U.S. Bancorp (USB) Q1 2019 Earnings Report, Transcript and Summary

Welcome to U.S. Bancorp’s First Quarter 2019 Earnings Conference Call. Following a review of the results by Andy Cecere, 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. [Operator Instructions] This call will be recorded and available for replay, beginning today at approximately noon, Eastern Standard Time, through Wednesday April 24 at 12:00 midnight, Eastern Standard Time. I’ll now turn the conference call over to Jenn Thompson, Director of Investor Relations for U.S. Bancorp.

Thank you, Jeff, and good morning to everyone who’s joined our call. Andy Cecere 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 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 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, Jenn, and good morning, everyone, and 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. The slide highlights a number of financial metrics, but at a high level, growth in net interest income and fee revenues 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 fee businesses, which is driving market share gains. Turning to capital management; our book value increased by 8.6% 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 18.4% return on tangible common equity, and a 1.49% return on average assets. Now let me turn the call over to Terry, who’ll provide more detail on the quarter as well as forward-looking guidance.

Thanks, Andy. If you turn to Slide 5, I’ll start with the balance sheet review and follow up with the discussion of our first quarter earnings trends. Average loans grew 0.9% on a linked-quarter basis and increased 3.7% year-over-year, excluding the impact of the second quarter 2018 sale of our federally guaranteed student loan portfolio and the fourth quarter 2019 sale of FDIC covered loans that had reached the end of the loss coverage period. On the consumer side, we saw good growth in our residential mortgage, retail leasing and installment loan portfolio. Digital acquisition of customer accounts across platforms continues to be robust. Commercial loan growth accelerated in the first quarter, driven by M&A-related lending, slower pay down activity, partly due to timing. New business pipelines are healthy, although, pay down activity is likely to remain elevated and chop in near term. As expected, commercial real estate loans decreased on a sequential and year-over-year basis. This quarter, commercial real estate contributed a 40 basis point drag to linked-quarter average loan growth and an 80 basis point drag to year-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 pay down pressure, which has moderated from peak levels, but continue – but will continue to restrict growth in this portfolio. Turning to Slide 6, deposits increased 0.3% on a linked-quarter basis and 0.2% year-over-year. As previously discussed, balance migration related to the business merger of a large financial client continues to impact deposit growth on a year-over-year basis. This migration impact on deposits will continue to moderate through mid-year. Slide 7 indicates that credit quality was relatively stable in the first quarter. Nonperforming assets increased modestly versus the fourth quarter, but were lower by 16.5% compared to the first quarter of 2018. Slide 8 highlights first quarter earnings. We generated earnings by $1 per share in the first quarter of 2019 compared to earnings per share of $0.96 a year ago. Turning to Slide 9, net interest income on a fully taxable equivalent basis was lower by 1.4% compared to the fourth quarter, but increased 2.8% year-over-year, which was in line with our expectations. Both linked-quarter and year-over-year comparisons benefited from loan growth and interest rate hikes. As is typical in the first quarter, linked-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 10 highlights trends in noninterest income. On a year-over-year basis, we saw mid-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 6.2% 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 year-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 year-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 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 debit – deposit service charges for recording purposes. The transition services revenue associated with ATM business is included in other income. As a result, for the decline and 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 credits indications and equity investment revenue. 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 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 in earnings credits, which is typical in a rising rate environment. The beneficial revenue and 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 year-over-year increase in noninterest expense reflected higher compensation expense, primarily due to the higher – impact of hirings to support business growth. This was partially 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 1 capital ratio estimated using the Basel 3 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 year-over-year basis. 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 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 saving enough of cash we expected. The U.S. economy is healthy and supportive of growth and a credit quality environment is stable. Macro 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’re 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 or 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 improves sales functionality and enables a more seamless experience for our customers. Early, feedback from users has been very positive. If you 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 of 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 end-to-end, and that percentage is growing. This past September, we lost the fully digital lending solution for small businesses that can significantly reduce the customers’ time to credit decision and funding to in some cases, as short as one hour. Migration of sales and transactions to 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’re 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’ll now open up the call to Q&A.

Certainly. [Operator Instructions] Your first question comes from the 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 1 to 1.5 this quarter, but that included some pressure from the billing cycle processing days issue. So as you look ahead, do you have a bias towards the lower or the higher end of that 1 to 1.50 range? Or I guess, may be 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 to the higher end?

Yes, John. This is Terry. And I think that where we end up in the range will partly driven by what sort of revenue growth we see throughout the year. 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, we’re more likely to be closer to that lower end of the range, I think 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.

Okay. And what’s the right level of expense growth for USB in this kind of environment? You have 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’s surcharge roll off. How should we think about our expenses? And what you think about this year? And what’s kind of a good target for you guys?

Hi, John. This is Andy. Yes, you’re right about both of these items. The pressure on compliance cost 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 what 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 utilized is branch optimization, which over the next couple of years, I would expect 10% to 15% reduction in our actual physical account 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%.

Okay. 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.

Yes. So from a seasonality standpoint, certainly the impact of the credit card revenue growth did end up impacting it. But as probably narrows just a little bit midyear and then tends to expand in the fourth quarter, it’s fairly consistent through the year.

That’s right, Terry. Typically over the past many years, I think our strongest and weakest quarters 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.

Okay. 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 1.5?

Yes, on the revenue environment, right.

Yes, where the revenue grows because some of it’s variable expense.

Okay. Thank you.

You’re welcome.

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

Good morning.

Hi, John.

Hey, John.

On the margin side, first on the – actually more specifically around deposits, we saw 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.

Yes. So there’s certainly continues to be some migration to interest-bearing sort of 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 simply because with short-term rates kind of on hold, there’s going to be a lot of less pressure on earnings credit rates and then that is going to not reduced, but at least lower the increase of the any excess deposits. So, I do expect it to moderate a bit.

Okay. So how would that play into your margin outlook here, as you saw about a bit of expansion in this quarter. Is it fair to assume relatively stable despite that continue to flow into interest bearing but with the expected abatement? Thanks.

Yes. So as saw, our net interest margin was up a one basis point on a linked-quarter basis. Given the current rate environment, my expectations from a deposit standpoint is that deposit base will compare, the pricing will continue to creep up a little bit. It will be more driven by the loan growth than, where that loan growth is occurring. Our expectation is really no rate hikes for 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 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 one 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, we pretty much expect it to be flat.

Got it. All right. Thanks, Terry.

Your next question comes from Erika Najarian with Bank of America. Your line is open.

Hi, Good morning.

Good morning, Erica.

I just wanted to follow-up on John’s question on positive operating leverage. Just wanted to be clear because I think there’s a little bit of confusion how the market interpreted your comments on the previous call. So in the environment we’re both NII and fees are going low single-digits, can we assume that expenses will be flat to up 1% if that’s the revenue environment that we are in? I’m just trying to make sure we’re interpreting it correctly.

Yes. Erika, we clearly don’t understand the revenue environment that we’re in right now. And we’re looking at every opportunity to be able to manage our expenses down. So I think your expectation is right that we’re going to be very prudent with respect to our spending. We look at -- from a leverage standpoint, Andy talked a total bit about physical optimization you’re looking at any discretionary spending. You remember from the fourth quarter, we went through kind of an organizational redesign that will have some benefits to us throughout this year and also in the first quarter with the Tim Welsh taking over our consumer banking business. That gives us the opportunity to kind of look at the organizational design structure. So it’s little whole variety of different things. And then if you remember FDIC surcharge going the way giving us some flexibility in order to be able to get there. So, I think there are number of different levers, but it is 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 flat net interest margin, you’ve often talked to us about the concept of terminal betas especially on the commercial side. In the environment of no Fed rate hikes, what kind of flexibility do you have on your pricing? And if you could, because we’ve done so well in the past, give us a sense of how you think pricing will trend on the commercial side versus the retail side?

Yes. I think that given the right environment without rate hikes, again, I think, the deposit pricing and how that changes will be a function of what sort of loan growth you see and the need to -- and the competition you have with respect to deposits in that situation. I do expect that on the wholesale trust side, there is 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 of – looking at our deposit growth, we’re seeing the deposit growth in terms of consumer balances, and as you know, the pricing flexibility on that site is a little bit better.

Got it. Thank you.

Your next question comes from the line of Scott Siefers with Sandler O’Neill. Your line is open.

Good morning, guys. Thanks for taking my question.

Moring, Scott.

Terry. I was just wondering if you could spend just a second digging into your loan growth outlook. I guess, my understanding was sort of the 1Q would be sort of seasonally weaker and then maybe things accelerate a bit from there. But in your prepared remarks, you’ve mentioned, the pay down pressure and 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?

Yes. So when we end up looking at the loan growth. I think, it’s hard to look also too far. Certainly when we think about the second quarter, our expectations is that loans will grow kind of in line with a linked-quarter growth that we saw in the first quarter. But may be let me give a little bit of context in terms of some of the dynamics. The middle market loan growth was stronger in the first quarter, on a linked-quarter basis, it was up about a 1.3%, and year-over-year, its closer to about 5%. So we saw a nice growth in the middle market space. We saw a good growth with respect to our auto lending. It was a little bit less price competitive during the first quarter, and we kind of expect that to continue. Residential mortgages are -- our mortgage volume was a strong in the first quarter and so we continue to believe that’s going to be a positive thing. C&I, in general, was good. I mean, I think the economy is solid, our C&I pipelines are strong at this particular point in time and businesses continue to spend and makes some business investment. And so I think there is a lot of different factors that would suggest that sort of growth will continue. I think there’re two things in terms of overall total loans that created a bit of a drag. We talked 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 upon where we’re at in the business cycle. And then within C&I kind of buried there is tax exempt loans. And when the tax rates change for a corporates coming down, but individuals staying pretty high, the appetite I guess what where the opportunity build to grow tax exempt in the corporate size equation or a banking size equation is a little bit more challenging. So that on a linked-quarter basis in the first quarter was about 20 basis points drag for us. So it is kind of a number of puts and takes, but overall, we feel good about where the economy is and where our businesses are spending.

Okay. Perfect, that’s a good color. I appreciate that. And then if I could, one more – take that one, just maybe your other fee income, I think there was kind of not too long ago where you were doing about $250 million a quarter. That be definitely a big outsized quarter, but more recently, it’s kind of crapped up there kind of steadily, consistently been in sort of a $225 million to $250 million range. If you look at $247 million this quarter, is that a pretty good base to go off of or was there anything volatile or unusual in there?

Yes. That’s a little bit of lumpy in terms of other revenue. 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 million to $225 million on the 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 line of Ken Usdin with Jefferies. Your line is open.

Thanks. Good morning, guys. Andy, I don’t know if you’ve spoken since the up mergers of equals transactions we got last quarter. And I think we all know where you have stood as far as the current strategic imperatives of work on the digital strategy consolidate some of the branches. Just wondering as where you stand on your view of our U.S. 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 today, but just from a bigger picture strategic point?

Sure, Ken. First, let me say we consider all options for growth and we 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-term focus will likely be on the fee businesses, the working processing to trust businesses that we’re focusing on. We have a lot of momentum across our digital activities, you have a lot more flexibility and now that we’re out of the consent order, we’re making a lot of progress across all of our business plans, and I feel very comfortable with where we are today.

Okay. And then two just small ones. First, on the card spending rate of growth slowing, I know part was a 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 are up a lot sequentially about 30 basis points, I’m just wondering what was underneath that increase? Thanks guys.

Yes. So maybe on the consumer spend, again we talked about the fewer processing days necessarily was an impact. But one of the thing that we saw kind of post holiday is that consumer spend did drop pretty dramatically, came back in January, a little stronger in February and it is kind of 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 continuing to accelerate from a sales standpoint. From a revenue perspective, I think that, again, it’s going to continue to get stronger in the second and third quarter. We’ll recapture some of those processing days. But our expectation for our credit and debit card revenue for the full year, given the impact of the first quarter, is really low single-digits at this particular point in time.

And, Terry, that first quarter, it was the period government shut down, there was some turbulence in equity market, there was weather impacts across our geographies sales, those things and all passed us right now, that’s why we look more confident and what more.

Yes, it is hard to identified any single or anyone of those things. But I think every one of them had some impact in the early part of the first quarter.

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

Hi, good morning.

Hi, Betsy.

Recently, you’ve 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 our U.S. Bancorp? He’s a pretty senior higher, I know you did a whole revamp of our mobile platform, so I’m wondering what’s left?

There is a lot left. So we have a lot of activity going on from the digital perspective. We have a 20 agile studios in growing. We have just developed a new app and we’re to continue to enhance and we continue to improve that. We have real-time payments that’s impacting the consumer side of the equation as well as the wholesale, and ultimately, payments. We have AI going on. We have block chain. We have initiatives across all the business lines focused on digital activities and Derek’s goal will be to really bring that altogether into a common U.S. bank sort of vision and theme, so that we’re really optimizing with their customers across all business lines and really leveraging capabilities across our 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 in the team perfectly.

Okay. So it’s beyond consumer and also in areas like B2B?

Yes. It is.

Yes. I think one of the other things that kind of ties into that is continuing to enhance and to improve our anti-digital marketing sort of capabilities into that all 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. Does it -- how does it impact your P&L? Is it neutral? Do you give up slowed, but get back volume? I’m just trying to think through how you think about the ROIC and all of this?

Yes, Betsy, as I think about this, I think these enhancements to both revenue and expense. Because from a revenue standpoint, I think, it is going to allow for additional customer acquisition as well as retention, building the customer from a centrality standpoint. On the expense side of the equation , I think, it offers operational efficiencies. If you think about check processing, carrier cost and things of all those source of things, overtime, I think, it will offer benefits on both sides.

And the flows give up really is in that bigger deal?

No the flow – there’s positive and negative with that. And I think the negative is not going to be that material.

Okay. Thank you.

Your next question comes from the Vivek Juneja with JP Morgan. Your line is open.

Good morning, Vivek.

Good morning. A couple of questions for you. One is, did I cash this correctly the prepaid cards, the accounting change in the first quarter of 2018 that benefited by 400 basis points or did I miss to hear that?

Yes, 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. If you think about we’re down 6.2%, there was a 500 basis point drag where I did three fewer processing days, 400 basis points drag related to the accounting change, and then the drag associated with the 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 is this something that reversed in the rest of 2018? How did it play out?

No, it was a onetime item in the first quarter of 2018, so it was one time. So it won’t impact anything related to our future quarters from a comparison standpoint.

Okay. Got It. And this 500 basis point fuel processing days that should completely reversal with the course of the next quarter or is it take multiple quarters to do that?

Yes, it is not necessarily in the second quarter. We would expect it to reverse principally in the third quarter. By year-over-year basis, 2019 versus 2018 they’re actually two fewer processing days in total. So we’re going to get some of it back, but not all of them this year.

Yes, okay. Okay, great. Thank you.

You bet.

Thanks for that.

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

Good morning. I just want to follow up on some of the comments you made about commercial real estate, is it feels like there is a distinct shift here as we go into 2019 versus the outlook for the competitive environment that we saw on the latter half of 2018. You mentioned in where we are in the business cycle in some of your remarks, I am just wanted 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.

Yes. So we’re certainly seen, 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 then what we have seen in the past. Fourth quarter was a little bit of an anomaly for us, because the first quarter kind of got – some of the first quarter activity got pulled forward into the fourth order. 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, the coin in the portfolio is probably going to be fairly consistent through the year. In terms of type of product, in terms of where we’re seeing it, I just really kind of across the board in terms of all the different areas, but it’s really from construction to that permanent financing stage. And part of that is, we’re at this particular point in the business cycle, we’re just not willing to extend out terms and go deeper with respect to commercial real estate at this particular point in time.

lower funding cost in the spots in the curve…:

Yes.

That we typically would go.

Yes.

Okay. That’s helpful. And then to follow up on some of the comments around in the mobile strategy, you introduced the small business mobile app and from the lending you did last year. Can 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 loan growth.

Yeah. So we spent a – I mentioned the agile teams, that was a great example of the agile team coming together in a matter of months to develop a product that allowed for funding and what was typically days or weeks to hours. And it’s in early innings of the project, but it’s been very favorable in terms of offering customers convenient choice. Your 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 talked about that allows for just a more convenient, simple or set of navigation options and also sales and information. So it’s part of a larger strategy. And also I want to highlight that the mobile app that we are introducing out it’s just phase one. It will continue to be updated and enhanced and you’ll see more and more of these capabilities. I also mentioned in my prepared remarks that currently 75% of our mortgage apps are now done in a digital fashion end-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 application really stronger, and it’s one of the reasons why we feel pretty bullish on mortgage origination through the rest of the year.

Okay. Thank you Andy and thank you Terry.

Yes.

Thanks, Kevin.

[Operator Instructions] Your next question comes from the line of Saul Martinez with UBS. Your line is open.

Hey, good morning guys. A couple of questions, 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 previous quarters versus the fourth quarter and 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?

Yes, the ATM business was sold of mid fourth quarter. So the change and deposit service charges fourth, 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. And I think that’s probably the best way of kind of thinking about it.

Okay. So, sorry. So the best ways to sort of look at the year-on-year Delta versus where it was in the first quarter of 2018.

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

Okay. So it’s a about $40 million to $45 million. So not all of it goes away from what you previously were posting in that ATM processing services line, which was like $80 million to $90 million a quarter.

That’s right. Because it included in that was third party service provider fees as well as that branded ATM fees.

Got it. And then on your C&I loan yields, it tipped up quite a bit this quarter. They were up like 30, almost 30 basis points, I think 29 basis points, which is fairly high even in a quarter where you have a hike and LIBOR obviously moved up. The average LIBORmoved up less than in prior quarters, if anything unusual in that tick up and commercial loan yields that we should be aware of or it seems like a pretty big increase.

Yes, typically I think you would expect to see about maybe 60% of the rate hike that would be probably more normal, so maybe in that 20 basis points. The rest of it is really kind of driven by the mix of the growth in the portfolio. So it’s really more of a mix issue.

Okay. So you get some rate hike and then you’re benefiting obviously I guess from the mix as well.

Exactly. Yes.

All right. Okay. Got It. Thank you.

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

Hi, can you hear me?

Yes, Mike.

Yes, Mike.

Great, so I know Betsy asked one question about Derek White, I guess comes from BBVA, which is considered one of the leaders in digital banking. That’s a pretty big higher. So what metrics should we on the outside look 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 there?

Thanks Mike. And it is all those things, it’s digital engagement. It’s going to be sales activity and be as a 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 in 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, I want to make sure you’re aware of it.

And 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. 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 on loan customers. We also have large employee bases. And I think what we’re focused on is expanding and what I’ll call it digital light strategy, 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.

And then one short follow-up by last one. You’ve been around a long time, 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. You are 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. 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 need a physical presence to expand the customer relationship. And if you didn’t have a branch in that location or many branches, the 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% of our customers use the 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. I think the other thing that I would add is that I think a big part of the digital world is the experiential aspect associated with it. And if you think about Millennials and Gen Z et cetera, being much more digitally attempt, and I think that – as that continues to occur, it’s going to continue to create that opportunity.

Thanks again.

Thanks Mike.

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

Thank you, good morning. Andy and Terry, how are you?

Good morning, Gerard.

Doing well.

Could 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 answered that question, can you think about also your exposure to retail malls in the stuff that’s increased activity and 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 that we’re 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 on the commercial side of the equation 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 areas that we have that it 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, it – 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, 1995, Chairman Greenspan shifted his policy and interest rates from raising rates to cutting rates within six months in 1995. If Chairman Paul 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?

As soon as the rate starts 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.

Yeah. Thanks, Gerard.

There are no further questions at this time. I would now like to turn the call back over to Jenn 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. Bancorp’s first quarter 2019 earnings conference call. We thank you for your participation. You may now disconnect.