a volatile nature to that, that comes with it. And I think what we see going forward is a more normalized activity.

So I guess, a modest build in the second quarter and...

Principally due to loan growth.

Principally driven by loan growth, yes.

Got it. And then I guess, Terry, you kind of mentioned leverage lending as an area to watch in the beginning, which I know is something that you're not very big in. I guess what other kind of portfolio do you think we should be most focused on as analysts?

Yes. I think that whether it's us or whether it's across the industry, I think probably the one thing that we're continuing to watch is just what does the return to office look like. Companies are putting into place a lot of different sort of models, hybrid models, some are back for a day, 3 days, whatever might be the case. That still is going to play out over some period of time. And how that plays out, I think, will end up impacting office space. It will be kind of a, what I would say, a longer-term sort of structural change that will take place if it does or when it does. And so I think it's very manageable, but it's one of the areas that we continue to watch.

Yes. And like Terry said, it's a slow burn, Jason, because the leases are 7 to 10 years in duration, and people continue to judge those things over time. So that's not going to happen overnight.

Yes. And from a credit, in terms of recognizing that issue, we were very proactive in terms of recognizing that when we went into the pandemic. So in terms of where the reserves are for those types of portfolios, we feel very good about. So we don't feel like there's a need to really build more on top of that unless something changes.

And then just on the capital front, when you announced the UB deal, you suspended the buyback. I think you want to -- you're going to wait to get back to 9% CET1 before restarting the buyback. Just maybe talk to, if you closed the deal at year-end, where you see kind of pro forma CET1? How long would it take you to get back to 9%? And just how you think about capital return once UB gets folded in?

Yes, very consistent with what we talked about. Date of closing, we would expect the CET1 to be somewhere around our target, which is 8.5%, a little plus or minus from there. Again, that will be somewhat dependent upon what interest rates are at that particular point in time. But based upon what we see right now, that's kind of our expectation. We are in a situation where we've suspended the buyback, as you know. And our expectation, especially given the mark-to-market and the accretion that will happen fairly quickly after the deal, that we would be back at that 9% level within a year. And at that particular point in time, we'd open up the buyback program.

Got it. And then I guess, the last couple of years, you've done some smaller kind of nonbank acquisitions, kind of maybe more payments fintech-type stuff. Do you still have the ability to do that? And kind of what areas are you most focused in?

Yes, we do. So we've done deals both in the payments space as well as the wealth management and corporate trust and institutional trust money fund area. And I would expect us to continue to focus in that area, either to increase capabilities, technology capabilities, or increase distribution. And those deals have really helped us in that business banking and payments combination. talech is one example, TravelBank is another, Bento is another. So those are great add-ons to the capabilities we have.

And I'm going to pull up here and see if there's any questions from the audience. I think the biggest advantage of us being back in person is that you guys have the ability to ask management questions while they're mic-ed. So an actually friendly setting. You guys did not take advantage of it in the last session. I know that was a 7:30 session. A little bit later in the morning, everyone's had their cup of coffee. So any questions from the audience? [ Steve ] in the front stage. Right behind you, [ Steve ], it's coming.

If you look at the H.8 data, it looks like C&I growth has really slowed this quarter to date on an annualized basis versus, say, year-over-year, like to maybe 2% or 3% versus 10%-plus. But it doesn't sound like you're seeing that or you didn't really articulate that. Can you just sort of explain why maybe you wouldn't be seeing that?

So I think we had tremendous growth in C&I in the last couple of quarters, and we're looking at it more on a linked-quarter basis because I think it's just easier to think about. And we are actually not seeing a downturn. We're seeing a steady growth in C&I continuing. Part of it is due to the increased utilization that we talked about across our corporate and commercial customer base. Part of it is due to M&A activity. Part of it is due to capital spend and investment in technology. And we're seeing continued growth in C&I, at least at U.S. Bank.

Additional questions? There's one right behind you.

They're not in the groove of asking questions yet.

I'm just going to ask you a general one. So when you speak to the Fed, and obviously, the bulk of QT is coming through excess reserves leaving the system. But all you big banks seem to pleading less deposits than probably we should have seen for the rate of QT. I mean how do you interpret that? Like do you think, eventually, there's going to be less QT because your deposits have been more stable in general as a system? Or do you think it will be a bigger step change? As you said, you want to be conservative in your AFS because you don't know what happens.

Go ahead, Terry.

Yes. I was going to say, if you end up looking at deposit levels in the system, I think that our expectation is that while they may come down, I don't think you're going to see a step function down because of QT. And that's a function of the fact that while the Fed is pulling some of the liquidity out of the system, you still have GDP growth that's taking place. And so some of that deposit growth is just naturally a part of that GDP growth. I think that's kind of what you're seeing right now. Now you could see a bit of more pressure if QT continues and then we start moving into a harder sort of recession at that sort of point in time. But then I think the Fed would probably be adjusting its position as well. So our expectation, at least right now, is that in the system, the deposit levels are going to be relatively stable with maybe a little bit of pressure, but not major.

And seeing we're out of time, please join me in thanking Andy and Terry for their time today.

Thank you.

And next up is State Street in this room. We'll have Huntington in the Nassau suite.

Thanks, Jason.