Earnings Call Transcript
US BANCORP \DE\ (USB)
Earnings Call Transcript - USB Q1 2024
Operator, Operator
Welcome to the U.S. Bancorp First Quarter 2024 Earnings Conference Call. This call will be recorded and available for replay beginning today at approximately 8:00 a.m. Central Time.
George Andersen, Senior Vice President and Director of Investor Relations
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 risk 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, CEO
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 notable items, 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 multiyear 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 a 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 pressured 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 on to 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, CFO
Thanks, Andy. On Slide 8, we provide an earnings summary. This quarter, we reported diluted earnings per share of $0.78 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 an 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 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 exceed our cost of capital and further optimize our funding mix. We continue to limit our reliance on short-term borrowings and remain disciplined on deposit rates 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 8 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 noninterest income. Noninterest 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, noninterest income, as adjusted, decreased 1.4% or $38 million, reflective of seasonal declines in payments volume; and previously discussed impacts related to exiting our ATM cash provisioning business, which pressured service charges; and lower tax credit syndication fees, which impacted other revenue. Turning to Slide 12. Reported noninterest expense for the quarter totaled $4.5 billion, which included approximately $265 million of notable items. Noninterest 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, nonperforming assets increased 20%, reflecting continued stress in our commercial real estate office portfolio and one idiosyncratic commercial loan. The ratio of nonperforming assets to loans and other real estate was 0.48% at March 31 compared with 0.40% at December 31 and 0.30% a year ago. Our first quarter charge-off ratio of 0.53% increased 4 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 31 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 31 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 in noninterest 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 noninterest expense of $16.8 billion or lower, which compares to $17.0 billion in 2023.
Andrew Cecere, CEO
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 a 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.
Operator, Operator
Your first question comes from the line of Scott Siefers with Piper Sandler.
Scott Siefers, Analyst
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 deposit costs and betas. So maybe the main 1 or 2 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, CFO
Thank you for the question, Scott. To address it, when we discussed our guidance in January, we anticipated that our net interest income for 2024 would align with the annualized fourth quarter figure, reflecting the MUB actions we had undertaken throughout the year. Currently, we are experiencing a 1% to 3% decrease compared to this new guidance. The outlook highlights the changes and dynamics within the economy, the interest rate environment, and the deposit landscape. The conversation has evolved from expecting several cuts to a higher interest rate environment. Over this period, we've noticed shifts in client behavior, particularly among corporate and mid-market clients, as they move from low-cost to higher-cost deposits, although the speed of this shift is not as rapid as we had predicted. Overall, we expect our second quarter net interest income to remain stable, with growth anticipated in the latter half of the year. We have provided a range due to the uncertainties in client behavior. Additionally, we are proactively addressing this by evaluating our expense base and implementing necessary adjustments. This outlines our guidance from a broader perspective.
Andrew Cecere, CEO
Thanks, John. And Scott, I'd just add that we continue to look for opportunities to improve efficiencies, particularly in this higher-for-longer rate environment. So we benefited from the $900 million of cost takeouts from the Union Bank transaction. We continue to focus on additional efficiencies in areas like procurement and third-party spend, our workplace management and our properties and real estate. 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 those are the actions we're taking.
Operator, Operator
Your next question comes from the line of Ebrahim Poonawala with Bank of America.
Ebrahim Poonawala, Analyst
I guess maybe just following up on NII, John, if we could drill a little bit into it. One, the securities yield went down 1 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 noninterest-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?
John Stern, CFO
Sure, I'll start with your first question about the securities yield, which was relatively flat or down 1 basis point, as you noted. This quarter was somewhat different because we implemented hedging actions that offset some of the typical asset churn. I believe this situation is more of a temporary occurrence. Looking ahead, the usual churn we see in asset repricing is still relevant. To remind you, there's about $3 million per quarter rolling off at a lower level that will be replaced. That's what we will focus on going forward, so I see this as an anomaly. Regarding deposits, we did experience a surge at the end of the quarter due to a holiday when many customers increased their balances with us. This is also temporary, as those balances fluctuated around tax season. Typically, we see seasonal variations, and this surge was higher than what we usually experience for several reasons. As mentioned previously, we expect that to return to more seasonal levels. On the noninterest-bearing deposits side, it has continued to trend down in terms of the mix of NIB versus total deposits, currently in the 17% range. Since we are in a higher-for-longer environment, it is possible that this continues to decrease based on the dynamics we observe in the marketplace.
Ebrahim Poonawala, Analyst
Got it. And I would like to understand the outlook for fee revenues. I think Andy addressed that in his prepared remarks, but could you give us an idea of the areas where you are seeing momentum in fee revenue and if there is potential for any upside surprises if we face additional negative adjustments on net interest income?
John Stern, CFO
Yes, overall, we are quite pleased with the results from the first quarter. We experienced solid account growth and are strengthening our relationships. We continue to make progress with Union and identify growth opportunities there. Consumer spending metrics and the underlying indicators remain strong, and capital markets activities are robust, supporting our outlook for single-digit growth in fees. We have particularly noted growth in the capital markets sector, with an impressive performance in fixed income activities, benefiting from numerous issuances. Although mortgage applications and production have decreased year-over-year, we are observing significantly wider spreads in our focus areas. This consistent strategy is aimed at enhancing our return on equity and overall returns. The payments business is performing well and aligning with our expectations. Everything is coming together nicely, and we are confident in our fee outlook.
Operator, Operator
Your next question comes from the line of John McDonald with Autonomous Research.
John McDonald, Analyst
We're wondering about how you are 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, kind of what are you seeing? And are you still kind of thinking about a mid-50s kind of net charge-off outlook for this year? That would be helpful.
Terrance Dolan, Vice Chair and Chief Administration Officer
Yes, John, this is Terry. Let me take that question. When we end up looking at credit, again, credit generally is pretty strong. I think that we're continuing to see in nonperforming assets that, that will continue to tick up and did tick up in the first quarter. It's primarily related to commercial real estate office space. When we think about kind of the rest of the year, 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. The thing to keep in mind with respect to commercial real estate office space is we've aggressively reserved for that. We feel like we've adequately covered the loss content that's in that portfolio. Even though NPAs are likely to tick up, we don't see that as a real impact from a P&L standpoint. From a charge-off point of view in the first quarter, that's principally driven by just credit cards. Our expectation is that, that will probably in the second quarter also come up. But then on a full year basis, 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 that charge-off rate to be pretty similar to the charge-off rate that we see in the first quarter of about 0.425%.
John McDonald, Analyst
Okay. Got it. And then for the overall company, kind of still trending to that mid-50s perhaps on the charge-offs?
Terrance Dolan, Vice Chair and Chief Administration Officer
Yes. I would say mid-50s, maybe closer to the 60 basis points. Again, I think that it's going to be a little bit lumpy because of just the 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, Analyst
Got it. Okay. Great. And then, Andy, how are you thinking about the expense flex? You mentioned offsetting the NII. I guess, within reason, you're going to flex the expenses depending on how the revenue environment plays out through the year?
Andrew Cecere, CEO
Yes, John. It’s essential to focus on efficiencies in our current environment, and that’s a priority for us. We will continue to adapt in areas where opportunities arise. We have centralized our operations and identified further chances to optimize spending. This is a company-wide initiative that we are committed to. However, I want to emphasize, John, that we are still making investments while simultaneously seeking operational efficiencies in delivering our products and services. The investments we've made have contributed to our ongoing efficiencies.
Operator, Operator
Your next question comes from the line of Betsy Graseck with Morgan Stanley.
Betsy Graseck, Analyst
Thank you very much. I have a follow-up regarding the corporate behavior and the deposit shift from NIB. I would like to know if you are observing a shift of corporate deposits from NIB to IB or primarily from NIB to MMS. Additionally, corporates typically maintain deposits in NIB as compensating balances for other services. As this shift occurs, does it indicate we might see an increase in treasury services or any other fee lines?
John Stern, CFO
Betsy, it's John. Thanks for that. In terms of client behavior, we are observing a slowdown in trends. Clients seem to be shifting their deposits more from non-interest bearing accounts to interest-bearing accounts. They are optimizing their finances and closely examining their balance sheets, particularly in this high interest rate environment, which they now expect to last longer. We're noticing this trend more frequently, but the shift is taking longer than we initially thought. When it comes to compensating balances, those decisions are made on a case-by-case basis with our clients. We consider the rates we pay on earnings credit and clients make their decisions accordingly. These are the trade-offs we currently observe.
Betsy Graseck, Analyst
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, CFO
It's possible. But again, the dynamic's pretty fluid is kind of how I would describe it.
Betsy Graseck, Analyst
Okay. And also folks are staying on your balance sheet as opposed to going off balance sheet into MMS?
John Stern, CFO
That's correct. A significant part of this involves supporting our clients and ensuring we are there for them. We believe this situation is temporary and mainly related to timing. The ongoing churn is still present, but the rate at which it stabilizes is taking longer than we expected. This is the core issue we are facing. Our goal is to be here for the long term for our clients and to support them as we navigate this rate environment.
Betsy Graseck, Analyst
Got it. Okay. That's super helpful. And then just 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?
John Stern, CFO
Certainly. From a risk management standpoint, we are currently neutral regarding asset sensitivity. We have implemented various strategies to prepare for the uncertain interest rate environment. Initially, there were predictions of seven cuts this year, but now it seems more likely to stay around zero. Our goal is to be ready for any potential rate scenarios. When considering asset sensitivity, we're positioning ourselves for a situation where interest rates might remain elevated for an extended period. Key factors to watch will be deposit betas and rates we offer. Although those may increase, we will also experience turnover in both our loan and investment portfolios. Over time, these factors will balance out in our favor, but the timing of these shifts will be crucial.
Andrew Cecere, CEO
Betsy, as John mentioned, this is Andy. We have tried to minimize the range of volatility considering the uncertainty in the outlook. Therefore, we are quite neutral given all the factors John discussed.
Operator, Operator
Your next question comes from the line of Ken Usdin of Jefferies.
Kenneth Usdin, Analyst
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 merchant 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?
John Stern, CFO
Sure, I appreciate that. Let me address your questions in order. On the merchant side, we were around 4% in terms of fees. This quarter, we noticed a slight decline in travel, but the other key metrics showed strong growth. Our tech-driven initiatives continue to perform well, with high single-digit growth across almost all other categories in that area. We believe the dip in travel is temporary, and we remain optimistic about sustaining high single-digit growth there. Regarding the corporate payment segment, while it was down year-over-year, we're adjusting for the freight impact experienced over the last year, and we expect that to improve. We anticipate momentum continuing as the fundamentals of business spending remain strong. Therefore, we feel positive about achieving high single-digit growth. Additionally, on the card side, we've seen robust fee growth, healthy spreads, and favorable payment spending trends, which support our outlook. Overall, we are confident in the underlying trends from a payments perspective.
Kenneth Usdin, Analyst
Okay. Got it. And then just in terms of some of the other lines, corporate services and mortgage did a lot better. I think you mentioned DCM and corporate and better gain on sale. Just wondering, are those both sustainable? Or was there any pull-forward on both of those areas this quarter?
John Stern, CFO
I believe there's some underlying strength that showed a bit of positivity in the first quarter. The gain on sale in our markets is genuine. Despite the market being slower in terms of applications and production, it's still down nearly 20% year-over-year. There's a lot to consider; volumes are lower, but spreads are wider, and we expect this trend to continue moving forward.
Kenneth Usdin, Analyst
Okay. Great. And one last thing regarding the ATM business. It appears that service charges remained unchanged. Can you provide an update on that? I understand it's neutral net profit, not a net profit.
John Stern, CFO
Yes. There was some of that in this quarter, and so they'll kind of fully run off here in the second quarter.
Operator, Operator
Your next question comes from the line of Mike Mayo with Wells Fargo.
Michael Mayo, Analyst
Another one on net interest income. Andy used the word temporary in your opening remarks when talking about either the decline or the worst guide. I didn't know what you meant by temporary.
Andrew Cecere, CEO
So what we're saying, Mike, is that this pressure that, as John described, we believe is going to dissipate. It's just dissipating slower than we thought. We expect a relatively stable NII into the second quarter and then growth in the back half of '24. So that's what I meant by temporary.
Michael Mayo, Analyst
Do you have any expectations for 2025 and where the floor is for noninterest-bearing deposits? Or any other color?
Andrew Cecere, CEO
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 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.
Michael Mayo, Analyst
And I know I've asked this before, but it still applies, I think. So the big picture here is you got $900 million of savings from the Union Bank acquisition. That's good for the expenses. The revenues you highlighted in your slide, business banking is up 1/3 over 3 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. Then we look at the efficiency ratio for this quarter and the core number is 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 BAAB conference, but it's just like when do you get under 60%? I get the NII effect that distorts things, but you do have some peers that are under 60% now. How should we think about efficiency at U.S. Bancorp?
Andrew Cecere, CEO
Yes, Mike, that's why we're pulling these expense levers and looking at continuing to create efficiency. 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 continue to operate efficiently and look for expense levers to get that efficiency ratio downward, and that's an objective of ours.
Operator, Operator
Your next question comes from the line of John Pancari with Evercore.
John Pancari, Analyst
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 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 dynamics impacting you on the loan front?
John Stern, CFO
Thank you, John. To address your second question first, the focus is more on the deposit mix and the rates paid rather than the loan side. While loan demand has softened, we are observing positive momentum in the commercial segment with good growth at period-end and healthy spreads. The asset churn is favorable as well. The main concern remains with the deposit mix, particularly on the commercial side, which seems to be more of a rotational issue. The rates in the commercial sector have remained stable, whereas, on the retail side, rates fluctuate based on geography and market conditions. We are competitive in retail and are committed to maintaining our growth, which includes an increase in consumer deposits, as previously mentioned. Regarding your first question about the deposit surge, we experienced inflows of approximately $15 billion to $20 billion. This uptick often occurs at the end of the quarter as customers prepare for outflows related to month-end and tax-related payments. We’ve noticed a pattern where deposits surge at the end of the quarter, holding steady through tax season before gradually declining. This surge is more pronounced than what we typically experience.
John Pancari, Analyst
Okay. And then separately, on the expense efforts where you're taking a closer look, and you mentioned some of the areas, are those measures that you've taken 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, CEO
So John, they're reflected in the efforts. That's why we brought it down to $200 million. In the note, you'll see that's $16.8 billion at least. We could pull additional levers as we continue to focus on this, but it is reflected in the guidance.
Operator, Operator
Your next question comes from the line of Vivek Juneja with JPMorgan.
Vivek Juneja, Analyst
Just want to probe, Andy, a comment that you expect net interest income to go up in the second half of '24. Could you talk a little bit about what you see as the drivers of that?
Andrew Cecere, CEO
I'm going to let John start, and I'll add on.
John Stern, CFO
Yes. The primary factor is the deposit side of things. We're noticing that the migration and rotation are slowing down, and it's taking some time. Eventually, as this progresses, it will stabilize. Additionally, you'll see ongoing asset churn in both loans and the investment portfolio. We've also taken significant steps to improve our return on equity, exploring capital-efficient growth opportunities. These underlying themes persist, and we see favorable loan spreads. These factors contribute to our optimistic outlook on the interest income that Andy mentioned.
Andrew Cecere, CEO
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, Analyst
Could you explain the hedge you implemented this quarter, which you described as an anomaly? Will it have any ongoing impact? Was it primarily for capital protection, or was there another reason?
John Stern, CFO
Sure. It was mainly aimed at maintaining our asset sensitivity in a neutral position. We took those actions as a one-time measure. That's why I refer to it as a temporary step for this quarter. Moving forward, the key factor in our investment portfolio is the $3 billion rolling off at lower yields, which will now be replaced with current higher interest rates.
Operator, Operator
Your next question comes from the line of Gerard Cassidy with RBC Capital Markets.
Gerard Cassidy, Analyst
John and Andy, could you provide an update on your CET1 ratio, which has recently improved to 10%? With the Basel III endgame approaching, it seems that unrealized securities losses for category 2 and 3 banks will affect regulatory capital, contrary to the current situation. Considering this context, what are your goals for the CET1 ratio? Historically, you've returned 75% to 80% of your annual earnings through dividends and buybacks. When do you anticipate returning to that level of distribution?
John Stern, CFO
Sure, Gerard. I'll start. First of all, I'll provide an update on the unrealized loss. On a positive note, some of the hedging activities we've discussed previously have been beneficial because, despite rates increasing by 30 to 40 basis points during the quarter, our accumulated other comprehensive income (AOCI) remained relatively stable. The current impact on AOCI from the investment portfolio in our pension is around 220 basis points compared to the 10.0% we have for common equity Tier 1. You're correct about the Basel III endgame and similar factors. Both this and our CCAR results are two crucial milestones we need to consider before we make any significant statements regarding our capital ratios moving forward. In the meantime, we will keep building our capital levels while prioritizing our returns. Clearly, maintaining our dividend is a major concern, and we also want to invest in the company. At this time, we are pausing share repurchases to focus on capital growth. Eventually, we will return to a normalized approach similar to what we had before.
Gerard Cassidy, Analyst
Very good. Returning to the topic of Union Bank, I assume it is now fully integrated, which has been your focus since the acquisition. Can you share your thoughts on de novo expansion? You have expanded in the Charlotte area. Is there more to come now that the acquisition is completed? What are your thoughts looking ahead over the next 12 to 24 months?
Andrew Cecere, CEO
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 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. 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. 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, Analyst
And Andy, just a quick follow-up on the deepening of 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, 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, CEO
It's significantly higher. The more relationships, the higher the return, the more revenue, certainly. If they have a loan only versus a loan plus deposit, plus treasury management, plus commercial products, plus payments, it all adds up.
Operator, Operator
Your next question comes from the line of Matt O'Connor with Deutsche Bank.
Matthew O'Connor, Analyst
There's obviously a lot of puts and takes 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. I’m 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. What do you think about NIM kind of medium term versus where you are right now?
John Stern, CFO
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 on deposit costs and the liquidity mix, things of that variety can also drive it as well. 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.
Matthew O'Connor, Analyst
Are there any considerations regarding the securities book, particularly in relation to cash flow, and are there any swaps we should be aware of that might impact us over the next couple of years?
John Stern, CFO
I'm sorry, Matt, I didn't...
Andrew Cecere, CEO
Swaps. So again, go ahead.
John Stern, CFO
Our hedging activities remain robust, with no fundamental changes. We are focused on pay-fixed swaps to hedge the investment portfolio. While we adjusted some, which had an impact, it is temporary. We still have over one-third of our risk hedged on the securities book. Additionally, we have been incorporating receive-fixed swaps, both spot and forward-starting, based on the circumstances. As interest rates have risen and the curve has flattened, it's a great opportunity for us to add protection against potential downturns. Overall, this contributes to our net neutral interest rate risk position.
Operator, Operator
Your next question comes from the line of Saul Martinez with HSBC.
Saul Martinez, Analyst
Your guidance does assume a modest reacceleration of net interest income in the second half. The midpoint for second half net interest income is expected to be 2% higher than the first half. Can you provide more specifics about the assumptions regarding the through-the-cycle deposit beta? Also, John, you mentioned that noninterest-bearing deposits could continue to decline from 17%. What’s your best estimate for how much more deposit migration we might see, and where could that ultimately land? Additionally, what is reflected in the guidance for those metrics?
John Stern, CFO
Sure, Saul. It's John. So on the beta side specifically, that has continued to slow. I think we're only up 1 or 2 points here this quarter and was 3 the prior quarter. So it clearly has slowed. 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, if you're higher for longer, it may creep up 1 point here or 2, but we feel like the low 50s is probably the right place for it, for that to be as we look forward.
Saul Martinez, Analyst
Okay. And in terms of noninterest-bearing, the total liability or total deposits, where does...
John Stern, CFO
I believe that, as I previously mentioned regarding the noninterest-bearing deposits, we are currently around 17%. Customers are becoming more efficient, and it's possible that this could decrease by a few points as we remain in this prolonged higher interest rate environment.
Saul Martinez, Analyst
Okay. Great. I have a follow-up question regarding the surge in deposits that you mentioned earlier. I apologize if I overlooked this, but was the $15 billion to $20 billion increase a typical surge in noninterest-bearing deposits? What I'm really trying to understand is what portion of this surge was above the usual amount for this quarter. I'm looking to establish a baseline for forecasting noninterest-bearing deposits in the future.
John Stern, CFO
Sure. 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 quarter.
Operator, Operator
Your next question comes from Mike Mayo with Wells Fargo.
Michael Mayo, Analyst
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, CFO
Yes, it's John. To answer your question, we are neutral regarding shocks to interest rates. What we’re trying to explain is the behavioral side of it, which can be somewhat difficult to gauge at any given moment. The pace of rotation is slowing down, but not as much as we had expected. Even with rate fluctuations, we feel confident from a neutral perspective. It’s really the behavioral aspect we have been discussing.
Michael Mayo, Analyst
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 reprice? Do you have like one grand number for that?
John Stern, CFO
I would say that approximately half of our loan portfolio consists of fixed-rate components, while the other half is made up of floating-rate components, and we are observing widening spreads. This suggests that some of the floating-rate components may improve over time. We're experiencing solid growth in credit card payments, along with some shifts in the mix. Commercial loans are increasing and coming in at wider spreads. This is my overall perspective on the situation.
Michael Mayo, Analyst
Loan spreads have changed significantly. For a period, it seemed like we were entering a recession without widening loan spreads. Now, with the absence of a recession and tight spreads in the capital markets, loan spreads are widening. This change raises questions about why loan spreads are increasing at this time, which could be seen as a positive development.
John Stern, CFO
Yes. So I think it's just different markets. 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. But I think that has taken away volume to a certain extent. In other areas where access to capital markets isn't as pronounced, I would say there has been a decent opportunity for spreads there.
Operator, Operator
Your next question comes from the line of Ebrahim Poonawala with Bank of America.
Ebrahim Poonawala, Analyst
John, I just want to clarify something. You mentioned the surge in deposits and that you expect about $15 billion to go out. Is all of that coming from noninterest-bearing accounts? So, does the $91 billion figure drop into the mid-70s as we consider the second quarter?
John Stern, CFO
Some of this is temporary. The surge can come from both the money market and noninterest-bearing accounts. It may cause a short-term increase in noninterest-bearing accounts, but it won't significantly impact the quarter. The surge we've discussed can be a result of both factors.
Ebrahim Poonawala, Analyst
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, CFO
Yes. I would expect, as we said, the rotation is continuing. I wouldn't expect growth necessarily in DDA, but deposits overall, we do expect it to basically be stable.
Ebrahim Poonawala, Analyst
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 3 months from now. 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?
John Stern, CFO
Yes, Ebrahim, I don't look at it 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.
Operator, Operator
There are no further questions at this time. Mr. Andersen, I turn the call back over to you.
George Andersen, Senior Vice President and Director of Investor Relations
Thank you for listening to our earnings call. Please contact the Investor Relations department if you have any follow-up questions.
Operator, Operator
Thank you. This concludes today's conference call. You may now disconnect.