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

Let me go ahead and get started. So for our first presentation on the third day of our financials -- third and last day of our financials conference, we have next up U.S. Bancorp. From USB, we have Tim Welsh, Vice Chair and the head of the consumer business. The consumer business is one of 3 businesses at USB, commercial and payments the other two. We also have joining us John Stern, CFO. So thank you both for joining us. And I believe management has some prepared remarks and a few slides that they'd like to go through. So I'm going to hand it over to Tim and John. Thank you.

Perfect. Thank you. Thanks so much, Ebrahim. Great to be with all of you. We really appreciate the opportunity to talk to all of you today. Want to just provide -- first of all, note that some of the statements that we will be making are -- may be forward-looking, subject to risks and uncertainty. If you have any questions about that, you can see our safe harbor provisions here. Just wanted to give you a little bit of an overview of U.S. Bank to ground you in sort of who we are. You can think about us in a couple of different ways. You can think about us first of all as where we have our branch network. It's regional, it's in 26 states, about 2,300 branches. And you see the map there approximating where those branches are. Many of our businesses, including many of our consumer businesses, are national. So you think about a mortgage business, cards, wealth management, and certainly our commercial businesses are national in scope. And some of our businesses, including Investment Services and Payment Services, are also in Europe. So you can think about us having lots of different ways of serving clients in many different parts of the world, and certainly all across the U.S. As Ebrahim alluded to, our business mix is approximately broken out here: you see about 37% in consumer and small business banking, we'll talk about that in a bit more detail; payment services, almost 30%; and wealth and our corporate and commercial businesses representing the rest. So that's a bit of an overview of who we are. Now digging in a little bit on the Consumer and Business Banking side, business banking is how we refer to small business. If you had looked at us about 5 years ago, you would have said, boy, that's a traditional high-performing retail bank, largely branch-focused and lots of in-person capabilities, in-person branches, obviously, but then business banking, et cetera. That was the way much activity was done at that point. If you fast forward to today, what we have said is we're trying to live our purpose of powering human potential by becoming central to the lives of our clients. It means important, relevant. In order to be that central, in order to be important or relevant, you must be great at digital, right? The world 5 years ago has rapidly evolved. And we talk about digital being great and that human connection, because that's what really helps solidify a relationship with a business client or a consumer. And if you think about the progress that we've made in the last few years, just a few things to highlight. So mobile app, absolutely critical to any of you who do banking. In 2019, we launched a brand new mobile app, and it is now consistently rated by third-party sources as the best app in banking. And we're constantly improving it and innovating to make sure that it's serving the needs of our clients. With that digital capability, you can expand the way you serve clients in new ways. So we are able to offer, through that app, CDs and money market accounts all across the country. So you don't need to be near a U.S. Bank account -- your U.S. Bank branch to be able to have access to our deposit products. And then similarly, we've been investing in the mortgage business. Many of you will remember, if you haven't had a mortgage in a while, you remember how cumbersome the paperwork had been associated with that. We've digitized all that. You can do it on your phone, and again rated the #1 app in mortgage. Close to 100% of our mortgage apps are now done digitally. But they also have a person connected to them, a mortgage loan officer, because it's that real ease of digital plus the human connection that really matters, okay? So we'll talk a lot about that human plus digital, but that's the essence of where we are today. And if you think about how that's manifesting itself, there are several different aspects to this. So the first is if you just think about traditional consumer banking. And obviously, in the last year, there's been a lot of discussion about deposits. As you've heard in our earnings call, we've been pleased to see growth in consumer deposits, right, while maintaining competitive rates. And the reason for that growth is not only our terrific branch network, but also those digital capabilities I mentioned, plus we have this alliance with State Farm that you may have heard about that allows us to offer deposit products all through the State Farm agents all across the country. So that's how you're able to grow in ways that go well beyond traditional branches. Consumer lending. We talked about the mortgage investment in digital. That -- as you can see on the chart, we're the #2 bank-owned mortgage originator last year, right? That's up from the #3 spot the previous year. So we're growing there. And then business banking. Business banking is fascinating, and we're going to talk about this in a little bit more detail. If you think about a business owner, what they really want is ease, right? They got into opening a business not because they loved banking. They got into opening a business because they loved making pasta or whatever it is that they love to do, right? And so what -- running -- if we're going to be effective at business banking, we have to not only bring together banking and payments, which we do and are one of the few banks that can really do that, but we also have to integrate into their software, right, because they have some software that they're running their business with, and this is a hugely important play. And so we've acquired talech, we've acquired Bento. These are all plays to help integrate payments, banking and software to serve that client, to make their life as easy as possible so that they can do the things that they love doing. And as a result, you see on the bottom all of these places where our position has -- what our position is in these various markets, and they're all growing, right? As I mentioned, mortgage, we're #4 in servicing, up from #5; #3 in RV, up from #8; and we were the fourth largest SBA lender, up from #5. So you're seeing it's this digital plus human helps generate the growth all across these different parts of the business. And I mentioned and just want to go a little bit deeper in this business banking side for a second. It really is the power of payments and banking together integrated into software that's really compelling. So if you think about it, if you just -- think about a small business that you have visited, perhaps a restaurant that you know well or any other business, they're running their software and you often will see in a restaurant they're doing everything on handheld devices and that sort of thing. We want to be able to link into that, and we are able to link into that. And what we're able to offer that few institutions can is the ability to have merchant processing, so you can handle your credit cards; credit cards, we can give you a credit card so you can pay your vendors and others that you work with; and then, of course, deposit accounts. We can bring all of those together in a way that other institutions have a hard time doing. And we can -- with talech and Bento, we not only bring these together, we make them smart. You get analytics associated with them. And so all of a sudden, you're seeing really good takeup, and I hear from, literally every week, from clients who just love this combination of software, payments and banking all coming together. So that's a little bit of the story of Consumer and Business Banking. And now I want to turn it over to John for just a little bit more description of future-looking.

And I'll be very brief. Back by popular demand, we brought back a guidance slide. And so we provided it here for you. There's no change from what we talked about during our call, which was about just a little over a month ago, but all the numbers are here. I'm sure we'll dive into it in a little bit more detail as we talk here today.

All right. Thanks, John. We missed the slide on earnings day. So thank you.

Yes, yes. You're welcome.

But maybe just to -- in terms of your guidance, remind us, I mean, I think when you look at the shifting sort of macro backdrop, things around rates, around the economy, you seem to be evolving at a very, very fast clip. Give us a sense of what's the underlying sort of puts and takes when we look at your revenue growth guidance, what did you assume in kind of the drivers of those?

Sure. So maybe first of all -- and good morning, everyone. Good to see you all here this morning. First of all, maybe just stepping back to where we are and how our views of the economy, we feel that the economy is in good shape. It's healthy, inflation is moderating, and soft landing is our base case. So that's fundamentally what we think about. In terms of -- maybe I can break that down in a couple of different places. So I can talk about in the consumer side, we see that people are employed, they're spending, their wages are growing. Now their savings, they're starting to dip into that as they make these purchases. Their levels are kind of where they were prepandemic, but overall, they're healthy. On the wholesale side or business side of things, we're seeing that, again, people are -- balance sheets are healthy. But there's cost avoidance that CFOs and others want to avoid, and so high interest rates are a headwind to taking out loans. And so we do see that. And that's, I think, reflected in the H.8 data that you're all seeing in terms of where loan growth is at this particular point in time. In terms of the components of earnings, as you alluded to, just looking at this slide, I mean the puts and takes really on net interest income are really quite basic. It's on -- on the asset side, we see loan spreads that are widening. We see the asset churn that's occurring. We have our investment portfolio, our loans that are repricing at this higher rate. And then you think about on the deposit side of things, clearly the quantitative tightening is impacting us and the industry in terms of balances, and we'll talk more about that and things of that variety. The fees side we feel very good about, very comfortable. We have a lot of good momentum there. I'll talk about that in a little bit more detail as we go through that, I'm sure. And then on expenses, we feel very good about $17 billion. That's -- we're going to be flat on a year-over-year basis. We have the Union Bank savings. We have -- the $900 million is totally now in our run rate. And we have the ability now to become more operationally efficient with those investments and things of that order and increase our capabilities. So you put that all together, we feel very good. Last year was very much a transition year in terms of we've had to integrate Union Bank, we grew our capital, and now we're in a position where, looking forward, we're going to take our diversified business model along with our underwriting capabilities and financial discipline and really drive and enable our industry-leading returns.

We'll follow up on a bunch of things you mentioned. But maybe just, Tim, thanks for running through the business. Talk to us in terms of strategic priorities that you're looking at. And then, every bank I talk to is focused on digital investments and driving growth. So give us a sense of, one, your strategic priorities, and how do you differentiate USB versus the big money center banks versus the regionals?

Yes. Thank you, Ebrahim. So a couple of things. If you think about the strategic priorities, you first start with the consumer, right? And we're trying to continue to serve our customers on the savings side, particularly with growing deposits, and I'll come back to that in a second; secondly, growing business banking, and we'll talk about that in detail; and then third is this constant digital innovation, which cuts across both. So let me just give you some examples of this. What we're trying to do with the consumer is not only have a leading app, right, but make life really simple for them so that they can do all the things they want to do really easily. So a couple of examples of that. Many -- our app today has so many features in it that many of our consumers couldn't possibly keep up without it. So the way that we help them is we have this feature called cobrowse. So if you're at home and you are confused about something, you can not only call us, but we can actually go right on your phone and we can show you in a privacy-protected way exactly how to do everything that you need to do. So you get your problem solved. We do that several million times a year, and clients love it, right? It's a distinctive feature. Almost no other bank has that kind of thing. If you want to -- if you come into a branch or you're just interested in a credit card, we can do what we call text to apply, right? So we'll send you a quick text, you click on it, answer a few questions, you have a credit card, right? Similarly, if you think about moving your checking account, what's a big pain? Direct deposit. How do you move your direct deposit? We've automated that. So these are examples of things that are differentiating our digital offering from a whole lot of other institutions out there. And then on the business banking side, it's similar, right? You think about talech Terminal. talech is a software package that we have that goes along with our Elavon merchant processing. You can take a mobile talech Terminal if you're a business banking -- if you're a banking client, business bank, and you can use it in your store, process cards, pay invoices right on that talech Terminal, right? That's, again, the kind of thing that people -- most institutions can't offer. Similarly with our Bento, we're rolling out a whole series of spend management. So if I'm an owner of a business, I can control through Bento my spending. So these are kinds of things that differentiate us on the digital side. And then what that allows our people to do is be there to be consultative, right, because you're not processing transactions. So when you go into a branch, you can sit down with someone and say, okay, help me think about how to manage my debt and things like that. And that's what our people do.

Got it. And just to talech and Bento, are those integrated solutions for -- or are they still separately run? I'm just wondering from the client's standpoint, can they get both as a package? Like how integrated are those?

Yes. We're working all the time, Ebrahim, to exactly integrate these, right? What clients have said to us and we are working very hard toward is: make it really simple for us, right? And so we're at the spot where we want to be able to give you merchant processing, card and checking all at the same time. And we'll be -- and we're working very hard to get to that.

And you would be competing with some of the digital-native companies there in payments?

That's a very important point, right? What we're able to offer is something that few banks offer as well as even the digital-natives have time -- a hard time pulling that together, right? So that's where we're playing because it's this game about software.

And what's the sales cycle like? How do you prospect for the small business client?

Yes. It's a very interesting question, Ebrahim, because if you think about the range of small business clients, many -- there are many small businesses that are started up every year, right? And what they need at that moment is this payments, card, checking account combination right at the beginning, right? So the sales cycle for that is actually pretty short, because they've decided to start the business, they need it right now. We have ease of access for that. What we're doing longer term for more larger clients is -- it's a longer sales cycle, as you would expect, but what we're able to say is, let us bring all these pieces together, integrate it into your software, make it easier for you to manage.

Got it. And I guess the other side of this, the value of a branch has been debated for over a decade. Just give us a sense of just the importance of the branch network as you think about bringing in retail and I think even small businesses deposits.

Absolutely. It's hard to overemphasize the importance of the branch, right? We talk about digital plus human. Humans are in branches. They're also out talking to business clients, but they're often in branches. But what's happening in a branch is different from what many of us traditionally think about a branch. Many of us think about, I go in, I cash a check, I leave. Yes, that happens today. But also what is happening is a branch is, first, it's a technology advice center, right? So if you need help with your talech Terminal, if you need help with your app, you come to the branch or you call the branch and we do cobrowsing with you, right? So the first thing that happens in a branch is you get technology assistance. The second thing that happens is you get consultation. You can sit down, and we can do millions of appointments a year where we're doing -- sitting down with a family or a business and helping them think through what their needs are. That's a very different way of interacting that many of us experience [ in a ] branch. And that kind of human interaction is hugely valuable and can continue in the future.

Got it. I'm sorry, I'm going off script here, George, but in terms of online deposits, right, I think there's a debate whether online deposits can bring in really sticky or is it just a rate scheme. You're paying the highest rate, those deposits come in and, especially given the focus on liquidity, stress testing, the value of those deposits, do you agree with that characterization? And how do you see that evolving in terms of consumer preference to be all digital?

I think -- look, there is no doubt that rate plays an important part in any group of consumers and how they think about their deposits, right? But what we also see is that consumers value ease of access and, in many cases, a human connection, even if it's not physically near them, right? And so rate's important, but if you have to have an app that makes it really easy to sign up for a CD or a money market account and then roll that over, right, because -- and if the process is clunky, then rate doesn't matter. People will go someplace else for an easier process, right? And many consumers do have questions. They can call a call center, they can call a branch, et cetera. So online deposits, I don't think you should think of them as just -- only people who are just moving money digitally. There are certainly some of those. But what we find is that many consumers consider both the rate, the ease and the possibility of a human interaction all as part of a bundle, and that's how they make their buying decisions.

And then just to add on that, Tim and our -- my team, Tim's team, we work all the time. We're constantly talking about where the market is and how things react. And so from a treasury perspective, just looking at total balance sheet and you're looking at loan growth and deposits, we can help consult, really, Tim and his team on what rates are appropriate or where we want to be and all that sort of thing. So it's a constant partnership that our teams work together on.

I guess maybe just shifting, John, around your outlook and guidance. We've heard from a bunch -- a few banks that loan growth has started out weak for the year. What's underpinning your expectations around loan growth? And what are you seeing in terms of lending or borrower demand?

Yes. So I think I might -- I alluded to this somewhat in my opening comments that the H.8 data, industry data, is kind of a good place to look because that's just -- it reflects kind of where we are in the economy. I mentioned kind of some higher interest rates and things like that, that are probably influencing that. But I would say on the C&I side, our pipeline is favorable. I look at that and I -- we have a lot of hopes. There's a lot of things that are going on, whether it's M&A across various geographies or just different pockets of things. We have a lot of prospects on the C&I side as we get into the year. In terms of other loan categories, credit cards are favorable. There's a lot of -- the payments. People are continuing to spend and that's translating into balances and things of that variety, so -- which is good. Mortgage is going to be probably relatively flat, but -- and autos are -- we're just not priced in that space. It's just not a return profile that's conducive to us right now.

And I guess just from a sentiment standpoint, do you think that -- do we need rate cuts for like business just to get a little bit more upbeat in activity, pick up investment spend, but -- or do we need to get through the elections later this year? How do you think about that or maybe even -- Tim?

Yes. I would just say, I think reduced uncertainty and more confidence, I think, is really helpful. I think the rate -- I think when rates -- just really big picture, when rates shot up that amount of time, that 5% or whatever in a short amount of time, there's a little bit of sticker shock there, right? And so I think once you get into that new normal, then -- if I'm a business owner and I see an opportunity, I'm just going to go ahead and do it. I'm agnostic to rate at that point. I think we're just kind of at that point -- that transition point. That's why I signal kind of that the pipeline feels good because we can kind of start to see that momentum in some of those categories.

And on that point, we survey small businesses annually. And one of the things that we found, to John -- exactly John's example was small businesses are bullish on the long-term prospects of their business. They're very excited about it. And they're just cautious about the near-term environment, right? And both of those things are true, right, is they see potential for their business to grow, and they're really passionate about that. And for all the reasons, as John articulated, it's an uncertain time.

Got it. I guess, maybe just switching gears, John. Talk to us around underlying assumption for your NII outlook and then just the sensitivity if we get no cuts instead of 3 to 4 that the market is currently pricing in.

Sure. So just stepping back, our forecast has 4 interest rate cuts, and that's no change from when we talked back in January. So we have that starting in May. And that's effectively where the market is today. So -- but irrespective of that, whether it's 0 or at 6% or it's any number in between, we really positioned ourselves to be agnostic or being immaterial to our guidance and things of that variety. And if I think about our balance sheet, it's a naturally hedged balance sheet to begin with. We have roughly 50% fixed rate loans, 50% fixed -- floating rate loans. On the deposit side, 50% retail, 50% wholesale/institutional or commercial. So it's already naturally hedged in that regard. And then we -- going into this year, we were uncertain about interest rates. Like the market was at 8 cuts at one point, then it's at 2, and then it's -- Larry Summers says, oh, we might raise rates. So I mean, there's just a lot of uncertainty. So we wanted to use our hedging techniques and things like that to even tighten it up even further, whether that's hedging our investment portfolio on the long end of the curve or hedging commercial loans, turning the floating rate into fixed rate on the short end to provide us protection on down rate protection. We did those things to just kind of true-up and make sure that we're pretty -- as neutral as we could be.

Got it. And I guess, I'm assuming the back book repricing -- you said 50% fixed rate loans -- that should be a multiyear tailwind in terms -- if the yield curve remains fairly steep?

As an example, our investment portfolio, there's $3 billion. It's just like clockwork. Every quarter, $3 billion is rolling off, and we're reinvesting and we're -- at the then current higher interest rates, which kind of range anywhere from 2.5% to 3% additional carry pickup.

What's a similar number for the lending book?

It varies. It just depends on -- if it's autos, which we're -- that book -- we still book things, but there's just not as much in this environment, versus if you're in mortgage and things of that variety. So it just varies depending on asset class.

And maybe just on the other side, talking about the deposit mix, like your deposit mix is a little different than the average regional bank because of the businesses. Just talk to us around what the pricing environment is today and your outlook around the mix shift growth going forward.

Yes, I can start. So first of all, from a deposit, the way we're thinking about it is there's quantitative tightening that is still going on. So fundamentally, the Fed is pulling out liquidity out of the system. And so that's going to be just an overall pressure for the industry just as a whole. And on top of that, for us specifically, Q1 is seasonally a lower deposit level. We have a lot of institutional businesses that ramp up in the fourth quarter, and then those outflows occur during the first quarter. So that's just like clockwork for us. In terms of where we're going, we continue to see a creep-up in deposit betas, and that's just nothing new. That's going to continue to happen as long as the Fed is here at these levels. But what I would say, though, is that once the Fed cuts rates -- as I mentioned, we have 50% of our deposits that are institutional, wholesale, commercial, whatever you want to call it, and that is going to reprice as fast down as it will -- as it went up. And so that's going to be an advantage. And I think on top of that, we're very selective in our deposit pricing. And so while see deposits, maybe the beta creeping a little bit, I would also say that we're very selective from a relationship standpoint, making sure we're not chasing anything, particularly if loans, like the H.8 data is saying, are kind of flat, we don't need to go out and chase deposits. The one area, and Tim, you could comment on, on the consumer side, we're seeing great growth there. And we've been very bullish on picking up and taking share on the consumer side, and it's a lot -- a function of all the capabilities and features that he and his team are building.

Yes. I just think to expand on that a little bit, John, because we are seeing -- we've mentioned growth in consumer deposits, as we've talked about. But it is in partnership with your team to make sure that the rates are competitive. And Ebrahim, it goes back to this question you asked earlier, which is how does a consumer or how do a business -- a banking client make decisions about where to put their deposits? And it really is that combination of price, ease and human connection. And you really do have to play all those. I'm struck by the -- on the consumer and small business side, it's not the rate, it's not purely a rate game. And the fact that we have such great digital tools and people really make the deposits, I think you're seeing, John, hold stickier than we might otherwise have experienced.

Just moving to the Union Bank acquisition. I think it does offer additional scale to the bank. Talk to us -- I mean I think you talked in the last year or so around the synergies from the -- I think the expense synergies are fully in there. But give us a sense of the revenue synergies, how impactful that acquisition has been for your business.

Well, it's tremendously exciting for us. I mean -- first of all, I continue, even a couple of years into this, trying to remember the scale of California. It's easy to think of it as a state. It's actually much closer to a country, right? When you just look at GDP, it's -- per capita, it's sort of U.K. and France. So huge opportunity. What we're seeing is we couldn't be more excited about having these Union teammates come on board. If you think about the -- just on deposits, which we were just talking about, what we were able to offer is, because when we had the conversion in May, what we were able to do is bring all of our analytics that we've been investing in on the deposit side, bring that to our Union Bank clients and offer digital ease, competitive rates and humans. And guess what, we grew deposits as a result of that, right? So that was a very positive thing to see. We're also -- as we've talked about in our earnings call, the penetration of payments into the checking account base at Union Bank was only about half of what it is at U.S. Bank, right? And so there's enormous upside for credit card. And boy, what we're seeing is we have terrific credit card products, as an example, and we're seeing very good progress as the -- as our clients are offered -- our Union Bank clients are offered those things. And of course, it's all easy because they get new digital tools, and they've been very excited about that. So from an excitement, new products, retention, we're seeing lots of good things coming along so far, and it's only 6 months in.

And just to go off that, all that is absolutely the case, and I would even say, just zooming out into other parts of the bank, I think about other fee revenue areas where we have a lot of excitement going into the year, whether it's Union or it's our core businesses, you think about the payments business side of things, and Tim has talked about that already. And again, this is the power of the diversified business model. So how do we leverage what we have and then apply that to our core legacy customers as well as the Union customers. So payments obviously a very big part of that. I'll talk about trust and investment management fee, a very big category for us that has continued to show great growth. We have a lot of scale in many of the different markets that we are in, whether it's global corporate trust or global fund services or wealth management, that -- those things all kind of play into that trust category. A lot of those places, we're #1 or #2 on the institutional side of things, in trust and fund services and things of that variety. We have over $10 trillion of assets that are under custody and administration. So we administer a ton of things for a number of different businesses. And we have over $450 billion of assets under management. So these are just -- these are things that we can continue to leverage on our -- not only our clients but also with the Union Bank side of things. And then the final one would be capital markets. We're seeing great growth in that, interest rate derivatives, foreign exchange, syndications, fixed income underwriting and things of that variety. So it's just been a great growth story for us over the last several years.

And just on all of those, give us a sense of the investment cycle there. Are these -- are you still -- is there a significant heavy lifting when we think about technology, personnel hiring, or do you have the teams and technology in place, understanding that it's a constant process?

It's a -- yes. I was just going to say it's a constant process. So I'll take our capital markets as -- just as an example. We have invested a lot in systems and capabilities. I think you bring in the talent first in this case, just to build that breadth. And then over time, as you build scale, you realize you're going to need more systems, more horsepower, et cetera. And so that's where the new systems come into play and the investment. That's why it's so critical, this transaction with Union Bank, where we got the ability to generate $900 million of savings that's now fully in the run rate. We're able to take that, maintain expenses as being flat and then invest -- continually invest in the business. It's a very important concept and a differentiator for us versus others, where if we were in this environment and we did not have Union, and we're forced, given where net interest income has gone, has been more pressured, then you're doing, well, I got to get to flat expenses and I got to cut more into the bone or cut my investment and kind of losing that tranche or that -- of investment. And we're not in that case. And I think that's a really important, powerful point for us.

And John, if I could just pick up on your comments because it ties back, Ebrahim, to your question about differentiation. What John just highlighted is our continued investment in a whole variety of businesses and digital technologies. What that enables over time is exactly what you were describing, which is you get better and better at the tools, whether they're the analytic tools around pricing of deposits or the app gets better or you add new features to any one of the businesses, et cetera. And that creates more and more differentiation over time, right, is because it's if -- we're in a fortunate position to be sort of at the leading edge of some of these things, and we need to keep doing that. And that will continue to help make our offerings easier, simpler, and hopefully, really special for our clients.

Got it. Two topics I wanted to hit, capital and credit. Maybe with capital, just talk to us -- you were in optimization mode last year. Give us a mark-to-market in terms of, you're accreting decent capital every quarter, just where you want to be capital-wise. And from a shareholder perspective, how should investors think about potential for capital return at some point or maybe USB looking at buybacks?

Sure. So maybe stepping back, you alluded to it, but just to level set everyone, we grew 150 basis points of capital last year, really through a combination of earnings as well as balance sheet optimization techniques and things of that variety. Now that we turn into 2024, we're not as going to be focused on the balance sheet optimization. It's going to be more about core earnings. And we generate somewhere between 20 to 25 basis points of capital per quarter just on that alone. And so I think when -- we're at 9.9% on CET1 right now. We're going to -- at this point, the way we're thinking about priority of deployment of capital is really business line investments and dividend. Those are the 2 things that we're really focused on. The share buybacks are something that we're pausing on and have paused for a while because we want to see what's going on with the final rule set. We need to see where Basel III ends up. That's a big part. We want to see where the stress test results. Once we have those components, we'll have a very good idea of where our capital levels should be in, and we'll be able to share that once we get to that point.

And is it fair to assume that just from an optimization standpoint, you're done with that? Or are there other actions that you're taking, [ be it ]...

You're always looking -- yes. I mean it's not like we just hit a switch and now you stop doing that. I think there's -- I'm just -- I want to get people framed off we're not going to be as focused on the balance sheet optimization as we were once before. We may still do a transaction here or there if it makes sense and it fits in with the portfolio and all those sorts of things, but we're really going to look at the earnings generation, the natural accretion of capital in that sense.

Got it. And I guess maybe switching to credit. One, give us a sense of -- or what were the underlying assumptions driving your ACL at the end of the year? And then where are the stress points? Maybe even, Tim, like when you look through the business, where are you seeing pain -- a lot of focus on CRE. Just talk to us about your exposure there.

Yes. I mean from a credit standpoint, there's really no change to what we -- what guidance we provided last call. So we looked at -- we've talked about our net charge-offs in that 50 -- mid-50 basis point range for the year. We feel as if we're properly reserved at this point. We are very proactive in our management of credit. So if I think about commercial real estate/office, you mentioned it, so -- and a lot of people talk about it, we're very proactive in terms of working with clients, making sure we have the right level of reserves. We have 10% reserve on that book at this point in time. And we feel it's going to be -- there's going to be lumpy things that will happen, but we're working with our clients to figure out the best way forward. And it's just going to be a process that will take place over the course. But in a big pictures format, we feel very properly reserved at this point in time.

And just -- John touched on the consumer being generally strong. I think we're seeing that across all the businesses that we're engaged in from a consumer perspective.

Got it. And do you think if the Fed is unable to cut because of inflation, like does that picture change? Or do you think the resiliency that we've seen with businesses, consumer, holds up even if, let's say, we don't get a rate cut right until the end of the year? Like would that change your view?

I don't necessarily think that's the case. I think we -- our underwriting process is really a through-the-cycle process. It's -- we look at things very conservatively from a cash flow perspective. So whether, again, if it's 0 rate hikes or rate cuts or if it's 6 rate cuts or maybe even it goes up, I don't know, but we have that baked into our underwriting. And it's incorporated into our reserve process as we kind of go through that on a quarterly basis.

And multifamily CRE is getting some attention in terms of -- in particular markets. What's your view? What are you seeing in the portfolio?

Yes. It's not a lost content story for us. It's just -- it's a book where there's going to be some pressure on underlying borrowers or tenants and things like that just because of the higher rates that you mentioned and other things that come about. And so we're going to be proactive in working with those clients and making sure. But in terms of -- if someone actually does fall into trouble, the underlying property is in great shape. We're well protected, and we feel like we have a lot of things there. I think we -- in our annual review -- our annual report, we talked about New York. We're not involved in those sorts of properties where there's rent stabilization metrics and all those sorts of things. So we feel very comfortable with the geography and the level of multifamily that we have.

I've got one more question, but I just want to open it up and see if anyone in the room had a question. If you have a question, raise your hand. If not, I guess maybe one last one for you, John. As we think about looking forward, both in '24 and over the medium term, what are the 1 or 2 things that you would like us to be focused on in terms of how we measure management and how we measure progress at USB?

Well, I would just say, again, last year, capital building, Union integration. This year, all about, again, applying our diversified business model set and how do we take that and apply it to our legacy customers as well as to our Union -- new Union clients. And that is -- and utilizing that with the backbone of our financial discipline and our risk management processes around credit underwriting and so on and so forth. Those are the things that we're really focused on, because if we can apply that and we're creating the products, and Tim alluded to this, how we can create simpler, more efficient uses for people to run their business or run their lives, we're going to win. And that's going to help us drive more revenues and go into the bottom line so that we continue to be -- enhance our industry-leading returns.

All right. With that, John and Tim, thank you so much.

Great. Thank you.

Thank you.