Q3 2019 Earnings Call
Following a review on the results by Andy So Terry 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 answer session. If you would like to ask a question. Please press star one on your today.
Tone phone and price dependent key to withdraw.
This call will be recorded and available for replay beginning today had approximately 12 30 PM Eastern through Wednesday October 20, Threerd at 12 midnight Eastern standard time.
I will now turn the conference over to Gene Thompson Director of Investor Relations for U.S. Bancorp you may begin.
Thank you probably good morning, everyone Who's joined our call any serious Terry Dolan are here with me today to review use Bancorp third quarter. So to answer your question.
And he's Harry will be referencing the slide presentation during their prepared remarks.
A copy of the slide presentation as well as our earnings release and supplemental schedules are available on our website, a U.S. banks dot com.
I'd like to remind you that any forward looking statements made during today's call are subject to risk and uncertainties.
Factors that could materially change our current we're looking assumptions are described on page two of today's presentation in our press release in in our Form 10-K , and subsequent reports on file with the FCC.
Ill now turn the call Liberty Andy Thanks, John Good morning, everyone and thank you for joining our call. Following our prepared remarks, Terry and I will take your questions.
I'll begin on slide three in the third quarter, where the dollar content per share.
I didn't more challenging interest rate environment, we reported record levels of revenue and net income driven by healthy loan to deposit growth and continued momentum across our fee businesses credit quality remains stable.
Turning to capital management, our book value per share increased 10.6% from a year ago.
During the quarter, we returned 80% of earnings to shareholders through dividends and share buybacks.
Slide four provides key performance metrics in the third quarter, we delivered a return to the average common equity a 15.3%.
<unk> return on average assets assets of 1.57%.
Our return on tangible common equity was 19.4%.
Positive operating leverage drop improvement in our efficiency ratio on a linked quarter and year over year basis, now I'll turn call over to Jerry will provide more detail in the quarter as well as forward looking guidance.
Thanks, Andy.
Turning to slide five I'll start with a balance sheet review, followed by a discussion of third quarter earnings Troms.
As expected average loans grew 1.1 person a winter quarter basis, an increased 4.7% year over year.
During the fourth quarter 2018 sale up FDIC covered loans that had reached the end of the loss coverage Korea.
Strong residential mortgage and credit card loan growth supported both linked quarter in year over year performance commercial and industrial loans grew 0.4% sequentially and 4.7% on a year over year basis.
Paydown activity picked up in the third quarter, primarily reflecting the rate environment and robust capital market conditions.
New business activity remains healthy all bulk they don't activity is likely to continue at elevated levels near term.
Commercial real estate loans decreased on a sequential and year over year basis. This quarter commercial real estate contributed 33 basis point drag to linked quarter average loan growth and an 89 basis point drag to year over year average loan growth.
Turning to slide six deposits increased 1.4% on a linked quarter basis and grew 6.0% year over year.
Paired with the prior period, we continued to see migration from non interest bearing interest bearing in accounts that migration along with deposit growth momentum in both our wealth management and corporate and personal banking divisions.
Dr. average savings deposits up 8.4% year over year.
As you go feel slide seven credit quality remains stable on a dollar basis nonperforming assets increased 2.7% versus the second quarter, but decreased by 2.5 per cent compared with a year ago.
The ratio of nonperforming assets to loans plus other real estate owned was stable at 33 basis points compared with the second quarter and modestly improved versus 36 basis points a year ago.
[laughter] slide eight highlights third quarter earnings results, we reported earnings per share of $1.15 compared with the dollars six a year ago.
Turning to slide nine net interest income on a fully taxable equivalent basis declined by 0.5 per cent compared with second quarter and increased by 0.8% year over year, which is in line with our expectations.
Well, it's linked quarter and year over year comparisons benefited from healthy loan growth offset by the impact a declining rates and a flatter yield curve.
Our net interest margin declined by 11 basis points versus the second quarter inline with our expectations.
About four basis points. So the decline was due to higher cash balances, primarily reflecting changes in policy is related to deposit by the European Central Bank.
Slide 10 highlighted trends in noninterest income.
Middle single digit year over year growth in each of the three payment felines credit and debit card corporate payments products and merchant processing was driven by higher sales volumes.
As a reminder, processing day count will end up affecting your older Your credit and debit card revenue growth comparisons in the several quarters in 2019 in the third quarter three additional processing days versus a year ago benefited revenue growth in the fourth quarter, two fewer days will be a drag on year over year growth we continue.
To expect low single digit growth of credit and debit card revenue fee revenue for the full year.
Commercial product revenue increased 11.1% from a year ago, primarily due to higher corporate bond fees and trading revenue related to strong capital markets activity [laughter] mortgage banking revenue increased 56.3% year over year on strong origination in sales revenue growth compared with.
Third quarter of 2018 mortgage production volume increased by 40.3% and mortgage application volume increased by 53.1% refinancing activity represented about 40% of production in the third quarter plenty 19 compared to about 30% in the linked quarter refinancings.
Represented 51% of applications and the other applications in the third quarter.
Year over year decline in deposit service charges reflected the impact of the sale of our third party ATM servicing business in the fourth quarter 20 team.
Increased and other revenue was partly driven by the inclusion of their related transition services revenue, which will decrease over time as well as higher equity investment income and a gain on sale of assets.
Turning to slide 11 year over year increased in non interest expense reflected higher personnel costs, partly due to higher variable compensation related to business production was on mortgage banking and the capital markets business lines as well as increased medical costs.
Professional services expense increased primarily due to business investment and enhancement and risk management programs, while higher technology expense growth was primarily tied to the business growth initiatives.
The decrease in other expense, primarily reflected lower cost related to tax advantaged projects and lower FDIC assessment costs.
Slide 12 highlights our capital position.
At September Thirtyth 30 at September 30 of our common equity tier one capital raise show estimated using the Basel three standardized approach. This 9.6%. This compares to our target of 8.5%.
As previously discussed our goal has been to manage the capital level closer to our target once we had clarity related to adopt in seasonal and final capital rules were promulgated by the federal reserve.
With the recent release of the final rules, we plan to make a request to the federal reserve to increase our share repurchase program to enable us to begin the reducing our common equity tier one ratio from 9.09, 0.6% to approximately 9.0%.
I'll now provide some forward looking guidance.
For the fourth quarter, we expect fully taxable equivalent net interest income to decline in a low single digits on a year over year basis.
We expect middle mid single digit fee income growth on a core business year over year, we expect to deliver positive operating leverage for the full year 2019 on a core base those inline with our previous guidance. We continue to expect our taxable equivalent tax rate to be approximately 20% on it.
Full year basis.
Credit quality in the fourth quarter is expected to be remain stable compared to the third 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.
Record results and industry, leading returns that we delivered in a third quarter. Despite a more challenging interest rate environment is a testament to our well balanced business model are numerous competitive advantages and our risk management discipline.
As we head into the final quarter of 2019, so we feel good about our loan and deposit trends and our ability to continue to gain market share across our franchise.
As indicated on slide 13, we're seeing good digital uptake trends as loans are increasingly sourced through our digital channels, we expect better customer experience.
Higher accountant volume growth and improved operational efficiency.
Our core fee businesses are performing well investments made over the past few years in our payments can mortgage business lines are delivering anticipated results in the form of improving sales and volume growth.
Our scale and differentiated service model is helping us win new business and expand existing relationships in our trust and investment services business, which is driving strong assets under management and fee growth.
Accordingly, we are deepening relationships across our entire franchise as we bring to power one U.S. bank to each of our business customers and consumers.
Credit quality remains stable and we are not seen any early indicators in our portfolio that causes concern. However, we are mindful that and at some point industrial experience or credit downturn and remain disciplined in terms of origination quality and our long term strategy of remaining within our define credit box redone, regardless of the competitive environment.
In closing I'd like to reread reiterate the message I delivery, our recent Investor day.
We are in a position of strength and we'll continue to leverage the core competencies and competitive advantage has that kind of story. Our today. However, the world. This changing rapidly and we are adjusting and investing for the future. So that we can continue to deliver the industry leading growth and returns our shareholders have come to expect from US I think I'd like to thank our employees.
For their hard work and commitment they bring to the job every day.
We will now open up the copper QNX.
[noise] if he would like to ask a question. Please press Star then the number one all your Touchtone phone and press the pound key to withdraw.
Well pause for just a moment to compile the Q and a roster.
[laughter].
Your first question comes from Matt O'connor with Deutsche Bank.
Uh huh.
I'll be we're not hearing we're not hearing Matt.
And Matt Your line is open.
We can go to the next caller, maybe Mac and dialing.
Again.
Okay and your next question comes from the line of John Mcdonald with Autonomous research.
Hi, good morning.
Morning, just wondering.
Hi, Jerry I was wondering if you could just give a little more color on the request for the capital increased just over what timeframe you might be looking to do the nine six down to nine is that over the course of a year or a couple of months or.
And again, what gave you the what was the clarity we're looking forward Seesawing tailoring I think you mentioned, yes, well with respect to the second part I think that we've now been through parallel run for a couple of different quarters and.
The outlook from an economic standpoint, it's still relatively solid and so I think we feel comfortable that we have a good range and it's consistent with only talked about at Investor Day, and then obviously the final rules coming out is helpful, but timing standpoint.
And it won't be accelerated I think it'll be bringing that 9.6 down to 9.0.
Really during the 2019 see CCAR cycle, so by the end of the second quarter.
Okay got it so it is for this cycle to do it by the second quarter last year, yes.
Okay got it and then I wanted to ask you guys just more broadly about your outlook.
Just in terms of kind of generating positive operating leverage in what is proving to be a difficult more difficult rate environment.
As you as it turned the corner went to 2020 is that a goal is that 100 basis points kind of a bogey still and Terry you had mentioned at the Investor Day to 2020, you know was a tougher year when you're talking about your three year targets.
And then and maybe also tell you could just kind of clarify I think in Investor Day, you said part of that outlook as you thought your net interest income micro faster than your fees and maybe just give a little follow up color on that.
Yeah, So a lot of different lot of different questions or I mean, certainly in terms of positive operating leverage, let's say balancing act between short and long term and we always kind of take that into consideration 2020, as I said at Investor Day, I think is going to be a challenging year because of.
Where interest rates are today versus where they were a year ago him in the long end of the curve tenure as I think down 150, almost 150 basis points, where it was last year. So.
The the landscape certainly has changed relative when that guidance came out.
When we right now I think our outlook with respect to positive operating leverage is two to achieve that in 2019 on a core basis.
And as we kind of think about different initiatives.
Things, where we will take into consideration as.
The fact that our.
We continue to transform from a digital perspective.
Derek talked about kind of I mean, do it yourself sort of a focus you know so I think you were going to end up looking out a lot of different things that we can do in order to try to manage expenses as prudently as we can.
But I think part of it is just what happens with interest rates I mean as a so volatile right now it's a hard really know and.
Having an outlook that's much beyond a quarter is pretty tough.
Coming back to net interest income versus fees than that and tightening sorry. So those comments are really focused around what we think between now and three years out where that growth is going to come from and I think part of that as an assumption that once we get beyond 2020, the interest rate environment starts to normalize and either stable.
This is our starts to come up and so I think that's the part of the thought process between where that mix is going to come from.
And I'd just reiterate John that theme that we talked about it. This is Andy talked on Investor Day continues to all of which is delivering in the short term on investing for the long term. So we're going to manage short term performance understanding the rate environment in all in the economic environment, but deliver on what what we.
What we talked about in terms of positive operating leverage but at the same time investing for the long term growth that we're seeking.
Got it thank you sure John .
Your next question comes from the line of Betsy Graseck with Morgan Stanley .
Good morning, Thanks, Good morning, Hi.
One follow up there on the tailoring rule Theres also a benefit I think to the LCR and how you're.
Required calculate that and carry cash around that and I'm wondering.
Does that have any impact on how you think about either at the portfolio that you're holding or your ability to be more competitive for.
Owns because you can value nonoperating deposits or any other benefit from that that that maybe we could get alone under the hood on.
Yes, so with what the rules related to LCR coming out.
So essentially kind of reducing into a 80, 85% level and as we talked that.
It really helps free ups liquidity, probably in the range of $11 billion to $15 billion kind of in that ballpark and we're still formulating a kind of what our game plan as but.
I think Ted.
We'll look at kind of remix in the investment portfolio in order to be able to.
Both extend duration and possibly enhanced feels a little bit we may look at reducing our debt level in the wholesale markets and I think that a number of those different actions.
It would would be beneficial to the company on its going to be it's going to be basis points, it's not going to be.
A major.
Change I think in terms of net interest income just based upon kind of where the yield curve as et cetera, but we're looking at all sorts of things.
Right and I get that every little bit help though so you have just because under does yep and and does it impact at all the competitiveness with regard to commercial lending or not really.
I don't think so okay, I mean, we Uh huh.
We ended up but driving from a competitive standpoint based upon what the prices in the marketplace and I just don't get impacted that a lot and given our debt rating on our low cost of funds were already in a pretty good position regard regarding loan pricing.
Got it Okay, and then and you just separately you know at Investor Day, really interesting you know kind of cyber attack.
Showcase that you had and I wanted just to understand how you're thinking about the offering that you've got four merchant acquiring merchant services and I understand where are you, saying there's more that you can do there to expand your offering either to other verticals take what you've gotten in your restaurant hospitality et cetera to other verticals.
Sure.
If there is more that you can do with adjacent sees on some of the things that you've been adding to over the past year or so.
Yes, I think it's a three pronged strategy. One is continued focus on e-commerce , and I SBS, which we've made great progress in over the last year will continue to focus on a going forward secondly is the.
Focused on certain verticals you named a couple Airlines hotel the industry health care, and thirdly, and importantly, and probably the biggest opportunity is this combination of banking products and services together with merchant products and services. The fact is.
All of our merchants bank.
Many of our small business customers need a merchant provider and our ability to weve and put those products together in a comprehensive set.
That helps the customers run their business and get them information I think as a key to our focus and one of the areas I think obviously the most potential.
And is it primarily you asked or is it also Europe I know you have.
More global footprint in this yes. So so the first two would be global across the board that combination of banking and got merchant processing would be principally in the us.
Uh huh.
Okay. Thanks.
And your next question comes from the line of can Usten with Jefferies.
Monica vacancy hey, good morning, guys. How you doing a it's just a couple of fee follow ups I'm, obviously mortgage banking was very strong and I'm sure built into your outlook for the fourth quarter growth, but can you just talk about how much more pipeline you expect to pull through on the mortgage side and what you're seeing in terms of the gain on sale outlook and.
And so the common loan officer side to the equation there.
So if you think about mortgage banking as we I mean, obviously, there's a very strong quarter from refinancing when we end up thinking about the fourth quarter. You know, it's very dependent upon where long term rates are there was a rates kind of coming up a little bit. Most recently at probably will not be of strong, but I think it'll still be a good year over year story.
The mortgage banking perspective.
Application volume as a strong and production it was strong in the third quarter. We continue to see that momentum, yes, I think candidates and we talked about this is you know we've been.
Over time, making that investment in mortgage loan officers on the retail side of the equation enhancing that.
The digital platform that we talked about has a very high percentage of.
Okay.
Application capture and that just that just helps and helps because of the speed to market in our ability to be able to service.
Those customers and get the loans thought we went through the last.
What I would say cycle refinancing and are.
Our processing times were relatively short compared to competitors and certainly what we have experienced in the past once all because of those investments.
Got it and my second question I know its comes up from time to time, but inside the other you always mentioned that you know the p. gains or are there and we know that the the ATM or.
Agreement isn't there as well can you help us I wondered just to understand the magnitude of the PE against either even on a comparison basis, if not the number and then also just how the ATM services is how much is that in revenues and expenses today and how does that work going forward. Thanks, sorry, yes, so in terms of.
In terms of other revenue.
It is it won't be category it ends up going up and down depending upon what's happening within the various categories. It includes a lot of different things an equity investment as just one piece of it but the unemployment at the overall increase on a year over year basis, I would break it down kind of like this about half of it is related to the transitional services revenue and.
25% of its related to equity investments and none of it's kind of combination of a lot of other things are kind of driving that so when we think about it because I know this question is out there when we think about other revenue we talk little bit about this.
Over the course, the last eight quarters. It has ranged anywhere from on a quarterly basis 160 million to as high as 300 million and when we end up looking at kind of what is a core reasonable level that 200 million dollar range is kind of in that ballpark give or take.
<unk> up a little bit in some quarters and down a little bit another quarter and thats, how we kind of think about it.
And then can you just on the on the expense side of the ATM is at a decent part of the growth on the expense side as well the services agreement. Yes. It is no that service agreement was really.
Negotiated in order to be able to cover the cost and so the cost levels associated with making that transition service agreements is as you.
A fairly similar to the revenues are generated and from a timing standpoint that will start to go away as conversions are taking place between now and the end of 2020.
Got it thank you.
Thanks, Ken.
And your next question comes from the line of Mike Mayo with Wells Fargo Securities.
Hi.
I know, we decide your Investor day, you're talking about positive operating leverage driven by the digital transformation. So I guess I have a front office and kind of a back office question. The the front off. This question I guess you close what like 150 branches in the last year, but stood decent deposit growth. So how much growth are you getting through debt.
Digital channels.
Or some sort of metric that you can give us and then the harder question. The back office I mean, your retooling the inside of the company.
Can you give us any metrics one like data centers or that the peak, where you are now where you expect them to go or what percent of your applications you expect to migrate to the public cloud or or anything else about how the the internal retooling too.
Mike I'll start and then Terry can add on so from a sales perspective, as we think about the digital initiatives that revamping of our App and the.
Focus on the digital capabilities is focused on a couple of areas one is insights and improving the ability to connect with the customers. But secondly, it's also the ability to improve sales activity and you see some of our loan stats in the deck that we provide as part of the earnings call well tell you that both loan activity from a sales perspective as well as deposit activity is growing quite rapidly.
And we will see a continued.
Movement of more sales activity transactions is already high as you know digitally but more sales activity to digital channels I think over time, which will allow for continued opportunities on the expense side. The equation and if you think about back room, yes. So I mean, it was the backroom or even within the branches I'm a big part of the decision around.
Orders related to branches and reinvestment in branches as well is really kind of that intersection of our employees are people in digital and our customers.
Obviously, the customer behaviors are changing.
You know the.
Amount of transaction activity that's happened in the branches is significantly less than where it was in fact, 80% of at roughly 70% of it goes through digital channels. Today, So that gives us the opportunity to really reconfigure the branch network. Both in terms of size the numbers et cetera.
But also to change the focus from a service oriented type of location into something that's much more either sales and or advice focused and so I think those trends are going to continue I don't necessarily have specific metrics.
On the deposit side, I would say that there's still room and opportunity for the percentage of sales from the deposit perspective to continue to grow.
And I think.
Derek at Investor Day has said you know when you think about you think about the opportunity from a digital perspective from sales and I and we would include deposits and this is that now that should give us closer to that 40, 50% over time, but it'll take a while for us hit there because thats a customer adoption that has to take place.
Okay, and then as far as the back office. It could do you have any metrics on.
Number of data centers or how many apps you expect to migrate to the public cloud or anything else just on the inside of the company.
We havent disclosed a number of datacenters, but I would tell you might that we continue to migrate activity to the cloud and Jeff Jeff I'd go over and spoke a little bit that added investor day, but most of our new activity development with will occur in the cloud, which offers a number of advantages both from a capacity as well as a cost yep yep.
Alright, thank you.
Thanks, Mike.
And your next question comes from Scott, Hi, fresh with Sandler Oneill.
Hi, Scott Scott Corning guys. Thanks for taking the question just Terry maybe some updated thoughts on the margin given that the noise from some of the transitory stuff in the third quarter should presumably be settling into a fourth quarter I guess one.
When and apologies if you said this but when do you have any additional rate cuts baked into your own outlook. There and then just as we go forward, we still thinking kind of $40 million to $45 million, a sort of all else equal from impact from you trade cut.
Yeah, well, let me make kind of talk a little bit about kind of our guidance and hopefully this will kind of get to some of your points you saw our guidance with respect to low single digits is really kind of looking at the implant market rates in terms of where they're at.
In the first couple of weeks here of October and.
Kind of implied in that is an assumption that rates are going to decline in our assumption is that it will be in 25 basis point cut in both October and then in December and.
I think theres still question as to why the December curves.
The long end of the Kirby United before assuming that it's roughly kind of where is right now so that's kind of the assumptions that were.
We're baking into kind of our perspective regarding margin.
Our net interest income from a margin perspective.
It's down about 11 basis points on a linked quarter, there's about four basis points, that's really related to that those cash balances are going in the balances and so.
When we think about the fourth quarter, we would expect our net interest margin to decline, but kind of in the range of that core level, which is 70 basis points.
Okay. So 70 basis points of margin decline in the fourth quarter in the fourth quarter, Yeah, I think that the other thing is it's a kind of interested if you think about third quarter third quarter from an average perspective short term rates were actually up about 29 basis point 30 basis points, while the long end it was down about 100 little over 100.
In the fourth part of that will be the first quarter on a year over year basis. When the short end is down.
You know kind of in the range of that 40 to 50 basis points in the long end is down 150 basis points. So in the industry. That's why people are looking at and then just we would expect fourth quarter to become more challenging as we go into the quarter and into 2020.
Okay, and then so with that just I understand what that's 78 basis points, presumably that kind of moderates as.
We would look of additional rate cuts or is that that's sort of a new new products I just want to make sure I'm I'm sort of understanding but yeah I mean.
I would say that given the fact that it and so volatile right now and we don't really know where rates are going I hate to look out beyond the fourth quarter. Okay fair enough alright. Thank you very much I appreciate it.
Scott.
Your next question comes from the line of Ericsson Nigerian with Bank of America.
Hi, good morning print Erica.
I wanted to follow my on John's line of questioning so even outside of mortgage the fee income trends are quite strong and payments up 5% year over year Trust and investment management up 2% year over year and I'm wondering as we try not back to your your your long term revenue targets.
He is a 5% fee income.
Clip over that three year period.
Ido too optimistic or about in line with what you're thinking I guess the reason I'm focusing on fees is because like you said Terry nobody has any idea and what the curve forward curve is going to look like right. I mean, the probability of October changed in the power over the past two hours I'm trying to think about the contribution of fees and I have a follow up on balance sheet growth.
Yeah, well, maybe just kind again in this kind of ties a little bit to investor day in some of the guidance was such that the outlook for fee income.
In part will depend upon what happens with rates I mean, the puts and takes with respect to mortgage banking and saw all kind of a function in terms of what happens from our rate perspective, but.
I think we're confident when we think about the investments that we've been making both in the payments space. So the business and our corporate trust in some of the digital capabilities.
Our capital markets business all those.
We feel like we have a position of strength at this particular point in time and that momentum will continue to carry but I mean, there will be puts and takes it kind of depends upon what happens in the environment.
Tumor spend continues to be strong we don't see anything in the short term, but you know where that ends up turning I wouldn't get into 2020 is anybodys game.
And on the.
Balance sheet gross contribution to those long term revenue targets and the fully acknowledge had 2020 is going to be challenging if the rate curve because it normalize as you think but doesn't necessarily get worse than whats in the current expectation.
Is there enough opportunity in terms of.
Delivering all of the bank into your current customers with regards to loan growth in other words that implies to me that you would you know we would need mid single digits digit loan growth over those three over that three year period in order to potentially mitigate some of the net interest margin.
Volatility or lack of help from the yield curve, rather, yes, maybe a couple of things.
The targets that we soccer kind of based upon where we think.
No the growth rates are going to be as we get into the second and third year.
Tried to be clear that that's not our expectation with respect to 2020 units not necessarily a compounded rate over the three years because of the challenges that will happen in 2020, but when you end up when we think about you know the balance sheet right now.
And again this is all kind of depends on what happened in the economy and thats, a little bit hard to predict but no consumer spend and consumer confidence continues to be strong and business activity continues to to be strong I think it's moderated somewhat because of tariff policy and that sort of thing or trade policy, but [noise], but.
Generally I think the economy is solid and when we end up thinking about 2020 from a loan growth perspective, we think that some of the trends that we're seeing this year will continue.
And as as we talk third quarter loan growth of about 4.7% in the quarter basis.
We think thats achievable and I think from US banks perspective, we have the lowest cost of funds in the industry and we have some competitive advantages from a pricing perspective that will enable us to be able to seasonal effects. So I feel reasonably confident yes, and Eric can you know if you think if you step back and look at the third quarter, earning asset growth was just under 5% or deposit growth year over year was just about.
6%, so thinking about the balance sheet growing in that mid single digits I think is about right yep.
Got it great. Thank you capture.
Okay.
And your next question comes from the Vic tune Jay with JP Morgan.
Good morning to that payback honoring hi, sorry, we've been jumping around multiple Paul Simon apologizing, if I'm repeating making you repeat something.
The other income did you give any sort of way to think about walk the sort of run a run rate that seems reasonable.
Yeah, we did talk a little bit about that and maybe just reiterate we end up looking out of that and when we think about it ends up looking at that level on a quarterly basis, it's gone anywhere from 160 million to $300 million and that's a function of the lumpiness that exist across a lot of different categories of of income within that.
Coding equity investments.
But if I were to when we think about kind of that core level on a quarterly basis. It all 200 million plus or minus is kind of the I'll, where we believe that is a reasonable.
Kind of range and if you remember in the past I had said.
Somewhere between 175 in 225, and that's kind of in that ballpark. So when you end up looking at when you kind of looking at the year over year.
Ill.
For the third quarter, but half of that growth is related to the transition services agreement, that's tied to the ATM business and so that.
Goes away over time.
During 2020 tied to win those conversions together at the expense together with the expansion of the expenses is pretty similar to the increase in.
Related to the transition service revenue I know you.
And then the other one which is positive operating leverage of previous guidance, who used to have the hundred 250, which went to 100 are you thinking fully in 19, given everything going on new obviously got positives on mortgage banking other income running higher but then eni soft or is it still closer to 100 base.
This points or do you think given where rates have gone it's.
Thats going to be harder to get to.
Where are consistent with we talked about Investor day, the deck, which is somewhat below 100 basis points still positive operating leverage.
Okay.
Okay, great. Thank you yes.
Your next question comes from line of Matt O'connor with Deutsche Bank.
Well go back value, thanks, sorry about that before.
Just stepping back kind of bigger picture. This whole operating levers question, you've got the best revenue growth year to date I think of the big banks about 4%. It seems like the expense growth is also the highest and I guess I'm just conceptually wondering like is that the cost of doing business like to get that much revenue growth. That's expense growth that you need or is it was still some.
Catching up.
In terms of infrastructure or single stuff that you are working on a few years ago or is there something to get ahead of.
Congrats to help drive revenue growth in the future and obviously I'm not looking for specific numbers, but just conceptually.
You know some people would look at you and say okay. The revenue goes is really good.
At the expense growth is a bit higher end.
It might just cost how much to generate that much revenue growth, maybe if you just to comment on some of that.
So I'll start Madden and Terry will add on so certainly first from a big picture standpoint, three big puts and takes number one is we're going to continue optimizing under of initiatives from an operation standpoint, the waiver delivering products and services. The way we're operating in the back room and all those things will allow for some safe. So thats a positive secondly, we're going to continue to invest for the launch.
German the digital initiatives, we talked about in Investor day, So thats going to cost, but more a lot of that's already in the run rate. If you look at the third quarter, specifically, though there were a couple of areas of revenue growth, specifically mortgage and capital markets that have expenses related commissions associated with them and that was one of the reasons for a little higher expense growth.
Okay.
I think I would just kind of maybe add to that.
Because we see that in mortgage obviously doesn't capital markets.
Typically but no one optimization standpoint, we talked about this investor day, no very focused on as the customer behavior change in making sure that were Spain lock step with that and I think there as well as opportunity in the front office from a branch perspectives and we'll continue to look at that and as I said, we you may accelerate or increase you know some of the activity associated with that but it's going to.
We tightened what happens from a customer standpoint, and then as we continue to move to a digital platform I think theres back office opportunities in terms of optimization and then the other thing in this kind of gets back to the digital digital activities that he was talking about we're making are making important investments in all of our lines of businesses and.
We want to and we'll continue to do that because it's important for US look both short term as well as long term so.
Okay. That's helpful.
I just I think sometimes we're also focused on the absolute level of operating leverage and the fact of matter is call. It 80 bips of operating leverage with 4% revenue growth is a lot better than you know, 1% plus operating leverage with 1% Remy growth just the way the math works so.
Okay. Thank you well that's right isn't it.
That 0.8 positive operating leverage on 54 efficiency ratio have before as a lot different than 1% on 62, no side given its all sorts of things part of its the starting point.
Thanks Pat.
Your next question comes from the line asylum Martinez from with the yes.
Hey, good morning, guys.
Hey, So you guys to address but.
Lot of my question is going to ask you to speak to some of the loan growth trends, which pretty pronounced not not only in terms of the absolute level balance sheet growth, but just the mix with commercial on an end of period basis, commercial growing 3% and and consumer 7%, even with home equity declining so the cores, even even faster than that so I guess a couple of.
So maybe you can you just how much of that growth is related to.
You know exhaustion is factors or is.
Dependent on a strong macro environment, continuing and how much of the growth is a function of things you're doing at the company level to deepen relationships use analytics and whatnot and I guess the second part of my question, though is.
Around fee so in and whether you could you know do you guys. Even can do you guys consider the impact of Ses along.
Yes, when addressing this growth because a lot of the growth is occurring in.
Lending segments that are going to be disproportionately impacted by Cecil longer term.
Longer weighted average lives in higher loss content like card and you guys think yourself Perry mentioned at the Investor day that Youre, you'll have a higher a triple well to maintain that a triple ratio you have to provision more.
But with this mix shift that a true blow ratio will continue to migrate upward and.
Is that something you guys think about or do you guys. Just say that hey, that's accounting noise in the economics of of just lending activity is the same it doesn't really matter and over the life of loan losses. The loss. So just kind of whether you know the seasonal impact on your growth is something you guys think about and how we should think about in terms of modeling it.
Good question and then as we kind of talk a little bit about the past, we think about loan growth and where it comes from and kind of our focus within the company you really think about a more on an economic basis and we do on an accounting because I do think this was a lot of accounting noise that occurs within Cecil for a lot of different reasons. One is that every company.
Have their own forecast with respect to what happens in the economy and.
All things we've talked about so we really think about it more from an economic standpoint.
In terms of in terms of loan growth.
And it's just comes back in terms of wearable, where what we're seeing today and what we see today is that consumer confidence.
Strong and consumer spend is strong and those things for tens or.
Good growth from a consumer perspective and.
Even on the business side, you know that while it may moderate it's still very solid business.
No so.
Some of it is driven by macroeconomic other especially as we kind of think out on longer term basis.
Bill is driven by initiatives.
We we started a.
Yes lending sort of flat on a year ago, but this focus and Andy talked about it now we have merchants in the merchant acquiring side equation in small businesses and there is a there is a significant opportunity for us to build the leverage. Both also when you think about loan growth. We also because tied to some of our initiatives.
Okay. No. That's helpful. Thank you very much thanks.
Your final question comes from the line of Gerard Cassidy with RBC.
Thank you I want to it drags morning, guys.
You guys had been very good sharing with us the competition in commercial real estate lending and what's going on in the different loan markets. We hear from many of the smaller commercial banks that they're building out the Treasury management products are you guys seeing any increased competition in that part of.
The commercial customer base that you know that you deal with that use those products.
Sure. It I would say, it's not any different than we've seen historically I would say probably does that change it's occurring in treasury management, you'll continue to see it going forward is that migration and the use cases related real time payment rates that have been developed at the new products and services as a result of that so I think that is going to continue to be a change in you think about our.
Capabilities and Treasury management combined with a corporate payments I think you're going to continue to see those things coming together and changing with these new rails that had been developed.
And do you think you're speaking to Andy do you think Xcel will play a role and then on a go forward basis, Brazil goes from a P to P to possibly a b to b.
Well as Ll will start to use those new rails as a component of their mechanism for sure Thats. One number two as I think still has a lot of opportunity for growth in different aspects and that is there also use cases request for payment and other things that are kind of the sell side. So youre going to see changes on the on the business to business side related to the real time rails.
You're going to see continued migration and changes in enhanced spent on the consumer side related to sell and at some point some of those thanks particular small business may come together a little bit.
On a three other thing doesn't Gerard I would just say is that the I think the challenge or the competitive.
Landscape is going to be one based on who is able to make investments in connecting the rail real time rail or sell or whatever you might be keys to the customer and that's where our area of focus has really been around.
Use cases that create.
A value proposition to the customer and that's that investment is very important and it's an area of focus for US is absolutely right. Thank you.
Thank you and then to pivot you guys have been very conservative in your construction lending the portfolio is about what $10.7 billion down just under 5% on a year over year basis, but there seems to be recently a resurgence in housing today the national associations have homebuilder.
Lose their marketing index rose, beating consensus and there seems to be recently some pickup in activity. Here are you guys seeing that in any year markets and are there opportunities for you to capture some of that growth.
Sure we have a housing capital group that does focused on homebuilders and we are seeing good growth there, they're a west coast in south principally is where our focus areas and that that business is doing well and growing some of the other aspects the commercial real estate and some of the declines that you're seeing a really a function of some of the credit components that were seeing our competitors a move.
To that were not comfortable it. So you have some positives, but we have some negatives and we're sticking with our core customers and within the credit box that we are we participate in.
Great. Thank you so much appreciate thank you all right okay.
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That concludes our call.
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