Ebrahim Poonawala: I just want to follow up one on credit. So you talked about consumer. Looking at the CRE slide, just if you don’t mind talking €“ sharing your perspective around the CRE book, if you’re beginning to see any softening either in certain markets, maybe California or within the office CRE book, which is about 10% of loans.
Terry Dolan: Yeah. I mean, maybe at a high level, certainly from a CRE perspective, valuations, I think, are moderating to some extent. The areas that we have had probably the greatest focus on if you will, is really office space. And that is really probably as much tied to return-to-office sort of behaviors or patterns. And I think that, that is probably a longer-term sort of structural adjustment that’s going to end up happening. We’re just going to have to watch it over time. But when we just kind of look at the core CRE portfolio, it continues to perform pretty well from a credit perspective at this particular point.
Ebrahim Poonawala: Got it. And I guess, just one separate question around payments. When you think about in your slide, you mentioned about some of the tech investments and partnerships. Just give us a sense of €“ remind us around competitive positioning for USB, how you’re thinking about just market share outlook and from this partnership standpoint, like areas of like secular growth that you see in this business?
Andy Cecere: Yeah. As you mentioned, we’ve made a lot of investments in tech-led activity, and our tech-led investments have led to that being the principal area of growth for the merchant processing categories. And then on the card side, the partnership’s component continues to be an important strength for us and a point of growth as we look forward. So those two areas, tech-led on merchant and partnerships on card, are doing well and it’s partly due to the investments we’ve made over the past few years.
Ebrahim Poonawala: And is the strategy there to just build this in-house, or do you see more kind of bolt-on acquisitions within that business?
Andy Cecere: Many of the investments we made are internal investments that we’ve developed our capabilities and our platforms to allow for different activities and allow for integration with some of the software that the company has used to run their business. We’ve added as well, as you know, miscellaneous M&A acquisitions that — you said bolt-ons like Atellic or Bento that add capabilities around the edges. And I think we’ll continue to do a little of both as we look forward.
Ebrahim Poonawala: Good. Thank you.
Andy Cecere: Sure.
Operator: And we can go to Gerard Cassidy with RBC. Please go ahead.
Terry Dolan: Morning Gerard.
Andy Cecere: Morning Gerard.
Gerard Cassidy: Hi Andy, hi Terry, congratulations on closing the deal. Question for you, Terry, on the balance sheet optimization where you guys decided to sell off certain loans that were acquired. Can you give us some color on types of credits were in those sales? And why would they chose — I know they didn’t meet your credit profile, but what was the driver of that — I mean some of the details of the credit profiles?
Terry Dolan: Yes. Maybe as a starting point, when we thought about the balance sheet optimization, the things that we were thinking about is really repositioning the balance sheet to position ourselves for growth going forward to be able to optimize or improve profitability and looking at profit margins across various portfolios and returns and then the risk profile. So, maybe from a risk profile perspective, we ended up looking at Union Bank portfolios that we end up acquiring, and there were a couple of different areas that we focused on. One is that they had acquired a number of loans related — or through a lending club channel, if you will. And that was something that we had planned to run off over time originally when we looked at the deal.
And we made a decision that when we looked at the kind of the credit risk profile, how it’s originated, et cetera, that we thought that taking care of that upfront made a lot of sense. The other area that we ended up selling was some commercial real estate in their particular portfolios in order to be able to kind of bring that concentration down a bit. And then the other areas of optimization was more on the U.S. Bank side. We ended up looking at lower-margin indirect auto loan portfolio. We securitized about $4 billion associated with that particular portfolio. And then the other things that we ended up looking at in the C&I book of business and across kind of our corporate space is just relationships that maybe had lower returns associated with it, where we could optimize that.
And so we allowed some of that to run off, so to speak, during the quarter. And those were the primary areas of focus with respect to the balance sheet optimization. Last thing I would maybe say on the investment portfolio side is that we ended up selling about $15 billion of securities, the vast majority of that coming from Union Bank. And that was really to kind of — think about it from an interest rate risk perspective, HTM perspective, et cetera. But that was the other area where we did some balance sheet optimization.
Gerard Cassidy: Terry, where there — in the corporate loans, were there any shared relationships, meaning you had an exposure to XYZ company as the Union Bank and the total was maybe too much and you guys decided to take that down as well?
Terry Dolan: Yes. Exactly. So, maybe from a risk perspective, looking at hold levels or concentrations with respect to specific customers, yes, that was a part of the strategy.
Gerard Cassidy: Very good. And then just as a follow-up, you guys obviously gave us very good detail on your slides. And on the credit quality, slide 14, you give us the breakout in the net charge-offs, and you show us the reported number at 64 bps versus your core legacy number of 23 basis points. If I pull out the $189 million from the optimization, it looks like the net charge-off ratio is around 43 basis points, including the Union Bank numbers. Is that the level we should gear ourselves to for 2023 now that Union will be fully implemented into your business?
Terry Dolan: Yeah. Let me clarify. So it’s 64 basis points on a reported basis, 23 basis points on a core basis. And there’s two components to that core; the balance sheet securitization that I talked about that you articulated. But then under CECL, what you end up having to do is you have to recapture loans that they have charged off you have to make an assessment. And then if you believe that, that charge-off was appropriate, you have to charge that off on day one, so to speak. And there was about $173 million of charge-offs related to those — to that kind of day one effect associated with CECL. So there’s really kind of three components. But 64% on a reported basis, 23% on a core basis. And when we think about going forward, I would use the 23 basis points as the start point, and that’s about $210 million worth of core charge-offs.
Gerard Cassidy: Thank you for clearing that up. I appreciate it.
Terry Dolan: Yeah.
Operator: And next, we can go to Betsy Graseck with Morgan Stanley. Please go ahead.
Betsy Graseck: Hi, good morning.
Terry Dolan: Hi, Betsy.
