U.S. Bancorp. (USB) — Q1 2019 Earnings Call Transcript

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

Thanks, Jenn, and good morning, everyone, and thank you for joining our call. Following our prepared remarks, Terry and I will be taking your questions. I’ll begin on Slide 3. In the first quarter, we reported earnings of $1 per share. The slide highlights a number of financial metrics, but at a high level, growth in net interest income and fee revenues were in line with our expectations, credit quality was stable, and we delivered positive operating leverage. Our balance sheet is strong and growing and we continue to see good account and volume momentum across our fee businesses, which is driving market share gains. Turning to capital management; our book value increased by 8.6% from a year ago. During the quarter, we returned 77% of our earnings to shareholders through dividends and share buybacks. Slide 4 provides key performance metrics. In the first quarter, we delivered an 18.4% return on tangible common equity, and a 1.49% return on average assets. Now let me turn the call over to Terry, who’ll provide more detail on the quarter as well as forward-looking guidance.

Thanks, Andy. If you turn to Slide 5, I’ll start with the balance sheet review and follow up with the discussion of our first quarter earnings trends. Average loans grew 0.9% on a linked-quarter basis and increased 3.7% year-over-year, excluding the impact of the second quarter 2018 sale of our federally guaranteed student loan portfolio and the fourth quarter 2019 sale of FDIC covered loans that had reached the end of the loss coverage period. On the consumer side, we saw good growth in our residential mortgage, retail leasing and installment loan portfolio. Digital acquisition of customer accounts across platforms continues to be robust. Commercial loan growth accelerated in the first quarter, driven by M&A-related lending, slower pay down activity, partly due to timing. New business pipelines are healthy, although, pay down activity is likely to remain elevated and chop in the near term. As expected, commercial real estate loans decreased on a sequential and year-over-year basis. This quarter, commercial real estate contributed a 40 basis point drag to linked-quarter average loan growth and an 80 basis point drag to year-over-year average loan growth. Given what we consider to be a still unfavorable risk reward dynamic in certain areas of commercial real estate lending, we expect pay down pressure, which has moderated from peak levels, but will continue to restrict growth in this portfolio. Turning to Slide 6, deposits increased 0.3% on a linked-quarter basis and 0.2% year-over-year. As previously discussed, balance migration related to the business merger of a large financial client continues to impact deposit growth on a year-over-year basis. This migration impact on deposits will continue to moderate through mid-year. Slide 7 indicates that credit quality was relatively stable in the first quarter. Nonperforming assets increased modestly versus the fourth quarter, but were lower by 16.5% compared to the first quarter of 2018. Slide 8 highlights first quarter earnings. We generated earnings of $1 per share in the first quarter of 2019 compared to earnings per share of $0.96 a year ago. Turning to Slide 9, net interest income on a fully taxable equivalent basis was lower by 1.4% compared to the fourth quarter, but increased 2.8% year-over-year, which was in line with our expectations. Both linked-quarter and year-over-year comparisons benefited from loan growth and interest rate hikes. As is typical in the first quarter, linked-quarter growth was negatively impacted by two fewer days. The first quarter of 2019 also experienced lower interest recoveries than the fourth quarter of 2018. Slide 10 highlights trends in noninterest income. On a year-over-year basis, we saw mid-single-digit growth in both merchant processing revenue and corporate payments products revenue, each driven by higher sales volumes. Credit card and debit card revenue declined by 6.2% from a year ago despite strong average account growth this quarter. There were fewer processing days in the first quarter of 2019 than in the first quarter of 2018, which created a headwind to year-over-year revenue growth. Also, a favorable change in accounting for prepaid revenue in the first quarter of 2018 negatively impacted the credit and debit card revenue growth rate. The billing cycle impact is simply a timing issue within the full year of 2019 credit and debit card revenue. Both of these items are unique to our business. In the fourth quarter of 2018, we sold our third-party ATM servicing business. However, we continue to provide operational services during a transitional conversion period. Given the sale, we have combined ATM processing revenue with deposit service charges for recording purposes. The transition services revenue associated with the ATM business is included in other income. As a result, the decline in deposit service charges in the first quarter was driven by the impact of the sale. The increase in other income was driven by the inclusion of the transition services revenue, which will decrease over time, as well as higher tax credits and equity investment revenue. Lower mortgage banking revenue in the first quarter was primarily driven by relative changes in MSR valuations. However, mortgage origination revenue grew in the first quarter and application volume was up 10% from a year ago. We continue to expect growth in mortgage banking revenue for the full year of 2019. The decline in treasury management fees continues to reflect the impact of changes in earnings credits, which is typical in a rising rate environment. The beneficial revenue impact of compensating balances, which is reflected in net interest income, more than offset the decline in treasury management revenue. Turning to Slide 11, the year-over-year increase in noninterest expense reflected higher compensation expense, primarily due to the impact of hiring to support business growth. This was partially offset by a decrease in other expense, primarily reflecting lower costs related to tax advantage projects and lower FDIC assessment costs. Slide 12 highlights our capital position. At March 31, our common equity Tier 1 capital ratio estimated using the Basel 3 Standardized approach was 9.3%. This compares to our target of 8.5%. I’ll now provide some forward-looking guidance. For the second quarter, we expect fully taxable equivalent net interest income to increase in the low single digits on a year-over-year basis. We expect fee revenue to increase in the low single digits year-over-year, including the negative impact of the sale of the ATM business. We expect to deliver positive operating leverage of 100 to 150 basis points for the full year of 2019, in line with our previous guidance. We continue to expect our taxable equivalent tax rate to be approximately 20% on a full-year basis. Credit quality in the second quarter is expected to remain relatively stable compared with the first quarter. Loan loss provision expense growth will continue to be reflective of loan growth. I’ll hand it back to Andy for closing remarks.

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

Thank you. Andy and Terry, hi, good morning. I wanted to ask you guys about the operating leverage target for this year. You came in at the low end of the range, the 1 to 1.5 this quarter, but that included some pressure from the billing cycle processing days issue. So as you look ahead, do you have a bias towards the lower or the higher end of that 1 to 1.50 range? Or I guess, may be said differently, what kind of environment would get you at the lower end of the operating leverage target and what would it need to do to get to the higher end?

Yes, John. This is Terry. And I think that where we end up in the range will partly be driven by what sort of revenue growth we see throughout the year. The extent that revenue growth picks up a little bit gives us the opportunity to be close to the higher end, but if it’s a challenging revenue environment, we’re more likely to be closer to that lower end of the range. I think we’re just going to continue to manage and make decisions based on both short-term and long-term objectives of the company.

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

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

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

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

That’s right, Terry. Typically over the past many years, I think our strongest and weakest quarters are principally driven by revenue seasonality, a lot of it’s the payment businesses, but a lot of businesses, three, four, two, one strongest to weakest.

Okay. But in terms of year-over-year operating leverage that doesn’t necessarily apply, that’ll depend on the environment more so whether you get up to that 1.5?

Yes, on the revenue environment, right.

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

Okay. Thank you.

You’re welcome.

Good morning.

Hi, John.

Hey, John.

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

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

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

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

Got it. All right. Thanks, Terry.

Hi, Good morning.

Good morning, Erica.

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

Yes, Erika, we clearly don’t understand the current revenue environment. We are examining every opportunity to reduce our expenses. Your expectation is correct that we will be very cautious with our spending. Regarding leverage, Andy mentioned physical optimization and we will assess any discretionary spending. As you may recall from the fourth quarter, we underwent an organizational redesign that will benefit us this year, especially with Tim Welsh taking over our consumer banking business. This gives us a chance to reevaluate our organizational structure. There are various factors at play, and with the FDIC surcharge changes giving us some leeway, we believe we have several strategies to navigate this challenging environment.

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

Yes. I believe that in a favorable environment without rate hikes, the changes in deposit pricing will largely depend on the level of loan growth and the competition for deposits. I anticipate that there will still be some pressure on the wholesale trust side, but I expect that will ease significantly. Additionally, regarding our deposit growth, we are observing increases in consumer balances, and as you know, we have more pricing flexibility in that area.

Got it. Thank you.

Good morning, guys. Thanks for taking my question.

Morning, Scott.

Terry. I was just wondering if you could spend just a second digging into your loan growth outlook. I guess, my understanding was sort of the 1Q would be sort of seasonally weaker and then maybe things accelerate a bit from there. But in your prepared remarks, you’ve mentioned, the pay down pressure and particularly on the CRE side a couple of times. So just curious for any updated thoughts you might have on the overall loan growth trajectory?

When we consider loan growth, it's difficult to predict too far ahead. For the second quarter, we expect loans to grow in line with the growth we observed in the first quarter. In the first quarter, middle market loan growth was strong, showing a 1.3% increase from the previous quarter and around 5% year-over-year. Auto lending also saw good growth, and we anticipate this trend will persist since the competition wasn't as fierce during that period. Our mortgage volume remained strong in residential mortgages, which we believe will continue to be beneficial. Overall, our C&I segment performed well; the economy appears solid, and our C&I pipelines are robust as businesses keep investing. However, two factors have somewhat hindered total loan growth. Our Commercial Real Estate portfolio is likely to remain a drag for the rest of the year due to the current business cycle. Additionally, the changing tax rates for corporates versus individuals has made growth in tax-exempt loans more challenging in the corporate banking sector, contributing about a 20 basis points drag for us in the first quarter. Although there are various influences at play, we remain optimistic about the economy and our business spending.

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

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

All right. That’s perfect. Thank you very much.

Thanks. Good morning, guys. Andy, I don’t know if you’ve spoken since the up mergers of equals transactions we got last quarter. And I think we all know where you have stood as far as the current strategic imperatives of working on the digital strategy and consolidating some of the branches. Just wondering as to where you stand on your view of our U.S. banks size and scale? And how you think if any differently just about either the need or desire to think about Bank M&A down the road even, if not today, but just from a bigger picture strategic point?

Sure, Ken. First, let me say we consider all options for growth and we look at anything that is available and/or any strategic initiative that would be sensible for our company. But I will tell you, I think our near-term focus will likely be on the fee businesses, the working processing to trust businesses that we’re focusing on. We have a lot of momentum across our digital activities, we have a lot more flexibility now that we’re out of the consent order, we’re making a lot of progress across all of our business plans, and I feel very comfortable with where we are today.

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

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

And, Terry, that first quarter, it was the period of the government shutdown, there was some turbulence in the equity market, there were weather impacts across our geographies, all those things have passed us right now, that’s why we look more confident in what’s more to come.

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

Hi, good morning.

Hi, Betsy.

Recently, you’ve announced the hiring of a new Chief Digital Officer, Derek White, and I just wanted to understand what your expectation is for how Derek is going to be impacting our U.S. Bancorp? He’s a pretty senior hire, I know you did a whole revamp of our mobile platform, so I’m wondering what’s left?

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

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

Yes. It is.

Yes. I think one of the other things that kind of ties into that is continuing to enhance and to improve our anti-digital marketing capabilities into that all-digital strategy, data analytics, and a lot of those other things that will help drive growth in the future.

When we consider the impact on the P&L, the enhancements in digital and real-time capabilities are clearly beneficial for clients. How does this affect your P&L? Is it neutral? Do you sacrifice some growth but regain volume? I'm trying to understand your perspective on the return on invested capital in this context.

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

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

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

Okay. Thank you.

Good morning, Vivek.

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

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

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

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

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

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

Yes, okay. Okay, great. Thank you.

You bet.

Thanks for that.

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

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

Lower funding costs in the spots in the curve that we typically would go.

Yes.

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

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

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

Okay. Thank you, Andy and thank you, Terry.

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

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

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

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

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

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

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

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

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

Exactly.

Hi, can you hear me?

Yes, Mike.

Yes, Mike.

Great, so I know Betsy asked one question about Derek White, I guess comes from BBVA, which is considered one of the leaders in digital banking. That’s a pretty big hire. So what metrics should we on the outside look to see if the digital banking effort will be successful? Say in one, two or three years, is it percentage of customers that are engaged digitally? Is it customer satisfaction? What would be your metrics for success for whatever Derek White will be doing there?

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

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

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

Thanks again.

Yes.

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

Good morning, Gerard.

Doing well.

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

Good question. Regarding our portfolio, there is nothing on the horizon that concerns us. Our portfolio is mainly prime-based, which applies to both our consumer products and, on the commercial side, typically involves high investment grade customers. Therefore, there are no specific areas that raise concerns for us, particularly in commercial real estate. We are currently not extending terms because we believe it's wise to maintain our position rather than expand at this stage in the business cycle. As for retail malls, that sector may continue to face pressure. However, our exposure is under $250 million, so it is not significant for us at this time.

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

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

Very good. Thank you.

Yeah. Thanks, Gerard.

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