Q2 2019 Earnings Call
Good morning, Matt have your conference I'd number.
Yes that is 5545338.
Thank you May I have the spelling of your first and last night.
Yes first name is Catherine and spelling is the A.T.H.B.R.I.E.
Last name is Harrison.
Ha, our our ISO one.
Even with the pressure on the media.
No.
I have your company name.
Era, the spelling is A.I.E. already.
Thank you I would like now.
In our press release.
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 take your questions.
Ill begin on slide three in the second quarter, we reported earnings per share of one dollar nine despite our more challenging interest rate environment for the banking industry that has seen some time, we delivered strong financial results supported by topline revenue growth and positive operating leverage of 1%.
Loan and deposit trends improved compared with the first quarter and we saw broad based momentum across our fee businesses driven by account and volume growth.
Credit quality remains stable and we continue to prudently manage operating expenses, while appropriately investing for the future.
Turning to capital management.
Our book value per share increased by 9.7% from a year ago. During the quarter, we returned 79% of our earnings to shareholders through dividends and share buybacks.
In June we received the results of our CCAR submission and the Federal reserve did not object to our capital plan, which included a dividend increase of 13.5%.
Slide four provides key performance metrics in the second quarter, we delivered a return on average common equity of 15%.
And a return on average assets of 1.55%.
Our return on tangible common equity was 19.2%.
Our efficiency ratio improved both on a linked quarter and year over year basis.
Now, let me turn the call over to Terry will provide more detail on the quarter as well as forward looking guidance.
Thanks, Andy.
Please turn to slide five ill start with the balance sheet review and follow up with a discussion of second quarter earnings trends.
Average loans grew 1.1% on a linked quarter basis, and increased 4.5% year over year, excluding the fourth quarter 2018, and sale of FDIC covered loans that had reached the end of the loss coverage period.
Solid year over year growth in mortgages credit cards, and installment loans supported solid consumer loan trends, while commercial loan growth reflected strength in both large corporate and middle market lending, partly offset by pay downs related to active capital markets.
New business pipelines remain healthy, although paydown activity is likely to remain elevated and choppy near term.
Commercial real estate loans decreased on a sequential and a year over year basis. This quarter commercial real estate contributed a 20 basis point Derrick 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 unfavorable risk reward dynamics in certain areas of commercial real estate lending, we expect paydown pressure to continue to restrict growth in this portfolio.
Turning to slide six deposits increased 2.9% on a linked quarter basis of 3.1% year over year.
Compared with the prior year period growth in consumer wealth management, and corporate trust balances was offset by lower corporate and commercial customer balances balances continue to migrate to higher yielding savings and time deposits from non interest bearing deposits.
The decline in corporate and commercial banking balances were also affected in part by migration related to the business merger of a large financial client. This migration has stabilized and we will be less impactful in future quarters.
Slide seven indicates a credit quality is relatively stable in the second quarter nonperforming assets decreased 5.2% versus the first quarter and were down 12.6% for the same period a year ago.
Commercial loan 90 day delinquencies were elevated this quarter as a result of an administrative matter related to a single customer and is expected to be resolved in the third quarter without a credit loss.
Slide eight highlights second quarter earnings results, we reported earnings of one dollar nine cents per share in the second quarter of 2019 compared with earnings per share of one dollar two cents a year ago.
Turning to slide nine net interest income on a fully taxable equivalent basis grew by 1.4% compared with the first quarter and increased by 3.3% year over year, which was in line with our expectations, both linked quarter and year over year comparisons benefited from loan growth offset by the impact of a flatter yield curve.
Linked quarter growth also reflected an additional day in the quarter and higher interest recoveries.
Slide 10 highlights trends in noninterest income.
On a year over year basis, we saw mid single digit growth in credit and debit card revenue corporate payments revenue and merchant processing revenue driven by higher sales volumes in each category.
Trust and investment management fees grew 3.5% due to business growth and favorable market conditions.
And 6.4% growth in commercial product revenue was driven by higher corporate bond fees and trading revenue, partly offset by lower syndication fees.
Mortgage origination revenue decreased on a year over year basis strong origination and sales volumes were offset by an unfavorable change in the valuation of mortgage servicing rights net of the hedging activity.
The 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 of 2018.
The increase in other income was partly driven by the inclusion of the related transition services revenue from the sale, which will decline over time as well as higher tax credit of syndications and equity investment revenue.
Turning to slide 11, the year over year increase in noninterest expense, reflecting higher personnel costs.
And professional services and technology expense tied to business growth initiatives.
This was partially 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 June Thirtyth, our common equity tier one capital ratio estimated using the Basel three standardized approach was 9.5%. This compares to our target of 8.5%.
I will now provide some forward looking guidance.
For the third 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 mid single digits on a year over year basis, we expect to deliver positive operating leverage of 100 to 150 basis points for the full year 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 third quarter is expected to remain relatively stable compared with the second quarter.
Loan loss provision expense growth will continue to be reflective of loan growth.
Now I'll hand back to Andy for closing remarks.
Thanks Terry.
The us economy remains healthy the jobs market is robust and the business and consumer confidence remain supportive of favorable consumer spending patterns as well as related business investment.
While the flattening yield curve has created a more challenging interest rate environment, our core deposit franchise business deposit mix and consistent risk management philosophy puts us in a strong relative to the physician from which we will navigate.
Fundamental trends in each of our major fee businesses are healthy and importantly, our being fueled by growth in new accounts and expansion of existing relationships, which in turn is driving strong volume growth.
Our loan growth came in a little better than we had anticipated in the second quarter and we are confident in our ability to win market share across our consumer kasbrols commercial portfolios.
We are investing in the future with digital initiatives a key focus as you can see on slide 13 loan sales are being increasingly source through our digital channels.
We expect this trend to continue with the expected outcome, a better customer experience higher account and volume growth and improved operational efficiency.
The success of our additional mortgage platform continues to meet or exceed our expectations currently over 80% of all mortgage loan applications are completed digitally.
Small business lending was another area, where meaningful digital migration is occurring.
As a reminder, last fall, we launched a portal that allows small business customers to apply for and fund a loan up to $250000 entirely digitally and then.
Consumer reaction has been extremely positive in June about 25% of our applications for launch of their size use our digital Florida and year to date.
Loan volume in this category is up 7% the same period a year ago.
To summarize the second quarter came in as we expected and we are well positioned as we head into the second half of the year.
I'd like to thank our employees for their hard work and dedication which drove these results that concludes our formal remarks, we will now open up the call for Qs.
At this time, if you'd like to ask a question. Please press star one on your telephone keypad.
The first question comes from the line of Matt O'connor with Deutsche Bank. Your line is open.
Good morning.
Morning, Matt.
I'm sorry, if I missed this group Weve just been jumping around here.
But the margin was a little more resilient this quarter than I would've thought given some of the growth so things like securities and other earning assets basically lower yielding.
Asset bucket, so even though the NIM was in line with what you guys have said.
It did seem a little more resilient and I was wondering what drove that and then if you gave any NIM outlook. Thank you.
Yes, I think this is Terry so I think part of that resiliency. This just loan growth and where we ended up seeing so that kind of the mix of loan growth.
I think that was one of the one of the major drivers.
The we continue to have a little bit of accretion with respect to the investment portfolio and of course the change in the yield curve came very late in the quarter. So I think there is a number of drivers like that.
And then the.
If you think about net interest margin.
Our outlook can be think about for our third quarter.
Our current forecast assumes a two rate to rates declined for the rest of 2019, one and the end of July and one in September .
And the long end of the curve staying essentially kind of where it is and as a result of that we are going to see some pressure with respected mentors arm during the second half of the year.
Okay.
When we think about the margin our expectation is that it is going to decline in the high single digits.
In the third quarter. There are two reasons for that the first one has really no impact on net interest income and let me talk a little bit about that so about half of the impact is due to a change in the regulatory in a European regulatory policy that has the effect of restricting our ability to include these balances in the LCR ratio. It is an industry wide policy change by the European regulatory agencies.
But because LCR as a binding constraint for us we will have to increase our liquidity position by incurred by purchasing HQ outlays securities and funding. This growth through borrowings that will have similar sort of rates, so earning assets will grow and that will offset the impact of.
We have about half of the change in net interest margin.
The other half of net interest margin will decline because directly related to our expectation of the decline in rates as well as where the long term yields are right now.
So.
So.
Good summary, carry and just to reiterate about half of that decline in net interest margin is not impactful at all to net interest income it's just.
So higher asset offset by a lower rate.
Due to that regulatory change that you talked about and I think we're all said and done that we expect on a year over year basis net interest income to be up.
In that during a low single digit range given the rate declines that we expect hearing that as Terry talked about the second half of the year.
Okay, and then I mean, there's obviously.
Some moving pieces on race between here and the October call, but just as we think about say fourth quarter NIM.
The impact of building liquidity is that going to be fully in the run rate in threeq, two or is there going to be kind of a stub impact of that in Fourq you.
And then.
Should we think about a similar kind of core decline in the NIM.
In the fourth year for yet another rate cut in September .
Yes, So let me ask you the answer the first question first on the fourth quarter related to the build in liquidity that will be fully in the run rate.
Because it really becomes effective for us July onest. So we are already kind of execute against that so that will be fully in the run rate as we think about the fourth quarter. The fourth quarter, we will in the third quarter, we will see a we expect to see a rate cut at the end of July and then in September and so will that obviously assets will start to price down immediately in deposit will deposit pricing will kind of come down over time. So I would expect that in the fourth quarter. You are going to continue to see more pressure was expected net interest margin and Thats, just kind of the dynamics of the balance sheet.
Just last one the squeeze in some banks are also given guidance that if rates stay stable.
If rates are stable NIM extra liquidity.
Is that kind of flat to down just a little bit or alright, you want to comment on more of a stable rate environment.
As well thanks.
John .
Stable to here, yes, I think I mean, essentially again, we think about.
Net interest income being relatively stable relative to where it is the second quarter.
It's relatively flat.
Okay. Thank you.
John Pancari with Evercore Your line is open.
Good morning.
Let me turn to John .
Given your outlook for two cuts.
Before the end of the year, the how does that impact your.
Your expectation for expense growth at all does that does that impact how you're thinking about.
Expenses I know you had expected full year expenses to be flat to up a percent or so for the full year 19, and then also I know.
So a little bit of pressure this quarter on expenses. So curious how back growth expectation is changed and then separately about operating leverage as you look for 2020.
How are you thinking about that thanks, yeah. So John again. This is this is Terry so when we think about the second half the year clearly are going to be pressure on net interest income.
But one of the things I think we're seeing as good momentum on the fee income side of the equation, which I think will help to offset.
Uh huh.
Some of that at least a fair amount of that so if you think about it we are seeing acceleration or momentum growing in our payments businesses. The consumer spend issues that were occurring in the early half of the year. It really kind of normalized you were seeing good momentum with respect to our mortgage banking revenue and while it was down about a percentage point year over year. This quarter, we would expect that to have hit that inflection point and start to grow.
In the third quarter, I think that that will help.
We're seeing good momentum continuing momentum with respect to trust and investment Securities and I think with that.
The decline in the.
Rate environment, I think you'll see more fun.
Formation I think in the third quarter with respect to corporate Trust. So my point is that when you look across all of our fee categories. We see some pretty nice strengthen that I think thats.
Kind of one of the benefits of our business model and the diversification that we have on the revenue side of the equation is that fee income tends to help offset some of that pressure on the net interest margin side of the equation antiques and John specifically to your question, we'll continue to manage expense reflective of the revenue environment and we still continue to expect full year operating leverage in that 1% to 1.5%. If the revenue is tougher it will be at the lower end of that range.
Got it thanks Thats helpful and just one other follow up.
How would you think about operating leverage for 2020.
I'm, assuming obviously, that's still very much part of it but again, we could get.
A tougher backdrop as we go from the top line, how do you think about what's attainable in 2020.
Yes, well our goal I think in 2020 continues to be the 100 to 150 basis points will end up having to manage through the rate environment course, making decision short term versus long term investments that we end up needing to make but.
As we think about 2020, we will continue to have that is our goal that we expect to achieve.
Where we might have saw more expansion in a in a.
Based upon what conditions were at the beginning of this year.
That may continue to stay more at the lower end of the range, but we'll have to see how revenues develop.
Got it all right. Thanks Terry.
John Mcdonald with Autonomous research your line is open.
Hi, I wanted to follow up on John's question Terry.
For the operating leverage for this year.
You came in the first half of the year towards the lower end at the 1% just kind of wondering I think you mentioned some things that get better in the second half what are the puts and takes towards maybe getting to the middle of the range.
In the second half of the year, maybe closer to the one and a half.
Yes, I think in order for us in the second half the year again, I think just given the revenue environment on the net interest income side of the equation that that will be harder to achieve.
But again I think it depends upon how strong the fee income growth.
It is as we go into the second half of the year again, we're seeing a nice acceleration with respect our payments our mortgage banking businesses et cetera, So that's going to be kind of a wildcard there.
And then Jon this is Andy on the expense side of the equation importantly, we continue to invest in a number of our technology and digital initiatives, while at the same time.
Optimizing the current business structure, and I think that put and take those two things will.
Drive the expense growth at the low side, so that we're managing consistent with the revenue environment.
Okay, and then just a follow up on some of the III questions. Terry is there a way to size, how much 125 basis point cut.
Hertz in terms of.
Hi, or NIM everything else equal.
Yes, so if you think of.
And again, you can kind of do the math based upon some of our asset liability disclosures, but 25 basis point cut on the short end only.
Probably has a 40% to $45 million sort of impact to us.
So thats kind of how we did mention that.
And then.
You know the if you end up looking at the kind of on a shock basis I guess, if you will that would be.
82.
On $80 million to $90 million.
They all year cost across the across the quarter.
Okay, and you would be like a parallel.
Yep.
Okay, and then just for that so I guess, that's the other point I would like right now are the current reinvestment yields with where the long end is our current reinvestment yields accretive dilutive or kind of breakeven ish.
Yes, so our expectation when we think about the third quarter is that.
It certainly has come down in terms of the amount of accretion that you have we still think there's opportunity for 20 to 25 basis points of accretion on the investment portfolio I think in the short term, though we're going to see some pressure with respect to premium amortization that may offset that.
Okay got it but those securities that you plan to put on.
And.
In terms of the some of the else the pressure that you mentioned.
For the for the next quarter.
Are those kind of how you think of those as an i. accretive.
We're thinking of those is in terms of the liquidity position and the regulatory issue specific yes.
Yes, so we think that that is that's neutral.
From a net interest income perspective.
Got it got in a little bit hurtful to the NIM percent.
Yes, it'll it'll hurt NIM by say it'll be neutral with respect to net interest income.
Got it okay, great. Thanks, guys little things John .
Betsy Graseck.
Morgan Stanley Your line is open.
Hey, good morning.
Thank you.
So just to make sure understand it's neutral for the coming quarter, but does it flip positive one premium amortization goes away.
You mean in terms of the investment portfolio yeah.
Yes.
Again, it kind of depends on what ends up happening with respect yield curve. So if premium amortization starts neutralize it would have a little bit of a positive impact.
Right, Okay, and then I wanted to just ask a little bit of around the mortgage business, obviously strong quarter. There can you give us a sense as to how you're thinking that plays out over the rest of the year is this.
Quarter reflect you know the.
Significant pickup in applications and when you close you know there is only a tail a little tail left or do you feel like this will continue to ramp throughout the rest of the year.
Yes, I think it continues to to be beneficial through the rest of the year and I think for a couple of different reasons. You know some of the benefit is because the refinance activity on the because of the change in the long into the curve.
But you know refinancings continued to be only about 30% of our overall volume. So a lot of that volume pickup for US I think is driven more by things like the investments we've made in our digital channel.
Vestments, we have made in terms of the retail side of the channel versus the the correspondent side of the equation and the fact that because of that investment on the retail side of the equation Weve expected margins to start to improve so we're going to we're going to see the benefit of higher margins because of that mix of business, but also on the purchase side equation volumes have been very strong. So we expect to see a pickup in the second half and for it to continue.
Okay, and then can you talk a little bit about consumer spending and how that impacted you in the quarter.
So actually this is Andy that's starting to come back as we talked about late in 2018 into the first quarter and 19 that started to weaken a little bit, but weve seen sequential improvement in each month announced closer to that by five and a half 6% range, which is still a little bit below early last year, but starting to get back to normal levels.
Okay, and if you if you think about our payments space, you know that Ivan five and a half retain he talked about but on the merchant side as closer to about 9% in merchant acquiring going on merchant acquiring volumes and again I think that is tied to some of the investments that we've been making in the business of the integrated software solutions et cetera.
And then.
The the sales volumes on the corporate payment side of the equation continued to hold up and that's really more kind of in the 6% range. So it's lower than it was a year ago, but.
Still.
Quite strong and those types of things give us some confidence with respect to the where the economy as well.
It was interesting just linking that to commercial loan growth you had a nice pick up Q on Q I know you mentioned that the forward look we'll have.
You know some impact from pay downs and.
I guess the question I have here is have you seen pay paydowns accelerate at all in to Q.
Yes, I would say that the with respect to loan growth in the second quarter not a lot of acceleration in terms of pay downs, we continue to see it in the commercial real estate side equation, and so where we say that theres going to be pressure I think it's really more on commercial real estate and I guess now based upon where we're at in the economic cycle I think we're fine with that.
And those pay downs will come because of increased capital markets sort of activity based upon where.
Commercial real estate developers can't refinance their projects.
But if you had a you know when we think about kind of our.
Outlook from a loan standpoint, again, I think consumer spending.
You know continues to be strong GDP is holding up okay unemployment is just fine.
You know the we're seeing good growth in terms of the middle market space and really kind of across most regions in the country. So.
We just we just think that Theres a lot of signs that would suggest that that loan growth is going to continue.
M&A activity pipelines et cetera, So we feel fairly confident about where we're at right now.
And just one last question for me on the Middle market side in most regions doing better I'm wondering if you're seeing any particular industries accelerate because you know as we look at the macro data we've had some.
Pulled back in some of the manufacturing area trade AG, our transportation I should say agriculture.
So one of the things I've been getting from folks is hey, you know, whereas this strains and seen I coming from I don't know if you have any.
You know things, yes here with us on that yeah again on the middle market side of the equation you know that if you think about just kind of core commercial see an eye.
Our growth was on a linked quarter basis, two plus percent I think it did there was a little bit of an offset or drag because of the agricultural lending that we have.
And again Thats, just kind of where the farming economy is at this particular point in time, we don't do a lot of land financing ours is really tied more to.
Farm operations and the exposure to AG for us is really not that significant so.
No. The I think manufacturing continues to hold up reasonably well it may be a little bit lower than what it's been in the past, but for us our middle market business is pretty diversified across many different industries and across our entire footprint. So.
You know based upon what we're seeing right now we would expect that to continue at all.
All right. Thank you.
We won't expect.
Erika Najarian with Bank of America. Your line is open.
Hi, good morning.
Good morning.
Thank you so much for the detail on.
Net interest margin sensitivity to rate cuts I'm wondering if you could give us.
Some insight on how you're thinking about deposit repricing in terms of both lag and magnitude of repricing relative to each 25 basis points.
Yeah. So again just to kind of give a reminder, if you think about our deposit base about half of it is retail in about half of it is corporate and trust.
And the retailers.
Deposit betas in the movements up.
Was fairly elastic so you didn't see a lot of movement with respect to deposit pricing there, but you know our corporate trust in our wholesale deposits tend to be much more sensitive as you can imagine so when we think about a declining rate environments.
We believe that.
Deposit betas are going to come down in the corporate Trust World.
Reasonably.
Reasonably fast as rate cuts are occurring, but you're just not going to see as much with respect to retail.
So perfectly fair, but it had to be does incorporate interest or I think higher than expected. So as I think about full year 2020.
It seems like there's an opportunity for actually net interest margin.
Either stability or accretion relative to Four Q2 19, even in the face of rate cuts. If we assume repricing on just 50% of that book in assuming the curve stays where it is is that too optimistic of a conclusion. Yeah. I think if you end up looking out to 2020 and you're assuming the rate cuts are occurring I think that.
That's because of our mix of corporate trust and wholesale that.
We on a on a comparative basis are going to.
Perform pretty well, so that's more going to be more sensitive and deposit pricing is going to come down more quickly in the right.
I think Jerry is that what you said was the betas for corporate Trust and wholesale will continue to be high asset come down absolutely absolutely.
Got it and I noticed that comp expenses rose only 2% year over year.
And when it had been trending in the 8% to 9% range annually previously and I'm wondering if this is really an opportunity the opportunity that always existed even.
Despite the change in the rate environment and I am wondering as we think about it was comp levels are the good the rate of growth of comp.
A is it between two to eight and how should we think about the slowdown that pace of growth.
Yes. So if you think about compensation that that 8% range and that really was a period of time, when we were building our risk and compliance and.
You know.
Different areas with respect to investments in the business. So that was unusually high and as we've said that kind of started to moderate in late 2017, certainly 2018 2019. I think is is kind of all of that has normalized.
When I think about.
2% to 3% sort of compensation range, we certainly think that we can manage it within that level.
For an extended period of time, and I think that will help us.
Some of that compensation, obviously is tied to revenue. So for example in the capital market space are.
Some of the wealth management areas, but.
So it will be somewhat dependent upon what sort of revenue streams, we see on the on the fee side equation, but that would be a good thing.
Got it thank you.
Uhhuh.
Ken Duston with Jefferies. Your line is open.
Hey, good morning, guys just to ask a couple of quick cleanup ones.
Can you help us understand the magnitude of the interest recoveries that came through the NIM this quarter relative to last.
Yes, you know I mean can we always have we always have interest recoveries that are occurring I think the reason why we want to highlight that a bit as simply because we're at the end, whereas the late end of the business cycle and you know just given where credit has been for an extended period time, we just don't know whether or not that will continue so it's more of just.
Trying to highlight that a little bit because of where around the business cycle.
Okay. So it wasn't above normal or I mean, the way, we do have and what was it above normal even.
I would say it was kind of normalize, but maybe a little bit high given where we're at in the in the business cycle.
Got it okay.
On the on the.
You mentioned in other you had some elevated.
Yes, we have been successfully harvesting some some gains and do you see a lot of opportunities on that front, especially where we are in the equity cycle should that continue to also be relatively strong as far as the other income line. Other fee income line is concerned.
Yeah, I mean other income includes a lot of different things that includes.
Tax syndication revenues that includes another transition revenue related to our ATM sales.
Due to the sale of our ATM business that will continue through 2020, but it will start to dissipate as we go through that conversion on the equity investment side of the equation, we still think there's opportunity there.
Okay, and then last one just as we get hopefully closer to the feds.
Making some of the rules finalize at some point on the Cowering front can you just talk through.
Where you are seeing or anticipating to be the potential biggest opportunity sets and can you get ahead of any of those at all or do you have to wait till they get for more specialized thanks, sorry, yeah.
Certainly from a capital management standpoint deal, there's going to be a benefit because of the AOCI.
And then on the liquidity side that will help us as well.
We really.
We really will have to wait until or we are going to wait until we have clarity with respect to the adoption of that.
And then kind of make decisions both with respect to capital management in LCR, we've talked about in the past that we think that there is the opportunity to to bring down HQ outlay by that $10 billion to $15 billion range and.
Hi, there redeploy it or think about.
The investment security portfolio on the capital management side, you were at 95 today and once we have clarity around see Solange tailoring rules, we would expect to start managing that back down closer to the 8.5% target.
Got it thanks Terry.
We do.
Good morning, most be with Vining Sparks your line is open.
Hi, good morning.
Okay had one big strategic question in a very specific accounting question, let's start with the accounting side.
When you talked about premium.
Amortization, you talked about maybe a headwind you cut off so well there are some headwind coming what I was curious about is most of the other calls we've actually heard man. This was talking about how they had accelerating so I know you can from an accounting standpoint.
Estimate amortization and so when rates move you get kind of a whipsawed around or you can kind of pay as you go I was just curious in the sense of how you're amortizing that premium are you really more kind of a pay as you go are you estimating what you think the rates are going to do to you.
Well, we're certainly taking into consideration what we expect rates to do to premium amortization I think the deal for us anyway.
There is just a little bit of a lag most of the most of the most significant changes that are occurring very late in June and so I know the way that we end up accounting for it and we'll end up coming really more so through the third quarter than it was in the second quarter.
Just the way we on the podium.
So, it's just a quarter lag more than anything else and that's yet again thats, assuming that the rate curve kind of stays where it is you know in terms of what that impact is going to be going forward.
And that happens in the third quarter, and then if rates stay where they're at that's kind of behind you and you go into the fourth quarter then.
With no impact on us since the rates don't change anymore.
Yes, we're open.
All right all right and then the other thing I was trying to get at was.
Merchant processing, you were talking about growth and the eight or nine personally on when revenues are kind of growing in the 4% to 6%.
Hi, how is the competitive environment for merchant processing.
It seems like you've been picking some momentum backup there, but do you feel like you are going to be growing with kind of the same store sales and maybe in a little bit a market share game, how do you envision that merchant processing as you're looking at the competitive environment right now.
Yeah.
So certainly the differences between the two is you know the the tour that you have in their book of business our growth rates I do think that will.
You know from four and a half a percent or so we'll continue to accelerate.
As that new business comes on board. The other thing is that you have effects of foreign exchange and other things that are dampening that growth rate on the revenue side of the equation.
So there's just a number of kind of dynamics, but when we think about the underlying business. We think it's accelerating we think its strong its way and I might add I think the team has done a terrific job of accelerating our integrated software vendor capabilities, well as well as our omnichannel capabilities and importantly, integrating with the other banking component. So that we have a full set of products and capabilities that we can offer our middle market small business customers. So.
Those activities are I think also driving the growth in a in a very positive way.
Great. Thanks.
Okay.
Antonio Chopper.
Yes. Your line is open.
Hey, guys. This is Sal Martinez the U.S.
Hey, How's it going so a couple of questions first of all.
One of the follow up on the area because question on the trajectory of of deposit costs and fully get the difference between retail and.
Corporate and trust deposits, but if I bring all of that together how do we think about just the overall.
Trajectory of your cost of interest bearing deposits because historically you know.
There's typically a sort of a one to two quarter lag between when the cost of deposits.
Start to decline and when the fed starts to cod. So as we think about Threeq to Fourq you should you should see an immediate benefit from say July hike or I'm, sorry July cod or does it take a couple of quarters for that to start to filter in the one point 12%.
Cost start.
Interest bearing cost of deposits starts to come down later in 2019 or from one cures or should we start to see that fall in threeq.
Yes, so let's say corporate trust serve the wholesale side of the equation.
That will be fairly quick.
In terms of the July rate cuts some of it is the timing of the fact that the July rate I would probably happen at the end of the month.
There's just opportunities for us to be able to incorporate that into our process, but so on the corporate trust side equation will be it will be pretty quick.
But there is always there is always a little bit of a lag in terms of it kind of getting incorporate into the process. So the benefit will be stronger in the fourth quarter certainly the third.
Right in your guidance I mean are we assuming are you assuming that the the overall cost of deposits come in from Twoq levels.
Yes, yes, okay, alright in Threeq you alright.
Change gears a little bit.
On your branch strategy, you've you've highlighted.
10% to 15% branch reductions now over I guess, a couple of years.
On the surface. It Didnt 3000 branches that doesn't seem like a huge number.
But it's about three to 450, if thats just dumb if I'm thinking about it right on 3000 branches and I think what you've said in the past is your community bank branches, which are like.
A little over 1000 and in store branches.
Which would take you cumulatively on those two to about 2000 aren't really subject to being rationalized. So.
Effectively your metro markets you're cutting.
The huge amount of your existing branches in in urban markets. If if my logic is right something like 30% to 45% of your Metro markets first I. So I guess my question is is first.
Am I thinking about that right are the cuts going to be exclusively or almost exclusively in the metro markets, which are like a thousand branches and you know what what's driving this because it seems like a pretty.
Substantial repositioning of your branch network.
Yes, so Sal you're right, we have three sort of segments of branches a thousand in a community just under a thousand in store and on site and just over 1000 Metro. What we said is we're not going to exit communities. So we are not going to exit and have no branch standing in the commodity market. We are currently in but we do have some opportunity community markets to rationalize or consolidate branches, particularly those that are close together and that's also true of the in store. So it is not only focused in natural near thing I'd mention to you is that that 10% to 15% a net number that includes optimization really two branches to a better location entering new markets like we announced in Charlotte So for it. So that's a net number across all categories.
Okay, but should we assume that the.
Vast majority of the branch rationalization occurs in metro markets, because even if even if there is some rationalization in.
Community Bank, the community banking and and in store branches it seems like.
Especially considering that's a net number of branches, you'll open in Charlotte Atlanta, Dallas, whatever it seems like a pretty big proportion of your existing branch network gets rationalized in urban markets and what we were looking at optimization of our branch network, it's really across all three categories.
We do believe that there is opportunity with respect to all categories. I mean think about community as an example, and includes some sizable markets like at the mine in Omaha, our Boise et cetera, where we do have.
Fairly significant branch network. So it will be across all of them they will tilt toward the metro markets.
But it will include all markets right. Okay. So it's not just black and white as those maybe thinking about it okay.
Alright, Thanks, a lot.
Yep.
Again, if youd like to ask a question. Please press star one on your telephone keypad, David long with Raymond James Your line is open.
Good morning, everyone you Dave entity.
You guys have.
This is a follow up to that last question, but talking about some of the areas, where you're looking to add branches and.
Just curious how the rate backdrop.
Plays into how aggressive you are in didnt pursuing that strategy.
I don't think the rate backdrop is it is directly impactful to I think what we're trying to do is enter new markets, where we already have a large employee base customer base to have.
One or two or three other products at U.S. bank in their wallet, but don't have a full banking relationship and trying to extend that relationship using the data in it and things that would be valuable that customer regardless of the rate environment. So it's about building. The overall relationship with the customer and then you think about it I mean this is really a long term strategy. So the current rate environment is only one consideration on data point.
Got it and then.
Second question I had was related to see so on the impact that may have.
Yeah, you guys that are positioned at a point, where you can talk about what the impact may be on your overall.
[noise] reserve level and also your appetite to make loans into certain categories.
Yeah. So yeah, I think what we have talked about in the past as 20% to 40% and so in the third quarter will be kind of going through a more substantive parallel run I think we'll have better insight with respect to.
Implications associate at that point in time, but we've always said, it's a range of probably 20% to 40% increase in numbers or.
And.
I think we've even said its you know kind of closer to that 30% sort of range. So you can kind of do the math.
Ah, but deal, we're probably going to wait until we get through that third quarter assessment.
The other thing is I think we'll have better visibility with respect to what the.
Economy will look like and of course, that's that's certainly a driver in that process.
As we've thought about.
All the different products and what will emphasize or de emphasized we are really making decisions more based upon the economics.
Of the product.
Profitability than we are.
While allowing the accounting model to influence as sort of a decision. So at this particular point in time, we Havent really said, we're going to change that approach.
Got it thanks for taking my question. Thanks, David Thanks, David.
Gerard Cassidy with RBC.
Capital markets. Your line is open.
Thank you good morning, guys.
Pardon me does.
Good.
Can you guys give us some color obviously payments is a very important part of your business model and we've seen the announcement on Libra and what they are going to try to do have you guys.
Read the white paper and can you give us your thoughts on what you think.
We have read the white paper and we've had a number of discussions on it.
I think it's in the early stages, you're actually I don't think there's any immediate impact and I think we have a number of initiatives going on with our payments. We are trying to understand the impact and not only that but really optimizing the new real time rails that have been built and are being used a number of use cases across the company that migration of Treasury management, moving the corporate payments activities and the impact on the consumer side to all the real time activity. That's occurring so is one component of a more substantial changes occurring in the environment, which is around payments overall, which is very impactful and very much something we're focused on.
Very good and then coming back over the years. Obviously, you guys have been very successful in making depository acquisitions as well as other non depository acquisitions can you give us your view on what you're thinking over the next maybe.
12, 24 months on depository transactions as well as non depository transactions are you interested or is that something that.
Could happen if the right opportunities came up.
Yeah. So as you know most of our recent.
Transactions have been non depository, they've been either card portfolios payments capabilities trust things of that sort technology capabilities and I think that will continue to be a focus for us as we talked about we are we are working on entering new markets without an acquisition, but in this concept of a digital first branch like strategy. So I think that is a a new way to enter a market in my view more efficiently and effectively without paying a big premium and having attrition that occurs after the fact.
So if we were looking at anything larger and we'll look at all opportunities that would have to be substantial would have to be meaningful and we'd also have to wait.
That transaction against the great momentum that we have across the company right now across many of the businesses and think about it from a long term perspective. So we'll consider all those things, but I wouldn't expect us to enter a new market with a small depository acquisition given around other opportunities to do that.
And speaking of that opportunity Sandy can any early read yet on the digital strategy that you guys have launched into these markets or is it too early to tell or what are you guys seeing from the early results. It just starting Georgia. We are in fact in the next month, we will have the first branch there and while the others are well will come after that so it's too early in the game to tell.
Okay I appreciate that thank you.
You bet. Thank you.
There are no further questions at this time I would now like to turn the call back over to the presenters for final remarks.
Thank you for listening to our earnings call. This morning, please contact the Investor Relations Department, if you have any follow up questions.
This concludes the U.S. Bancorp second quarter 2019 earnings conference call.
We thank you for your participation you may now disconnect.
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