U.S. Bancorp (NYSE:USB) Q1 2024 Earnings Conference Call April 17, 2024 8:00 AM ET
Company Participants
George Andersen – Senior Vice President and Director of Investor Relations
Andrew Cecere – Chairman, President and Chief Executive Officer
John Stern – Senior Executive Vice President and Chief Financial Officer
Terry Dolan – Vice Chair and Chief Administration Officer
Conference Call Participants
Scott Siefers – Piper Sandler
Ebrahim Poonawala – Bank of America
John McDonald – Autonomous Research
Betsy Graseck – Morgan Stanley
Ken Usdin – Jefferies
Mike Mayo – Wells Fargo
John Pancari – Evercore ISI
Vivek Juneja – JPMorgan
Gerard Cassidy – RBC Capital Markets
Matt O’Connor – Deutsche Bank
Saul Martinez – HSBC
Operator
Welcome to the U.S. Bancorp First Quarter 2024 Earnings Conference Call. Following a review of the results, there will be a formal question-and-answer session. [Operator Instructions] This call will be recorded and available for replay beginning today at approximately 8:00 AM Central Time.
I will now turn the conference call over to George Andersen, Senior Vice President and Director of Investor Relations for U.S. Bancorp.
George Andersen
Thank you, Rochelle, and good morning, everyone. Today, I’m joined by our Chairman, President and Chief Executive Officer, Andy Cecere; our Vice Chair and Chief Administration Officer, Terry Dolan; and Senior Executive Vice President and Chief Financial Officer, John Stern.
Together with some initial prepared remarks, Andy and John will be referencing a slide presentation. A copy of the presentation, our earnings release and supplemental analyst schedules are on our website at usbank.com.
Please note that any forward-looking statements made during today’s call are subject to risks and uncertainty. Factors that could materially change our current forward-looking assumptions are described on Page 2 of today’s presentation, our press release, our Form 10-K, and in subsequent reports on file with the SEC. Following our prepared remarks, Andy, Terry and John will take any questions that you have.
I will now turn the call over to Andy.
Andrew Cecere
Thanks, George. Good morning, everyone, and thank you for joining our call. I’ll begin on Slide 3.
In the first quarter, we reported earnings per share of $0.78, which included $0.12 per share of notable items. Excluding notables, earnings per share totaled $0.90. Our balance sheet remains strong. We are maintaining our through-the-cycle underwriting discipline and seeing the benefits of our multi-year investments in digital, technology and payments ecosystem in the form of strong fee growth across our business lines.
Importantly, we continue to accrete capital this quarter. Our CET1 ratio ended the period at 10.0%, and our return on tangible common equity ratio was 17.4% on an adjusted basis. Slide 4 provides additional performance metrics on both a reported and adjusted basis.
On Slide 5, I’ll provide some additional high level observations for the quarter. Starting with the balance sheet. Credit quality metrics continue to develop in line with our expectations and we achieved healthy growth in tangible book value per share on both the linked-quarter and year-over-year basis.
Loan and deposit growth remains under pressure for the industry and that dynamic impacted our net interest income this quarter. Our NII on a taxable equivalent basis of approximately $4 billion was within our guidance, albeit on the lower end of the range. We are seeing good opportunities for loan growth in targeted portfolios and notably, we continue to see consumer deposit growth despite the impact of QT on industry deposit levels.
Over the past few weeks, the outlook for potential rate cuts in 2024 has meaningfully changed as long-term rates have backed up. Client behavior across the industry is adjusting in response to the potential higher for longer interest rate environment that has impacted our deposit mix and pressure deposit costs.
As a result, we now expect our NII for the full year to be lower than anticipated. However, we are taking a closer look at our expense base given these near-term NII headwinds and plan to take actions to mitigate the impact of lower-than-expected NII to our overall profitability. John will go into more details on these topics, but importantly, we believe this is a near-term phenomenon.
Turning to Slide 6, we continue to feel good about the momentum across our differentiated fee businesses. Fee income represents about 40% of our total net revenue, which stands to position us well in a lower interest rate environment. Overall, we are encouraged by our current trends in our client growth and penetration rates as evidenced by the continued strength we have seen across many of our fee revenue businesses this quarter.
Slide 7 provides an update on our differentiated payments ecosystem. Over the past few years, we have made good progress to both expand our business banking and payments relationships and grow related revenue associated with these relationships.
You may recall, we discussed an opportunity to grow small business relationships by 15% to 20% and related revenue by 25% to 30% a few years ago. As you can see on this slide, we’re making good progress and see even greater opportunity to further expand these relationships and related revenue in the medium term.
Let me now turn the call over to John, who will provide more detail on the quarter as well as provide forward-looking guidance.
John Stern
Thanks, Andy. On Slide 8, we provide an earnings summary. This quarter, we reported diluted earnings per share of $0.78 per share or $0.90 per share after adjusting for notable items, including the last of merger and integration costs of $155 million following our acquisition of Union Bank, and $110 million related to anticipated increase in the FDIC special assessment.
Turning to Slide 9, total average loans were $371 billion, down 0.5% linked-quarter as growth was impacted by slow industry loan demand in the current higher interest rate environment.
Despite tightening monetary policy and ongoing pressure on industry-wide deposits, our total average deposits of $503 billion were stable linked-quarter as we continue to see our efforts to grow consumer-related deposits materialize. End of period deposit growth was a little higher than we would typically see in the first quarter.
Trust and corporate deposit inflows are seasonally higher at the end of the first quarter. However, the impact of holiday timing at the quarter end delayed planned outflows of institutional deposits, which resulted in temporarily higher cash levels. We expect deposit outflows to move in line with more typical seasonal patterns.
Importantly, we continue to proactively manage the balance sheet by prioritizing opportunities that exceeded our cost of capital and further optimized our funding mix. We continue to limit our reliance on short-term borrowings and remain disciplined on deposit rate paid as we focus on relationship based deposits.
Turning to Slide 10, net interest income on a taxable equivalent basis totaled approximately $4.0 billion, down 3.1% linked-quarter, and net interest margin declined eight basis points to 2.70%. Both net interest income and net interest margin declines were driven by continued unfavorable deposit mix shift and deposit pricing pressure as well as slower loan demand.
Slide 11 highlights trends in non-interest income. Non-interest income increased 7.7% or $193 million on a year-over-year basis, driven by higher payments revenue, continued strength in underlying capital markets activity and stronger mortgage banking fees.
On a linked-quarter basis, non-interest income as adjusted decreased 1.4% or $38 million, reflective of seasonal declines in payments volume and previously discussed the impacts related to the exiting of our ATM cash provisioning business, which pressured service charges and lower tax credit syndication fees, which impacted other revenue.
Turning to Slide 12, reported non-interest expense for the quarter totaled $4.5 billion, which included approximately $265 million of notable items. Non-interest expense as adjusted decreased $10 million or 0.2% on a linked-quarter basis, and $117 million or 2.7% year-over-year, driven by both cost synergies with Union Bank and our continued focus on operational efficiency.
Slide 13 highlights our credit quality performance. Asset quality metrics continue to develop in line with our expectations. Linked-quarter, non-performing assets increased 20%, reflecting continued stress in our commercial real estate office portfolio and one idiosyncratic commercial loan.
The ratio of non-performing assets to loans and other real estate was 0.48% at March 31st compared with 0.40% at December 31st and 0.30% a year ago. Our first quarter net charge-off ratio of 0.53% increased four basis points from a fourth quarter level of 0.49%, and was higher when compared to a first quarter 2023 level of 0.3% as adjusted. Our allowance for credit losses as of March 31st totaled $7.9 billion or 2.1% of period end loans.
Turning to Slide 14, our Common Equity Tier 1 ratio of 10.0% as of March 31st was reflective of a 10 basis point increase from year end, which included 20 basis points of net capital accretion, offset by a CECL transitional impact of 10 basis points. We remain well above our regulatory capital minimum requirements.
I will now provide forward-looking guidance on Slide 15. We expect net interest income for the second quarter on an FTE basis to be relatively stable with the first quarter level of approximately $4.0 billion. Full year 2024 net interest income on an FTE basis is now expected to be in the range of $16.1 billion to $16.4 billion.
Our revised guidance reflects a shift in commercial client deposit behavior in a higher for longer rate environment and heightened competitive industry dynamics. For the full year, we continue to expect mid-single-digit growth of a non-interest income.
Given the pressure we are seeing on net interest income, we are reducing our expense guidance for the year. We now expect full year non-interest expense of $16.8 billion or lower, which compares to $17.0 billion in 2023.
Let me now hand it back to Andy for closing remarks.
Andrew Cecere
Thanks, John. We have been preparing for a wide range of economic scenarios for some time now and we continue to deliver industry-leading returns despite the current industry stress. Our diverse business mix is allowing us to differentiate in a competitive market and we are seeing the benefit of the investments we’ve made and continue to make in our digital capabilities, our technology modernization, and our payments ecosystem.
The message I’d like to leave you with is that we will successfully navigate through the near-term challenges the industry is facing, but more importantly, we are well-positioned for the future and continue to manage the company with the long-term lens.
Let me close by recognizing the many dedicated employees for all they do to support the constituents of our national banking franchise. It is because of our exceptional talent pool that we remain poised to execute on our capital-efficient growth objectives and continue to deliver the financial performance our shareholders have come to expect.
We will now open up the call for Q&A.
Question-and-Answer Session
Operator
Thank you. [Operator Instructions] Your first question comes from the line of Scott Siefers with Piper Sandler. Your line is open.
Andrew Cecere
Good morning, Scott. Thanks for taking it.
Scott Siefers
Good morning. Thank you for taking the question. I was hoping, either Andy or John, you could talk just in a little more detail about sort of the nuance in the tougher NII guide for the full year. So I guess at an industry level, we’ve got a couple of dynamics at play, whether it’s the challenging loan growth environment or, of course, the impact of higher for longer on, you know, deposit costs and betas. So maybe the main one or two kind of pressure points you saw. And then I guess as the follow-up, it doesn’t feel like there will necessarily be a lot more pressure on NII. It’s just that it might not advance in the second half. Is that the best way to think about it?
John Stern
Sure, Scott. Good morning and thanks for the question. So, you know, maybe just take a step back just to answer your question. In the — in January, when we talked about our guidance, we looked at — and we expected our 2024 net interest income to be in line with the annualized fourth quarter number given that was past MUB actions that we had taken throughout the course of the year. And so, to your point, we’re 1% to 3% lower than that new guidance — with our new guidance here. And the outlook really speaks to, you know, changes or the dynamics that we have in the economy, the interest rate environment, the dynamics in the deposit environment, those sorts of things. The conversation, of course, has shifted, at the beginning of the year, there were multiple cuts. Now we’re shifting to more higher for longer. And what we’ve witnessed over that time is that our client behavior, particularly in the corporate and mid-market sections, you know, have been shifting their behavior. And clients are continuing to rotate out of low-cost deposits into higher-cost deposits. And the pace of this action is slowing. We absolutely see that. It’s just not slowing as fast as what we would have anticipated. So to boil that all together, we — what we do see now with our guidance is that we have the second quarter net interest income will be relatively stable, and we should see growth in the second half of the year. And we provided a range given that uncertainty in terms of client behavior and things of that variety. And the final thing I would just say is that we recognized this upfront and we’re taking action. We’re looking at our expense base and taking action and pulling some levers that we have been looking at. And so that’s kind of how we think about the guidance from a big picture perspective.
Andrew Cecere
Thanks, John. And Scott, I’d just add that, you know, we continue to look for opportunities to improve efficiencies, particularly in this higher-for-longer rate environment. So we benefited from the $900 million cost take-outs from the Union Bank transaction. And we continue to focus on additional efficiencies in areas like procurement and third-party spend, our workplace management, and our properties and real estate. And probably, the area of greatest emphasis is operational efficiencies as we centralize our operations activities and technology investments we’ve made to really improve the effectiveness and efficiency in how we deliver our products and services. So that will continue to be a focus and a lens for us and that’s — those are the actions we’re taking.
Scott Siefers
Okay. Perfect. Thank you very much, Andy and John.
Andrew Cecere
You bet.
John Stern
Thank you.
Operator
Your next question comes from the line of Ebrahim Poonawala with Bank of America. Your line is open.
Ebrahim Poonawala
Hey, good morning.
Andrew Cecere
Good morning.
Ebrahim Poonawala
I guess maybe just following up on NII, John, if we could drill a little bit into it. One, the securities yield went down one basis point sequentially. Just could you remind us of the dynamic both in terms of the security book and fixed-rate asset repricing that we should be mindful of going forward? And then, non-interest-bearing deposits, I think saw a big surge at the end of the quarter. Again, what’s the right way to think about NIB balances and mix as we look forward? Thank you.
John Stern
Sure. So maybe I’ll start with your first question on the securities yield. You know, it was relatively flat or down 1 basis point as you cited. This quarter is a little bit different. We had taken some hedging actions that actually offset some of the asset churn that we typically would see. And so I would view this as more of a temporary thing. I would — look, as I look forward, the typical churn that you see in asset repricing of that book. As a reminder, we — it’s about $3 billion per quarter that is rolling off at the lower level and will replace. And so, that’s really going to be what we’re looking at kind of going forward. So I just look at this as an anomaly. On the deposit side, yeah, we did — I believe your question was on the surge in deposits. We did see a surge at the end of the quarter. There was a holiday in there. A lot of customers place balances with us, very much temporary. A lot of those balances kind of hung on in and out here through tax season. And so, we typically have that is just higher than what we would typically see for various reasons. And so, we — as we mentioned in our comments, we expect that to get to more seasonal levels. And then just your follow-on was really on the non-interest bearing side of things. You know, it’s continued to trend down that mix of NIB versus total deposits. You know, we’re kind of in that 17% category right now. As we’re in a higher for longer, it’s possible that continues to drift lower just based on the dynamics that we’re seeing in the marketplace.
Ebrahim Poonawala
Got it. And I guess just separately around the outlook for fee revenues. So you — I think Andy addressed that in his prepared remarks. But give us a sense of any — what areas you’re seeing momentum on the fee revenue side? And whether there’s any room for sort of upside surprise if we get additional negative guide downs on NII? Thank you.
John Stern
Yeah, sure. So I mean, overall, we feel very — we’re pleased with the quarter one results. We saw good account growth. We’re deepening relationships. We continue to see progress on Union and the growth opportunities that we see there, consumer spending metrics, all the underlying metrics are strong, capital markets activities are strong. And that is supportive of our continual view on mid-single-digit growth on the fee aspect of things. Areas that we see growth, you know, we particularly have seen that in the capital market space. We had extremely strong fixed-income capital markets activity, a lot of issuance that came to market and our franchise absolutely benefited from that. Mortgage has continued to be strong in terms of — even though applications and production has been lower on a year-over-year basis. We’re actually seeing much wider spreads just given the areas that we’re focusing on. And that’s just a constant theme of how we’re focusing on more return on equity or higher returns overall. And then the Payments business continues to do well and be in line with our expectations. And so — and that’s just drive — that helps us support the payments ecosystem that we have and all the initiatives and investments that we’ve made over time. So all that is very much coming together and we feel very, very comfortable about our fee outlook.
Ebrahim Poonawala
Okay. Thank you.
John Stern
Thanks, Ebrahim.
Operator
Your next question comes from the line of John McDonald with Autonomous Research. Your line is open.
John McDonald
Thanks. Good morning.
John Stern
Good morning, John.
John McDonald
How are you thinking about the outlook for net charge-offs and provision and just kind of the credit trends you saw this quarter? John, you mentioned there was the one idiosyncratic commercial. Other than that, you know, kind of what are you seeing? And you’re still kind of thinking about a mid-50s kind of net charge-off outlook for this year would be helpful. Thanks.
Terry Dolan
Yeah, John, this is Terry. Let me take that question. So when we end up looking at credit, again, credit generally is pretty strong. I think that we’re continuing to see in non-performing assets that will continue to tick up and did tick up in the first quarter. It’s primarily related to commercial real estate office space. And, you know, I think when we think about kind of the rest of the year, you know, probably in the second quarter, it’s going to tick up a bit more, but then that growth rate is going to really moderate quite a bit. You know, the thing to keep in mind with respect to the commercial real estate office space is that we’ve aggressively reserved for that. We feel like we’ve adequately covered the lost content that’s in that portfolio. So, you know, even though NPAs are likely to tick up, you know, we don’t see that as a real impact from a P&L standpoint. From a charge-off point of view, you know, in the first quarter, that’s principally driven by just credit cards. And our expectation is that will probably in the second quarter also come up. But then on a full-year basis, you know, the charge-off rate that we would expect in credit cards is probably going to move up a bit in the second quarter and then start to moderate downward again. On a full-year basis, we would expect, you know, that charge-off rate to be pretty similar to the charge-off rate that we see in the first quarter of about $4.25.
John McDonald
Okay. Got it. And then for the overall company kind of still kind of trending to that mid-50s perhaps on the charge-offs?
Terry Dolan
Yeah. I would say mid-50s perhaps maybe closer to the 60 basis points. And again, I think that it’s going to be a little bit lumpy because of, you know, just timing of commercial real estate charge-offs that will occur through the year. But again, we feel like we’ve adequately reserved for it.
John McDonald
Got it. Okay. Great. And then, Andy, how are you thinking about the expense flex? You mentioned, you know, offsetting the NII. I guess within reason, you’re going to flex the expenses depending on the revenue environment plays out through the year.
Andrew Cecere
Yeah, John. So it is a — an environment that it’s always important to look at efficiencies and we’re — that’s something we’re very focused on. And it is in those areas we talked about. We’ll continue to flex where we see opportunities. We’ve centralized operations. We have other opportunities in spend. It’s a company-wide initiative and we’ll continue to focus on that. Again, importantly, though, I want to tell you, John, that we’re still investing, but we’re looking at operational efficiencies as we deliver our products and services while continuing investments because the investments we’ve made is helping us with the efficiencies on a go-forward basis.
John McDonald
Got it. Thank you.
Andrew Cecere
You bet.
Operator
Your next question comes from the line of Betsy Graseck with Morgan Stanley. Your line is open.
Betsy Graseck
Hi. Good morning.
Andrew Cecere
Welcome back, Betsy.
Betsy Graseck
Thanks so much. So I had a follow-up on the comments around corporate behavior in the deposit shift from NIB. I just want to understand two things. One is it — do you see your corporate deposits shifting from NIB to IB? Or is it more NIB to MMF? And then separately, typically corporates are in NIB because it’s compensating balances for other services. So as this shift is going on, does it suggest that we’re going to see an uptick in, say, for example, treasury services or any of the other fee lines?
John Stern
Hey, Betsy, it’s John. Thanks for that. So, you know, in terms of the behavior, I think what we’re seeing is the trends are slowing, the rotation is going — maybe, first answer your question more from NIB into more IB, and it’s more of the — it’s the trade-off for the client. And what we’re seeing really there is clients are just optimizing and being as just looking at their balance sheet, looking at their balances, especially in this higher-rate environment and now that they know it’s going to be here for a longer period of time. They’re taking a closer, closer eye to it. We’re just seeing that more and more. So the trends have been slowing of that mix-shift is just taking longer than what we would have anticipated. So, you know, in terms of compensating balances that those are the things that are on a case-by-case basis with the clients. They, you know, we look at the ECR rates that we pay and customers will then make decisions based on that. And so, you know, those are kind of the trade-offs that we see relative to that right now.
Betsy Graseck
Okay. So treasury services potentially could see a little pop-up in growth as how you pay for services changes or is that an overreach?
John Stern
It’s possible. But again, the dynamic is pretty fluid is kind of how I would describe it.
Betsy Graseck
Okay. And also folks are staying on your balance sheet as opposed to going off-balance sheet into MMF.
John Stern
That’s right. Yeah, a lot of this is defending clients and making sure we’re there for them. You know, again, we view this as a temporary phenomenon. This is just a timing thing. It’s really just the churn here is continuing. It’s just being — the pace of it is taking a little bit longer for it to stabilize than what we would have anticipated. And that’s really what’s going on here. We want to make sure we’re here for the long run for our clients and serving them as we kind of transition through this rate environment.
Betsy Graseck
Got it. Okay. That’s super helpful. And then just, you know, kind of 30,000-foot question here. Just — could you help us understand how you are currently thinking about the asset sensitivity of U.S. Bancorp at this stage? How should we think about what higher for longer means for you for the whole organization? Thanks.
John Stern
Yeah, sure. So I think, you know, in terms of asset sensitivity from a risk management perspective, we are as neutral as you can be. We — we’ve taken a lot of different actions to make sure because we just don’t know where the rate environment is. I mean, it was seven cuts at the beginning of the year the market had now it’s closer to zero. So we just want to make sure where we are prepared for different types of rate environments. And, you know, so I think as we think about the asset sensitivity, that is really how we’re positioning ourselves. As we think about, you know, higher for longer and what that means, the drivers there are going to be clearly deposit betas and rates and paid and all that sort of things may creep up. The offset to that is we’re going to have asset churn on the loan side and — as well as the investment portfolio side. And over time, those things will offset and turn ultimately in our favor. But it’s going to be that timing that’s really going to matter in terms of what are those things move and shift over time.
Andrew Cecere
So Betsy, as John said, this is Andy. We’ve tried to narrow the corridor of volatility given the uncertainty in the outlook. And so, we are about as neutral as we can be given all the puts and takes John talked about.
Betsy Graseck
Super. Thank you so much. Really appreciate it.
Andrew Cecere
Thanks, Betsy.
John Stern
Thank you.
Operator
Your next question comes from the line of Ken Usdin of Jefferies. Your line is open.
Ken Usdin
Hey, thanks. Good morning.
Andrew Cecere
Good morning.
Ken Usdin
If I could ask a couple of questions on the fee side. One, can we just talk a little bit through the payments businesses? It looks like the overall year-over-year growth rate was 4%. I think you’re aspiring for upper-single digits. It looks like corporate was down year-over-year and maybe the rate in merchants slowed a little bit. So can you just talk us through some of those dynamics and then how you’d expect that trajectory going forward?
Andrew Cecere
Sure. Yeah, I think — thanks, Ken. I appreciate that. We can look at — maybe I’ll take them in order. Merchant, you know, was kind of in that 4% area, as you mentioned on the fee side of things. You know, on that side, this quarter, we saw travel being a little bit down, but the other underlying metrics really have strong growth. We saw our tech-led initiatives really continue to propel very nicely. We saw high-single-digit for virtually other — all the other categories in that space. So we think the travel is just kind of a short-term nature thing here and we’re well-positioned and continue to feel good about high-single-digits there. On the corporate side — corporate payment side, as you mentioned, that is — it was negative over this year-over-year basis, but we are lapping the freight weight that has happened over the past year, and that will really churn. There might be a little bit more in that in the second quarter, but we see a strong momentum as we look. Again, the fundamentals of business spend and things like that are continuing to be in case. So we feel good about high-single-digits. And then on the card side, really strong fee growth, good spreads, payment rates, and payment spend trends, constructive for how we’re thinking about it. So all that — we feel good about all the underlying trends from a payment standpoint.
Ken Usdin
Okay. Got it. And then just in terms of some of the other lines, you know, corporate services and mortgage did a lot better. I think you mentioned DCM and corporate and better gain on sale. Just wondering, are those, you know, both sustainable or was there any pull-forward on both of those areas this quarter?
Andrew Cecere
I think it is — I think the underlying strength maybe had a little bit of positivity here in the first quarter. But underlying all that, I think the gain on sale in the markets that we’re playing is legitimate even though the market has been slower from an application standpoint, a production standpoint, it’s still kind of double-digit, almost 20% down from year-over-year. So there’s just — there’s a lot of — the volumes are lower, but the spreads are wider and we anticipate that to continue going forward.
Ken Usdin
Okay. Great. And last clean-up one, just that ATM business, it didn’t look like service charges changed. Did that close that? I know it’s not a net profit. I know it’s neutral net profit, but can you just update us on that? Thanks.
Andrew Cecere
Yeah. It — there was some of that in this quarter. And so they’ll kind of fully run off here in the second quarter.
Ken Usdin
With an offset in cost?
Andrew Cecere
Yes.
Ken Usdin
Thank you.
Operator
Your next question comes from the line of Mike Mayo with Wells Fargo. Your line is open.
Andrew Cecere
Good morning, Mike.
Mike Mayo
Hi. Another one on net interest income. Andy, you used the word temporary in your opening remarks, talking about either the decline or the worst guide. And I didn’t know what you meant by temporary?
Andrew Cecere
So what we’re saying, Mike, is that this pressure that, as John described, we believe is going to dissipate and has dissipated is just dissipating slower than we thought. And we expect a relatively stable in the second quarter and then growth in the back half of ’24. So that’s what I meant by temporary.
Mike Mayo
[Technical Difficulty] And where the floor is for non-interest-bearing deposits or any other color?
Andrew Cecere
So I would expect that ’25 would continue the momentum that we see in the second half of ’24. We’re not going to give a ’25 guide right now because it’s so volatile in terms of what rates could be. But, you know, the — importantly, Mike, we see the second half of ’24, even in a lower rate cut environment and higher for longer to start to go up.
Mike Mayo
And I know I’ve asked this before, but it still applies, I think. So that the big picture here is you got $900 million of savings in the Union Bank acquisition. That’s good for the expenses. The revenues you highlight in your slide, business banking is up one-third over three years in terms of revenues and relationships. You have mortgage, you have capital markets, you have payments. The revenues are working. The expenses are working. And then we look at the efficiency ratio for this quarter, and the core number is like around 62% for a company that for so long had an efficiency ratio under 60%. Now, I know you’re investing a lot nationally. We heard that at the BAFT conference. But it’s just like, when do you get under 60%? And I get the NII effect that distorts things. But you do have some peers that are under 60% now. So how should we think about efficiency at Bancorp?
Andrew Cecere
Yeah, Mike, that’s why we’re pulling these expense levers and looking to continue to create efficiency. So I feel very positive about our fee categories. We have a diversified set of businesses, a lot of businesses that other banks don’t have like payments and commercial products, fund services, corporate trust that helps us drive fee revenue. That’s the strength that we talked about that 7.7%. There are some headwinds on margin for the industry and for ourselves. We’ll get past those headwinds and we’ll continue to operate efficiently and look for expense levers to get that efficiency ratio downward, and that’s an objective of ours.
Mike Mayo
All right. Thank you.
Andrew Cecere
You bet.
Operator
Your next question comes from the line of John Pancari with Evercore. Your line is open.
Andrew Cecere
Good morning, John.
John Pancari
Good morning. Good morning. On the deposit growth in the quarter, the surge in growth you saw at the end of period. Can you maybe size up the impact that was more seasonal and more tied to the holiday dynamic and how much that could pull back? And then separately, also on the — on your NII commentary, you did mention the competitive landscape shifting. Is that just regarding the deposit mix and pricing? Or are you also seeing some competitive dynamic impacting you on the loan front? Thanks.
John Stern
Hey, John. Thanks. Maybe to answer your second question first, you know, it’s more of a deposit mix and rate paid. It’s not necessarily the loan side. I think actually on the loan side, we see, you know, even though loans are soft at this point, we do see decent momentum on the commercial side. We saw good period-end growth. Their spreads are good. The asset churn is positive all there. I think it’s just, again, it’s not back on the deposit side of things in the mix. And I would say even on the mix, I would say on the commercial side, it’s just a rotational thing. The rates environment really hasn’t changed in the commercial side. On the retail side, sometimes rates go up, sometimes down depending on geography and market and all those sorts of things. But we’re competitive there and we want to make sure that we’re growing and we have been growing. We’ve been growing consumer deposits as we mentioned. Back on your first question on the deposit surge, you know, it’s probably in the area of $15 billion to $20 billion that we received. We get a lot of inflow at the end of the quarter as people prepare for outflowing payments, end-of-the-month type payments or first of the month as well as fifth of the month. And then sometimes they just hold it all the way through the tax season. That’s exactly what we’ve seen here is that you get this kind of surge up at the end of the quarter. It holds for the duration through tax day, and then it starts to wind down kind of — that’s been very seasonal. It’s just a bigger number than what we have typically seen.
John Pancari
Okay. Thank you. And then separately on the expense efforts that where you’re taking a closer look and you mentioned some of the areas. Are those measures that you’re taking fully reflected in that updated expense outlook of $16.8 billion for the year? Or could your efforts drive a somewhat lower number as you evaluate the opportunity?
Andrew Cecere
So, John, they’re reflected in the efforts. That’s why we brought it down to $200 million. And in the note, you’ll see that’s $16.8 billion at least. So we could pull additional levers as we continue to focus on this, but it is reflected in the guidance.
John Pancari
Okay. Thanks for taking my questions.
Andrew Cecere
Thank you.
Operator
Your next question comes from the line of Vivek Juneja with JPMorgan. Your line is open.
Andrew Cecere
Good morning.
Vivek Juneja
Hi. Thanks. Good morning. Thank you. I just want to probe, Andy, your comment that you expect net interest income to go up in the second half of ’24. Could you talk a little bit about what do you see as the drivers of that?
Andrew Cecere
I’m going to let John start and I’ll add on.
John Stern
Yeah, you know, the drivers really, you know, Vivek, as we talked about the, it’s — it comes down to the deposit side of things, really, first and foremost. And, you know, again, we’re seeing [Technical Difficulty] slow. It’s just, again, it’s just taking some time. So eventually as that goes, that will stabilize. And then you’re going to have the asset, continual asset churn on both loans as well as investment portfolio, things like that. I would also say that, you know, we’ve taken a lot of action to enhance return on equity. We’re looking at capital-efficient ways to grow that. Those underlying themes continue. The union growth opportunities that we see — and loan spreads have been favorable. So those are kind of the reasons that we see a positive nature and bend to the net interest income that Andy talked about.
Andrew Cecere
So as John said, it’s the repricing of loans, the expectation of stabilization of the flow of deposits, and the securities portfolio churn that we talked about.
Vivek Juneja
And the hedge that you did, which you said was an anomaly this quarter. [Technical Difficulty] Was that for — that’s not going to have an ongoing impact? Was that just something that you put on for capital protection or what was it?
John Stern
Sure. Yeah. So it really was more to get our asset sensitivity to be — continue to be neutral. So those are actions that we took kind of as a one-time matter. So it’s in the rate and go forward. That’s why I kind of — I called it as a temporary measure here in this quarter. Going forward, again, as the driver here in investment portfolio is the $3 billion or so that’s rolling off at lower yields and will be replaced at now current higher interest rates.
Vivek Juneja
Got it. Because you had always said you were neutral. So that’s what I was trying to understand what sort of change to make — that you had to do to make it go to neutral.
John Stern
Yeah. Those are part of the actions that we take to get neutral. And those are the things that the team looks at on a frequent basis. We’re actively managing that on a daily basis. We’re looking at markets. We’re taking actions. And this is just the result of that.
Vivek Juneja
Okay. And is that what just received fixed swaps you added or terminated or what did you do?
John Stern
Well, specifically, they were just — they were pay-fixed swaps that we had terminated, they were shorter-dated in nature, but it reduced the yield because the pay-fixed carry was — had been gone. But that just neutralized our interest rate sensitivity.
Vivek Juneja
Thanks.
Operator
Your next question comes from the line of Gerard Cassidy with RBC Capital Markets. Your line is now open.
Gerard Cassidy
Good morning, Andy. Good morning, John.
Andrew Cecere
Good morning.
Gerard Cassidy
John and Andy, can you share with us, obviously, you had a nice move up in your CET1 ratio is now at 10%. And we all know the Basel III endgame is coming. Nobody knows for certain when that final proposal will be in place. But it seems like for the Category II and III banks, that the unrealized securities losses will be carried through regulatory capital, which is not the case today, of course. So with that as a backdrop, can you update us on where you want that CET1 ratio? And historically, you guys have been so good at giving back 75% to 80% of your annual earnings in dividends and buybacks. And when do you think we could possibly get back on that kind of track?
John Stern
Sure, Gerard. I’ll start. First of all, just to give an update on the unrealized loss. So from a positive standpoint, part of the hedging activities that we do that I just talked about in prior questions, really help here because we had — even though rates went up 30 basis points, 40 basis points throughout the quarter, our AOCI was fairly neutral. So the impact to the AOCI from the investment portfolio and pension right now is about 220 basis points versus the 10.0 that we have on common equity tier 1. You’re right, the Basel III endgame and all those sorts of things, that along with, I would call, CCAR results for us, are two important milestones we need to see before we make any grand declarations on what our capital ratios will be going forward. In the meantime, we’ll continue to build our capital levels. And what we’ll also do is focus on our returns. Obviously, the dividend is a large priority. Additional priority is investing in the company. And so we’re pausing on share repurchases at this time as we build the capital. Over time, that will normalize back to kind of where we were. But this is kind of that transitional period that we’re in.
Gerard Cassidy
Very good. And coming back to — stepping back for a moment. Now the Union Bank, I assume is fully integrated. And obviously, that has been your focus since that acquisition. Can you share with us your thoughts about de novo expansion. You had that expansion down in the Charlotte area. Is there more to come now that, again, the acquisition is behind you? What’s your thoughts there as you look out over the next 12 months to 24 months?
Andrew Cecere
Yes, Gerard, we’re focused on building our core customer base and deepening the relationships with the customers we have through those set of products and services that we offer. We have — we do that through a number of mechanisms. One of them is through our branch system, one of them is through our relationship managers and working together. And that de novo effort is doing well. We also have partnerships with State Farm, which increase our distribution base. So we’ll continue to look at all those levers, but the bottom line is that we continue to focus on more customers, deeper relationships across the diverse set of businesses that we have. And a lot of the opportunity Gerard, is providing more services to customers who already are customers of U.S. Bank could benefit from some of the other products and services that we offer.
Gerard Cassidy
And Andy just a quick follow-up on the deepening the customer relationship that you just identified. When it comes to your middle market commercial or your core commercial account, if they only have a loan relationship versus one of your preferred accounts that have multiple relationships, that deepening you just mentioned, what kind of profit differential would you estimate there is between a customer that only has a loan versus your customer that has multiple products?
Andrew Cecere
It’s significantly higher. The more relationships, the higher the return, the more revenue, certainly. So if they have a loan only versus a loan plus deposit plus treasury management plus commercial products plus payments, it all adds up.
Gerard Cassidy
Yes. No, I agree. Okay. Thank you. Appreciate it.
Andrew Cecere
You bet.
Operator
[Operator Instructions] Your next question comes from Matt O’Connor with Deutsche Bank. Please ask your question.
Matt O’Connor
Good morning.
Andrew Cecere
Good morning, Matt.
Matt O’Connor
There’s obviously a lot of puts and takes, like as you think about the net interest margin over time. But we’ve seen a number of banks put out kind of this medium-term NIM target. And wondering if you have any thoughts on what a more sustainable NIM is for you guys. You talked about the securities kind of cash flowing $3 billion. I don’t know if there’s any kind of underwater swaps that are chunky and roll off. But I guess the question is, what do you think about NIM kind of medium term versus where you are right now?
John Stern
Yes. I’ll start here. Matt, in terms of the net interest margin, it’s going to obviously track net interest income over time, but it may bounce around some of the drivers of that, obviously, could be some of the things you just mentioned, the asset churn on the investment portfolio, the creep and on deposit costs and things like that. The cash levels and liquidity mix and things of that variety can also drive it as well. So we don’t really have a call or a base of here’s where our net interest margin. We’re more focused on net interest income.
Matt O’Connor
And then are there any — again, the securities book, you’re pretty clear on the cash flow there, and I think that’s fairly long duration from a cash flow perspective. Any swaps that we should be mindful of that could go either way looking out the next couple of years?
John Stern
I’m sorry, Matt, I didn’t.
Andrew Cecere
Swaps. So we again — go ahead.
John Stern
The swap activity that we have. Yes. So just as a — our hedging — while we’re very active in our hedging activities, we — there’s really no fundamental change. We continue to focus on pay-fixed- swaps that have — that hedge the investment portfolio. Obviously, we took some off that impact if that is a temporary thing. We still have well over 30% or well over a third actually of our risk hedged on the securities book. And then we have been adding receive fixed swaps as well. Some of that spot, some of that forward starting depending on the nature as the curve has come up here, and the curve has flattened and higher, that’s an excellent opportunity for us to add some protection for the downside if and when that does occur. And all that adds up to be kind of a net neutral interest rate risk position that we’re in.
Matt O’Connor
Okay. Thank you.
John Stern
Thanks, Matt.
Andrew Cecere
Thanks, Matt.
Operator
Your next question comes from the line of Saul Martinez with HSBC. Your line is open.
Saul Martinez
Hi. Thanks. Good morning.
Andrew Cecere
Good morning.
Saul Martinez
I guess another one on NII. Your guidance does some modest reacceleration of NII in the back end. I think the second half NII is at the midpoint, 2% higher than the first half. But what’s embedded in — can you be more specific about what’s embedded in the through-the-cycle deposit beta assumption. And John, you mentioned non-interest bearing could continue to move down a little bit from 17%. How far could — what’s your best guess now as to how much more deposit migration and where that ultimately could land at and what’s sort of embedded in the guidance for those measures?
John Stern
Sure, Saul. It’s John. So on the beta side specifically, that has continued to slow. I think we’re only up one points or two points here this quarter and it was three points, the prior quarter. So it clearly has slowed. And as I mentioned, deposit rates in the commercial side are very flat. They have not changed. Retail bounces around a little bit, but we’re going to be competitive and follow the market there, of course. But all-in, it’s — if you’re higher for longer, it’s going to — it may creep up a point here or two, but we feel like the low 50s is probably the right place for that to be as we kind of look forward.
Saul Martinez
Okay. And in terms of non-interest bearing, the total liability or total deposits, where it is?
John Stern
Yes. I think that — I think, yes, as I mentioned a little bit on the non-interest bearing side, we’re at about 17%. It’s — customers are being more efficient and things like that. It could go down a couple of points as we stay, a little bit lower at this higher for longer type period.
Saul Martinez
Okay. Great. And I guess a follow-up on just a clarification on the deposit surge, your response to an earlier question on the deposit surge. Forgive me if I missed this, but the $15 billion to $20 billion surge, that’s a normal surge in non-interest bearing deposits. But I guess the question is, what sort of the incremental to the normal surge — what was incremental this quarter to what you normally see? I’m just trying to get a base on which to forecast non-interest bearing deposits going forward?
John Stern
Sure. So in terms of the surge, the surge in absolute terms was like it was about $20 billion or so. It’s probably $10 or so billion above and beyond what we typically see for this type of the quarter.
Saul Martinez
Okay. All right. That’s helpful. Thank you.
John Stern
Thanks.
Operator
Your next question comes from Mike Mayo with Wells Fargo. Your line is now open.
Mike Mayo
Hi. Just kind of still a cleanup on NII. Just in very simple terms, if you’re neutral to rates, why the guide lower for NII? I just want to make sure I have that rate. Did something happen that you didn’t expect or you weren’t fully neutral before this quarter?
John Stern
Yes. Sure. Mike, it’s John. So the — yes, we are neutral, to answer your question, to shocks to interest rates. I think what we’re explaining is the behavioral aspect of it, which sometimes can be a little more challenging to judge at that point in time. And so, again, it’s a little bit — the pace of rotation is a little bit — it’s slowing down just not as much as what we had anticipated. So, again, rate shocks moving up and down, we continue to feel very good from a neutral standpoint. It’s just that behavioral aspect that we’ve been talking about here.
Mike Mayo
And do you have a number for fixed asset repricing, say, through the end of next year, because I think that’s what’s driving your higher guide for the second half of this year and into next year. So you’ve talked about $3 billion of securities. But by the end of next year, how much do you have in fixed assets that should be priced? Do you have like one grand number for that?
John Stern
Well, I think the way I would think about it is about half of our loan book is fixed rate component, the other half is floating rate component and spreads are widening. So you can — you can see some of the floating rate components perhaps improve over time. We’re seeing decent growth in payments — or excuse me, credit card. And so some of the mix is also working at play here. And so commercial loans are coming on. They are coming out at wider spreads. So that’s kind of how I think about that from a big picture perspective.
Mike Mayo
And then last one, loan spreads, I mean, for a while there, it looks like we’re heading to the recession and loan spreads were not widening. Now it looks like we’re not having a recession and you have tight spreads in the capital markets and loan spreads are widening. Just why are loan spreads widening now? I guess that would be an incremental positive.
John Stern
Yes. So I think it’s just different markets. So I think some of the drag you’re seeing in the commercial volume side is capital markets. Spreads have been — and the access has been very good. We saw that reflected in our fixed income capital market fees and things of that variety and so, but I think that has taken away volume to a certain extent. In other areas where access to capital markets is as pronounced, I would say there has been decent opportunity for spreads there.
Mike Mayo
All right. Thank you.
John Stern
Thanks, Mike.
Operator
Your next question comes from the line of Ebrahim Poonawala with Bank of America. Your line is open.
Ebrahim Poonawala
Thank you. Hey, John, just a quick follow-up to make sure we get this right. The surge deposits that came in, I think you mentioned you expect about $15 billion to leave. Am I — is all of that going out of non-interest bearing, so the $91 billion number, does that go into the mid-70s as we think about the second quarter?
John Stern
No. Some of this is temporary. So the surge that happens, it can be a mix of both money market as well as NIB. It may surge the NIB for a brief period of time, but it’s not going to be material to the quarter. So even though — so the surge that we’ve been talking about can be a mix of both.
Ebrahim Poonawala
Mix of both. And so you do expect just from a very dollar balance standpoint, NIB staying north of $80 billion. Is that fair?
John Stern
Yes, I wouldn’t expect. As we said, the rotation is continuing. So I wouldn’t expect growth necessarily in DDA, but deposits overall, we do expect it to basically be stable.
Ebrahim Poonawala
And just a separate question. Given all these questions on NII, I think, would love to hear the degree of conservatism baked into your NII outlook? Because I guess the concern you’re hearing is whether we see another downward guide three months from now. And, yes, so in terms of what would go wrong in order for us to see another guide down on NII and for you to be surprised? Thank you.
John Stern
Yes, Ebrahim, I don’t look as conservative or aggressive, it’s just the range. It’s just the range that we provided, just given the uncertainty that’s just in the market given all the factors that we’ve talked about here today.
Ebrahim Poonawala
Got it. Thank you.
Andrew Cecere
Thank you.
Operator
There are no further questions at this time. Mr. Andersen, I turn the call back over to you.
George Andersen
Thank you for listening to our earnings call. Please contact the Investor Relations department if you have any follow-up questions.
Operator
Thank you. This concludes today’s conference call. You may now disconnect.
