U.S. Bancorp. (USB) — Q4 2018 Earnings Call Transcript

Thank you, Kirk, and good morning to everyone who's joined our call. Andy Cecere and Terry Dolan are here with me today to review U.S. Bancorp's fourth quarter results and to answer your questions. Andy and Terry will be referencing a slide presentation during their prepared remarks. A copy of the slide presentation as well as our earnings release and supplemental analyst schedules are available on our website at usbank.com. I'd like to remind you that any forward-looking statements made during today's call are subject to risk and uncertainty. Factors that could materially change our current forward-looking assumptions are described on Page 2 of today's presentation, in our press release and in our Form 10-K and subsequent reports on file with the SEC. I'll now turn the call over to Andy.

Thanks, Jen, and good morning, everyone, and thank you for joining our call. Following our prepared remarks, Terry and I will open the call up to Q&A. I'll begin on Slide 3, which provides financial highlights for the fourth quarter. We reported earnings per share of $1.10, which includes $0.03 per share of notable items, which Terry will discuss in more detail in a few moments. Excluding these notable items, we reported earnings per share of $1.07 for the quarter. Loan growth accelerated in the fourth quarter driven by strength across our consumer and commercial loan portfolios. The income improvement was supported by growth in new customer accounts and expanding client relationships. Strong payments revenue growth reflected higher sales volume across the board in retail card, corporate payments, and merchant acquiring. We also saw good business growth in trust and investment management, which offset the impact of unfavorable market conditions. In summary, loan growth and fee revenue trends remain healthy. As expected, we delivered positive operating leverage on a core basis in both the fourth quarter and for the full year 2018. Credit quality was stable, and our book value increased by 6.3% from a year ago. During the quarter, we returned 80% of our earnings to shareholders through dividends and share buybacks. Slide 4 provides key performance metrics. We delivered a 20.2% return on tangible common equity in the fourth quarter. We also saw year-over-year improvement in our efficiency ratio, return on average assets, and our return on average common equity. Now, let me turn the call over to Terry who will provide more detail on the quarter as well as forward-looking guidance.

Thanks, Andy, and good morning. If you turn to Slide 5, I'll start with the balance sheet review and follow up with the discussion of fourth quarter earnings trends. Average loans grew 1.5% on a linked quarter basis and increased 2.6% year-over-year, excluding the impact of the fourth quarter of 2018 sale of the majority of our FDIC covered loans that had reached the end of the loss coverage period. On the consumer side, we saw continued strength in residential mortgage, credit card, and retail leasing. Credit card loan growth was supported by expansion in both the number of active accounts and sales per active accounts, as well as seasonal sales activity. Digital acquisition of customer accounts across platforms continues to be robust. As expected, commercial loan growth accelerated and pipelines are strong. Fourth quarter growth was supported by strong M&A financing activity in our corporate banking business line. Paydowns continued to be a headwind to balance growth, however, the pace of the paydowns continues to moderate. Commercial real estate loans increased on a linked quarter basis, although they declined versus a year ago. Linked quarter growth was partly due to the timing of closings in the third and fourth quarter, which helped average balance comparisons. Also, during the last several months, the competitive environment has shifted a bit providing more lending opportunities that meet our disciplined underwriting criteria. Turning to Slide 6, deposits increased 1.3% on a linked quarter basis. As expected, deposits declined on a year-over-year basis reflecting the previously discussed balance migration related to the business merger of a large financial client. This migration impact on deposits continues to moderate. Slide 7 indicates that credit quality was relatively stable in the fourth quarter. Notably, our non-performing assets declined 1.5% compared with the third quarter and decreased 17.6% compared to the fourth quarter of 2017. Turning to Slide 8, you'll see highlights of fourth quarter earnings results. We reported earnings per share of $1.10, which included several notable items amounting to $0.03 per share. Slide 9 lists notable items that affected earnings for the fourth quarter of 2018. Fourth quarter 2018 notable items included a gain from the sale of our ATM servicing business and the sale of the majority of the company's covered loans as well as charges related to severance, asset impairments, and accrual for certain legal matters. The company also had a favorable impact to deferred tax assets and liabilities related to changes in estimates from tax reform. As a reminder, we recognized several notable items during the fourth quarter of 2017, including $825 million of expenses related to settlement of regulatory matters, a special employee bonus, and a contribution to the company's charitable foundation. Along with the tax impact of revaluation and deferred tax assets and liabilities related to the enactment of the tax reform bill, the net impact of notable items in 2017 was $0.09 per common share. My remarks throughout the remainder of this call will be referencing results excluding notable items incurred in the fourth quarter of 2018 and 2017. On Slide 10, linked quarter and year-over-year net interest income growth was supported by higher interest rates and earning assets growth, which was partially offset by higher deposit costs and a shift in funding mix. In the fourth quarter, net interest margin was 3.15%, flat with the third quarter of 2018, but up 4 basis points compared with a year ago. Slide 11 highlights trends in non-interest income. On a year-over-year basis, we saw strong growth in payments revenue and trust and investment management revenue, partly offset by a decrease in mortgage banking revenue and treasury management fees. Lower ATM processing servicing fees reflected the sale of the company's ATM servicing business in the fourth quarter of 2018. In 2019, ATM processing servicing revenues will decline by approximately $150 million and the pre-tax income will decline by approximately $70 million as we continue to provide operational services during a transitional conversion period. Lower mortgage banking revenue reflected the continued, but moderating declines in the industry refinancing activity. Mortgage gain on sale margin was relatively stable in the fourth quarter compared to the third quarter. The decline in treasury management fees reflects the impact of changes in earnings credits, which typically is common in a rising rate environment. The beneficial revenue impact of compensating balances reflected in net interest income more than offset the decline in treasury management revenue. Turning to our payments business, we had double-digit growth in credit and debit card revenue and corporate payment products revenue, each supported by higher sales volumes. During the fourth quarter, the federal government completed its renegotiation of certain payment services. While we expanded our market share of future government spending, business margins will compress in the next few quarters. Additionally, we expect commercial spending volume growth to moderate in 2019. As such, we expect mid-single-digit growth in corporate payments products revenue next year. Strong merchant acquiring sales volume growth drove mid-single-digit revenue growth in the fourth quarter in line with our expectations. Trust and investment management fee growth was primarily driven by business growth, offset somewhat by unfavorable market conditions late in the quarter. Turning to Slide 12, the year-over-year increase in non-interest expense reflected higher compensation expense, primarily due to the impact of hiring to support business growth and compliance programs and higher variable compensation related to business production. This was partially offset by lower costs related to tax advantage projects and lower FDIC assessment costs. Slide 13 highlights our capital position. As of December 31st, our common equity tier 1 capital ratio estimated using the Basel III standardized approach was 9.1%. This compares to our target of 8.5%. I'll now provide some forward-looking guidance. For the first quarter, we expect fully taxable equivalent net interest income to increase in the low single digits on a year-over-year basis. Net interest income is typically lower in the first quarter of each year due to the impact of day accounts and that will be the case again this year. Additionally, in the first quarter, year-over-year net interest income growth will be negatively impacted by the sale of the acquired loan portfolio yield curve. We expect fee revenue to increase in the low single digits year-over-year, including the negative impact of the sale of the ATM business. We expect to deliver positive operating leverage on a core basis for the full year of 2019, in line with our previous guidance. During the fourth quarter of 2018, the provision for income taxes resulted in a taxable equivalent tax rate of 14.6% or 20.1% excluding the notable item from changes in estimates related to deferred tax assets and liabilities. In the quarter and for the full year of 2019, we expect our taxable equivalent tax rate to be in the range of 20% to 21%. We expect first quarter credit quality to remain relatively stable compared to the fourth quarter. I'll hand it back to Andy for closing remarks.

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

Thanks. Good morning, everyone. Can you provide more details on your outlook for the loan segment? Excluding the covered loan sale, how would you describe what you’re observing in the market? You mentioned improvements on the commercial side and solid pipelines, but what is the nature of the loan growth within those pipelines? Do you anticipate further improvements, or do you think the growth will remain consistent with what we've experienced recently?

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

I agree. And the only thing I would add to what Terry said is the first quarter is seasonally typically a little lower just in terms of activity, but we've seen strength throughout the year. We were at 0.3, 0.9, and 1.5 in the last three quarters and I think that's reflective of what we're seeing from a pipeline and from an economic standpoint.

Got it. On the other hand, loans have been increasing faster than deposits, but there has still been solid underlying deposit growth. Should we anticipate that this trend will continue, with loan growth remaining ahead of deposit growth?

We continue to experience strong deposit growth in our consumer or retail business. In the fourth quarter, our wholesale deposits increased compared to the previous quarter, which is positive. At this stage of the cycle, if we see loan growth similar to that in the fourth quarter, it may slightly exceed deposit growth.

Thanks Ken.

Hi, good morning.

Good morning, John.

Wanted to talk a little bit about the plans for a positive operating leverage. You're planning for an increase to the 1 to 1.5 range in 2019. And this quarter looks like you came in even above that range or so, 180 basis points or so after adjustment. So I’m just wondering, how you think about the puts and takes to delivering on that positive operating leverage for this year? What should we keep in mind? And what could push you to the high end of that 1 to 1.5 range?

Certainly, our focus is on achieving positive operating leverage. The fourth quarter typically performs better, and this year was especially strong due to lower tax credit amortization compared to last year, which is related to the implementation of the tax reform bill. The number of tax credit deal closures needed to be reduced, positively influencing this year's fourth quarter. As we consider the upcoming year, several factors seem to be aligning favorably, including a decline in mortgage-related costs. In November, we undertook a reorganization where we evaluated our management structure and various operational levers to better position ourselves for success next year. Andy?

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

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

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

Okay. Just expenses in 2019 versus '18...

Yeah. On a quarter-on-quarter basis.

Okay. Got it. Thank you.

Thanks, John.

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

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

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

Yes, Erika. We're going to manage the company reflective and incorporating the revenue environment, so yes.

Got it. That's clear. Thank you.

Good morning.

Hey, John.

Good morning John.

You mentioned in your commentary about loan growth that you noticed a shift in the competitive environment and became a bit more accommodating in your production. Is that primarily on the real estate side, particularly commercial real estate, or are you observing this trend on a broader commercial scale?

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

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

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

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

Okay. Got it. Thank you.

Hey. Thanks so much. Good morning.

Hey, Betsy.

Andy, I wanted to understand more about your comments on optimizing the branch strategy. Could you provide some insights on your thoughts and plans in that area? When you mentioned selectively expanding, is this an organic approach or inorganic? Also, please elaborate on what meets your criteria.

One of the significant aspects of the consent order was our restriction on opening new branches, which also limited our ability to close branches effectively since we couldn’t optimize our structure and footprint. Over the past few years, we’ve been closing about 1% to 2% of our branches, and I anticipate that pace will increase as we aim to better optimize our footprint, especially where branches are located close to one another, considering the decline in transactions at these locations. At the same time, we are evaluating select markets where we currently do not operate. This could involve focusing on better locations within our existing footprint or even areas outside of it where we have a substantial customer base, using a digitally-oriented branch strategy. This approach provides us with much greater flexibility, and I believe that the net closures will rise beyond the current 1% to 2%, resulting in additional savings moving forward.

Is the deposit growth you are seeking from those markets going to be driven by rates as well? Will you be focusing on higher yielding products, or will it align with the pricing in your branch locations?

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

These are customers that know us and like us with respect to those particular products, we're just trying to deepen that relationship on the deposit side using digital capability.

Okay, that's clear. Thank you. Regarding the ATM, you mentioned the revenues and operating income for 2019. Looking ahead to 2020, will those revenues and expenses be reflected in 2020, or will this situation persist for a longer period?

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

Okay. And the expenses and revenues come down ratably, I assume?

Yeah. The expenses come down ratably, yeah.

Yeah. Okay. Got it. All right. Thank you.

Thanks, Betsy.

Good morning.

Hey, Kevin.

Hey, Kevin.

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

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

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

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

Okay. Thank you for taking my questions.

Thank you.

Hey, Marty.

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

From a merchant processing perspective, there has been a notable shift over the years from a focus on financial institution portfolios to a more technology-driven approach to business growth. This shift emphasizes digital and integrated software solutions, concentrating on specific industry segments. We have also been making investments to adapt to this change. Looking ahead to next year, we foresee continued growth in same-store sales along with new business opportunities. This competitive shift is significant, and the transition to a tech-led model tends to yield higher growth rates and better margins compared to traditional methods. As we have previously discussed, the business has evolved beyond mere transaction processing to providing valuable information to merchants. This focus on technology-driven investments and initiatives is essential.

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

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

And any willingness to take some losses and restructure what's unavailable for sale to round up to the current rates?

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

Thanks.

Yeah.

Thanks, Marty.

Hey. Good morning, everybody.

Hey, Saul.

A couple of questions. First, now with a consent order sort of in the rearview mirror, can you just give us what your updated thoughts are on your M&A strategy in organic growth opportunities? Just what are some of the parameters around which you might gauge any opportunities or if that's not part of the thought process, also that would you just let us know if there's any update on your M&A? How you're thinking about M&A right now?

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

Okay. So there's really no updated thought in terms of how you might consider a deposit for you?

Throughout the consent process, we haven't encountered any transactions that we would have pursued. In this new environment, where transactions are moving away from branches and our digital capabilities are expanding, the dynamics around deposits have changed significantly. Therefore, I anticipate that our focus will be on payments, transactions, integrated software providers, and optimizing the pressures related to branches.

I would like to emphasize that in considering a larger depository transaction, we recognize the importance of our digital capabilities and the ongoing transformation in the coming years. A significant transaction would likely lead to considerable management disruption, and honestly, we believe it shouldn't be our main focus at this time.

Okay. Now, that's very clear. Can you provide an update on the outlook for credit quality? Specifically, do you have any expectations for how loan loss provisions or net charge-offs might trend, or the levels of the allowance for loan and lease losses? If you haven't addressed this yet, could you share your thoughts on the credit quality outlook?

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

This quarter's increase to reserves and the $50 million is really a function of the loan growth number just reflecting that.

Got it. So we should expect ALLL level more or less to stay where they are at?

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

Okay, got it. Thanks so much.

Yeah.

Good morning, guys.

Good morning, Gerard.

Hey, Gerard.

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

Removing the principal geopolitical risk, which is significant, the effects of tariffs influence certain companies and are dependent on decisions being made, which may lead to deferred investments. This ties into both geopolitical and tariff concerns. Another important aspect for us, as well as for many banks, is the current situation with interest rates and the yield curve, which we're paying close attention to, particularly in relation to our balance sheet. Lastly, the investments we are making in a rapidly changing banking environment, including our payment operations, branch presence, customer connection strategies, and how we utilize data to benefit our customers, are all key areas of focus for us.

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

From a timing perspective, the entire industry has been working on developing and building models over the past couple of years, and we are in good shape in that regard. For us, 2019 is essentially the final phase of that process, alongside our existing models to ensure that when we go live on January 1, 2020, everything is in order. It's important to consider that CECL could be influenced by the business cycle at the time of adoption, which might introduce some volatility. However, based on current conditions, estimates suggesting a 20% to 30% impact on day one seem reasonable.

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

I think our expectation is that by mid-year we will start to provide some projections, but we need to be cautious because that will only reflect a specific moment in time. If conditions change between then and the end of the year, we will need to make adjustments.

Sure. I appreciate it. Okay. Thank you.

Yeah, thanks.

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