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

Thank you, everybody, for joining us this morning. I have a brief disclosure and then we'll get into it. For important disclosures, please see Morgan Stanley research disclosure website at morganstanley.com/researchdisclosures. Taking of photographs and the use of recording devices is also not allowed. If you have any questions, please reach out to your Morgan Stanley sales representative. Okay. We have disclosures, too, in our world, I know.

Sounds good.

So I'm delighted to have with us this morning, Andy Cecere, Chairman, President and CEO of U.S. Bank.

Good morning.

Thank you so much for joining us.

My pleasure.

Terry Dolan, Vice Chair and CFO.

Good morning, Betsy.

Appreciate your time this morning.

Yes, thank you.

I think we'll just kick off with a little bit of an overview question. How are you seeing, feeling about the macro environment? And maybe give us a sense as to where things are trending this quarter.

Sure, Betsy, good morning. Good morning, everyone. So let me start giving the big picture and then Terry might update on our outlook. So first of all, we have a big card issuing and big card acquiring business. And I will tell you from a spend standpoint, people are still spending on travel and entertainment. That is up in a significant way year-over-year. But there's a bit of a slowdown in retail and discretionary items, sort of what we've seen in the last few quarters. So that continues to slow a bit. And that parallels what we're seeing with deposit balances at the individual level. For a number of quarters, almost 2 years, Betsy, that was increasing, increasing, increasing. And again, per customer, it's starting to go back to pre-COVID levels, so probably be there in the third quarter. So the spend parallels the deposit balances, which is generally saying slowdown. From a loan standpoint, loan demand is down versus where it was a year ago for sure. Utilization rates are relatively flat. And a number of banks are being very prudent about capital allocation. So that is creating sort of a flattish loan activity. And deposits, and Terry will talk about that, are relatively stable. We are going to sort of parallel the H.8 data, which is down a little bit because of the quantitative tightening. So big picture, stepping back, what we're seeing is a bit of a slowdown. We project one more rate increase in the summer and then sort of flat rates. And we have a very soft, moderate recession, slow -- very short in terms of duration and not very deep in terms of severity. So that's what our projections are. We're preparing for a number of environments, but that's sort of our base case.

Okay.

And then from what that translates to in terms of outlook, I'll ask Terry to update.

Yes. So let me give a little bit of update with respect to our guidance. So when we think about our forecast for the second quarter as well as for the full year, it is still very consistent with the guidance that we gave in April, so no significant change with respect to that. Maybe just a couple of insights. In the second quarter, one of the things that we were doing was building cash balances a little bit more than what we had expected. So cash levels are a little elevated. And we did that because of the uncertainty related to the debt ceiling. And as a result of that, our NIM for the quarter is going to be a little bit lower than what we had projected or guided. But the net interest income associated with the elevated cash balances -- fundamentally, net interest income is going to be fairly neutral relative to that guide. And more importantly, it's temporary. We're starting to bring those cash balances down now that the debt ceiling issue has been resolved, at least for some period of time. And so when we're thinking about the guidance of NIM for the full year, we still believe that 3% to 3.05% is a reasonable guide. Couple of other things I would just say is one of the things we talked about is that net charge-offs were going to continue to increase over time. Our expectation is that net charge-offs increase to about 50 basis points, which is pre-COVID guidance. But that will occur over a period of time. We won't get back to that 50 basis point level probably until sometime mid-2024. The one change that I do have with respect to the guidance is related to the tax rate. So our TEB tax rate is, in the second quarter as well as the full year, is expected to be about 24%. And that's up just a little bit. And primarily, it's related to our capital optimization activities that we're going to -- I know that we'll talk a little bit about that later. So that's really the only change to guidance that I have.

Okay, great. Well, thanks for the color. So let's dig in a little bit on the strategy side. Andy, you've done quite a bit over the past few years with the Union Bank acquisition. You also have had the State Farm partnership that you've been executing on. So I did just want to dig in a little bit and ask, as you think going forward, top 3 strategic priorities from here.

So let me start with Union Bank because that is at the top of the list. And we completed successfully our integration at the Memorial Day weekend. That was our major integration with most of the system. So we have our credit card conversion here at the end of June, but that went very well. And we already have almost 400,000 customers digitally enabled, which is a big deal for us and a higher level of focus. We're consistent with our expectation of our cost takeouts, which is $900 million full rate into '24, about $300 million this year, full run rate by the end of the year and into -- 2024, we'll be at $900 million. So that's positive. While we didn't project and model any revenue enhancements, Betsy, I think there's a significant amount. First of all, the digital enablement is much more significant for us and our capabilities are greater than what Union Bank had. Second, our penetration, for example, a card penetration is half what U.S. Bank is at Union Bank. So we have a lot of opportunity in payments. The payments on the corporate/commercial side is 1/3 the penetration what it is at U.S. Bank. So I think we have a lot of opportunity. And that's going to be our focus is really taking that customer base, 1.2 million customers, and really fulfilling the full capabilities that U.S. Bank has in terms of products and capabilities and digital enablement. And I think there's a great opportunity there. And the team did a great job on the integration. And so that's number one. Number two is the digital component is continuing to -- has continued to be a focus for us. We've invested quite a bit in that, our app, our [ pay ] capabilities, our cobrowsing capabilities. And this concept of having great digital capabilities, combined with great human capabilities, and being able to use the branch as a place for consultation and advice and direction while having digital capabilities for opening accounts and transactions is what we're focused on. And I think we've done a nice job with that. And the third component is our payments ecosystem. So we've talked a lot about the fact about 29% of our revenue streams come from payments. So that's card issuing, corporate payments and merchant acquiring. And I think we have this great opportunity to weave together our payments capabilities with our banking capabilities, particularly for mid- and small-sized businesses, and helping them not just do banking but run their business, manage payables and receivables and cash flow activities. And some of the acquisitions we've made, with talech and Bento and TravelBank, really manages both sides of the balance sheet for their company and helps them through their banking and payments component. So that ecosystem is a huge focus. And that also will apply to Union Bank, which we increase our small business customer base by about 20% with that acquisition. So those three things, Union Bank, digital capabilities and payments ecosystem.

And have you ever sized what that opportunity set could be?

For Union Bank or for...

Yes, for Union Bank.

Well, for Union Bank, we didn't model it, but we were actually working on a number of activities to increase that penetration, again the card on the other side. I think the payments ecosystem, so we have a great opportunity. Less than half of payments customers are banking, less than half of banking are payments. And this opportunity to sort of weave together both sides and have a more robust product set increases revenue but importantly also increases the opportunity to gather new customers over time. So we think we can gather new customers in that 20% range and new revenue in 25% to 30% range.

And then one question we do get from investors is, is there any investment you need to do to get to these revenue opportunities that you're seeing?

Well, a lot of the investment that we needed to do, we've done. In the last 4 or 5 years, we've spent a fair bit of investment dollars in terms of our digital capabilities, our payments ecosystem, tech-led acquiring capabilities. And we also went from about 40-60 offense to 60-40 offense in terms of the investment dollars that we spend. We spend about $2.5 billion a year. And so the capabilities we have are far -- are really very solid right now. And we're seeing that when we compare and contrast against some of what Union Bank had in terms of capabilities. We'll continue to invest in those capabilities going forward. But we're sort of at a level run rate in terms of the spend on a go-forward basis.

And Betsy, one of the things that I would add was specifically related to Union Bank. I mean, that's one of the benefits of scale. And in this particular transaction, it's really a lift and shift. So we're really fundamentally taking that 1.2 million customers and putting it onto our platform and being able to utilize all the technology investment that we've already made. So that -- we don't really see an additional need with respect to that. Any investment that we need to make with respect to the business opportunity has already been incorporated into the $900 million of the cost synergy.

Right. And again, scale in this environment is critically important. When you think about it simply, Union Bank allowed us to increase our scale 15% to 20% with a very efficient platform that we've already invested in. And so the value of scale is evident in this transaction.

We should see the cost curve start to bend again.

That's where the $900 million is going to be quite impactful. If you think about $900 million against our expense base, it's about 3%.

While we're on the topic of expenses, maybe we could just dig in a little bit on the tech side of the expense spend. You mentioned back in January that you're past the heavy spend part of tech. And I guess, what I'm wondering is does that mean that you are anticipating just stable from here or that you should actually start to see a decline in tech spend?

I think we're going to continue stable from a tech spend standpoint. But the opportunity, I think, is leveraging that tech spend into operational efficiency. So one example is we're migrating to the cloud and our ability to achieve cost savings because of that. Another is investments in operational activity, which allows us to have more effective backroom operations. So the spend will stay the same, but the value of the spend, I think, comes through in terms efficiencies and also additional revenue.

And I have to lean in and ask the question about AI.

Yes.

I'm sure it's something that you've discussed at the management level and maybe even at the Board level. So give us a sense as to what you're thinking about this.

Well, there are a number of use cases that we're working on in terms of customer service, customer interactions, next best action, a lot of things like that. So I would say it's an active process across many different areas of the bank. And it impacts actually every single business line in one way, shape or form as addition -- in addition to the operations in backroom.

So the question we get from investors, even as recently as last week, I was on a long call debating and discussing, is this going to be something that impacts our outlook for efficiency ratios in the next 1 or 2 years? Or is this more science fiction and now 3, 4, 5?

I'm not sure it's science fiction. But I think it is probably a little bit more towards that 2 to 3 years as opposed to the next year.

And you have been delivering some nice positive operating leverage here, 200 basis points, I believe, last year.

Yes, 230, yes.

230.

230.

Yes, okay. So the other question I get is, "Wow, how could you do even more than that? That seems pretty robust." And so maybe we could lean in a little bit on the $900 million and the timing for all that.

Well, again, the $900 million will be full run rate into 2024, about $300 million this year, mostly in the second half. Conversion was Memorial Day weekend. So that's the big picture. And again, that $900 million will drive us to positive operating leverage because it is -- represents about 3% of our expense base.

Okay. Pulling back up to the opportunities, first one on Union Bank and the revenue synergies there. I hear you on the opportunity set that the Union Bank customers don't have products with you. They might have products with other people, right? So how do you go about trying to move them over in a way that's efficient from a price perspective?

Yes. So I think part of it is back to that digital enrollment and enablement. We have a terrific app and terrific online capabilities. And the ability to offer products and services that perhaps Union Bank didn't have exactly the same or the same robust set of products, I think, offers us a tremendous opportunity. We also have a tremendous payments capability that they can utilize in an efficient fashion. And to the extent they're linking it with the bank account, I think that creates convenience and opportunity. So it's digital, it's linking and it's convenience.

And the small business opportunity there seems very compelling.

More small businesses than any state in the country, a great -- increases our base by about 20%. And it is far less penetrated than our current base.

Okay, great. I want to turn to capital as I'm sure you know that's a topic that you get a lot of questions on. And you're focused on the capital accretion to drive the CET1, right, from the current level to, what, 10.5%, is that right, by year-end '24?

Yes, we're very comfortable we're going to get to 9% by the end of this year under Cat III rules and 10.5% under Cat III rules by the end of next year, getting us to about 9% on a normal basis. But maybe I'll ask Terry to walk through the components.

Yes. So there's going to be -- there's really three kind of components to us in terms of adopting the Cat II. And to kind of give you some perspective, we've been working on this for well over 18 months already. So as soon as we signed the deal with respect to Union Bank, we expected that we would start to come close to that threshold. So this is something that we have been working on for a while. But the first component will really be around the earnings accretion and the capital accretion that comes along with it. We guided to the fact that over the next 7 quarters, on average, we're going to see somewhere between 20 and 25 basis points of accretion. It probably will be -- and to kind of maybe gauge that, first quarter, we had about 20 basis points of accretion. There was a CECL adjustment that brought that down by 10. But on a core basis, it was already about 20 basis points. And if you think about once we get past the system conversion, so second quarter may be a little bit lower than that. But once we get beyond that, we start to see the benefit of the integration in the rearview mirror. You start to see the cost synergies kicking in. And then merger-related charges will be about $1 billion this year and really insignificant next year. So there's multiple reasons why we feel very comfortable with the accretion. Second component at a very high level is just risk-weighted asset optimization. And those things, we already have identified roughly 50 basis points of things that I would call low-impact actions or activities that we can take that will help us accrete about 50 basis points of capital and not have that big of an impact with respect to our operations, et cetera. And then as we get into 2024, standing up things like securitization structures, flow agreements, things like that, that help us manage risk-weighted asset levels, risk transfer sort of vehicles, those sorts of things, which we've already done, and we just -- we would just continue to do more of it. That allows us to expand beyond that 50 basis points. So when you take accretion and the risk-weighted asset optimization, that gets us to the 10.5%, where we need to be by the end of 2024 on a Cat III level. Maybe to kind of also give some insight, 2024 -- or fourth quarter of '24 is the earliest that we have to adopt Cat II. The Fed kind of has the option dependent upon where our asset levels are at that particular point in time. Now we'll know more about that in the -- at the beginning of 2024. But we are on our trajectory or plan to be able to get there.

Right. Because the Fed supposedly is going to inform you on January 1. Is that right?

Yes, at the beginning of the year of 2024.

Okay. So one question that we get a lot is the RWA optimization strategy. And how should we think about that impact on revenues?

Yes. And so that's why I say the first 50 basis points of risk-weighted asset optimization is very low impact. These are things that we can put into place. As an example, one credit transfer sort of structure, we call it an automobile loan repack. Once you go through that, you get to recharacterize the assets from loans to securities. You get the risk-weighted asset benefit associated with that reclassification. You still have margin on securities that's at a higher level. And you have the servicing fee associated with it. So those are all things that can have relatively limited impact with respect to your revenue stream and really add to the overall capital accretion. And that's just one example.

And that 50 bps is something you're anticipating generating this year.

Absolutely.

Right. And so that's already in your rev guide.

Correct. Yes, that's correct. Absolutely.

Okay. I guess, the other question that people have on the CET1 is the AOCI and the impact there. And it would be easier to forecast if it was -- rates never moved. But how should we think about how you're set up for that impact if rates do back up?

Yes. So where the AOCI is in terms of the impact, it's about 200 basis points today. And that's assuming a rate environment that Andy talked about where rates are maybe up one more time and then relatively stable through the rest of this year, maybe coming down one or two cuts sometime in 2024. So it's a pretty neutral rate environment that we are assuming. Under that, we expect that 200 basis points of AOCI impact to drop to about 150 basis points. And so that's why our target of 10.50% once we have to adopt Category II, we're at a healthy 9% capital ratio. Now one of the things that we are also doing is putting into place hedging strategies, so pay-fixed sort of swap structures that minimize the upside risk associated with the long end of the curve moving up. We may give up a little bit in terms of if there's some downside opportunity. But we're okay with that because capital is our primary focus.

Got it. All right. And then Andy, back to you. So with that all as a backdrop, how do you think about when the time is right to restart buybacks?

So our priority is, first of all, from a capital deployment standpoint, investment in the company. Number two is dividend. Number three is buybacks. So everything that Terry talked about is consistent with how we're managing capital. In addition to all that, as you know, the likelihood of capital for the industry going up, particularly for assets above $100 billion, is out there. So until we get more clarity on that from Basel III endgame to the final categorization rules, I think we're going to be very prudent about capital management.

Okay. And those proposals, when do you think those come on the requirements?

Well, I would guess they're going to come -- Basel III endgame could come as soon as the next few weeks and then some of the rest of them later this year into early next year. I would expect that they'll come and impact all banks of a certain size. And secondly, I would expect there will be some sort of transition period. So we'll be able to get there, like all banks will, over a period of time.

Right, okay. The other question that we get is on TLAC, right, total loss-absorbing capital. And I think you mentioned recently that you thought you might need to issue $10 billion to $20 billion, is that right, mid-20s of debt to deliver on new TLAC rules. Do I have that right?

That's about right. And we just issued $3.5 billion last week. And maybe, Terry, you can talk a little more about that.

Yes. So again, those are rules that are still kind of in the making. So one of the things we have to do is actually see what comes of it. I know that again, as Andy said, everybody that's in the regional bank structure above $100 billion is probably going to be subject to some level of it. The real question is the calibration with respect to how much TLAC and what the form of it is, is it principally debt, does it include capital plus debt, those sorts of things. Our expectation, kind of based upon how they have calibrated for the FBOs, is kind of in that $10 billion to $15 billion sort of range. And at that particular level, both from an issuance point of view, it's something that's very manageable for us, given kind of our size and depth in the debt markets. So being able to do that is very manageable. And the impact from a P&L standpoint is also something that we think is very manageable.

And the time frame for getting there, you think that's a multiyear process?

Yes, it's hard to know. The regulators haven't been specific on it. But precedent would suggest that there's going to be a transition period. And people are guessing at maybe 3 years or 3 to 5 years or whatever. But we'll have to just wait and see.

Okay.

Betsy, I think one of the interesting points about this is, regarding capital and AOCI filters and TLAC, these are things we've been contemplating for the last almost 2 years as part of our planning strategy. As we think about Union Bank, we knew we'd get to Category II at some point. You fast-forward now that, what was going to impact U.S. Bank is now going to impact the industry in a more structured way across banks smaller than ourselves as well. So I feel fortunate that we were planning for it in advance and really got ahead of the curve.

Okay, great. On to a little bit more detail on deposits and loans, just so we can dig in a little bit there on the core business. And as I'm thinking about deposits, you indicated pretty much similar to H.8 so far this quarter. The follow-up question there is how are you seeing about mix shift of deposits? Maybe give us a sense of rate-seeking behavior ameliorated yet or not. And give us a sense as to where you think the noninterest-bearing deposit skew is likely to migrate to.

Yes. So as Andy said, our expectation from -- in terms of deposit flows in the second quarter and going forward is it's going to be very consistent with what the industry is experiencing. The overall mix, just kind of in terms of rate-seeking customers, there's still some migration that's taking place. And we would have expected that. Our expectation is, for example, noninterest-bearing, which is roughly about 25%, migrates down to kind of the low 20s. That's where it was pre pandemic. And that, just in terms of the mix of our business, that makes sense. To kind of give you some perspective, just maybe as a reminder, about 50% of our overall deposits are consumer-related type of deposits, low cost, very stable type of deposits. The other 50% roughly is either our corporate/commercial customer base, which is very deep relationships there, or as a part of our corporate trust business or our fund services business, where you have a lot of structural sort of cash flow requirements within those bonds, again tends to be a very stable sort of deposits for us. And it's that other 50% where we're going to see the impact from it in terms of betas. But it will be just consistent with what we've seen in the past.

We talked a lot about our business mix before. And it's great because it offers us great mix and diversification of fee businesses combined with balance sheet-driven businesses. And they also act differently in different cycles. I just want to highlight what Terry talked about with corporate trust and fund services. Those are two businesses that offer not just fees but a tremendous level of deposit activity that's really related to the operational flows of those businesses that we have relationships with. So they're very stable in nature. They're very closely aligned to the activity of the business. And thinking about the value of deposits in this environment, it's great to have those businesses in our mix.

Yes. The other thing I would add to that and tied to those businesses is our money market funds. We have billions of dollars of assets under management there. And the benefit of that is that when you have these relationships with your customers and they're seeking yield, we have the opportunity, whether it's on-balance sheet or off-balance sheet, to be able to provide that. You're retaining that relationship. You retain the balances within your kind of four walls. It's just what is the form. And that gives us a lot of opportunity with respect to deposit flows that others don't have.

While we're on the subject of payments, maybe we can just dig in a little bit to the fee lines there and what you're thinking about in terms of opportunities between, say, the credit card, debit card line, the merchant processing, corporate payments. Is there any SKU that you're expecting is going to be doing better or worse?

So I'll give you -- let me give you the big picture and Terry will give you the details. So on the card issuing side, two great opportunities. Number one is we are one of the key providers of card issuing capabilities to other banks. And it's a function of our system and our platform that allows that to be very user-friendly component for other banks. So they have the issuing to their customers. But it is our balance sheet, our fee structure and our revenue sharing component. We're the biggest issuer to other banks in the country. And that continues to be an opportunity. In addition, I talked about the opportunity to further penetrate the Union Bank customer base, which is about half as penetrated as ours. So those would be our two focus areas on card. On merchant acquiring, the opportunity is twofold. Number one is tech-led. It used to be, Betsy, that you'd sell merchant processing sort of door-to-door. Now you sell it via the software that runs the company. And integrating into that software is we've made a lot of investments and where we have opportunity to further penetrate that customer base. That, coupled with that business banking initiative that I talked about, which is mixing payments together with banking, I think, is our greatest opportunity. And CPS, we have a great capability on CPS in terms of providing payments to large corporate and commercial clients as well as government agencies. That business has been growing very rapidly. We also have a big freight business that is part of that. And again, the penetration opportunity on the Union Bank client base is tremendous.

Yes. I mean, we end up thinking about those businesses in terms of growth rates. We made a lot of investment in the payment space over the last 5 years. It's part of our -- the investment that Andy talked about and being very tech-led. So when we think about, for example, merchant or the CPS business, we see those as, on a longer-term basis, high single-digit sort of revenue generators for us from a fee standpoint. The card is probably middle single-digit sort of growth rates is kind of what we expect with respect to fees in the payment space.

And just to come back to you being a provider of credit card capabilities for other banks, just for folks who might not be as familiar, we're talking not just a few banks, we're talking...

1,300, 1,500. 1,300 -- it depends on -- it's between 1,300 and 1,500. It's a big number.

Right, okay. Just wanted to get that out there. I just wanted to get that out there. It's a lot of banks, which obviously them relying on you for their backbone in this important product set is a high bar for you to...

It is. And we have -- we provide the balance sheet structure, the fee structure, the collections activity, the call service center capability. So it's a full set of services for someone who is not big enough or doesn't have the platform to issue on their own.

And our platform allows us to be able to tailor that experience for their customer base, depending upon how they want us to interact with those customers. So that's a very unique sort of business for us.

And then on the corporate payments, where you're talking about integrating the software capabilities in with the cash management and payment tools, do you see you're integrating even more into the software element here?

Yes. I think that's true both on the merchant processing side and the acquiring side as well as the corporate payment side. And it has become the vehicle to which you get integrated into their business process. So having that tech-led capability and the integrated software is really key to that success.

I feel a multiple lift coming.

Yes, absolutely. No, one of the things that often times when people come in, whether it's investors or they're talking -- customers who come in, they're always surprised with respect to the fintech elements that exist within our business. Andy talked about the investment we made in Bento, in talech, in TravelBank, et cetera. Those are all incubators of capabilities within that particular space. And so we see that as opportunity.

So now a little bit more back to the core, but you have -- well, I shouldn't call it core, payments is core, so a little bit more on balance sheet-related topics. You've got a fee category commercial product revenue, which had very strong growth recently. Maybe you could unpack that a bit.

Yes. That has been a real success story. That was built from basically nothing 10 years ago to what is over a $1 billion business right now. And the ability to offer debt, underwriting, FX components, other commercial product revenue-related processes that is really linked to the lending activity and the relationship we have has been tremendous. And we have a great set of relationships, a great set of products and good technology to allow us to do that.

Okay.

Yes. And because as Andy said, because it's focused on the capital markets that is linked to our commercial and corporate banking, when we see softness on the loan side and strength in the capital markets, we're able to capture the fee revenue from that particular point of view. When we see the opposite in terms of balance sheet growth, oftentimes, the capital markets is a little bit lower. So it's a nice way of diversifying our revenue stream as well.

And a natural extension of the credit relationship.

Okay. Lastly, on fees, mortgage banking revenues. Now you have been leaning in over the past many years and taking share there. How should we think about that line item?

So mortgage is a key product for the consumer and will continue to be for our set of products that we offer, will continue to be. It's another area where we've made a lot of digital investments. And the ability to originate a mortgage and go through the paperwork in a digital fashion without paper has been a real area of focus for us. The mortgage business has slowed down as you know. Refinancings are almost grounded to a halt. So we'll continue to be a player in the mortgage business. But the size of it is likely to be a little different than it was the last few years, given those high refinancing activities.

Right.

And I think to the extent that you see expansion of mortgage banking revenue, it will be because gain-on-sale margins are now, what I would say, stabilized and starting to expand a bit as capacity has come out of the system.

And then the California increased focus with Union Bank, I would think, would give you a little more.

It was. That was an area that they actually had a strong capability on as well. So linking those together will be consistent with what they've already have to focus on.

Okay. So in our last few minutes here, I did want to touch on loans and credit. The basic question here is how should we be thinking about your loan growth over the next several quarters and maybe into the next year? We're hearing a bit of demand softening but then also lending standard tightening. Where do you stand on that with your clients and...

So demand is down. I talked about that before. Utilization is relatively flat, still well below pre-COVID levels or what it was in a normal environment. So that's number one. And that slowdown is really a reflection of businesses just being careful, given the uncertainty of the environment. So that's number one. Number two is a lot of banks, including ourselves, are very prudent around capital allocation and capital utilization, so making sure that we're getting the right returns for the businesses. So I wouldn't call it credit standard tightening. We never loosened, we didn't tighten. So we're very consistent through the cycles. But we're being very prudent about that. So all that adds up to relatively modest loan growth is how I would think about it over the next few quarters, at least as far as I can see. And within that, there will be some mix differences, where we might have higher credit card growth as that spend activity continues and the payment rates start to come down and a little bit more moderate, certainly not a lot of growth at all, in commercial real estate.

Okay. And then on the credit side, can you give us a sense as to what you're seeing there in the various asset classes?

Sure. And maybe just as a reminder, from a consumer perspective, if you think about that as a kind of a broad class, we are a prime, super prime sort of lender. We always are underwriting through the cycle. And so our performance is pretty consistent, depending upon -- regardless of where you're at in the cycle. So I think that, that's an important starting point. The other thing is from a corporate and commercial side of the equation, we tend to focus on investment-grade type of customers. And so our credit quality, our credit performance is -- tends to be pretty strong in that particular space as well. The one area that's getting a lot of attention we're certainly focused on is commercial real estate. It represents about 14% of our overall portfolio. And most of the asset classes within commercial real estate are performing quite well, whether it's multifamily or industrial or whatever may be the case. The one area that we are focused on is this commercial real estate office space and because of the pandemic and the impact that has had on office space. And just to kind of put some context around it because we think it's very manageable, it represents about 2% of loans and represents about 1% of our overall commitment. So it's relatively small within our overall portfolio. And then to kind of -- it's also important to kind of peel that back. About 10% of it is what I would call specialty office space, medical buildings and things like that, that are going to perform very well. About a little under 50% of it is what I would call central business districts. The rest of it is suburban. And so where the area of focus is really around that central business district. And if you peel that back even more, it's important to understand, do you have Class A or Class B or Class C type of -- what is the quality of the building that you're in? And within the central business district, about 80% of our commercial office space is Class A office space. So again, when you think about who we've invested with, the developer, strong sponsors, all sorts of things, again we think it's very manageable. But it is one of the things that we're going to have to kind of work through.

Okay, great. Well, thank you very much for your time this morning.

Thank you, Betsy.

Thank you, Betsy.

Appreciate it.