Welcome to the U. S. Bancorp's Third Quarter 2019 Earnings Conference Call. Following a review of the results by Andy Cesare, Chairman, President and Chief Executive Officer and Terry Dolan, U. S.
Bancorp's Vice Chairman and Chief Financial Officer, there will be a formal question and answer session. This call will be recorded and available for replay beginning today at approximately 12:30 pm Eastern through Wednesday, October 23rd at 12 midnight Eastern Standard Time. I will now turn the conference over to Jean Thompson, Director of Investor Relations for U. S. Bancorp.
You may begin.
Thank you, Polly, and good morning to everyone who has joined our call. Andy Cecere and Terry Dolan are here with me today to review U. S. Bancorp's Q3 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 ks and subsequent reports on file with the SEC. I will now turn the call over to Andy.
Thanks, Jen. Good morning, everyone, and thank you for joining our call. Following our prepared remarks, Terry and I will take your questions. I'll begin on Slide 3. In the Q3, we entered $1.15 per share.
Despite a more challenging interest rate environment, we reported record levels of revenue and net income driven by healthy loan and deposit growth and continued momentum across our B businesses. Credit quality remains stable. Turning to capital management, our book value per share increased 10.6% from a year ago. And during the quarter, we returned 80% of our earnings to shareholders through dividends and share buybacks. Slide 4 provides key performance metrics.
In the Q3, we delivered a return on average common equity of 15.3% and a return on average assets of 1.57%. Our return on tangible common equity was 19.4%. Positive operating leverage drove improvement in our efficiency ratio on both a linked quarter and year over year basis. Now I'll turn the call over to Terry to provide more detail on the quarter as well as forward looking guidance.
Thanks, Andy. If you turn to Slide 5, I'll start with a balance sheet review followed by a discussion of 3rd quarter earnings trends. As I did, average loans grew 1.1% on a linked quarter basis and increased 4.7% year over year, excluding the Q4 2018 sale of FDIC covered loans that had reached the end of the loss coverage period. Strong residential mortgage and credit card loan growth supported both linked quarter and year over year performance. Commercial and industrial loans grew 0.4% sequentially and 4.7% on a year over year basis.
Paydown activity picked up in the 3rd quarter, primarily reflecting the rate environment and robust capital market conditions. New business activity remains healthy, although pay down activity is likely to continue at elevated levels near term. Commercial real estate loans decreased on a sequential and a year over year basis. This quarter, commercial real estate contributed a 33 basis point drag to linked quarter average loan growth and an 89 basis point drag to year over year average loan growth. Turning to Slide 6.
Deposits increased 1.4% on a linked quarter basis and grew 6.0% year over year. Compared with the prior period, we continued to see migration from non interest bearing to interest bearing accounts. That migration, along with deposit growth momentum in both our Wealth Management and Corporate and Commercial Banking divisions, helped drive average savings deposits up 8.4% year over year. As you can see on Slide 7, credit quality remains stable. On a dollar basis, non performing assets increased 2.7% versus the 2nd quarter, but decreased by 2.5% compared with a year ago.
The ratio of non performing assets to loans plus other real estate owned was stable at 33 basis points compared with the 2nd quarter and modestly improved versus 36 basis points a year ago. Slide 8 highlights 3rd quarter earnings results. We reported earnings per share of $1.15 compared with $1.06 a year ago. Turning to Slide 9, net interest income on a fully taxable equivalent basis declined by 0.5% compared with the 2nd quarter and increased by 0.8% year over year, which is in line with our expectations. Both linked quarter and year over year comparisons benefited from healthy loan growth, offset by the impact of declining rates and a flatter yield curve.
Our net interest margin declined by 11 basis points versus the 2nd quarter, in line with our expectations. About 4 basis points of the decline was due to higher cash balances, primarily reflecting changes in policies related to deposits by the European Central Bank. Slide 10 highlights trends in non interest income. Middle single digit year over year growth in each of the 3 payment fee lines, credit and debit card, corporate payments products and merchant processing was driven by higher sales volumes. As a reminder, processing day count will end up affecting year over year credit and debit card revenue growth comparisons in several quarters in 2019.
In the Q3, 3 additional processing days versus a year ago benefited revenue growth. In the Q4, 2 fewer days will be a drag on year over year growth. We continue to expect low single digit growth of credit and debit card fee revenue for the full year. Commercial product revenue increased 11.1% from a year ago, primarily due to higher corporate bond fees and trading revenue related to strong capital markets activity. Mortgage banking revenue increased 56.3 percent year over year on strong origination and sales revenue growth.
Compared with the Q3 of 2018, mortgage production volume increased by 40.3% and mortgage application volume increased by 53.1%. Refinancing activity represented about 40% of production in the Q3 of 2019 compared to about 30% in the linked quarter. Refinancings represented 51% of applications in the 3rd quarter. The year over year decline in deposit service charges reflected the impact of the sale of our 3rd party ATM servicing business in the Q4 of 2018. The increase in other revenue was partly driven by the inclusion of the related transition services revenue, which will decrease over time as well as higher equity investment income and a gain on sale of assets.
Turning to Slide 11, the year over year increase in non interest expense reflected higher personnel costs, partly due to higher variable compensation related to business production within mortgage banking and the capital markets business lines, as well as increased medical costs. Professional services expense increased primarily due to business investment and enhancement in risk management programs, while higher technology expense growth was primarily tied to business growth initiatives. The decrease in other expense primarily reflected lower costs related to tax advantage projects and lower FDIC assessment costs. Slide 12 highlights our capital position. At September 30, our common equity Tier 1 capital ratio estimated using the Basel III standardized approach was 9.6%.
This compares to our target of 8.5%. As previously discussed, our goal has been to manage the capital level closer to our target once we had clarity related to adopting CECL and the final capital rules were promulgated by the Federal Reserve. With the recent release of the final rules, we plan to make a request to the Federal Reserve to increase our share repurchase program to enable us to begin reducing our common equity Tier 1 ratio from 9.6% to approximately 9.0%. I'll now provide some forward looking guidance. For the Q4, we expect fully taxable equivalent net interest income to decline in the low single digits on a year over year basis.
We expect middle, mid single digit fee income growth on a core basis year over year. We expect to deliver positive operating leverage for the full year 2019 on a core basis 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 4th quarter is expected to remain stable compared to the 3rd 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 record results and industry leading returns that we delivered in the Q3, despite a more challenging interest rate environment, is a testament to our well balanced business model, our numerous competitive advantages and our risk management discipline. As we head into the final quarter of 2019, we feel good about our loan and deposit trends and our ability to continue to gain market share across our franchise. As indicated on Slide 13, we are seeing good digital uptake trends. As loans are increasingly sourced through our digital channels, we expect better customer experience, higher account and volume growth and improved operational efficiency.
Our core fee businesses are performing well. Investments made over the past few years in our payments and mortgage business lines are delivering anticipated results in the form of improving sales and volume growth. Our scale and differentiated service model is helping us win new business and expand existing relationships in our trust and investment services business, which is driving strong asset under management and fee growth. Importantly, we are deepening relationships across our entire franchise as we bring the power of 1 U. S.
Bank to each of our business customers and consumers. Credit quality remains stable and we are not seeing any early indicators in our portfolio that causes concern. However, we are mindful that at some point the industry will experience a credit downturn and remain disciplined in terms of origination quality and our long term strategy of remaining within our defined credit box regardless of the competitive environment. In closing, I'd like to reiterate the message I delivered at our recent Investor Day. We are in a position to strength and will continue to leverage the core competencies and competitive advantage as they got us to where we are today.
However, the world is changing rapidly and we are adjusting and investing for the future so that we can continue to deliver the industry leading growth and returns our shareholders have come to expect from us. I'd like to thank our employees for their hard work and commitment they bring to the job every day. We will now open up the call for Q and A.
And your first question comes from Matt O'Connor with Deutsche Bank. And Matt, your line is open.
We can go to the next caller and maybe Matt can dial in again.
Okay. And your next question comes from the line of John McDonnell with Autonomous Research.
Hi, good morning. Good morning,
John. Hi, Terry. I was wondering if you could just give a little more color on the request for the capital increase. Just over what timeframe you might be looking to do the 9.6% down to 9% is that over the course of a year or a couple of months or just and again what gave you the what was the clarity you're looking for? Was it CECL and tailoring I think you mentioned?
Yes. Well, with respect to the second part, I think that we've now been through parallel run for a couple of different quarters. And the outlook from an economic standpoint is still relatively solid. And so I think we feel comfortable that we have a good range and it's consistent with what we talked about at Investor Day. And then obviously the final rules coming out is helpful.
From a timing standpoint, it won't be accelerated. I think it will be bringing that 9.6 down to 9.0 really during the 2019 CCAR cycle, so by the end of the second quarter.
Okay, got it. So it is for this cycle to do it by the Q2 of 1st year?
Yes.
Okay, got it. And then I wanted to ask you guys just more broadly about your outlook, just in terms of kind of generating positive operating leverage in what's it proving to be a difficult more difficult rate environment. As you turn the corner into 2020, is that a goal and is that 100 basis points kind of a bogey still? And Terry, you had mentioned at the Investor Day that 2020 was a tougher year when you're talking about your 3 year targets.
Yes.
And then and maybe also, Terry, you could just kind of clarify. I think at Investor Day, you said part of that outlook is you thought your net interest income might grow faster than your fees. And maybe you could just give a little follow-up color on that?
Yes. So a lot of different questions there. I mean, certainly in terms of positive operating leverage, it's a balancing act between short and long term and we always kind of take that into consideration. 2020, as I said at Investor Day, I think is going to be a challenging year because of where interest rates are today versus where they were a year ago. I mean, the long end of the curve, 10 year is, I think, down 150 almost 150 basis points from where it was last year.
So the landscape certainly has changed relative to when that guidance came out. When we right now, I think our outlook with respect to positive operating leverage is to achieve that in 2019 on a core basis. And as we kind of think about different initiatives, the things that we will take into consideration is the fact that our we continue to transform from a digital perspective. Derek talked about kind of a do it yourself sort of focus. So I think we're going to end up looking at a lot of different things that we can do in order to try to manage expenses as prudently as we can.
But I think part of it is just what happens with interest rates. I mean, it is volatile right now. It's hard to really know. And having an outlook that's much beyond the quarter is pretty tough. Coming back to net interest income versus fees, that guidance or those comments are really focused around what we think between now 3 years out where that growth is going to come from.
And I think part of that is an assumption that once we get beyond 2020, the interest rate environment starts to normalize and either stabilizes or starts to come up. And so I think that's the part of the thought process between where that mix is going to come from.
And I'd just reiterate, John, that the theme that we talked about, this is Andy that talked about Investor Day continues to hold, which is delivering in the short term while investing for the long term. So we're going to manage short term performance, understanding the rate environment and the economic environment, but deliver on what we talked about in terms of positive operating leverage, but at the same time investing for the long term growth that we're seeking.
Got it. Thank you.
Sure, John.
And your next
One follow-up there on the tailoring rule. There's also a benefit, I think, to the LCR and how you're required to calculate that and carry cash around that. And I'm wondering, does that have any impact on how you think about either the portfolio that you're holding or your ability to be more competitive for loans because you can value non operating deposits or any other benefit from that, that maybe we could get a loan under the hood on?
Yes. So with the rules related to LCR coming out, it was essentially kind of reducing it to 85% level. And as we talked, it really helps free up liquidity probably in the range of $11,000,000,000 to $15,000,000,000 kind of in that ballpark. And we're still formulating kind of what our game plan is. But I think that we'll look at kind of remixing the investment portfolio in order to be able to both extend duration and possibly enhance the yield a little bit.
We may look at reducing our debt level in the wholesale markets. And I think that a number of those different actions would be beneficial to the company. And it's going to be basis points. It's not going to be a major change, I think, in terms of net interest income based upon kind of where the yield curve is, etcetera. But we're looking at all sorts of things.
Right. And I get that every little bit helps though.
So just Yes, it sure does. Yes, sure does.
And does it impact at all the competitiveness with regard to commercial lending or not really?
I don't think so. Okay.
I
mean, we end up driving from a competitive standpoint based upon what the pricing is in the marketplace and I just don't see it impacting that a lot.
And given our debt rating and our low cost of funds, we're already in a pretty good position regarding loan pricing.
Got it. Okay. And then, Annie, just separately, at Investor Day, really interesting kind of sidebar tech showcase that you had. And I want to just understand how you're thinking about the offering that you've got for merchant acquiring merchant services and understand, where you think there's more that you can do there to expand your offering either to other verticals, take what you've gotten in your restaurant, hospitality, etcetera to other verticals or if there's more that you can do with adjacencies on some of the things that you've been adding to over the past year or so?
Yes, I think it's a 3 pronged strategy. 1 is continued focus focus on e commerce and ISVs, which we've made great progress in over the last year. We'll continue to focus on it going forward. Secondly, is the focus on certain verticals. You named a couple of airlines, hotel, the industry, healthcare.
And thirdly and importantly and probably the biggest opportunity is this combination of banking products and services together with merchant products and services. The fact is, all of our merchants need a bank. Many of our small customers need a merchant provider and our ability to weave and put those products together in a comprehensive set that helps the customers run their business and give them information, I think is a key to our focus and one of the areas that I think we're going to see the most potential.
And is it primarily U. S. Or is it also Europe?
I know you have a
a more global footprint in this business.
Yes. So the first two would be global across the board. That combination of banking and merchant processing would be principally in the U.
S. Okay, thanks.
You bet.
And your next question comes from the line of Ken Usdin with Jefferies.
Good morning, Ken. Hey, Ken.
Hey, good morning, guys. How are you doing? Just a couple of few follow ups. Obviously, mortgage banking was very strong and I'm sure built into your outlook for the Q4 growth. But can you just talk about how much more pipeline you expect to pull through on the mortgage side and what you're seeing in terms of the gain on sale outlook and the loan officer side of the equation there?
Yes. So if you think about mortgage banking, we obviously have a very strong quarter from refinancings. When we end up thinking about Q4, it's very dependent upon where long term rates are. With rates kind of backing up coming up a little bit most recently, it probably will not be as strong. But I think it will still be a good year over year story from a mortgage banking perspective.
The application volume was strong in production. It was strong in the Q3. We continue to see that momentum. The other thing, Ken, is that we talked about this. We've been over time making good investment in mortgage loan officers on the retail side of the equation, enhancing that.
The digital platform that we talked about has a very high percentage of application capture and that just helps and helps because of the speed to market and our ability to be able to service those customers and get the loans booked. We went through the last what I would say cycle of refinancing and our processing times were relatively short compared to competitors and certainly what we have experienced in the past and it's all because of those investments.
Got it. And a second question, I know this comes up from time to time, but inside the other, you always mentioned that the PE gains are there and we know that the ATM agreement is in there as well. Can you help us just understand the magnitude of the PE gains even on a
I
Yes. So in terms of other revenue, it is a lumpy category. It ends up going up and down depending upon what's happening within the various categories. It includes a lot of different things and equity investment is just one piece of it. But if you end up looking at the overall increase on a year over year basis, I would break it down kind of like this.
About half of it is related to the transitional services revenue and about 25% of it's related to equity investment and then it's kind of combination of a lot of other things that are kind of driving that. So when we think about it, because I know this question is out there, when we think about other revenue, and we talked a little bit about this, Over the course of the last eight quarters, it has ranged anywhere on a quarterly basis from $160,000,000 to as high as $300,000,000 And when we end up looking at kind of what is a core reasonable level that $200,000,000 range is kind of in that ballpark, give or take. It will be up a little bit in some quarters and down a little bit in other quarters. And that's how we kind of think about it.
And then could you just on the expense side of the ATM, is that a decent part of the growth on the expense side as well, the services agreement?
Yes, it is. That service agreement was really negotiated in order to be able to cover the cost. And so the cost levels associated with making that transition service agreement is fairly similar to the revenue that we're generating. And from a timing standpoint, that will start to go away as conversions are taking place between now and the end of 2020.
Got it. Thank you.
Yes. Thanks again.
And your next question comes from the line of Mike Mayo with Wells Fargo Securities.
Hi, Mike. Hi. I
know we just had your Investor Day. You're talking about positive offering leverage driven by the digital transformation. So I guess I have a front office and kind of a back office question. The front office question, I guess you closed what like 150 branches in the last year, but still a decent deposit growth. So how much growth are you getting through digital channels or some sort of metric that you can give us?
And then the harder question, the back office, I mean, you're retooling the inside of the company. Can you give us any metrics on like data centers, the peak where you are now, where you expect them to go or what percent of your applications you expect to migrate to the public cloud or anything else about kind of the internal retooling too?
Mike, I'll start and then Terry can add on. So from a sales perspective, as we think about the digital initiatives, the revamping of our app and the focus on the digital capabilities, it's focused on a couple of areas. One is insights and improving the ability to connect with the customers. But secondly, it's also the ability to improve sales activity. And you see some of our loan stats in the deck that we provide as part of the earnings call.
We'll tell you that both loan activity from a sales perspective as well as deposit activity is growing quite rapidly and we will see a continued movement of more sales activity. Transactions is already high as you know digitally, but more sales activity to digital channels I think over time, which will allow for continued opportunities on the expense side of the equation. And if you think about the backroom?
Yes. So I mean, it was the back room or even within the branches and a big part of the decision around closures related to branches and reinvestment in branches as well is really kind of that intersection of our employees, our people, the digital and our customers. Obviously, the customer behaviors are changing. The amount of transaction activity that's happened in the branches is significantly less than where it was. In fact, 80% of it roughly 70% to 80% of it goes through the digital channel today.
So that gives us the opportunity to really reconfigure the branch network both in terms of size and numbers, etcetera, but also to change the focus from a service oriented type of location to something that's much more either sales and or advice focused. And so I think those trends are going to continue. I don't necessarily have specific metrics. On the deposit side, I would say that there is still room and opportunity for the percentage of sales from the deposit perspective to continue to grow. And I think, Derek at Investor Day had said, when you think about the opportunity from a digital perspective, from sales and we would include deposits in this is that, that should get us closer to that 40%, 50% over time.
It will take a while for us to get there because it's a customer adoption that has to take place.
And then as far as the back office, do you have any metrics on number of data centers or how many apps you expect to migrate to the public cloud or anything else just on the inside of the company?
We haven't disclosed a number of data centers, but I will tell you Mike that we continue to migrate activity to the cloud. And Jeff, I go over and spoke a little bit to that at Investor Day, but most of our new activity and development will occur in the cloud, which offers a number of advantages both from a capacity as well as a cost standpoint.
All right. Thank you.
Thanks, Mike.
And your next question comes from Scott Siefer with Sandler O'Neill.
Good morning, Scott. Hey, Scott.
Good morning, guys. Thanks for taking the question. Just, Terry, maybe some updated thoughts on the margin given that the noise from some of the transitory stuff in the 3rd quarter should presumably be settling in the Q4. I guess, 1, when and apologies if you said this, but when do you have any additional rate cuts baked into your own outlook there? And then just as we go forward, we're still thinking kind of $40,000,000 to $45,000,000 sort of all else equal from impact from e trade cut?
Yes. Well, let me make kind of talk a little bit about kind of our guidance and hopefully this will kind of get to some of your points. So our guidance with respect to low single digits is really kind of looking at the implied market rates in terms of where they're at in the 1st couple of weeks here of October. And kind of implied in that is an assumption that rates are going to decline and our assumption is that it will be in 25 basis point cut in both October and then in December. And I think there's still question as to whether December occurs.
The long end of the curve, I have people are assuming that it's roughly kind of where it is right now. So that's kind of the assumptions that we're baking into kind of our perspective regarding margin or net interest income. From a margin perspective, it's down about 11 basis points on a linked quarter. There's about 4 basis points that's really related to that those cash balances are building the balances. And so, when we think about the 4th quarter, we would expect our net interest margin to decline, but kind of in the range of that core level, which is 7 to 8 basis points.
Okay. So 7 to 8 basis points of margin decline in the 4th quarter?
In the Q4. Yes, and I think that the other thing is it's kind of interesting. If you think about Q3, Q3 from an average perspective, short term rates were actually up about 29 basis points, 30 basis points, while the long end was down about 100, a little over 100. In the Q4, that will be the Q1 on a year over year basis when the short end is down and kind of in the range of that 40 to 50 basis points and the long end is down 150 basis points. So in the industry, that's why people are looking at it and just we would expect Q4 to become more challenging as we go into the quarter and into 2020.
Okay. And then so with that, just so I understand with that 7 basis points to 8 basis points, presumably that kind of moderates as we would look at additional rate cuts or is that sort of a new proxy? I just want to make sure I'm sort of understanding that.
Yes. I mean, I would say that given the fact that it is so volatile right now and we don't really know where rates are going, I hate to look out beyond the Q4.
Okay, fair enough. All right. Thank you very much. I appreciate it.
Yes, Scott.
And your next question comes from the line Erika Najarian with Bank of America. Hi, good morning.
Good morning, Erika.
I wanted to follow-up on John's line of questioning. So even outside of mortgage, the fee income trends are quite strong, payments up 5% year over year, trust and investment management up 2% year over year. And I'm wondering as we tie that back to your long term revenue targets, is a 5% fee income clip over that 3 year period too optimistic or about in line with what you're thinking. I guess the reason I'm focusing on fees is because like you said, Terry, nobody has any idea on what the curve forward curve is going to look like, right? I mean the probability of October changed in over the past 2 hours.
So I'm trying to think about the contribution of fees and I have a follow-up on balance sheet growth.
Yes. Well, maybe just kind of again and this kind of ties a little bit to Investor Day and some of the guidance associated with that. The outlook for fee income in part will depend upon what happens with rates. I mean the puts and takes with respect to mortgage banking and so all kind of a function in terms of what happens from a rate perspective. But I think we're confident when we think about the investments that we've been making both in the payment space of the business and our corporate trust and some of the digital capabilities, our capital markets business, all of those, we feel like we have a position of strength at this particular point in time and that momentum will continue to carry.
But I mean there will be puts and takes. It kind of depends upon what happens in Consumer spend continues to be strong. We don't see anything in the short term, but where that ends up turning when we get into 2020 is anybody's game.
And on the balance sheet growth contribution to those long term revenue targets, fully acknowledge that 2020 is going to be challenging. If the rate curve doesn't normalize as you think, but doesn't necessarily get worse than what's in the bank
into your current
customers with regards to loan growth? Yes. So, I think, bank into your current customers with regards to loan growth. In other words, that implies to me that you would we would need mid single digit loan growth over those over that 3 year period in order to potentially mitigate some of the net interest margin volatility or lack of help from the yield curve rather?
Yes, maybe a couple of things. The targets that we set are kind of based upon where we think the growth rates are going to be as we get into the 2nd 3rd year. I tried to be clear that that's not our expectation with respect to 2020 and it's not necessarily a compounded rate over the 3 years because of the challenges that will happen in 2020. But when you end up when we think about the balance sheet right now, and again, this is all kind of dependent upon what happens in the economy and that's a little bit hard to predict. But consumer spend and consumer confidence continues to be strong.
I think business activity continues to be strong. I think it's moderated somewhat because of tariff policy and that sort of thing or trade policy. But generally, I think the economy is solid. And when we end up thinking about 2020 from a loan growth perspective, we think that some of the trends that we're seeing this year will continue. And as we talk, 3rd quarter loan growth of about 4.7% on a core basis, we think that's achievable.
And I think from U. S. Bank's perspective, we have the lowest cost of funds in the industry and we have some competitive advantages from a pricing perspective that will enable us to be able to achieve those. So I feel reasonably confident.
Yes. And Eric, if you think if you step back and look at the Q3, our earning asset growth was just under 5%, our deposit growth year over year was just about 6 So thinking about the balance sheet growing in that mid single digits, I think it's about right.
Yes.
Got it.
Great. Thank you.
Yes, sure.
And your next question comes from Vivek Juneja with JPMorgan.
Good morning, Vivek. Hey, Vivek.
Good morning. Hi. Sorry, we've been jumping around multiple calls. I'm apologizing if I'm repeating making you repeat something. Any the other income, did you give any sort of way to think about what's the sort of run rate that seems reasonable?
Yes. We did talk a little bit about that and maybe just to reiterate, when you end up looking at Vivek and when we think about it, if you end up looking at that level on a quarterly basis, it's gone anywhere from $160,000,000 to $300,000,000 And that's a function of the lumpiness that exists across a lot of different categories of income within that, including equity investments, etcetera. But if I were to when we think about kind of that core level on a quarterly basis, dollars 200,000,000 plus or minus is kind of the where we believe that is a reasonable kind of range. And if you remember in the past, I had said, somewhere between 175225 and 225 and that's kind of in that ballpark. So when you end up looking at the year over year for the Q3, about half of that growth is related to the transition servicing agreement
that's
tied to the ATM business. And so that goes away over time during 2020 tied to when those conversions Together with the expense. Together with the expense. And the expenses is pretty similar to the increase in related to the revenue
point of view.
And then another one which is positive operating leverage, your previous guidance you used to have the $100,000,000 to $150,000,000 which went to $100,000,000 Are you thinking full year 2019 given everything going on, you've obviously got positives on mortgage banking, other income running higher, but then NII softer. Is it still closer to 100 basis points? Or do you think given where rates have gone, it's that's going to be harder to get to?
We're consistent with what we talked about in Investor Day, Vivek, which is somewhat below 100 basis points, but still positive operating leverage. Okay, great. Thank
you. Thank you.
Yes.
Your next question comes from the line of Matt O'Connor with Deutsche Bank.
Just stepping back kind of
bigger picture on this whole operating leverage question, you've got the best revenue growth year to date, I think of the big banks about 4%. It seems like the expense growth is also the highest. And I guess I'm just conceptually wondering like is that the cost of doing business like to get that much revenue growth as the expense growth that you need or is there still some catching up in terms of infrastructure or some of the stuff that you were working on a few years ago Or is there some kind of get ahead of kind of to help drive revenue growth in the future? And obviously, I'm not looking for specific numbers, but just conceptually, some people would look at you and say, okay, the revenue growth is really good, but the expense growth is a bit higher and it might just cost that much to generate that much revenue growth. So maybe you could just comment on some of that.
So I'll start, Matt and then Terry will add on. So first from a big picture standpoint, 3 big puts and takes. Number 1 is we're going to continue to optimize a number of initiatives from an operations standpoint, the way we're delivering products and services, the way we're operating in the backroom and all those things will allow for some saves. So that's a positive. Secondly, we're going to continue to invest for the long term in the digital initiatives we talked about Investor Day.
So that's going to cost a bit more. A lot of that's already in the run rate. If you look at the Q3 specifically though, there were a couple of areas of revenue growth, specifically mortgage and capital markets that have expenses related to commissions associated with them and that was one of the reasons for a little higher expense growth.
Yes. And the thing I would just kind of maybe add to that, because we see that in mortgage, we see that in capital markets specifically. But from an optimization standpoint, we talked about this at Investor Day, very focused on as the customer behaviors are changing, making sure that we're staying lockstep with that. And I think there is both opportunity in the front office from a branch perspective and we'll continue to look at that. And as I said, we may accelerate or increase some of the activity associated with that, but it's going to be tied to what happens from a customer standpoint.
And then as we continue to move to a digital platform, I think there's back office opportunities in terms of optimization. And then the other thing and this kind of gets back to the digital activities that Aneem is talking about. We're making important investments in all of our lines of businesses and we want to and we'll continue to do that because it's important for us to look both short term as well as long term.
Okay. That's helpful. And I think sometimes we're also focused on the absolute level of operating leverage and the fact of the matter is, call it 80 bps of operating leverage with 4% revenue growth is a lot better than 1% plus operating leverage with 1% revenue growth, just the way the math works. So, okay. Thank you.
That's right. And that 0.8 percent positive operating leverage on 54 efficiency ratio of 54 percent is a lot different than 1 all sorts of things. Part of it is the starting point. Thanks, Matt.
And your next question comes from the line of Kyle Martinez with UBS.
Hey, good morning, guys. So you guys addressed a lot of my question. I was going to ask you to speak to some of the loan growth trends, which pretty pronounced, not only in terms of the absolute level of balance sheet growth, but just the mix with commercial on an end of period basis, commercial growing 3% and consumer 7% even with home equity declining. So the core is even faster than that. So I guess a couple of parts though, maybe you can just how much of that growth is related to exogenous factors or is dependent on a strong macro environment continuing and how much of the growth is a function of things you're doing at the company level to deepen relationships, use analytics and whatnot?
And I guess the second part of my question though is around CECL and whether do you guys even do you guys consider the impact of CECL on when addressing this growth? Because a lot of the growth is occurring in lending segments that are going to be disproportionately impacted by CECL that have longer term, longer weighted average lives and higher loss content like cards. And you, I think, yourself, Terry, mentioned at the Investor Day that you'll have a higher ALLL. To maintain that ALLL ratio, you have to provision more. But with this mix shift, that ALLL ratio will continue to migrate upwards.
And is that something you guys think about? Or do you guys just say that, hey, that's accounting noise and the economics of this lending activity is the same, it doesn't really matter. And over the life of the loan, the loss is the loss. So just kind of whether the CECL impact on your growth is something you guys think about and how we should think about in terms of modeling it?
Good question. And then as we kind of talked a little bit about this in the past, when we think about loan growth and where it comes from and kind of our focus within the company, we really think about it more on an economic basis than we do on an accounting, because I do think there's a lot of accounting noise that occurs within CECL for a lot of different reasons. One is that every company is going to have their own forecast with respect to what happens in the economy and all the things that we've talked about. So we really think about it more from an economic standpoint. In terms of loan growth, again, this comes back in terms of what we're seeing today and what we see today is that consumer confidence is to be strong and consumer spend is strong and those things should tend toward good growth from a consumer perspective.
And even on the business side, that while it may moderate, it's still a very solid business. So some of it is driven by macroeconomic, other, especially as we kind of think out on a longer term basis, is driven by initiatives. We started an ABS lending sort of platform a year ago. But this focus and Andy talked about it, we have merchants and the merchant acquiring side of the equation and small businesses and there is a significant opportunity for us to be able to leverage both of those. So when we think about loan growth, we also think it's tied to some of our initiatives.
Okay. No, that's helpful.
And your final question comes from the line of Gerard Cassidy with RBC.
Good morning, Gerard.
Hey, Gerard.
Good morning, guys. You guys have been very good at sharing with us the competition in commercial real estate lending and what's going on in the different loan markets. We hear from many of the smaller commercial banks that they're building out their treasury management products. Are you guys seeing any increased competition in that part of the commercial customer base that you deal with that use those products? Sure.
I would say it's not any different than we've seen historically. I would say probably the change that's occurring in treasury management, you'll continue to see it going forward is the migration and the and the use cases related to the real time payment rails that have been developed and the new products and services as a result of that. So I think that is going to continue to be a change. And if you think about our capabilities in treasury management combined with our corporate payments, I think you're going to continue to see those things coming together and changing with these new rails that have been developed.
And do you think speaking of that, Andy, do you think Zelle will play a role in that on a go forward basis as Zelle goes from a P2P to possibly a B2B?
Well, Zelle will start to use those new rails as a component of their mechanism for sure. That's one. Number 2 is I think Zelle has a lot of opportunity for growth in different aspects and there are also use cases request for payment and other things that are coming on the Zelle side. So you're going to see changes on the business to business side related to the real time rails. You're going to see continued migration and changes and enhancement on the consumer side related to Zelle.
And at some point, some of those things, particularly the small business may come together a little bit.
Yes. And the other thing, Gerard, I would just say is that, I think the challenge or the competitive landscape is going to be 1 based upon who is able to make use cases that create, the use cases that create a value proposition to the customer. And that investment is very important and it's an area of focus
for us. That's absolutely right. Thank you.
Thank you. And then to Pivot, you guys have been very conservative in your construction lending. The portfolio is about what $10,700,000,000 down just under 5% on a year over year basis. But there seems to be recently a resurgence in housing. Today, the National Associations of Home Builders, their market index rose beating in consensus.
And there seems to be recently some pickup in activity here. Are you guys seeing that in any of your markets and are there opportunities for you to capture some of that growth?
Sure. We have a housing capital group that does focus on homebuilders and we are seeing good growth there. There are West Coast and South principally is where our focus area is and that business is doing well and growing. Some of the other aspects of commercial real estate and some of the declines that you're seeing are really a function of some of the credit components that we're seeing our competitors move to that we're not comfortable with. So we have some positives, but we have some negatives and we're sticking with our core customers and within the credit box that we participate in.
Great. Thank you so much. Appreciate it.
Thank you. All right.
Have a
great day.
And there are no further audio questions. Are there any closing remarks?
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And thank you. Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.