U.S. Bancorp

Welcome to U.S. Bancorp's first quarter 2019 earnings conference call. Following a review of the results by Andy Ciceri, Chairman, President, and Chief Executive Officer, and Terry Dolan, U.S. Bancorp'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 1 on your touchtone 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, April 24th at 12 midnight Eastern Standard Time. I will now turn the conference call over to Jen Thompson, Director of Investor Relations for U.S. Bancorp.

Thank you, Jack, and good morning to everyone who's joined our call. Andy Ciceri and Terry Dolan are here with me today to review U.S. Bancorp's first quarter results and to answer your questions. Andy and Terry will be referencing a slide presentation during their prepared remarks. A copy of this 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 2 of today's presentation in our press release and in our Form 10-K and subsequent reports on file with the SEC. I'll now turn the call over to Andy.

Thanks, Jen, and good morning, everyone. Thank you for joining our call. Following our prepared remarks, Terry and I will be taking your questions. I'll begin on slide 3. In the first quarter, we reported earnings of $1 per share. This slide highlights a number of financial metrics, but at a high level, growth and net interest income at eRevenue were in line with our expectations, credit quality was stable, and we delivered positive operating leverage. Our balance sheet is strong and growing, and we continue to see good account and volume momentum across our feed businesses, which is driving market share gains. Turning to capital management, our book value increased by .6% from a year ago. During the quarter, we returned 77% of our earnings to shareholders through dividends and share buybacks. Slide 4 provides key performance metrics. In the first quarter, we delivered an .4% return on tangible common equity and a .49% return on average assets. 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. If you turn to slide 5, I'll start with a balance sheet review and follow up with a discussion of first quarter earnings trends. Average loans grew .9% on a link quarter basis and increased .7% year over year, excluding the impact of the second quarter 2018 sale of our federally guaranteed student loan portfolio and the fourth quarter 2018 sale of FDIC covered loans that had reached the end of the lost coverage period. On the consumer side, we saw good growth in our residential mortgage, retail leasing, and installment loan portfolios. Digital acquisition of customer accounts across platforms continues to be robust. Commercial loan growth accelerated in the first quarter, driven by &A-related lending and slower paydown activity, partly due to timing. New business pipelines are healthy, although paydown activity is likely to remain elevated and chop in near term. As expected, commercial real estate loans decreased on a sequential and -over-year basis. This quarter, commercial real estate contributed a 40 basis point drag to link quarter average loan growth and an 80 basis point drag to -over-year average loan growth. Given what we consider to be a still unfavorable risk-reward dynamic in certain areas of commercial real estate lending, we expect paydown pressure, which is moderated from peak levels but will continue to restrict growth in this portfolio. Turning to slide six, deposits increased .3% on a link quarter basis and .2% -over-year. As previously discussed, balanced migration related to the business merger of a large financial client continues to impact deposit growth on a -over-year basis. This migration impact on deposits will continue to moderate through mid-year. Slide seven indicates that credit quality was relatively stable in the first quarter. Non-performing assets increased modestly versus the fourth quarter, but were lower by .5% compared to the first quarter of 2018. Slide eight highlights first quarter earnings. We generated earnings of $1 per share in the first quarter of 2019 compared to earnings per share of 96 cents a year ago. Turning to slide nine, net interest income on a fully taxable equivalent basis was lower by .4% compared to the fourth quarter, but increased .8% -over-year, which was in line with our expectations. Both link quarter and -over-year comparisons benefited from loan growth and interest rate hikes. As is typical in the first quarter, link quarter growth was negatively impacted by two fewer days. The first quarter of 2019 also experienced lower interest recoveries than the fourth quarter of 2018. Slide ten highlights trends in non-interest income. On a -over-year basis, we saw -single-digit growth in both merchant processing revenue and corporate payments products revenue, each driven by higher sales volumes. Credit card and debit card revenue declined by .2% from a year ago, despite strong average account growth this quarter. There were fewer processing days in the first quarter of 2019 than in the first quarter of 2018, which created an approximate 500 basis point headwind to -over-year revenue growth. Also, a favorable change in accounting for prepaid revenue in the first quarter of 2018 negatively impacted the credit and debit card revenue growth rate by approximately 400 basis points on a -over-year basis. The billing cycle impact is simply a timing issue within the full year of 2019 credit and debit card revenue. Both of these items are idiosyncratic to our business. In the fourth quarter of 2018, we sold our third-party ATM servicing business. However, we continue to provide operational services during a transitional conversion period. Given the sale, we have combined ATM processing revenue with deposit service charges for recording purposes. The transition services revenue associated with ATM business is included in other income. As a result, the decline in deposit service charges in the first quarter was driven by the impact of the sale of our ATM business. The increase in other income was driven by the inclusion of the transition services revenue, which will decrease over time as well as higher tax credit syndications and equity investment revenues. Lower mortgage banking revenue in the first quarter was primarily driven by relative changes in MSR valuations. However, mortgage origination revenue grew in the first quarter, and the application volume was up 10% from a year ago. We continue to expect growth in mortgage banking revenue for the full year of 2019. Decline in treasury management fees continues to reflect the impact of changes on earnings credits, which is typical in a rising rate environment. The beneficial revenue impact of compensating balances, which is reflected in net interest income, more than offset the decline in treasury management revenue. Turning to slide 11, the -over-year increase in non-internet expense reflected higher compensation expense primarily due to the impact of hiring to support business growth. This was partly offset by a decrease in other expense primarily reflecting lower costs related to tax advantage projects and lower FDIC assessment costs. Slide 12 highlights our capital position. At March 31, our common equity tier one capital ratio estimated used in the Basel III standardized approach was 9.3%. This compares to our target of 8.5%. I'll now provide some forward-looking guidance. For the second quarter, we expect fully taxable equivalent net interest income to increase in the low single digits on a -over-year basis. We expect fee revenue to increase in the low single digits -over-year, including the negative impact of the sale of the ATM business. We expect to deliver positive operating leverage of 100 to 150 basis points for the full year of 2019 in line with our previous guidance. We continue to expect our taxable equivalent tax rate to be approximately 20% on a full year basis. Credit quality in the second quarter is expected to remain relatively stable compared with the first quarter. Loan loss provision expense growth will continue to be reflective of loan growth. I'll hand it back to Andy for closing remarks. Thanks, Terry.

The start of the year is shaping up as we expected. The U.S. economy is healthy and supportive of growth, and the credit quality environment is stable. The macroeconomic environment aside, we are confident in our ability to execute and win market share across our lending and fee businesses, supported by our scale, our skill, and our risk management discipline. Success in the banking industry will increasingly depend on our ability and determination to adapt to the evolving demands of our customers. The investments we are making in technology and innovation will play a critical role in our long-term success, and the payoff will be increasingly visible in the form of customer acquisition and retention as well as operational efficiency. One area we've been placing a lot of attention is our digital capabilities. We recently launched our newly developed mobile app, which incorporates improved sales functionality and enables a more seamless experience for our customers. Early feedback from users has been very positive. If we turn to slide 13, I want to share a few digital metrics we track. You can see from these slides that digital engagement with our customers is growing, and an increasing percentage of transactions and lending activities are occurring outside our physical locations. Particularly encouraging is the trend in digital loan sales. Approximately one-third of all loan sales are now completed digitally, up from 25% a year ago. Mortgage lending and small business lending are early digital lending success stories. Currently, nearly 75% of all mortgage loans are completed digitally -to-end, and that percentage is growing. This past September, we lost the fully digital lending solution for small businesses that can significantly reduce a customer's -to-credit decision and funding to, in some cases, as short as one hour. Migration of sales and transactions for our digital platform will enhance customer experience, improve operational efficiency, and enable expansion into existing markets where we currently have customers but little or no physical footprint. In closing, we are off to a good start to the year, and momentum is building across our businesses. I'd like to thank our employees for their hard work and dedication throughout the year. That concludes our formal remarks. We will now open up the call to Q&A.

Certainly. If you'd like to ask a question, please press star 1 on your telephone keypad. If you'd like to withdraw your question, press the pound key. Your first question comes from a line of John McDonald with Autonomous Research. Your line is open.

Thank you. Andy and Terry, hi. Good morning. I wanted to ask you guys about the operating leverage target for this year. You came in at the low end of the range, the one to one and a half this quarter, but that included some pressure from the billing cycle processing day's issue. So as you look ahead, do you have a bias towards the lower or the higher end of that one to one fifty range? Or I guess maybe said differently, what kind of environment would get you at the lower end of the operating leverage target, and what would it need to do to get you to the higher end?

Yeah, John, this is Terry. And I think that where we end up in the range will part be driven by what sort of revenue growth we see throughout the year. You know, the extent that revenue growth picks up a little bit gives us the opportunity to be close to the higher end. But if it's a challenging revenue environment, you know, we're more likely to be closer to that lower end of the range. And it's something that we're just going to continue to manage to and make decisions based upon both short-term and long-term sort of objectives of the company.

OK. And what's the right level of expense growth for USB in this kind of environment? You've got a little less pressure from compliance spend and some relief there. But on the other hand, you're stepping up investments and you're getting a little help from FDIC surcharge roll off. How do you how should we think about expenses and what you think about this year and what's kind of a good target for you guys?

Hi, John. This is Andy. You're right about both of those items. The pressure on compliance costs is eased as well as we're getting some benefit from FDIC. We will continue to make technology investments for all the digital capabilities that I referred to in my comments. I think another important factor is with the lifting of the consent order, we have a lot more flexibility and physical asset optimization. So I think the other lever that you're going to see us utilize is branch optimization, which over the next couple of years, I would expect a 10 to 15 percent reduction in our actual physical count of branches. We're going to open up some in places. We're going to be remodeling and changing the footprint, but the net of it will be down 10 to 15 percent.

OK, and then just one follow up on the operating leverage. Is there any cadence or seasonality to kind of the operating leverage? And did that billing issue with the processing days hurt you in the first quarter and keep you at the lower end? Thanks.

Yeah, so from a seasonality standpoint, certainly the impact of the of the credit card revenue growth did end up impacting it. But, you know, it's probably narrowed just a little bit mid year and then tends to expand in the fourth quarter. But it's fairly consistent through the year.

That's right, Terry. Typically, over the past many years, I think our strongest to weakest quarter is just in terms of principally driven by revenue seasonality. A lot of it's the payment businesses, but a lot of businesses three, four, two, one strongest to weakest.

OK, but in terms of year over year operating leverage that doesn't necessarily apply, that'll depend on the environment more. So whether you get up to that one and a half.

Yeah, and on the revenue environment, right? Yeah, where the revenue grows because some of it's variable expense.

OK, thank you.

You're welcome. Your next question comes from a line of John Pankari with Evercore. Your line is open.

Morning. Hi, John.

Hi, John.

On the margin side, first on the actually more specifically around deposits, we saw a pretty good decline in the non-interest bearing in the quarter. Can you give us a little bit more color around the driver of that and if you expect a continued shift at that pace into interest bearing, I want to get your thoughts on that first.

Yeah, so there certainly continues to be some migration to interest bearings for the deposits by our customers. We're seeing it mostly on the wholesale side as well as a little bit on the trust side. And that's a function of them looking for higher yield. It's also a function as earnings credit rates have come up with rising rates, just more excess deposits that they have the opportunity to be able to shift. I do think that that moderates a bit because with short-term rates kind of on hold, there's going to be a lot less pressure on earnings credit rates. And then that is going to not reduce, but at least lower the increase of the excess deposit. So I do expect it to moderate a bit.

OK, so how would that play into your margin outlook here? You know, you saw about a bit of expansion this quarter. Is it fair to assume relatively stable despite that continued flow into interest bearing, but with the expected abatement? Thanks.

Yeah, you know, as you saw, our net interest margin was up a basis point on a link quarter basis. Given the current rate environment, you know, my expectation from a deposit standpoint is that deposit pricing will continue to creep up a little bit. It will be more driven by loan growth and where that loan growth is occurring. Now, our expectation is really no rate hikes through the rest of the year that the yield curve stays relatively flat. And given that environment, our outlook for the rest of the year is a fairly flat net interest margin. And then the other thing that I would just point out is that there is a little bit of seasonality for us because of our credit card portfolio. In the second quarter, it's usually flat to down a little bit, a basis point or two. So just kind of expect that in the second quarter. But for the full year and through the rest of the year, you know, we pretty much expect it to be flat.

Got it. All right. Thanks,

Terry. Your next question comes from Erica Nijarian with Bank of America. Your line is open.

Hi. Good morning. I just wanted to follow up on John's question on positive operating leverage. You know, just wanted to be clear because I think there was a little bit of confusion on how the market interpreted your comments on the previous call. So in the environment where both NII and fees are growing low single digits, can we assume that expenses will be flat up one percent if that's the revenue environment that we're in? I'm just trying to make sure we're interpreting it correctly.

Yeah, I mean, Erica, we clearly know and understand the revenue environment that we're in right now. And we're looking at, you know, every opportunity to be able to manage the expenses down. So I think your expectation is right. Now that we're going to be very prudent with respect to our spending, you know, we look at from a lever standpoint, Andy talked a little bit about physical asset optimization. And we're looking at any discretionary spending. You remember from the fourth quarter, we went through kind of an organizational redesign that'll have some benefits to us throughout this year. And also in the first quarter with Tim Welsh taking over our consumer banking business that gives us opportunities to kind of look at that organizational design structure. So there's a whole variety of different things. And then if you remember FDIC surcharge going away gives us some flexibility in order to be able to get there. So I think there's a number of different levers, but, you know, it's challenging, but we're going to end up having to manage in that environment. And that's our expectation.

Got it. Perfect. And underneath your outlook for flattened interest margin, you know, you've often talked to us about, you know, the concept of terminal betas, especially on the commercial side. You know, in the environment of, you know, no Fed rate hikes, what kind of flexibility do you have on your pricing? And if you could, because you've done it so well in the past, you know, give us a sense of how you think pricing will trend on the commercial side versus the retail side.

Yeah, I think that, you know, given the right environment without rate hikes, again, I think that deposit pricing and how that changes will be a function of what sort of loan growth you see and the need to have that kind of change. And competition that you'll have with respect to deposits in that situation. I do expect that on the wholesale trust side, there's still going to be continue to be some pressure, but I do believe that that alleviates itself quite a bit. The other thing is that if you end up looking at our deposit growth, we're seeing good deposit growth in terms of consumer balances. And as you know, the pricing flexibility on that side is a little bit better.

Got it. Thank you.

Your next question comes from a line of Scott Seifers with Sandler O'Neill. Your line is open.

Morning, guys. Thanks for taking the time. Hey, Terry, I was hoping you could spend just a second digging into your loan growth outlook. I guess my understanding was sort of the one key would be sort of seasonally weaker and then maybe things accelerate a bit from there. But in your prepared remarks, you'd mentioned the pay down pressure, you're seeing particularly on the CRE side a couple of times. So just curious for any updated thoughts you might have on the overall loan growth trajectory.

Yeah. So when we end up looking at loan growth, I mean, it's hard to look out too far. Certainly when we think about the second quarter, our expectation is that loans will grow kind of in line with the link quarter growth that we saw in the first quarter. But maybe let me give you a little bit of context in terms of some of the dynamics. You know, the middle market loan growth was stronger in the first quarter on a link quarter basis. It was up about .3% and year over year is closer to about 5%. So we saw nice growth in the middle market space. We saw good growth with respect to our auto lending. It was a little bit less price competitive than during the first quarter. And we kind of expect that to continue. Residential mortgages, our mortgage volume was strong in the first quarter. And so we continue to believe that that's going to be a positive thing. And CNI in general was good. I mean, I think the economy is solid. You know, our CNI pipelines are strong at this particular point in time and consumer, excuse me, businesses continue to spend and make some business investments. So I think that there's just a lot of different factors that would suggest that that sort of growth will continue. I think there are two things in terms of overall total loans that create a bit of a drag. We talked a little bit about our commercial real estate portfolio and our expectation is that will continue to slowly to continue to be a bit of a drag throughout the rest of the year just based on where we're at in the business cycle. And then within CNI kind of buried there is tax exempt loans. And when the tax rates changed for corporates coming down, but individuals staying pretty high, the appetite, I guess, would be where the opportunity to be able to grow tax exempt in the corporate side of the equation, the banking side of the equation is a little more challenging. So that on a link quarter basis in the first quarter was about a 20 basis point drag for us. So, you know, it's kind of a number of puts and takes, but overall we feel a bit about where the economy is and where our businesses are spending.

Okay, perfect. That's good color. I appreciate that. And then if I could get one more more ticky tack one just in your other fee income. I think there was a time not too long ago when you know if you're doing like 250 million a quarter, that'd be, you know, definitely a big outsized quarter but you know more recently, it's kind of crept up there kind of steadily, you know, consistently been in sort of the 225 to 250 range. You know, as we look at the 247 for this quarter, is that a pretty good base to go off of or was there anything volatile or unusual in there?

Yeah, there's a little bit lumpy in terms of other revenue that probably the guidance that I would end up giving you is that through the rest of the year we would expect the range to be somewhere between 175 to 225 million on a quarterly basis. So if you're modeling kind of in between there, I think that's a good estimate.

All right, that's perfect. Thank you very much.

Your next question comes from the line of Ken Houston with Jeffries. Your line is open.

Thanks. Hey, good morning, guys. Hey, Andy, I don't know if you've spoken since the mergers of equals transactions we got last quarter. I think we all know where you have stood as far as the current strategic comparatives to work on the digital strategy, consolidate some of the branches. Just wondering just where you stand on your view of US banks size and scale and how you think, if any differently, just about either the need or desire to think about bank M&A down the road, even if not, not today, but just from a bigger picture strategic point.

Sure can. No, first, let me say that we consider all options for growth and we'll look at anything that is available and or any strategic initiative that would be sensible for our company. But I will tell you, I think our near future on purpose will likely be on the fee businesses, the merchant processing, the trust businesses that we've been focusing on. We have a lot of momentum across our digital activities. We have a lot more flexibility now that we're out of the consent order. We're making a lot of progress across all of our business minds and I feel very comfortable where we are today.

OK, then two just small ones. First on on the card spending rate of growth slowing. I know part was the billing cycle, but just can you just talk to us about what of it is just the underlying in terms of any changes you're just seeing or feeling in terms of just the consumer. That was the first one. The second one was just commercial loans were just up a lot sequentially about 30 basis points and just wondering what was underneath that increase. Thanks guys.

Yeah, so maybe on the consumer spend again, we talked about the fewer processing days. That certainly was an impact. But one of the things that we saw kind of post post holidays that consumer spend did drop pretty dramatically came back in January a little stronger in February. And it's kind of at that 4% year over year growth rate in March. Our expectation on a full year basis is that that will continue to get stronger kind of in that 5 to 6% sort of range in terms of in terms of continuing to accelerate from a sales standpoint. You know, from a revenue perspective, you know, I think that again, it's going to continue to get stronger in the second third quarter. We'll recapture some of those processing days. But our expectation for credit and debit card revenue for the full year, given the impact of the first quarter is really low single digits at this point in time.

And Terry that first quarter, you know, it's the period of government shutdown. There was some turbulence in the equity markets. There is weather impacts across our geography. So those things are all past this right now and that's why we look more confident going forward.

Yeah, and it's hard to it's hard to get an identifier single out any one of those things. But I think every one of them had some impact in the early part of the first quarter.

Right. Your next question comes from a line of Betsy graphic with Morgan Stanley. Your line is open.

Hi, good morning. Hi, Betsy. Recently, you announced the hiring of a new chief digital officer Derek White and I just wanted to understand what your expectation is for how Derek is going to be impacting US Bank Core. It's a pretty senior hire. And I know you just did a whole revamp of the mobile platform. So I'm wondering what's

left. There's a lot left. So we have a lot of activity going out from a digital perspective. You know, we have 20 agile studios and growing. We just developed a new app. We're going to continue to enhance and continue to improve that. We have real time payments that's impacting the consumer side of the equation as well as wholesale and ultimately payments. We have AI going on. We have blockchains. We have initiatives across all the business lines focused on digital activities. And Derek's goal will be to really bring that all together into a common US Bank sort of vision and theme so that we're really optimizing for our customers across all business lines and really leveraging capabilities across all of our business lines for the benefit of the customer. So we're excited to have Derek on board. He has great capabilities, a great background, and I think he's going to fit into the team. Terrific.

Okay, so it's beyond consumer and also in areas like B2B.

Yes, it is.

I think

one of the other things that kind of ties into that is, you know, continuing to enhance and improve and tie digital marketing sort of capabilities into that whole digital strategy, data analytics and a lot of those other things that will help drive growth in the future.

And when we think about the impact on the P&L, the improvement in digital and improvement in real time is obviously very positive for clients. How does it impact your P&L? Is it neutral? Do you give up float but get back volume? I'm just trying to think through how you think about the ROIC on all of this.

Yeah, that's either way I think about it. I think it's an enhancement to both revenue and expense because from a revenue standpoint, I think it's going to allow for additional customer acquisition as well as retention, building a customer from a centrality standpoint. On the expense side of the equation, I think it offers operational efficiencies. You think about check processing, courier costs and things of all those sorts of things. Over time, I think it will offer benefits on both sides.

And

the float give up really isn't that big a deal? No, the float, you know, there's positive and negative to that and I think the net of it is not going to be that material.

Okay.

Thank you.

Your next question comes from a line of Vivek Jhunja with JP Morgan. Your line is...

Hi, everyone. Hi, morning. A couple of questions for you. One is, did I catch this correctly, the prepaid cards, the accounting change in the first quarter of 2018 that benefited by 400 basis points or did I mishear that?

Yeah, the impact was favorable a year ago so it actually had a negative impact to the growth rate this year of about 400 basis points. So you think about we're down 6.2%. There was a 500 basis point drag related to three fewer processing days. 400 basis point drag related to the accounting change. And then the drag associated with consumer spend dynamics that we saw early in the first quarter.

Okay. And that favorable accounting change, Terry, did that benefit all of 2018 then or was this something that reversed in the rest of 2018 or how did it play out?

No, it was a one-time item in the first quarter of 2018. So it was one time. So it won't impact anything related to future quarters from a comparison standpoint. Okay.

Got it. And this 500 basis point fewer processing days, that should completely reverse over the course of the next quarter or does it take multiple quarters to do that?

Yeah, it's not necessarily in the second quarter. We would expect it to reverse principally in the third quarter. -over-year basis, 2019 versus 2018, there are actually two fewer processing days in total. So we're going to get some of it back but not all of it this year.

Okay. Okay. Great. Thank you.

You

bet. Thanks, Yvette. Your next question comes from a line of Kevin Barker with Piper Jaffray. Your line is open.

Good morning. I just wanted to follow up on some of the comments you made about commercial real estate because it feels like there is a distinct shift here as we go into 2019 versus the outlook or the competitive environment that we saw in the latter half of 2018. You're mentioning where we are in the business cycle and some of your remarks. I just want to get a little more color on where you're seeing either outsized competition now or maybe some softness in certain parts of the commercial real estate market.

Yeah, so we're certainly seeing, I think with respect to the capital markets, with rates coming down, we saw, I think, opportunity for some of that project financing to be refinanced in the first quarter. I think that's part of it. We're also seeing insurance companies, pension plans that have been a little more active with respect to taking out construction lending and providing the permanent financing, maybe than what we have seen in the past. Fourth quarter was a little bit of an anomaly for us because first quarter kind of got some of the first quarter activity got pulled forward into the fourth quarter. But when we think about commercial real estate, going through the rest of the year, the type of pay down activity, I think we expect it to continue. So, you know, the decline in the in the portfolio is probably going to be fairly, fairly consistent through the year. You know, in terms of type of product, you know, in terms of where we're seeing it, it's really kind of across the board in terms of all the different areas. But it's really from construction to that permanent finance financing stage. And part of that is, you know, we're at this particular point in the business cycle. We're just not willing to extend out terms and and go deeper with respect to commercial real estate at this particular point in time. And just

to add on Terry, another factor certainly is the flat yield curve is allowing some of these non banks to take advantage of the lower funding costs spots in the curve that are further out than we typically would go.

Okay, that's that's helpful. And then to follow up on some of the comments around the mobile strategy, you introduce the small business mobile app. And from the lending you did last year, could you just give an update on the progress that you've seen from that rollout, what the growth looks like and what it has done incrementally to your overall growth?

Yeah, so we spent I mentioned the agile teams. That was a great example of the actual team coming together in a matter of months to develop a product that allowed for funding in what was typically days or weeks to hours. And it's an early innings of the project, but it's been very favorable in terms of offering customers a convenient choice, fewer questions before the approval process to get them approved funding much more rapidly. And it's all part of the mobile app activity that we've talked about that allows for just a more convenient, simpler set of navigation options and also sales and information. So it's part of a large strategy. And I also want to highlight that the mobile app that we are introducing now is just phase one. It'll continue to be updated and enhanced and you'll see more and more of these capabilities. I also mentioned in my remarks that currently 75% of our mortgage apps are now done in a digital fashion and to end, which is a huge improvement and a great convenience from a customer standpoint.

And I think that is one of the drivers in terms of why we are seeing applications stronger. And it's one of the reasons why we feel pretty bullish on mortgage origination through the rest of the year.

Thank you, Andy. Thank you,

Terrence. Yeah, thanks. Thanks, Kevin.

Again, if you'd like to ask a question, please press star one on your telephone keypad. To withdraw your question, press the pound key. Your next question comes from a line of Saul Martinez with UBS. Your line is open.

Hey, good morning, guys. A couple questions, very sort of granular questions. First on your deposit service charges of 217 million. Obviously, it's not comparable to the prior quarters because of the ATM processing. The ATM sale, business sale, which had been consolidated in prior quarters and I think it was in there one month in the fourth quarter. But my understanding is that not all of that goes away. So how do I think about the 217 million on a like for like basis versus, you know, previous quarters versus the fourth quarter in the first quarter? I think they were doing like 45 million a quarter. But what kind of adjustments do we need to make to the prior quarters to get more of an apples to apples comparison? Yeah,

the ATM business was sold at mid fourth quarter. So, you know, the change in deposit service charges for, excuse me, first quarter to first quarter is a pretty good metric or indicator with respect to the type of impact that it will have on deposit service charges going forward. The, the, I think that's, that's probably the best way of kind of thinking about it.

Okay, so sorry. So the best way is to sort of look at the year on year Delta versus where it was in the first quarter

of

the year.

So the Delta was about 44, 45 million dollars. I think that is a pretty good metric.

Okay, so it's a 44. Okay, so it's about 40 to 45 million. So not all of it goes away. You know, in the, you know, from, from what you previously were posting in that ATM processing services line, which was like 80 to 90 million a quarter. That's right, because

included in that was third party service provider as well as branded ATM fees.

Got it. And then on your C&I loan yields, they ticked up quite a bit this quarter. They were up like 30, almost 30 base points, I think 29 base points, which is fairly high. Even in a quarter where you have a hike in LIBOR obviously moved up. The average LIBOR moved up less than in prior quarters. Is there anything unusual in that tick up in commercial loan yields that we should be aware of? It seems like a pretty big increase.

Yeah, typically I think you'd expect to see about maybe 60 percent of the rate hike. That would be probably more normal. So maybe in that 20 base point, the rest of it is really kind of driven by the mix of growth in the portfolio. So it's really more of a mixed issue.

Okay, so you get some rate hike and then you're benefiting obviously from the mix as well. Exactly. All right. Okay, got it. Thank you.

Your next question comes from a line of Mike Mayo with Wells Fargo Securities. Your line is open.

Hi, can you hear me? Yes, Mike. Great. So I know Betsy asked one question about Derek White, who I guess comes from BBBA, which is considered one of the leaders in digital banking. That's a pretty big hire. So what metrics should we on the outside look to to see if the digital banking effort will be successful, say in one, two or three years? Is it percentage of customers that are engaged digitally? Is it customer satisfaction? What would be your metrics for success for whatever Derek White will be doing now?

Thanks, Mike. And it is all those things that digital engagement is going to be sales activity via the digital platform. It's going to be customer activity via digital platform. And we're going to share more of those with you on this call and on our quarterly earnings and starting with what we did today, because it is something we're very focused on from a company perspective. And because we're focused on it, I want to make sure you're aware of it.

And you know, you were I think pretty recently said you might be going out of footprint with some digital banking efforts, kind of joining in on the national digital banking wars, so to speak. That's my term, not yours. But it does seem like everyone's doing that around the same time. You know, how does this hiring impact your plans to go out of market for more retail customers?

That is still our plan. And as a reminder, we have a number of customers outside of our 25 states that are either credit card, mortgage or auto loan customers. We also have large employee bases. And I think what we're focused on is expanding and what I'll call a digital light strategy, a branch light strategy, digital first strategy, which is with a few branches with this digital capability that we're talking about and encompassing the current customer base and becoming a more full bank experience for those customers.

So you can one short follow up by last one. Look, you've been around a long time. You know, the industry and the business. It's just we haven't found too many examples of cross selling to a credit card company. A lot of other say deposit and other products, changing a single product customer, whether it's in credit cards or auto and making them a full relationship customer. So why is now different? Or maybe there's examples that you see that I don't.

Yes, a fair question, Mike. You know, I think what's changed over the past few years is the capabilities that you can do from a digital platform. So historically, you really needed a physical presence to expand the customer relationship. And if you didn't have a branch in that location or many branches, a density of branches, you weren't able to really extend the relationship. I think with the capabilities today, the two thirds of transactions happen on a mobile device. The fact that 70 percent of our customers use a digital platform. All those facts allow you to enter a market with this branch light concept with a digital platform that is different from a few years ago. And I think that's the major change.

All right. Thank you. Yeah. The other thing that I would add is that I think a big part of the digital, the digital world is the experiential aspect associated with it. If you think about millennials and Gen Z, et cetera, in much more digitally at depth. And I think that, you know, as that continues to occur, it's going to continue to create that opportunity.

Thanks again.

Thanks, Mike.

Your next question comes from a line of Gerard Cassidy with RBC. Your line is open.

Thank you. Good morning, Andy and Terry. How are you?

Good morning, Gerard.

Good to well.

Can you guys share with us? Obviously, credit quality is very strong throughout the industry and for you folks as well. Are there any issues on the horizon that you're keeping your eye on that we should be aware of just as a general trend on credit? And then also, as you answer that question, can you think about also your exposure to retail malls and stuff, this, you know, increased activity in retailers shutting down stores and maybe there might be some pressure in that type of portfolio down the road?

Yeah, good question. Certainly with respect to our portfolio, there's nothing really on the horizon or too concerned about. As you know, that our portfolio is principally prime based, and that's true across all of our consumer sort of product. And the commercial side of the equation, it typically is an investment grade, high investment grade type of customers that we do business with. So I don't think there is a particular area that we have that stands out as a concern for us, certainly in commercial real estate. And one of the reasons why we're not extending terms and those sorts of things is just that at this particular point in the business cycle, we think it's prudent just to continue to hold our own as opposed to expand and grow. And then maybe coming back to your question with respect to retail malls, you know, I think that will continue to be an area of pressure if you think about the industry. But for us, the exposure, I believe, is less than 250 million. So it just isn't a big exposure for us at this particular point in time.

Very good. And then shifting to deposit betas, back in 1994-95, Chairman Greenspan shifted his policy on interest rates from raising rates to cutting rates within six months in 1995. If Chairman Powell decides to cut Fed fund rates this fall and some futures markets are suggesting he might do that, how quickly would your deposit betas start to fall following the Fed reducing short end rates?

You know, as soon as the rates start moving down, we and I think the industry would be fairly proactive in terms of bringing deposit pricing down along with it.

Very good. Thank you.

Thanks,

George.

There are no further questions at this time. I would now like to turn the call back over to Jen Thompson for closing remarks.

Thank you all for listening to our earnings call. Please contact the Investor Relations Department if you have any follow-up questions.

This concludes the U.S. Bancor's first quarter 2019 earnings conference call. We thank you for your participation. You may now disconnect.