Welcome to U.S. Bancorp's First Quarter 2022 Earnings Conference Call. Following a review of the results by Andy Cecere, Chairman, President and Chief Executive Officer; and Terry Dolan, Vice Chairman and Chief Financial Officer, there will be a formal question-and-answer session. This call will be recorded and available for replay beginning today at approximately 11:00 AM Central Time through Thursday, April 21, 2022, at 10:59 PM Central Time. I will now turn the conference call over to Jen Thompson, Head of Corporate Finance and Investor Relations for U.S. Bancorp.

Thank you, Francie, and good morning, everyone. With me today are Andy Cecere, our Chairman, President and CEO; and Terry Dolan, our Chief Financial Officer. During their prepared remarks, Andy and Terry will be referencing a slide presentation. A copy of the presentation as well as our earnings release and supplemental analyst schedules are available on our website at usbank.com. I'd like to remind you that any forward-looking statements made during today's call are subject to risk and uncertainty. Factors that could materially change our current forward-looking assumptions are described on Page 2 of today's presentation, in our press release and in our Form 10-K and subsequent reports on file with the SEC. I'll now turn the call over to Andy.

Thanks, Jen. Good morning, everyone, and thank you for joining our call. Following our prepared remarks, Terry and I will take any questions you have. I'll begin on Slide 3. In the first quarter, we reported earnings per share of $0.99 and total revenue of $5.6 billion. The quarter was highlighted by strong loan growth, continued momentum in our payments businesses, well-controlled expenses and strong credit quality. As expected, mortgage banking revenue declined in the first quarter due to slower refinancing activity in the market. However, we saw good momentum in business activity and related revenue growth within other fee businesses, including payments, trust and investment management and treasury management. This quarter, we released $50 million in loan loss reserves, reflecting continued strong credit quality. And at March 31, our CET1 capital ratio was 9.8%. Slide 4 provides key performance metrics. In the first quarter, we delivered a return on assets of 1.09% and a return on tangible common equity of 16.6%. Slide 5 highlights strengths in digital engagement. Digital transactions account for over 80% of total transactions and total digital loan sales account for about two-thirds of total loan sales. We are pleased with the progress we have seen so far, but believe there is further opportunity to increase customer engagement through digital adoption by helping customers, consumers and business customers to understand the full scope of capabilities available to assist them in managing their financial lives. We are continually adding and enhancing digital features and functionality and applying a digital plus human approach. A great example of this is our Do-it-Together co-browse technology. Through this tool, interactions with our customers, a key driver of engagements have increased in number and have become more efficient as well as effective. Turning to Slide 6. We believe our complete payments ecosystem is a competitive advantage for our company. The opportunity to connect our banking customers with our payments products and services and our payments customers with our banking products will continue to drive meaningful profit and return differential for our company over the next several years. Our small business initiative is just one example of many that we see driving both account growth and deeper relationships. We believe the suite of products we offer to our small business customers will allow us to grow those relationships by 15% to 20% and related revenue by 25% to 30% over the next few years. We are particularly encouraged by the trends we are seeing in the uptake of our talech point-of-sale functionality, which allows small business customers to manage their banking and payments needs in a simple, easy-to-use format that we provide in the form of a dashboard. On the right side of the slide, you can see that the number of new talech customers increased fivefold in 2021 compared to 2020, and that strong growth trajectory has continued in 2022. Year-to-date, new talech customers are 1.5 times the full-year 2020 level. Now let me turn the call over to Terry to provide more details on the quarter.

Thanks, Andy. If you turn to Slide 7, I'll start with the balance sheet review followed by a discussion of first quarter earnings trends. Average loans increased 3.4% compared with the fourth quarter, driven by 8.0% growth in commercial loans, 2.1% growth in mortgage loans and 1.0% growth in total other retail loans. Commercial loan growth reflected slowing paydowns, increased business activity and higher utilization rates across many sectors and most geographies. Client sentiment is stable and commercial lending needs are being driven by inventory building, M&A activity and CapEx expenditures. In the retail portfolio, we saw good growth in residential mortgage and other retail loans, including auto lending. Credit card balances declined linked quarter, reflecting typical seasonality and the impact of certain loans being moved to held for sale in the fourth quarter, which impacted average balance growth. Turning to Slide 8. Total average deposits increased 1.0% compared with the fourth quarter despite the typical seasonal reduction in noninterest-bearing deposits. Total average deposits increased 6.5% compared with a year ago. Slide 9 shows credit quality trends. Credit quality continues to be strong across our loan portfolio. The ratio of nonperforming assets to loans and other real estate was 0.25% at March 31 compared with 0.28% at December 31 and 0.41% a year ago. Our first quarter net charge-off ratio of 0.21% was slightly higher than the fourth quarter level of 0.17%, but lower compared with the first quarter of 2021 level of 0.31%. Our allowance for credit losses as of March 31 totaled $6.1 billion or 1.91% of period-end loans. Slide 10 provides an earnings summary. In the first quarter of 2022, we earned $0.99 per diluted share. These results included a relatively small reserve release of $50 million. Turning to Slide 11. Net interest income on a fully taxable equivalent basis totaled $3.2 billion. The 1.6% linked quarter increase reflected strengthening margins and strong loan growth in the quarter, particularly commercial loan growth. Our net interest margin improved 4 basis points to 2.44% due to the changing yield curve, investment portfolio actions and lower cash balances, partially offset by the impact of loan mix. Slide 12 highlights trends in noninterest income. Compared with a year ago, noninterest income increased 0.6%, reflecting strong payments services revenue, growth in trust and investment management fees and higher treasury management fees, offset by lower commercial product revenue and lower mortgage banking revenue. The decline in mortgage banking revenue reflected lower refinancing activity in the market and tighter gain on sale margins, giving excess capacity in the industry. In the first quarter, total payments revenues increased 10.1% compared to a year earlier, reflecting both continued cyclical post-pandemic recovery as well as strong underlying business trends supported by investments we are making. Credit and debit card revenue increased 0.6% on a year-over-year basis, as the impact of higher credit and debit card volume was offset by lower prepaid card activity. Excluding prepaid card revenue, credit and debit card fee revenue would have increased 9.6% compared with the first quarter of 2021. Both corporate payment products revenue and merchant processing fees increased at a double-digit pace compared with a year ago, with growth driven by both the cyclical recovery of pandemic-impacted industries as well as underlying business momentum. Slides 13 and 14 provide additional information on our payment services business. In the middle of Slide 13, we provided a table, which illustrates the cyclicality that naturally occurs in each of our three payments businesses over the course of a typical year. On the right side of the slide, you can see that COVID-19 impacted industries continued to recover throughout the first quarter. As of the first quarter of 2022, credit and debit card travel volumes exceeded pre-pandemic levels. In March of 2022, airline volume was flat compared to March of 2019, the first time we have seen recovery to pre-pandemic levels. Although T&E-related volumes in our corporate payments business are still below pre-pandemic levels, they continue their upward trajectory. Slide 14 provides linked quarter and year-over-year revenue growth trends for our three payments businesses. Because of the cyclical nature of our payments businesses, we believe year-over-year trends are the best indicator of underlying business performance in a normal environment. Year-over-year, credit and debit card revenue growth rates continued to be negatively impacted by the decline in prepaid card revenue as the benefit of government stimulus has dissipated. We provide details on prepaid card fee revenue over the past five quarters in the upper right quadrant. While prepaid card revenue is nearing a run rate on a linked-quarter basis, it will impact year-over-year credit and debit card fee revenue comparisons through the end of 2022. The bottom half of the slide illustrates the strong year-over-year growth rates in both merchant processing and corporate payments fee revenue over the past several quarters, which have partly reflected the pandemic-related recovery. While we expect the year-over-year growth rates to moderate from current levels, we continue to believe that both merchant processing and corporate payments fee revenue can grow at a high single-digit pace on a year-over-year basis in a post-pandemic environment. Turning to Slide 15. Noninterest expense decreased 0.9% on a linked quarter basis. The decline was driven by lower professional services expense, marketing and business development expense and technology and communication expenses, partially offset by increases in employee benefit expense primarily due to seasonally higher payroll taxes and other noninterest expenses. Linked quarter expense growth includes the impact of the acquisitions completed in the fourth quarter of 2021. Slide 16 highlights our capital position. Our common equity Tier 1 capital ratio at March 31 was 9.8%. As a reminder, at the beginning of the third quarter of 2021, we suspended our share buyback program due to the pending acquisition of Union Bank. After closing the acquisition, we expect to operate at a CET1 ratio between our target ratio and 9.0%. We continue to expect that our share repurchase program will be deferred until our CET1 ratio reaches 9.0% following the pending deal close. I will now provide some forward-looking guidance. The following guidance is for U.S. Bank on a standalone basis and does not include any potential impact from Union Bank. Let me start with full year guidance. We have updated our interest rate expectations to be consistent with market expectations. Given our revised interest rate assumptions, we now expect total net revenue to increase 5% to 6% compared with 2021, reflecting 8% to 11% growth in taxable equivalent net interest income and stable fee income, primarily due to lower mortgage banking revenue and deposit service charges offsetting growth in other fee businesses. We expect positive operating leverage of at least 200 basis points in 2022. As it relates to the second quarter specifically, we expect total revenue growth of 5% to 7% on a linked-quarter basis, benefiting from seasonal strength in many of our fee businesses, continued loan growth, and the second quarter impact of higher rates on net interest income and the recapture of fee waivers. In the second quarter, we expect expenses to increase 1% to 2% on a linked-quarter basis, primarily due to seasonally higher compensation-related costs and business investment spend. Credit quality remains strong. Over the next few quarters, we expect the net charge-off ratio to remain lower than historic levels but will continue to normalize over time. For the full year 2022, we expect our taxable equivalent tax rate to be approximately 21% to 22%. If you turn to Slide 17, I'll provide an update on our previously announced pending acquisition of Union Bank. In September of 2021, we announced that we had entered into a definitive agreement to acquire the core regional banking franchise of MUFG Union Bank. We continue to make significant progress in planning for closing the deal in the first half of 2022 while we await regulatory approval. As you know, regulatory approvals are not within the company's control and may impact the timing of the closing of the deal. We expect to close the deal approximately 45 days after being granted U.S. regulatory approval. Conversion is anticipated late in the second half of 2022. We continue to believe this deal is a compelling use of our excess capital from both a strategic and financial perspective. We feel comfortable with our initial financial deal assumptions, including an expectation that it will generate an internal rate of return of about 20%, which is well above our cost of capital. Assuming a June 30 close date, we expect Union Bank to contribute approximately $310 million to our pretax pre-provision net revenue in 2022 before considering cost synergies. We continue to expect to achieve approximately $900 million of total cost synergies related to the deal with approximately $85 million to $100 million of cost savings achieved in the second half of 2022. We continue to target total merger and integration costs of $1.2 billion, of which approximately $950 million will be incurred in 2022 with some charges anticipated in the second quarter as we prepare for system integration. In addition, there will be a Day 1 loan loss provision required at closing in accordance with the existing CECL accounting rules of approximately $800 million to $900 million. I'll hand it back to Andy for closing remarks.

Thanks, Terry. Our strong first quarter results have positioned us well for the rest of the year, and we are encouraged by the loan growth trends and business activity that we are seeing in the early part of the second quarter. Credit quality remains strong. Nonetheless, we continue to approach credit decisions with a through-the-cycle lens. We feel good about the secular trends we are seeing across our fee businesses. Our payments revenue continues to recover, and we look to continued cyclical recovery in travel and entertainment as the year progresses. More importantly, over the near and intermediate term, our multiyear investments in this business and the strategic initiatives aimed at leveraging the power of our payments ecosystem will continue to pay off. We are closely managing operating expenses even as we invest in our digital initiatives, our payments capabilities, and our technology modernization. On that front, I'd like to highlight a few of our recent announcements. We enhanced the service that we call Extend Pay, an offering which allows our existing consumer and business cardholders to have a buy now, pay later option where they can choose a flexible payment plan that suits their needs. We also rolled out a request for payment capability, which allows merchants to send bills directly to customers' bank accounts. Those customers have the option to send payment immediately to the biller via real-time payment rails. In February, we announced a meaningful investment in our cloud strategy, which is aimed at modernizing our technology foundation to further improve the security of our data, financial assets, and customer privacy while allowing for the transformation of applications and infrastructure to create leading-edge customer experiences. We will continue to leverage our suite of products, services, and capabilities to enhance the customer experience, which we believe will support meaningful account growth and deeper relationships across our entire franchise over the next several years. In closing, 2022 is off to a good start, and I'd like to thank our employees for all they do to support our strategic goals and continue to serve our customers and communities. We will now open up the call for Q&A.

Your first question comes from the line of Matt O'Connor from Deutsche Bank.

I was hoping you could provide an update on asset sensitivity of USB standalone and then the impact of UB? I know at one point, you had said it was going to make you a little more asset sensitive, but obviously, the rate environment has changed. I'm not really sure what's happening in their balance sheet. So some updates there on asset sensitivity, please?

Yes. Matt, let me take that question. With respect to asset sensitivity, I'll kind of refer back to maybe the disclosures we had in the 10-K, and probably the best one to look at would be an upward gradual 200 basis point movement. I think that is at least the environment that the market implied at this particular point in time. If you end up applying that rate sensitivity of about 5.4% to the fourth quarter, I think it gives you a pretty good estimate of what sort of benefit we see in terms of net interest income going forward. Maybe qualitatively, I think that when we see early in the cycle, deposit betas will be relatively low. Our portfolio, when you look at loans, is probably about 50% to 55% floating rate and about 45% to 50% fixed rate, so that probably gives you some perspective with respect to what we're expecting to see. From a Union Bank point of view, it is a bit more asset sensitive than us. It should help us about 35 to 40 basis points. When you end up looking at their portfolio and the assets that we'll be acquiring, it's deposit-heavy, so we'll have a substantial amount of cash and the opportunity to reinvest that as rates move up.

Okay. And then separately, you gave the impact of the UB deal on tangible book value; I think it was just a 1% reduction. What's the estimated impact on CET1 capital, both from the actual acquisition and then the upfront marks that you mentioned earlier?

Yes. As we've said, currently, we're at 9.8% in terms of our CET1 ratio. We would expect it to be in the range of that 8.5% to 9% at the end of the closing. Of course, it will be dependent upon how much rates move between now and the actual closing time. I talked a little bit about the Day 1 provision in terms of the credit mark. From an asset mark, it will be a little bit higher than what we had originally anticipated or disclosed at the time of the acquisition, simply because of the rising rates, but not significantly different.

And just a suggestion, lots of good guidance on the call. It would be great if you could put some of it in the slide. It is such a busy day and scramble to drive it all down. Some of your peers do that, and it's really helpful for us on this side.

Yes. We would anticipate we'll start to incorporate more of that as the deal moves forward.

Your next question comes from the line of John Pancari of Evercore ISI.

On the card and payment side, just curious if you can give us a little bit more detail on what you're seeing in terms of consumer spend behavior? Are you seeing any signs of pullbacks and shifts in the type of spend that could point to some softening there? We're starting to see some shifts towards nondiscretionary from discretionary spend. Curious if you're seeing that in your business, and if that is impacting your outlook at all?

Yes. So let me start, and then Andy can add to it. Certainly, what we are continuing to see, John, through the first quarter is good, strong, both year-over-year growth and comparisons back to 2019 really across the board. I think a couple of trends that we talked about are that travel, specifically airline, was back to pre-pandemic, and so that's continuing to develop and grow and that's occurred specifically in March. I think you'll see that continuing as we think about the second quarter and beyond. We do continue to expect in the CPS business, the travel and entertainment will continue to strengthen, and I think that is a tailwind or an opportunity for us as we move forward. I would expect that there's probably going to be a shift to some extent from what I would call durable goods that people were spending their dollars on in the past to more service-oriented activities. But in terms of the overall level of spend, I feel like that will continue at least for some period of time. Andy, what would you add?

I think that's a good summary, Terry. John, it's interesting because consumer spend on the merchant side, if we look at that data versus pre-pandemic levels in the first quarter, still up 9% to 15%. Consumer credit card spend still up versus pre-pandemic 35%, and corporate payments still up 10%. The one area Terry mentioned that is not back to recovery yet is corporate T&E, which is about 75% of what is normal or pre-pandemic levels, and we would expect that to continue to get better as we all start to get out on the road more. So we're not seeing any negative trends thus far, and it continues to be very strong.

And then on the commercial side, I know you cited in your prepared remarks that you are beginning to see CapEx plans as a driver behind the loan growth dynamics on the commercial side. Do you expect that to continue as we look out here? Or do you foresee a potential impact on borrower appetite amid still the inflationary dynamics and supply chain issues in Ukraine?

Yes. I think the capital expenditure is probably driven by a couple of different things. Most businesses over the course of the last couple of years have been holding back with respect to capital expenditure. I think there's a bit of an increase in that spend just related to that. And then I do think that as companies see more and more inflationary pressure, they're going to look to business and business automation as ways of offsetting some of the pressure that they see with respect to being able to acquire talent. I think that our expectation, at least in the near term, is that capital expenditure will continue to be reasonably strong.

I think our utilization rates support that, Terry. We have been running in that 19% plus or minus for a number of quarters, and we saw an increase, certainly not to normal levels, but in the 22% to 23% in the last few months.

Your next question comes from the line of Betsy Graseck of Morgan Stanley.

This is Ryan Kenny on behalf of Betsy. Wondering if we could dig in a little bit more on deposit betas. So I know that you mentioned that early in the cycle, you're expecting deposit betas to be relatively low. So on one hand, you have an industry with a lot of excess liquidity. But on the other hand, you have consumers that might be a little bit more cognizant of rate hikes coming faster with inflation on the headlines every day. You have rising fintech competition. So putting that all together, I'm wondering how you're thinking about deposit betas really over the first 100 basis points and then the following rates after that?

Yes. So I think it's helpful to put some context. When you look at our deposit business or balances, about 50% of it is consumer-based and 50% is institutional, which tends to have a little bit of a higher beta. But our expectation, especially early in the cycle, is that betas will move relatively slow. And then as we get further into the development of the cycle, it will start to accelerate a bit. But to give you some perspective, we would expect probably through the full cycle of 2022 that betas on the consumer will be less than 10% and then maybe slightly higher on a terminal basis. On the institutional side, we would expect through the 2022 cycle somewhere between 50% and 60% with a terminal level that's maybe a little bit higher than that. A couple of things to that, as we are looking at it, we believe that relative to the last cycle, our deposit betas will be a little less sensitive for a couple of different reasons. One is the consumer balances are larger by about 5% relative to the last cycle. Our corporate trust deposit balances are lower in concentration relative to the last cycle. We've moved away from concentrations related to brokerage-related type of deposits, which we had more of in the past. We still have some but at lower concentration. So all those things are going to drive lower beta growth than what we saw in the past.

And then just as a follow-up, wondering if you could dig into the book value per share decline of 9% linked quarter? How much of that came from AOCI drawdowns on the AFS portfolio? And is there anything you can do to mitigate the AOCI hit going forward if the rate outlook keeps moving higher?

Yes. The vast majority, if not all of it, was tied to the change in the unrealized gains and losses on the investment portfolio. As we think about the future, we started to change a few different things. So in the fourth quarter, we moved about $43 billion of our investment securities to held-to-maturity. As we are reinvesting runoff associated with the investment portfolio, we'll continue to move more and more of that into the held-to-maturity category. And then certainly, as we close on Union Bank, we have the opportunity after the mark to move a lot of that into held to maturity as well. So today, about 30% of the overall portfolio is in the held-to-maturity category, and our expectation is that over some period of time, we would move that percentage up significantly.

Your next question comes from the line of Erika Najarian of UBS.

Just putting together the most recent question and also on Matt's question, underneath the 8% to 11% NII growth, could you give us a little bit more of a breakdown in terms of what you're expecting for asset growth, given the strength in your loan book today? And Terry, I know short-term borrowings at period end by $10 billion. And again, going back to the question I think everybody is trying to ask, remind us how much of your deposit base is corporate trust today? And of those deposits, how much are indexed? Do they re-price immediately to the changes in underlying benchmark rates? Or do you have some ability in pricing power to be able to perhaps delay some of that repricing?

Yes. So let me start with the last question and talk a little bit about the deposits and, to the extent that I don't cover everything, remind me. Deposits in the Corporate Trust business or in the Trust, Institutional Investment Services Group, which includes Corporate Trust, represent about 15% of their total interest-bearing deposits. Now in the last rate cycle, that was about 22%. So it's down relative to the overall mix. And then the vast majority of it is not indexed to any particular rate. So we do have the ability to manage that. A fair amount of the deposits within Corporate Trust are noninterest-bearing as well, which I think is helpful. That percentage is probably a little bit higher than what it was in the past. But the competitive pressure will come as money market funds start to move up, and we do have the ability to lag relative to that. But that's where some of that competitive pressure comes from.

Just a follow-up on the underlying earning asset assumption that you have underneath.

Yes. When we look at earning assets, our expectation is that the investment portfolio will be relatively flat or stable through the end of the year, and the vast majority of the growth will come on the loan portfolio side of the equation. As we look into the second quarter, our expectation is that loan growth will continue to be strong. This, as a reminder, was up on a linked quarter basis about 3.4%. And while it may not be at that level, I think it will still be up on a linked quarter basis very nicely, and we would continue to expect good solid growth in the C&I portfolio as well as credit cards will start to seasonally get stronger, etc.

And a follow-up question to Matt's question on CET1. When you closed Union Bank, I think I'm estimating your total asset size to be just shy of $690 billion. And how should we think about capital management? Do you potentially approach a $100 billion asset mark in two years? And I'm just wondering in context of the TCE hit was obviously more than the CET1 hit because AOCI doesn't run through your CET1. So I guess I'm wondering in terms of your buybacks even after you replenish to 9 as we think about crossing the 700, how that might influence your capital management and capital return potentially differently over the next two years?

Yes, Erika, I believe your estimates regarding the total size are reasonable. To give you some perspective, the rules indicate that you need to maintain an average of over $700 million over a four-quarter period. Thus, there is some time before we might qualify as a category entity. The actions I mentioned concerning the held-to-maturity composition of the investment portfolio should help alleviate that. We'll generate a significant amount of earnings in the next six or seven quarters, which should help us navigate that period. Additionally, when we finalize the acquisition of Union Bank, which has a heavy deposit mix, we expect to have a considerable amount of cash. We plan to use that to reduce borrowings and manage our financial position to stay below the $700 million or $1 billion threshold for an extended period.

Just to clarify, as you close UB, the intention for the cash is not to deploy it, but to shrink the pro forma balance sheet to be able to accommodate more client growth rather than just broad balance sheet growth from UBS?

Exactly.

Your next question comes from the line of Ken Usdin of Jefferies.

Just a question on fees to start. In your revenue guidance, do you fully contemplate the full recovery of fee waivers, which I think you've said you've been running around $70 million? How much do you have that recovering in Q2? And I assume that's also fully recovered in the full-year guide?

Yes. To answer the last piece, yes, it would be fully recovered certainly by the end of the year. Just given projections in the marketplace with respect to rates, we'll see a significant amount of that recovered in the second quarter with a residual amount in the third quarter. As a reminder, we recover about 65% of it in the first 25 basis point movement, 90% of it in the next 25 basis point movement, and all of it after the third 25 basis point movement. So most of it in the second quarter, but some amount in the third.

So about 70% of it in the second quarter timeframe.

And then also just on the mortgage business. Obviously, the reset that you had given us, the expectation for just your outlook from here given where rates have gone and the ins and outs of production and servicing?

Yes. Obviously, the mortgage banking business is going to trend along with the point in time, refinancings, the mix of business is probably 70% home sales and 30% refinancing. So on a linked quarter basis, the impact of refinancings will be less than what it has been in the past. So it will come down to home sale activity. We continue to think that that will be reasonably strong. Our investment in the retail channel will be good. I think the things that will be drivers, Ken, in the future on a linked quarter basis will really be where do gain on sale margins go, and that will be driven based upon how fast the capacity comes out of the system. But at least at this particular point in time, looking at industry metrics is a good way of thinking about how we'll perform as well.

Your next question comes from the line of Mike Mayo of Wells Fargo Securities.

Just to clarify, so you improved 2022 guidance, revenues from 3% to 4% to 5% to 6%, NII from 5% to 8% to 11%, and operating leverage from 100 basis points to 200 basis points. I just want to make sure I have my facts straight there, is that correct?

You got it, Mike.

So that improved guidance, how much of that is due simply to higher interest rates? How much of that is due to better loan growth? And how much of that is due to payments or some other activities?

Yes. I think that, again, we would expect that fee income will be relatively stable on a year-over-year basis. So when you look at what's going to be the driver, it will be net interest income. From here on out, I think it's going to be kind of a balance between loan growth and interest rates because if I had to give you a mix, and I don't necessarily have that with me, but it's probably 60% to 65% rates and 30% to 35% on the loan portfolio growth side of the equation.

Your commercial loan growth seems to be quite rapid. You mentioned there might be a one-time factor involved, but what kind of commercial loan growth do you anticipate? Is this a significant shift related to the recovery from the pandemic, driven by inventory buildup, capital expenditures, or regional differences? This could potentially be some of the most impressive commercial loan growth we see on a linked quarter basis percentage-wise compared to other major banks. It would be helpful to get a bit more insight on this.

Sure, Mike. I'll start. This is Andy, and Terry will add on. It's across all those categories I mentioned earlier, and there is no one-timer in there. So it is core growth. One of the factors is our utilization rates, as I mentioned, have been hovering around 19% for a number of quarters, and they're up nearly 23%, which is a key component, which is again takedowns to fund all those things you talked about, which is CapEx and inventory growth and other activities. It's fairly widespread. It's true within our large corporate as well as our middle market and spread geographically as well. So it is a strength across many categories. Terry, what would you add?

Yes. The other thing I would just say is that we'll start to see some seasonal benefit associated with the credit card portfolio as we get into the second and third quarter.

Your next question comes from the line of Bill Carcache of Wolfe Research.

I apologize if I missed it. But I wanted to ask if you could comment on as we think about this runoff of the Fed balance sheet and happening faster than when we exited the last reserve cycle and the risk of noninterest-bearing deposits outflowing perhaps a bit faster and perhaps impacts on deposit betas. Could you comment on that? And if you already have, I'll just go back to the transcript.

Yes, that's a good question. As we analyze the modeling and consider how this will affect both us and the industry as a whole, it appears that deposit growth will slow. However, we expect that deposit levels will still grow, albeit at a slower pace, aligning more closely with overall economic growth. Therefore, we anticipate that deposits will continue to increase, but at a reduced rate.

Understood. And then following up on your commentary, I believe, Andy, around new point-of-sale solutions that you're looking at. There seems to be a little bit of debate among some banks who appear willing to promote the use of Zelle for retail payments versus others that would prefer to wait. Can you remind us where USB stands in that debate? And how you think about the risk of a product like Zelle potentially cannibalizing some of your payments volume?

What we're focused on with Zelle is just increasing the utilization of Zelle across our customer base. I think it's a terrific product. It has a lot of use cases. We're looking at different use cases. Overall, what we're trying to do is just increase the utilization.

If I may, there’s a perspective that has emerged, especially regarding the strength seen in the merchant acquiring sector. Some Fintech investors consider Elavon a legacy player reliant on outdated technology and losing ground in merchant acquiring. However, Nielsen's recent market share statistics for U.S. merchant acquirers indicate that Elavon actually improved its ranking from eighth place in 2020 to seventh place in 2021 based on dollar volume. From your viewpoint, do you believe that the investments in talech and other digital initiatives can help you further gain market share in the acquiring space, or are they primarily focused on safeguarding your current position?

No. We do think, Bill, that can allow us to gain share. I think it's a combination of a number of things. Terry talked about the investments we made over the last three or four years. Our focus on tech-led initiatives and selling points differently than it was four or five years ago. That combination of bringing banking together with merchant processing into a comprehensive product set, we talked about talech and the dashboard. I think all those things position us well for future growth, both within the customer base that we have and also expanding and acquiring new customers.

And speakers, we don't have any questions over the phone. Please continue.

Thank you for listening to our earnings call, and please contact the Investor Relations department if you have any follow-up questions. That concludes today's call.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.