U.S. Bancorp

Welcome to U.S. Bank Corp's fourth quarter 2018 earnings conference call. Following a review by Andy Cesari, chairman, president, and chief executive officer, and Terry Dwellen, U.S. Bank Corp's vice chairman and chief financial officer, there will be a formal question and answer session. If you'd like to ask a question, please press star one on your touch-tone phone and press the pound key to withdraw. This call will be recorded and available for replay beginning today at approximately noon Eastern Standard Time through Wednesday, 23rd at 12 midnight Eastern Standard Time. I now turn to conference call of Jen Thompson of Investor Relations of U.S. Bank Corp.

Thank you Kirk and good morning to everyone who's joined our call. Andy Cesari and Terry Dwellen are here with me today to review U.S. Bank Corp's fourth quarter results and to answer your questions. Andy and Terry will be referencing the slide presentation during their prepared remarks. A copy of the slide 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 two 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 and good morning everyone and thank you for joining our call. Following our prepared remarks, Terry and I will open the call up to Q&A. I'll begin on slide three which provides financial highlights for the fourth quarter. We reported earnings per share of $1.10 which includes three petties per share of notable items which Terry will discuss in more detail in a few moments. Excluding these notable items, we reported earnings per share of $1.07 for the quarter. Loan growth accelerated in the fourth quarter driven by strength across our consumer and commercial loan portfolios. The income improvement was supported by growth in new customer accounts and expanding client relationships. Strong payments revenue growth reflected higher sales volume across the board in retail card, corporate payments and merchant acquiring. We also saw good business growth in trusted investment management which offset the impact of unfavorable market conditions. In summary, loan growth and derevenue trends remain healthy. As expected, we delivered positive operating leverage on a core basis in both the fourth quarter and for the full year 2018. Credit quality was stable and our book value increased by .3% from a year ago. During the quarter, we returned 80% of our earnings to shareholders through dividends and share buybacks. Slide four provides key performance metrics. We delivered a .2% return on tangible common equity in the fourth quarter. We also saw a year over year improvement in our efficiency ratio, return on average assets and a return on average common equity. Now let me turn the call over to Terry who will provide more detail on the quarter as well as forward looking guidance.

Thanks, Andy and good morning. If you turn to slide five, I'll start with the balance sheet review and follow up with the discussion of fourth quarter earnings trends. Average loans grew .5% on the linked quarter basis and increased .6% year over year excluding the impact of the fourth quarter of 2018, failed the majority of our FDIC covered loans that had reached the end of the lost coverage period. On the consumer side, we saw continuous strength in residential mortgage, credit card and retail leasing. Credit card loan growth was supported by expansion in both the number of active accounts and sales per active accounts as well as seasonal sales activity. Digital acquisition of customer accounts across platforms continues to be robust. As expected, commercial loan growth accelerated and pipelines are strong. Fourth quarter growth was supported by strong M&A financing activity in our corporate banking business line. Paydowns continued to be a headwind to balance growth, however, the pace of the paydowns continues to moderate. Commercial real estate loans increased on a linked quarter basis although they declined on a -over-year basis, reflecting the previously discussed growth of the third and fourth quarter, which helped average balance comparisons. Also, during the last several months, the competitive environment has shifted a bit, providing more lending opportunities that meet our disciplined underwriting criteria. Turning to slide six, deposits increased .3% on a linked quarter basis. As expected, deposits declined on a -over-year basis, reflecting the previously discussed balance migration related to the business merger of a large financial client. This migration impact on deposits continues to moderate. Slide seven indicates that credit quality was relatively stable in the fourth quarter. Notably, our non-performing assets declined .5% compared with the third quarter and decreased .6% compared to the fourth quarter of 2017. Turning to slide eight, you will see highlights of fourth quarter earnings results. We reported earnings per share of $1.10, which included several notable items amounting to three cents per share. Slide nine lists the notable items that affected earnings for the fourth quarter of 2018. Fourth quarter 2018 notable items included a gain from the sale of our ATM servicing business and the sale of a majority of the company's covered loans, as well as charges related to severance, asset impairments, and an accrual for certain illegal matters. The company also had a favorable impact to deferred tax assets and liabilities related to changes in estimates from tax reform. As a reminder, we recognized several notable items during the fourth quarter of 2017, including $825 million of expenses related to settlement of regulatory matters, a special employee bonus, and a contribution to the company's charitable foundation. Along with the tax impact of revalue and deferred tax assets and liabilities related to the enactment of the tax reform bill, the net impact of notable items in 2017 was nine cents per common share. My remarks throughout the remainder of this call will be referencing results excluding notable items incurred in the fourth quarter of 2018 and 2017. On slide 10, linked quarter and year over year net interest income growth was supported by higher interest rates and earning assets growth, which was partially offset by higher deposit costs and a shift in funding necks. In the fourth quarter, the net interest margin was 3.15%, flat with third quarter of 2018, but up four basis points compared with a year ago. Slide 11 highlights trends in non-interest income. On a year over year basis, we saw strong growth in payments revenue and trust and investment management revenue, partly offset by a decrease in mortgage banking revenue and treasury management fees. Lower ATM processing servicing fees reflected the sale of the company's ATM servicing business in the fourth quarter of 2018. In 2019, ATM processing servicing revenues will decline by approximately $150 million and the pre-tax income will decline by approximately $70 million as we continue to provide operational services during a transitional conversion period. Lower mortgage banking revenue reflected the continued but moderating decline in the industry refinancing activity. Mortgage gain on sale margin was relatively stable in the fourth quarter compared to the third quarter. The decline in treasury management fees reflects the impact of changes in earnings credits, which is typical in a rising rate environment. The beneficial revenue impact of compensating balances reflected in net interest income more than offset the decline in treasury management revenue. Turning to our payments business, we had double digit growth in credit and debit card revenue and corporate payment products revenue, each supported by higher sales volumes. During the fourth quarter, the federal government completed its renegotiation of certain payment services. While we expanded our market share of future government spend, the business margins will compress in the next few quarters. Additionally, we expect commercial spending volume growth to moderate in 2019. As such, we expect mid single digit growth in corporate payments products revenue next year. Strong merchant acquiring sales volume growth drove mid single digit revenue growth in the fourth quarter in line with our expectations. Trust and investment management fee growth was primarily driven by business growth offset by unfavorable market conditions late in the quarter. Turning to slide 12, the year over year increase in non-interest expense reflected higher compensation expense primarily due to the impact of hiring to support business growth and compliance programs and a higher variable compensation related to business production. This was partially offset by lower costs related to tax advantage projects and lower FDIC assessment costs. Slide 13 highlights our capital position. At December 31, our common equity tier one capital ratio estimated using the Basel III standardized approach was 9.1%. This compares to our target of 8.5%. I'll now provide some forward looking guidance. For the first quarter, we expect fully taxable equivalent net interest income to increase in the low single digits on a year over year basis. Net interest income is typically lower in the first quarter of each year due to the impact of day accounts and that will be the case again this year. Additionally, in the first quarter of year over year net interest income growth will be negatively impacted by the sale of the acquired loan portfolio and sale curve. We expect fee revenue to increase in the low single digits year over year including the negative impact of the sale of the ATM business. We expect to deliver positive operating leverage on a core basis for the full year of 2019 in line with our previous guidance. During the fourth quarter of 2018, the provision for income taxes resulted in a taxable equivalent tax rate of .6% or .1% excluding the notable item from changes in estimates related to deferred tax assets and liabilities. In the quarter and for the full year of 2019, we expect our taxable equivalent tax rate to be in the range of 20 to 21%. We expect first quarter credit quality to remain relatively stable compared to the fourth quarter. I'll hand it back to Andy

for closing remarks. Thanks, Terry. As expected, our financial performance gained momentum in the second half of 2018. Loan growth accelerated and our fee businesses benefited from new strong sales activity and expansion of existing customer relationships. The economy is strong and resilient and the credit environment continues to be stable. However, we are mindful and we manage this company for the long term and we are mindful of the cyclical nature of the banking business. Discipline credit underwriting is the hallmark of this company and one that has differentiated our credit performance over the entire business cycle. We continue to be very focused on generating high quality credit asset growth. In the fourth quarter, the OCC terminated its 2015 consent order following several years of significant investment to improve our anti-money laundering and bank secrecy app programs and controls. The exit will give us more flexibility to optimize our existing branch network and to selectively expand into new markets with a digitally led branch-wide strategy. While technology and innovation investments such as digital, data analytics, and real-time payment capabilities remains a priority for us, we will continue to manage expenses for whatever revenue environment we are operating in. We expect to deliver positive operating leverage on a core basis in the range of 100 to 150 basis points for the full year 2019. In closing, I'm pleased with the results we reported this morning and I'm confident that we will continue to build on the momentum we are seeing across our businesses. I'd like to thank all our employees for their hard work throughout the year and for their commitment to serving our customers with the expertise and integrity they have come to expect from us. That concludes our formal remarks. We'll now open up the call for Q&A.

At this time, I'd like to remind everyone in order to ask a question, please press star then the number one on your telephone keypad. And the first question comes from Ken Yuske from Jeffreys. Your line is open.

Thanks. Good morning, guys. Can I ask you to elaborate a little bit more on your outlook for just the loan side, understanding the excluding the covered loan sale? We had a pretty good clip. How would you just walk us through just what you're seeing out there in the crowd? You talked about the improving on the commercial side and reasonable pipelines, but just the nature of the loan growth that you're seeing in those pipelines, do you expect it to be able to improve from here or do you expect that this is about, you know, again, the same type of growth that we've seen for a bit?

Yeah, Ken, this is Terry. So you know, I would say that, you know, when we look at the economy, GDP continues to be strong, unemployment is low, consumer confidence continues to be strong, and we see that in the consumer spend numbers that we have in our payments business. On the commercial C&I side, you know, the pipelines at the end of the year are continued to be pretty strong. Fourth quarter activity was driven to some extent by M&A activities, but we see that continuing into the first quarter. You know, again, customer spending was generally pretty strong. You know, the other thing that I would say is that if you end up looking at kind of the mix of business, we saw pretty good growth across all the different categories. The one thing that I would point out is that, you know, commercial real estate was actually up this quarter. That was principally due to the timing of some third quarter deals moving into the fourth quarter and some acceleration, I think, from first to fourth. If you look at ending loan balances within commercial real estate, it's actually down a little bit. And when we think about the first quarter, we would expect commercial real estate to be flat to down, similar to what it's been in the past. So generally pretty optimistic with respect to what our outlook of loan growth is. Andy?

I agree. And you know, the only thing I'd add to what Terry said is the first quarter season was typically a little lower just in terms of activity. But you know, we've seen strength throughout the year. We were at .3, .9, 1.5 the last three quarters. And I think that's reflective of what we're seeing from a pipeline and from an economic standpoint.

Got it. And then just on the flip side, just loans have been growing faster than deposits. You still had pretty good underlying deposit growth. Is that a dynamic that we should continue to expect where the loan growth would likely be still ahead of the deposit growth?

Yeah, you know, with respect to deposit growth, just kind of breaking it down a little bit, we saw we continue to see good deposit growth with respect to our consumer or retail business. In fourth quarter, our wholesale deposits were up on a link quarter basis, which is good. You know, at this particular point in the cycle, if we do see loan growth, you know, the way that we saw it in the fourth quarter, it would outpace probably deposit growth a little bit.

OK. All right. Understood. I'll leave it at that.

Thanks,

Ken. Your next question comes from Lionel John McDonald from Bernstein. Your line is open.

Hi, good morning. Good morning. I wanted to talk a little bit about the plans for positive operating leverage. You're planning for an increase to the one to one and a half range in 2019. And this quarter, it looks like you came in even above that range or so, 180 basis points or so after adjustments. So just wondering, you know, how you think about the puts and takes to delivering on that positive operating leverage for this year? What should we keep in mind? And what could push you to the high end of that one to one and a half range?

Yeah. Well, definitely, you know, our focus is on positive operating leverage. The fourth quarter always tends to be stronger because of, and this year particularly because tax credit amortization on year over year basis was lower. And that is really tied to the enactment of the tax reform bill. You know, the amount of deliverables of deal closings with respect to tax credits just needed to be less. And that favorably impacted this year in the fourth quarter. You know, as we certainly think about going into next year, you know, I think there's just a number of different, you know, things that are moving in the right direction. You know, the mortgage related costs continue to come down. You know, I think that we if you're in November, we had kind of a reorganization redesign where we looked at management spans and layers and just a number of levers like that that, you know, we are using to kind of set us up for success next year. Andy?

You know, what I'd add, John, is we're going to continue to invest in all the initiatives we talked about, the digital, the payments, the data analytics and so forth. So that'll be a continued investment. At the same time, I think exiting the consent order gives us more flexibility in our physical asset optimization. So I think you're going to see us being more proactive in terms of optimizing our branch network, which will offer us expense opportunities. So those are the big two big puts and takes from the perspective of the high level.

Okay. And just I guess as broad comparison, how should we think about expense growth in 19 relative to what we saw in 2018, you know, particularly with the FDIC surcharge rolling off as a bit of a tailwind?

Yeah, you know, I think that it's probably going to be in line with the expense growth that we saw kind of on a full year basis with probably, you know, a small amount of improvement from there.

Okay. Just expenses in 2019 versus 18. Yeah, on a

core basis.

Okay. Got it. Thank you.

Thanks, John. Your next question comes from Ericka Nigerian from Bank of America.

Yes, good morning. Thank you for taking my question. I wanted to ask a little bit more about the funding mix dynamics. I think the market is starting to assume that the Fed will be on a long pause after the December rate hike. And I'm wondering how we should think about, you know, whether or not the mix shift will continue and how many quarters until after the Fed stops raising rates do you typically see, you know, a drop off in deposit repricing?

Yeah. So I guess if you're looking at rate hikes, you know, the yield curve kind of where it is, you know, I would expect, you know, that the real driver with respect to deposit mix and pricing associated with that is going to be both competition in the market and that competition is going to be based upon what sort of long growth we see. So I think you end up having to kind of look at both sides of the balance sheet to kind of figure out what sort of dynamics you're going to have with respect to deposit flows. You know, once the Fed stops moving rates, I think you start to see stabilization with respect to deposit betas for the most part with the exception of, you know, the penny pressure you have from a competitive standpoint to fund loans. And then, you know, kind of coming back to your question, if rates start to move down, you know, we typically move deposit rates fairly quickly because the betas associated with things like corporate trust and wholesale are, you know, tend to be higher.

Got it. And just to confirm, a very strong message on the positive operating leverage for full year 2019. If the revenue environment is a little bit short of expectation, we should still expect 100 to 150 basis points of operating leverage is how we should think about it.

Yes, Erica, we're going to manage the company reflective and incorporating the revenue environment. So,

yes. Got it. That's clear. Thank you.

Your next question comes from a line of John Pancari from Evercore. Your line is open.

Morning. Hey, John. Morning, John. You mentioned in your commentary around loan growth that you're seeing you saw some shift in the competitive environment and became a bit more accommodative to produce. Is that mainly on the real estate side, on the commercial real estate side, where you saw that? Are you seeing that a little bit on the broader commercial?

Yeah, no, I would say that we saw that on the commercial real estate side. You know, earlier in the year, there was a lot of competition on what I would say a lot of structures that we just wouldn't do. I think as we are getting later in the cycle, the yield curve has shifted down. You know, the competition has pulled back from commercial real estate. And so the structures that we have seen most recently are things that we feel pretty comfortable about. And that's why there was a little bit of a shift. I would say, though, that when you end up looking at areas like auto lending, mortgage lending, you know, price competition continues to be very, very strong. In fact, you know, we in auto lending, you'll notice that growth has slowed there a little bit. And that's because we haven't chased yields down. We've been willing to give up some volume in order to maintain profitability. So it's probably more so on the commercial real estate side than anywhere else.

Got it. Okay. All right. And then on the corporate payments side, I know you indicated -single-digit growth for the -year-19. How has that changed from your previous expectations? How has that been projecting? And then also, how would you view that growth versus what you expect for the broader industry? Are you still in a position of regaining market share there? And should it exceed the industry levels? Thanks.

Yeah. So a couple of different things. I think government spend will change a little bit. In terms of the renegotiation of the contract, we actually captured more market share. So on a long-term basis, we feel good that our spend is going to grow. But because of the margin compression really over the next several quarters, it'll take a while to kind of laugh that. That's a big driver. And then the commercial spend on the business side has been particularly strong this year. Certainly double digits, I want to say close to 12% in the fourth quarter. We would expect to see that kind of moderate in 2019. So there's a couple of different factors that are really driving that as we think about commercial profit revenue.

But it is a function of more of a moderation of the corporate spend as well as the renegotiation. In both cases, we expect continued market share growth. So it's not a market share issue at all. It's both on the corporate side, it's more of an environment issue. And the government side is more of the renegotiation and really taking market share.

Okay, got it.

Thank you. Your next question comes from a line of Betsy Krasik from Morgan Stanley. Your line is open.

Hey, thanks so much. Good morning. Andy, I wanted to just understand a little bit more about your comments around optimizing the branch strategy. Maybe you could give us some color on what your thoughts and plans are there and when you mentioned selectively expand. Is this organic or not or is it inorganic? And give us some color on what hits your bar.

Right. Betsy, one of the most impactful components of the consent order was our inability to open new branches, which also put a little bit in terms of constraints on us in terms of closing branches because we couldn't optimize the structure and the footprint. So, if you think about the last few years, we've been closing in the neighborhood of one to two percent of our branches. I would expect that to accelerate, to really optimize the footprint. Think about where we have branches close to each other given the transaction exodus that's occurring in the branches, while at the same time looking at selective markets where we are not in. So that could be either in our footprint in better locations and or some out of footprint where we have a large customer base, which we would go in with a very digitally focused branch-like strategy. So it just allows us a lot more flexibility and I think that one to two percent net closures will become a higher number, which would allow for more savings on a go-forward basis.

And the digital focus and it's in either adjacent or a little bit separated geographies. To get the deposit growth that you're looking for from those markets, is this going to be rate-led as well? Will you be leaning into higher yielding products or is it going to be in line with the kind of pricing that you have in your branched areas?

I would expect it to be in line and as we talked about in previous calls, Betsy, the focus would be to leverage current customers who already have either a home mortgage, an credit card that's US Bank in their wallet, but don't have a full banking relationship and trying to leverage those relationships in a more full expansion standpoint with the current similar deposit rates that we're currently offering. These

are customers that know us and like us with respect to those products. We're just trying to deepen that relationship on deposits using digital capability.

Okay, that's clear. No, that's super. Thank you. Just a ticky-tacky on the ATM. You went through in 2019 the revs and the operating income that you'll have in 2019. In 2020, as we think out to that timeframe, do those revenues and expenses come out in 2020 or is this something that's going to continue for a while?

There is roughly a two-year transition period, but I do expect in 2020 that those expenses will start to come down. The reason for that is as you go through the conversion process, you will slowly ramp down that business and the transition period is intended to cover that entire timeframe.

The expenses and revenues come down rateably, I assume?

The expenses come down rateably,

yes. Okay, got it. Thank you.

Thanks, Betsy.

Once again, if you would like to ask a question, please press star then the number one on your telephone keypad and your next question comes from a line of Kevin Barker from Piper Chaffrey. Your line is open.

Good morning. Kevin, Kevin. Hey, Kevin. Hey. You guys mentioned that some of the business spending may impact your payments or maybe slow the growth there just a bit, but you've kept overall guidance for fee income in the mid-single digits, I believe. Could you just talk about the puts and takes for fee income going into 2019? Absent some of the things that we're seeing in mortgage banking that you've said could be a little bit better just on a comp basis year over year.

Yeah. Well, if you end up going within payments, we continue to expect that credit cards is going to do well when we look into 2019. Again, sales volumes have been particularly strong and we continue to believe based upon consumer spending, consumer confidence, and that will hold up. Merchant acquiring is an area that we would continue to expect it to accelerate some in 2019. We've made some nice investments in integrated software solutions and in the e-commerce sort of areas over the course of the last 18 months and more and more revenue from that starts to come online. I think that within payments, I think that is an area. I think the other thing is that in broad brushes, mortgage banking revenue, which has been a big drag, big headwind with respect to fee income, we really believe in 2019 starts to moderate for a couple of different reasons is that the vast majority of our business is purchased money as opposed to refinanced at this particular point in time. The other thing is that about two years ago, two, two and a half years ago, we started to shift more toward retail channels as opposed to correspondent mortgage production and margins there have been holding up and we would expect them to be stable or expand. Home sales currently are projected to be positive. So it may not be exactly in the first quarter, but certainly when we look at the second half of the year, we think that becomes at least neutral, if not a little bit positive. So those would be kind of big takes.

Okay. And then could you just provide a little bit more detail on the impact of integrated software on your merchant acquiring business and what your outlook is for the growth year over year with the merchant acquirer?

So this is Andy. As we talked about, there's a few focus areas of merchant acquiring. One of them is the integrated software providers. Another is the e-commerce as well as omnichannel. And those are areas we continue to both invest in as well as acquire. You saw that we did a couple of transactions in the last 90 days, both focused in those areas. So that is an area of continued focus and one of the reasons we expect our merchant acquiring business to grow in the mid-single digits.

Okay.

Thank you for

taking my questions.

Thank you.

Your next question comes from a line of Marty Mosby from Binding Sparks. Your line is open.

Hey Marty. Thanks. Hey. I had two questions. One was on merchant processing. The other fees in the processing business are growing double digits. Yeah, we're still not seeing merchant processing kind of kick in. So I just wanted from the business standpoint, I know that there's been some dynamics in that competitive environment where five years ago it was very favorable and then now the big players kind of back in tow. So just your thoughts about the competitive environment and what you're seeing in merchant processing.

Yeah, from a merchant processing standpoint again, I think that from a competitive standpoint, there had been a shift over the years really from what I would call financial institution portfolio type of business to really more tech-led sort of business growth, relying more on digital integrated software providers, being focused on industry segments and those sorts of things. And we as part of our investment, we've been making that shift as well. And so that's why when we think about next year, we continue to see and expect same-star sales, but also a new business accelerate and grow. And I think that's going to be a big driver. But that's been kind of a competitive shift that's been taking place. I think the positive thing as we shift more into that tech-led is that it has higher growth rates and better margins than kind of the traditional business. And as we've talked about, Marty, in the past, this is really a business that has moved away from just transaction processing to being able to really provide to merchants information. And that's why that tech-led sort of investment and spend and initiatives is critically important.

The other thing is you have a higher percentage of your portfolio that's held to maturity, but you still have some left unavailable for sale. As interest rates are still at a higher level than what the portfolio rates that you have are actually on the balance sheet, you think about any deployment of capital into restructuring to take advantage and lock some of those rates in because it is a fragile opportunity that we saw here in the last quarter when rates can kind of reverse on us pretty quickly.

Yeah, I think your question, if I understand it, and you kind of focus on that one area, but just what would we think about in terms of duration of assets and shifting maybe our focus from an asset growth perspective. And it is kind of when the yield curve flattens, certainly strategies you end up looking at is emphasizing a little longer duration fixed rate sort of assets. So whether that's mortgage or auto or whatever might be the case. And then in the investment portfolio, as we see maturities and as we have the opportunity to invest cash, our expectations probably will go a little bit longer in terms of the duration of new purchases. So we are thinking about that.

And any willingness to take some losses and restructure what is available for sale to round up to the current rates?

Yeah, we don't have any plans at this particular point in time to do that.

Thanks.

Yeah, thanks Martin.

Your next question comes from the line of Saul Martinez from UBS. Your line is open.

Hey, good morning everybody. Hey, a couple questions. First, now with the consent order sort of in the rear view mirror, can you just give us what your updated thoughts are on your M&A strategy and organic growth opportunities? Just what are some of the parameters around which you might gauge any opportunities or if that's not part of the thought process? Also, could you just let us know? Any update on your M&A, how you're thinking about M&A right now?

So Saul, exiting the consent order doesn't really change your M&A strategy. I think the types of transactions you've seen us do in the last few quarters as well as the last few years will be consistent with what we focus on going forward which are smaller payments, services deals, building capabilities around technology, the integrated software vendors that we've talked about and so forth. So that isn't going to change. As I talked about, I think the opportunity that the exit of the consent order provides us is physical asset optimization, really optimizing our branch structure and that's both optimizing from the perspective of reducing space and or the footprint as well as investing in certain locations to take advantage of where the market is going. So I think that's where you'll see us being a little bit more active.

Okay. So there's really no updated thoughts in terms of specifically how you might think about a depository.

You know, and throughout the consent process, as we've talked about, there really hasn't been a transaction that's come across our desk and we look at all things that we would have wanted to do and as we talked about, in this new environment which is one where transactions are migrating away from the branch, we have more digital capabilities, the whole math around depository is very different. So I would expect our focus to be, as I said, on payments transactions, integrated software providers and optimizing the branch structure.

And so the thing that I would add and things that we talk about, you know, if you think about doing a, let's say a more significant depository sort of transaction, you know, we have so many things that we think are critically important with respect to digital capabilities and kind of that whole transformation over the course of the next few years that, you know, if you did a fairly sizable transaction, there's a fair amount of management disruption that takes place as a result of that. But honestly, you know, we just don't think that should be our priority right now.

Okay. No, that's very clear. And the outlook for credit quality, and forgive me if you address this, I jumped on a little bit late. But what are your, did you give any expectations for what you think, how you think NCOs or known loss provisions may track or HLL levels? And if not, just any color on how you're thinking about the credit quality outlook here?

Yeah, so, you know, as we've said in the past, you know, when you think about our particular portfolios on the commercial side, typically high investment grade on the consumer side, super prime type of portfolios, you know, our net charge us day at one roughly around 50 basis points, a little shy of that. And, you know, our outlook when we think about 2019 is, you know, credit quality continuing to be very stable. And we don't see, you know, a significant change with respect to either, you know, the rate of net charge us from a provision standpoint, the provision will really track low net charges and low growth more than anything.

So this quarter's increase to reserve of the $15 million is really a function of low growth numbers just post-annual deterioration.

Got it. So we should expect HLL levels more or less where they're at.

Yeah, yeah, I would agree. You know, and the other thing, you know, early delinquencies, you know, all the sort of statistics, we're just not seeing any real significant movement or change in that. So pretty stable. Okay,

got it. Thanks so much.

Jordan's question comes from Lion after our Cassidy from RBC. Your line is open. Good morning, guys.

Morning, Jordan. Hey, Jordan.

Andy, when you look out over the next 12 months and if you agree that we are not likely to go into a recession in the United States and if you just take the geopolitical, you know, risks that you guys kind of talk about, you know, for the business over the next 12 months.

Well, you took out probably the principal risk that we talk about. You know, that is impactful. The outcome on tariffs impacts certain of our companies. I think that, you know, is a function of what decisions we made, the confidence in those decisions, deferring certain investments. Those are all encompassed in that geopolitical and tariff component. I think the other factor for us and for many banks is what's happening with rates and the yield curve. That's something at a high level that we're very focused on and some of the questions that came up in this call in terms of the balance sheet position and so forth. And then finally, you know, the investments that we're making, the business, the banking environment is changing very rapidly and as we think about what we're doing with our payments businesses, with our branch footprint, with our structure, with the ways we connect with our customers and the way we use data for the benefit of the customers. Those are all the things we're focused on.

Very good. And then maybe Terry, can you give us an update, and I apologize if you've addressed this already, on just your views of Cecil and what you're expecting and I assume you're expecting it will go live, you know, first quarter of 2020?

Yeah, I mean, purely from a timing standpoint, you know, I think the entire industry has been in the process of developing and building models over the last couple of years. And, you know, we're in pretty good shape with respect to that. 2019 from our standpoint is kind of the final dimension of that as well as kind of running parallel with respect to, you know, our existing models to make sure that, you know, when we go live on January 1st, 2020, we're in good shape. You know, if you end up thinking about, you know, Cecil ends up getting impacted by, you know, the pandemic, and then you're at the business cycle at the time that you end up adopting it, and as you know, it will create a little bit more volatility. But, you know, based upon current conditions, I think, you know, some of the other estimates that are out there, you know, 20 to 30 percent sort of impact is kind of a reasonable estimate on day one.

Okay, and do you, just to follow up on that, do you guys expect to kind of come out with something in the middle of this year or are you going to wait until the end of the year to get a full 12 months of the parallel systems and then obviously be very strong on the number that you know it's going to be?

Yeah, I think we'll probably, I mean, our expectation right now is that mid-year we'll start to be able to provide some ranges. But, again, the cautionary factor there is that, you know, that'll be a point in time, and if conditions change between then and the end of the year, you know, we would end up having to adjust.

Sure, no, I appreciate it. Okay, thank you.

Yeah, thanks.

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