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US BANCORP (USB) Q1 2019 Earnings Call Transcript

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US BANCORP (NYSE: USB)
Q1 2019 Earnings Call
April 17, 2019 , 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Welcome to U.S. Bancorp's First Quarter 2019 Earnings Conference Call. Following review of the results by Andy Cecere, 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. (Operator Instructions) This call will be recorded and available for replay beginning today at approximately noon Eastern Standard Time through Wednesday, April 24th, at 12 midnight Eastern Standard Time.

I will now turn the conference call over to Jen Thompson, Director of Investor Relations for U.S. Bancorp.

Jennifer Thompson -- Director of Investor Relations

Thank you, Jeff, 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 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 two 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.

Andrew Cecere -- Chairman, President and Chief Executive Officer

Thanks, Jen, and good morning, everyone. Thank you for joining our call. Following our prepared remarks, Terry and I will be taking your questions.

I'll begin on slide three. 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 revenue 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 four 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 will provide more detail on the quarter as well as forward-looking guidance.

Terrance R. Dolan -- Vice Chairman and Chief Financial Officer

Thanks, Andy.

If you turn to slide five, I'll start with the balance sheet review and follow up with a discussion of 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 2018 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 portfolios. 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 and slower paydown activity, partly due to timing. New business pipelines are healthy, although paydown activity is likely to remain elevated and choppy near-term. As expected, commercial real estate loans decreased on a sequential and a 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 paydown pressure, which has moderated from peak levels but continue -- but will continue to restrict growth in this portfolio.

Turning to slide six. 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 seven 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 eight 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 nine. 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 it's 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 an approximate -- created an approximate 500 basis point 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 by approximately 400 basis points on a year-over-year basis. 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 idiosyncratic 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 the transitional conversion period. Given the sale, we have combined ATM processing revenue with debit -- excuse me, deposit service charges for reporting 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 of our ATM business. The increase in other income was driven by the inclusion of the transition services revenue, which will decrease over time, as well as -- as well as higher tax credits indications and equity investment revenue [ph].

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.

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 compensated 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 reflects the higher compensation expense primarily due to the higher -- impact of hiring to support business growth. This was partly offset by a decrease in other expense, primarily reflecting lower costs related to tax-advantaged projects and lower FDIC assessment costs.

Slide 12 highlights our capital position. At March 31st, our common equity Tier 1 capital ratio, estimated to use in the Basel III 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 basis points 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.

Andrew Cecere -- Chairman, President and Chief Executive Officer

Thanks, Terry.

The start of the year is shaping up as we expected. The US economy is healthy and supportive of growth, and the credit quality environment is stable. The 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 are making in technology and innovation will play a critical role in our long-term success, and their payoff will be increasingly visible in the form of customer acquisition and retention as well as operational efficiency.

One area we we've been placing a lot of attention is our digital capabilities. We recently launched our newly developed mobile app, which incorporates improved sales -- sales functionality and enables a more seamless experience for our customers. Early feedback from users has been very positive.

If we 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 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 significantly reduce the customers' time to credit decision and funding to in some cases as short as one hour.

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 the businesses. I'd like to thank our employees for their hard work and dedication throughout the year.

That concludes our formal remarks. We will now open up the call for Q&A.

Questions and Answers:

Operator

Certainly. (Operator Instructions) Your first question comes from the line of John McDonald with Autonomous Research. Your line is open.

John McDonald -- Autonomous Research -- Analyst

Thank you. Andy and Terry, hi, good morning. Wanted to ask you guys about the operating leverage target for this year. You came 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 toward the lower or the higher end of that 1% to 1.50% range? Or I guess maybe 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 you to the higher end?

Terrance R. Dolan -- Vice Chairman and Chief Financial Officer

Yes, John, this is Terry. And I think that where we end up in the range will in part 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 is something that we're just going to continue to manage through and make decisions based upon both short-term and long-term sort of objectives of the Company.

John McDonald -- Autonomous Research -- Analyst

Okay. And what's the right level of expense growth for USB in this kind of environment? You've 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 surcharge roll-off. So how do you -- how should we think about expenses and what you're thinking about this year, and what's kind of a good target for you guys?

Andrew Cecere -- Chairman, President and Chief Executive Officer

Hi, John, this is Andy. Yes, you're right about both of those items. The pressure on compliance costs has 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 that in my comments. I think another important factor is, with the lifting of the consent order, we have a lot more flexibility in physical asset optimization. So I think the other lever that you're going to see us utilize is the branch optimization, which over the next couple of years I would expect a 10% to 15% reduction in our actual physical count of branches. We're going to open up some in-places. We are going to be remodeling and changing the footprint. But the net of it will be down 10% to 15%.

John McDonald -- Autonomous Research -- Analyst

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.

Terrance R. Dolan -- Vice Chairman and Chief Financial Officer

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

Andrew Cecere -- Chairman, President and Chief Executive Officer

That's right, Terry. Typically, over the past many years, I think our strongest to the weakest quarter is just in terms of principally driven by revenue seasonality -- a lot of it's the payment businesses, but a lot of businesses (inaudible) strongest to weakest.

John McDonald -- Autonomous Research -- Analyst

Okay. But in terms of year-over-year operating leverage, that does -- sorry, doesn't necessarily apply? That will depend on the environment, more so whether you get up to that 1.5%?

Terrance R. Dolan -- Vice Chairman and Chief Financial Officer

Yes. And...

Andrew Cecere -- Chairman, President and Chief Executive Officer

And on the revenue environment, right?

Terrance R. Dolan -- Vice Chairman and Chief Financial Officer

Yes. More than revenue growth because some of it's variable expenses.

John McDonald -- Autonomous Research -- Analyst

Okay, thank you.

Terrance R. Dolan -- Vice Chairman and Chief Financial Officer

You're welcome.

Operator

Your next question comes from the line of John Pancari with Evercore. Your line is open.

John Pancari -- Evercore -- Analyst

Good morning.

Terrance R. Dolan -- Vice Chairman and Chief Financial Officer

Hey, John.

Andrew Cecere -- Chairman, President and Chief Executive Officer

Hey, John.

John Pancari -- Evercore -- Analyst

On the margin side -- first, on the -- actually more specifically around deposits, we saw pretty good decline in the noninterest-bearing in the quarter. Could 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? Wanted to get your thoughts on that first.

Terrance R. Dolan -- Vice Chairman and Chief Financial Officer

Yes. So there certainly continues to be some migration to interest bearing sort of 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, but 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 be a lot less pressure on earnings credit rates and then that is going to -- if not reduce, but at least lower the increase of the any excess deposit. So I do expect it to moderate a bit.

John Pancari -- Evercore -- Analyst

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

Terrance R. Dolan -- Vice Chairman and Chief Financial Officer

Yes. These are -- our net interest margin was up 1 basis point on a linked quarter basis. So given the current rate environment, my expectation from the deposit standpoint is that deposit betas will compare -- pricing will continue to creep up a little bit. It will be more driven by loan growth and where that loan growth is occurring. Our expectation is like really no rate hikes through the rest of the year, 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 that 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, 1 basis point or 2 basis point. 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.

John Pancari -- Evercore -- Analyst

Got it. All right. Thanks, Terry.

Operator

Your next question comes from Erika Najarian with Bank of America. Your line is open.

Erika Najarian -- Bank of America -- Analyst

Hi, good morning.

Andrew Cecere -- Chairman, President and Chief Executive Officer

Good morning, Erika.

Terrance R. Dolan -- Vice Chairman and Chief Financial Officer

Good morning, Erika.

Erika Najarian -- Bank of America -- Analyst

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

Terrance R. Dolan -- Vice Chairman and Chief Financial Officer

Yes. I mean, Erika, we -- clearly, no one understand the revenue environment that we're in right now and we're looking at every opportunity to be able to manage the expenses down. So I think your expectation is right that we're going to be very prudent with respect to our spending. We looked at -- from a leverage standpoint, Andy talked a little bit about physical asset optimization. We are looking at any discretionary spending. You remember from the fourth quarter, we went through kind of an organizational redesign. That will have some benefits to us throughout this year. And also in the first quarter, with Tim Welsh taking over our consumer banking business, that gives us opportunities to kind of look at our organizational design and structure. It's clearly a whole variety of different things. And then if you remember FDIC surcharge going away, it gives us some flexibility in order to be able to get there. So I think there's a number of different levers. But it's challenging, but we're going to end up having to manage in that environment, and that's our expectation.

Erika Najarian -- Bank of America -- Analyst

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 you've done it so well in the past, give us a sense of how you think pricing will trend on the commercial side versus the retail side?

Terrance R. Dolan -- Vice Chairman and Chief Financial Officer

Yes. I think that given the rate environment without rate hikes, again, I think the deposit pricing and how that changes will be a function of what sort of loan growth you see and the need to -- and competition that you'll have with respect to deposits in that situation. I do expect that on the wholesale trust side, there is still going to be -- continue to be some pressure, but I do believe that alleviates itself quite a bit. The other thing is that if you end up looking at our deposit growth, we're seeing good deposit growth in terms of consumer balances, and as you know, the pricing flexibility on that side is a little bit better.

Erika Najarian -- Bank of America -- Analyst

Got it. Thank you.

Operator

Your next question comes from the line of Scott Siefers with Sandler O'Neill. Your line is open.

Scott Siefers -- Sandler O'Neill -- Analyst

Good morning, guys. Thanks for taking my questions.

Andrew Cecere -- Chairman, President and Chief Executive Officer

Good morning, Scott.

Terrance R. Dolan -- Vice Chairman and Chief Financial Officer

Morning, Scott.

Scott Siefers -- Sandler O'Neill -- Analyst

Hey. Terry, I was hoping 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 had mentioned the paydown pressures, 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.

Terrance R. Dolan -- Vice Chairman and Chief Financial Officer

Yes. So when we end up looking at loan growth, I mean, it's hard to look out too far. Certainly, when we think about the second quarter, our expectation is that loans will grow kind of in line with the linked quarter growth that we saw in the first quarter. But maybe let me give you a little bit of context in terms of some of the dynamics. The middle market loan growth was -- was stronger in the first quarter. On a linked quarter basis, it was up about 1.3%, and year-over-year, it's closer to about 5%. So we saw a nice growth in the middle market space. We saw growth with respect to our auto lending. It was a little bit less price-competitive during the first quarter and we kind of expect that to continue. Residential mortgages are -- our mortgage volume was strong in the first quarter, and so we continue to believe that that's going to be a positive thing. And C&I in general was -- was good. I mean, I think the economy is solid. Our C&I pipelines are strong at this particular point in time, and consumer -- excuse me, businesses continue to spend and make some business investments. So I think that there're just a lot of different factors that would suggest that that sort of growth will continue. I think there are two things in terms of overall total loans that created a bit of a drag. We talked a little bit about our commercial real estate portfolio, and our expectation is that we'll continue to slowly -- to continue to be a bit of a drag throughout the rest of the year, just based upon where we're at in the business cycle. And then within C&I, kind of buried there is tax-exempt loans. And when the tax rates change, for corporates coming down but the individuals staying pretty high, the appetite, I guess or the opportunity to be able to grow tax exempt in the corporate side of the equation or the banking side of the equation is a little more challenging. So that on a linked quarter basis in the first quarter was about a 20 basis point drag for us. So it's kind of a number of puts and takes. But overall, we feel good about where the economy is and where -- where our businesses are spending.

Scott Siefers -- Sandler O'Neill -- Analyst

Okay, perfect. That's good color. I appreciate that. And then if I could -- one more -- more (inaudible) one. Just in your other fee income, I think there was a time not too long ago when you're actually doing like $250 million a quarter. That would be definitely a big outsized quarter. But more recently, it's kind of crept up there, kind of steadily consistently been in sort of a $225 million to $250 million range. As we look at the $247 million for this quarter, is that a pretty good base to go off of? Or was there anything volatile or unusual in there?

Terrance R. Dolan -- Vice Chairman and Chief Financial Officer

Yes, there is a -- it's actually a little bit 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 are -- if you are modeling kind of in between there, I think that's a good estimate.

Scott Siefers -- Sandler O'Neill -- Analyst

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

Operator

Your next question comes from the line of Ken Usdin with Jefferies. Your line is open.

Ken Usdin -- Jefferies -- Analyst

Thanks. Hey, good morning, guys. Hey, Andy, I don't know if you've spoken since the -- the F [ph] mergers of equals transaction we got last quarter. And I think we all know where you have stood as far as the current strategic imperatives, to work on the digital strategy, consolidate some of the branches. Just wondering as to where you stand on, your view of U.S. Bank's 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 -- not today, but just from a bigger picture strategic point.

Andrew Cecere -- Chairman, President and Chief Executive Officer

Sure, Ken. Firstly, let me say that we consider all options for growth and we'll 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 purpose will likely be on the fee businesses, the merchant processing and trust businesses that we've been 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 lines and I feel very comfortable with where we are today.

Ken Usdin -- Jefferies -- Analyst

Okay. And two just small ones. Well, first on -- on the card spending rate of growth slowing, I know part was the billing cycle, but just can you just talk to us about what are the -- is it 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 just up a lot sequentially, about 30 basis points. I'm just wondering what was underneath that increase. Thanks, guys.

Terrance R. Dolan -- Vice Chairman and Chief Financial Officer

Yes. So maybe on the consumer spend. Again, we talked about the fewer processing days, and that certainly was an impact. But one of the things that we saw kind of post holidays that consumer spend did drop pretty dramatically; came back in January; a little stronger in February. And it's kind of at 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 -- in terms of continuing to accelerate from a -- 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 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.

Andrew Cecere -- Chairman, President and Chief Executive Officer

And Terry, that first quarter was the period of government shutdown. There was some turbulence in the equity markets. There was weather impacts across our geographies. So those are all past us right now, and that's why (inaudible).

Terrance R. Dolan -- Vice Chairman and Chief Financial Officer

Yes, and it's hard to -- it's hard to kind of identify a single or any one of those things. I think everyone of them had some impact in the early part of the first quarter.

Andrew Cecere -- Chairman, President and Chief Executive Officer

Right.

Operator

Your next question comes from the line of Betsy Graseck with Morgan Stanley. Your line is open.

Betsy Graseck -- Morgan Stanley -- Analyst

Hi, good morning.

Terrance R. Dolan -- Vice Chairman and Chief Financial Officer

Hi, Betsy.

Betsy Graseck -- Morgan Stanley -- Analyst

Recently you 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 U.S. Bancorp. It's a pretty senior hire and I know you just did a whole revamp of the mobile platform. So I'm wondering what's left.

Andrew Cecere -- Chairman, President and Chief Executive Officer

Yes, there's a lot left. So we have a lot of activity going on from a digital perspective. We have 20 agile studios and growing and we just developed a new app. We are going to continue to enhance and 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. So 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 for the customers across all business lines and it really leveraging capabilities across our business -- all of our business lines for the benefit of the customer. So we're excited to have Derek on board. Yes, great capabilities, a great background, and I think he is going to fit into the team terrifically.

Betsy Graseck -- Morgan Stanley -- Analyst

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

Andrew Cecere -- Chairman, President and Chief Executive Officer

Yes, it is.

Betsy Graseck -- Morgan Stanley -- Analyst

Okay.

Andrew Cecere -- Chairman, President and Chief Executive Officer

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

Betsy Graseck -- Morgan Stanley -- Analyst

And when we think about the impact on the P&L, the improvement in digital and improvement in real time is obviously very positive for clients. Does it -- how does it impact your P&L? Is it neutral? Do you give up float but get back volume? I'm just trying to think through how you think about the ROIC on all of those.

Andrew Cecere -- Chairman, President and Chief Executive Officer

Yes, Betsy, the way I think about it is, I think it is an enhancement to both revenue and expense because from a revenue standpoint, I think it's going to allow for additional customer acquisition as well as retention, building a customer from a centrality standpoint. On the expense side of the equation, I think it offers operational efficiencies. When you think about check processing, the courier costs and things -- all those sorts of things, over time, I think it will offer benefits on both sides.

Betsy Graseck -- Morgan Stanley -- Analyst

And the float give-up really isn't that big a deal?

Andrew Cecere -- Chairman, President and Chief Executive Officer

The float, there is positive and negative there. And I think the net of it is not going to be that material.

Betsy Graseck -- Morgan Stanley -- Analyst

Okay. Thank you.

Andrew Cecere -- Chairman, President and Chief Executive Officer

You bet.

Operator

Your next question comes from the line of Vivek Juneja with JPMorgan. Your line is...

Andrew Cecere -- Chairman, President and Chief Executive Officer

Good morning, Vivek.

Terrance R. Dolan -- Vice Chairman and Chief Financial Officer

Hey, Vivek.

Vivek Juneja -- JPMorgan -- Analyst

Hi, 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 '18 that benefited by 400 basis points? Or did I mishear that?

Terrance R. Dolan -- Vice Chairman and Chief Financial Officer

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. So if you think about, we're down -- we're down 6.2%. There was a 500 basis point drag related to three fewer processing days, a 400 basis point drag related to the accounting change and then the drag associated with consumer spend dynamics that we saw early in the third -- first quarter.

Vivek Juneja -- JPMorgan -- Analyst

Okay. And that favorable accounting change, Terry, did that benefit all of 2018 then? Or was this something that reversed in the rest of '18? Or how did it play out?

Terrance R. Dolan -- Vice Chairman and Chief Financial Officer

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 future quarters and from a comparison standpoint.

Vivek Juneja -- JPMorgan -- Analyst

Okay, got it. And this 500 basis point fewer processing days? That should completely reverse over the course of the next quarter? Or does it take multiple quarters to do that?

Terrance R. Dolan -- Vice Chairman and Chief Financial Officer

Yes, it -- it's not necessarily in the second quarter. We would expect it to reverse principally in the third quarter. On a year-over-year basis, 2019 versus 2018, there are actually two fewer processing days in total. So we're going to get some of it back, but not all of it this year.

Vivek Juneja -- JPMorgan -- Analyst

Okay. Okay, great. Thank you.

Terrance R. Dolan -- Vice Chairman and Chief Financial Officer

You bet. Thanks, Vivek.

Operator

Your next question comes from the line of Kevin Barker with Piper Jaffray. Your line is open.

Kevin Barker -- Piper Jaffray -- Analyst

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

Terrance R. Dolan -- Vice Chairman and Chief Financial Officer

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' pension plans that -- have been a little more active with respect to taking out construction lending and providing the permanent financing maybe than what we have seen in the past. Fourth quarter was a little bit of an anomaly for us because first quarter kind of got -- some of the first quarter activity got pulled forward into the fourth quarter. But when we think about commercial real estate going through the rest of the year, the type of paydown activity -- I think we expect it to continue. So the decline in the portfolio is probably going to be fairly -- fairly consistent through the year. In terms of type of product, in terms of where we're seeing, it's really kind of across the board in terms of 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.

Andrew Cecere -- Chairman, President and Chief Executive Officer

And just to add on Terry, another factor certainly is the flat yield curve. It's not allowing some of these non-banks to take advantage of the lower funding cost (inaudible) in the curve and (inaudible).

Terrance R. Dolan -- Vice Chairman and Chief Financial Officer

Yes.

Kevin Barker -- Piper Jaffray -- Analyst

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 some of the lending you did last year. Could 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?

Andrew Cecere -- Chairman, President and Chief Executive Officer

Yes. So we spent -- I mentioned the Agile team. So that was a great example. The Agile team coming together in a matter of months to develop a product that allows the funding in what was typically days or weeks to hours. And it's in early -- early innings of the project, but it's been very favorable in terms of offering customers convenient choice, fewer 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've talked about, that allows for just a more convenient, simple set of navigation options and also sales and information. So it's part of a large strategy and I also want to highlight that the mobile app that we are introducing now, 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.

Terrance R. Dolan -- Vice Chairman and Chief Financial Officer

And I think that is one of the drivers in terms of why we are seeing application value being stronger...

Andrew Cecere -- Chairman, President and Chief Executive Officer

Absolutely.

Terrance R. Dolan -- Vice Chairman and Chief Financial Officer

And it's one of the reasons why we feel pretty bullish on mortgage origination through the rest of the year.

Kevin Barker -- Piper Jaffray -- Analyst

Okay. Thank you, Andy. Thank you, Terry.

Terrance R. Dolan -- Vice Chairman and Chief Financial Officer

Yes, thanks.

Andrew Cecere -- Chairman, President and Chief Executive Officer

Thanks, Kevin.

Operator

(Operator Instructions) Your next question comes from the line of Saul Martinez with UBS. Your line is open.

Saul Martinez -- UBS -- Analyst

Hey, good morning, guys. 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 you 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?

Terrance R. Dolan -- Vice Chairman and Chief Financial Officer

Yes, the ATM business was sold kind of mid-fourth quarter. So the change in deposit service charges forth -- 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. The -- and I think that's probably the best way of kind of thinking about it.

Saul Martinez -- UBS -- Analyst

Okay. So -- sorry, so the best way to sort of look at the year-on-year delta versus where it was in the first quarter of '18?

Terrance R. Dolan -- Vice Chairman and Chief Financial Officer

So the delta was about $44 million, $45 million. I think that delta is a -- it's a pretty good metric.

Saul Martinez -- UBS -- Analyst

Okay. So it's a $44 million -- OK, so it's about $40 million to $45 million. So not all of it goes away in the -- from what you previously were posting in that ATM processing services line, which was like $80 million to $90 million a quarter.

Terrance R. Dolan -- Vice Chairman and Chief Financial Officer

That's right because included in that was third-party service provider fees as well as branded ATM fees.

Saul Martinez -- UBS -- Analyst

Got it. And then on your C&I loan yields, it ticked 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 -- in a quarter where you have a hike. And LIBOR obviously moved up -- the average LIBOR moved up less than in prior quarters. Is there anything unusual in that tick-up in commercial loan yields that we should be aware of? Because it seems like a pretty big increase.

Terrance R. Dolan -- Vice Chairman and Chief Financial Officer

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 point. 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.

Saul Martinez -- UBS -- Analyst

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

Terrance R. Dolan -- Vice Chairman and Chief Financial Officer

Exactly.

Saul Martinez -- UBS -- Analyst

All right. Okay. Got it. Thank you.

Operator

Your next question comes from the line of Mike Mayo with Wells Fargo Securities. Your line is open.

Mike Mayo -- Wells Fargo Securities -- Analyst

Hi, can you hear me?

Andrew Cecere -- Chairman, President and Chief Executive Officer

Yes, Mike. How are you doing?

Terrance R. Dolan -- Vice Chairman and Chief Financial Officer

Yes, Mike. We can hear, yes.

Mike Mayo -- Wells Fargo Securities -- Analyst

Great. So I -- I know Betsy asked one question about Derek White, who I guess comes from BBVA, which is considered one of the leaders in digital banking, so that's a pretty big hire. So what metrics should we on the outside look to, 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 -- what would be your metric for success for whatever Derek White will be doing now?

Andrew Cecere -- Chairman, President and Chief Executive Officer

Thanks, Mike. And it is all those things. It's digital engagement. It's going to be sales activity and digit -- via the 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, in our quarterly earnings, 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.

Mike Mayo -- Wells Fargo Securities -- Analyst

And you are -- 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 war, so to speak. That's my term, not years. 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 retail customers?

Andrew Cecere -- Chairman, President and Chief Executive Officer

That is still our plan. And as a reminder, we have a number of customers outside of our 25 states. They are either credit card, mortgage or auto loan customers. We also have large employee basis. And I think what we're focused on is expanding in what I'll call additional light strategy -- our 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 all-bank [ph] experience for those customers. So (multiple speakers)

Mike Mayo -- Wells Fargo Securities -- Analyst

And then one short follow-up, my last one. You've been around a long time. You know the industry and the business. It's just we haven't found too many examples of cross-selling to a credit card company a lot of other, say, deposit and other products. You're changing a single product customer, whether it's in credit cards or auto and making them a full relationship customer. So why it's now different? Or maybe there's examples that you see that I don't?

Andrew Cecere -- Chairman, President and Chief Executive Officer

Yes, a fair question, Mike. I think what's changed over the past few years is the capabilities that you can do from a digital platform. So historically, you really needed a physical presence to expand a customer relationship, and if you didn't have a branch in that location or many branches, a density of branches, you weren't able to really extend a relationship. I think with the capabilities today, the two-thirds of transactions happen on a mobile device, the fact that 70% of our customers use the digital platform, all those facts allow you to enter a market with this branch-light concept, with a digital platform that is different from a few years ago, and I think that's the major change. I think the other thing that...

Mike Mayo -- Wells Fargo Securities -- Analyst

All right. Thank you.

Andrew Cecere -- Chairman, President and Chief Executive Officer

Yes, I think the other thing that I would add is that I think a big part of the digital -- the digital world is the experiential aspect associated with it. And if you think about millennials and Gen Z, et cetera, they're much more digitally adept and I think that as that continues to occur, it's going to continue to create that opportunity.

Mike Mayo -- Wells Fargo Securities -- Analyst

Thanks, again.

Andrew Cecere -- Chairman, President and Chief Executive Officer

Thanks, Mike.

Operator

Your next question comes from the line of Gerard Cassidy with RBC. Your line is open.

Gerard Cassidy -- RBC -- Analyst

Thank you. Good morning, Andy and Terry. How are you?

Terrance R. Dolan -- Vice Chairman and Chief Financial Officer

Hi, Gerard.

Andrew Cecere -- Chairman, President and Chief Executive Officer

Hey, Gerard. Doing well.

Gerard Cassidy -- RBC -- Analyst

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 answer that question, can you think about also your exposure to retail malls and stuff, this increased activity in retailers shutting down stores and maybe there might be some pressure in that type of portfolio down the road?

Terrance R. Dolan -- Vice Chairman and Chief Financial Officer

Yes, good question. Certainly with respect to our portfolio, there is nothing really on the horizon that we're too concerned about. As you know that our portfolio was principally prime-based and that's true across all of our consumer sort of product, and the commercial side of the equation, it typically is investment grade -- high investment grade type of customers that we do business with. So I don't think there is a particular area that we have that stands out as a concern for us certainly in commercial real estate and one of the reasons why we're not extending terms and those sorts of things is just that at this particular point in the business cycle, we think it's prudent just to continue to hold our own as opposed to expand and grow. And then maybe coming back to your question with respect to retail malls, it -- I think that will continue to be an area of pressure, if you think about the industry. But for us, the exposure I believe is less than $250 million, so just isn't a big -- a big exposure for us at this particular point in time.

Gerard Cassidy -- RBC -- Analyst

Very good. And then shifting to deposit betas. Back in '94, '95, Chairman Greenspan shifted his policy on 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-term rates?

Terrance R. Dolan -- Vice Chairman and Chief Financial Officer

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.

Gerard Cassidy -- RBC -- Analyst

Very good. Thank you.

Terrance R. Dolan -- Vice Chairman and Chief Financial Officer

Yes. Thanks, Gerard.

Operator

There are no further questions at this time. I would now like to turn the call back over to Jen Thompson for closing remarks.

Jennifer Thompson -- Director of Investor Relations

Thank you all for listening to our earnings call. Please contact the Investor Relations department if you have any follow-up questions.

Operator

This concludes the U.S. Bancorp's first quarter 2019 earnings conference call. We thank you for your participation. You may now disconnect.

Duration: 46 minutes

Call participants:

Jennifer Thompson -- Director of Investor Relations

Andrew Cecere -- Chairman, President and Chief Executive Officer

Terrance R. Dolan -- Vice Chairman and Chief Financial Officer

John McDonald -- Autonomous Research -- Analyst

John Pancari -- Evercore -- Analyst

Erika Najarian -- Bank of America -- Analyst

Scott Siefers -- Sandler O'Neill -- Analyst

Ken Usdin -- Jefferies -- Analyst

Betsy Graseck -- Morgan Stanley -- Analyst

Vivek Juneja -- JPMorgan -- Analyst

Kevin Barker -- Piper Jaffray -- Analyst

Saul Martinez -- UBS -- Analyst

Mike Mayo -- Wells Fargo Securities -- Analyst

Gerard Cassidy -- RBC -- Analyst

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