美國合眾銀行 (USB) 2020 Q4 法說會逐字稿

Welcome to U.S. Bancorp's Fourth Quarter 2020 Earnings Conference Call. Following a review of the results by Andy Cecere, Chairman, President and Chief Executive Officer; and Terry Dolan, Vice Chair 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 12:00 p.m. Eastern through Wednesday, February 3, 2021, at 12:00 midnight Eastern.

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

Thank you, Natalia, and good morning, everyone. With me today are Andy Cecere, our Chairman, President and CEO; and Terry Dolan, our Chief Financial Officer. Also joining us on the call are our Chief Risk Officer, Jodi Richard; and our Chief Credit Officer, Mark Runkel. During their prepared remarks, Andy and Terry will be referencing a slide presentation. A copy of the slide presentation as well as our earnings release and supplemental analyst schedules are available on our website at usbank.com.

I'd like to remind you that any forward-looking statements made during today's call are subject to risk and uncertainty. Factors that could materially change our current forward-looking assumptions are described on Page 2 of today's presentation, in our press release and in our Form 10-K and subsequent reports on file with the SEC.

I'll now turn the call over to Andy.

Thanks, Jen, and good morning, everyone, and thank you for joining our call. Following our prepared remarks, Terry, Jodi, Mark and I will take any questions you have.

I'll begin on Slide 3. In the third quarter, we reported earnings per share of $0.95, revenue totaled $5.8 billion in the fourth quarter, and we delivered a record $23.3 billion for the full year 2020 in spite of the headwinds caused by the low interest rate environment and the economic shutdowns due to the COVID-19 pandemic. The value of our diversified business model was evident this past year as strength in our mortgage banking, Corporate Trust and capital markets businesses offset pressure on our net interest margin, which we expect to be stable in the near term and lower payments revenue due to reduced spend activity.

While uncertainty remains, I'm encouraged by economic data that have generally been coming in better than expected in recent months and an improving economic outlook, given progress on the vaccine and the potential for additional governance stimulus. In the fourth quarter, we saw a continuation of improving sales trends in our own payments data with the exception of some pressure on our merchant acquiring business's European operations, which was affected by the economic shutdown in the second half of the quarter. While we expect European operations to continue to experience pressure in the first quarter, we expect payments volume trends to continue to improve in line with consumer spend activity.

Noninterest expenses were stable compared with the third quarter, and we continue to target flat sequential expense levels as long as revenue growth remains challenging. Our balance sheet is in a strong position. Credit quality metrics were a little better than anticipated this quarter. And as expected, we neither built nor released reserves in the fourth quarter. We continue to maintain strong capital and liquidity positions, which will allow us to continue to support our customers in this environment. Following the results of the Fed stress test in December, which indicated that we will continue to be subject to the minimum stress capital buffer, we announced a $3 billion common stock repurchase program with buybacks beginning this quarter.

Slide 4 provides key performance metrics. In the fourth quarter, we delivered a 15.6% return on tangible common equity.

Slide 5 shows that we continue to see migration to the digital channel.

Now let me turn the call over to Terry who'll provide more color on the quarter.

Thanks, Andy. If you turn to Slide 6, I'll start with the balance sheet review followed by a discussion of fourth quarter earnings trends. Average loans declined by 2.8% compared with the third quarter. The decline was primarily driven by lower commercial loans, reflecting continued paydowns by corporate customers partly offset by higher mortgage loan balances. While paydown activity continues to slow, we expect it to remain somewhat elevated in the early part of 2021.

Turning to Slide 7. Average deposits increased 4.2% compared with the third quarter and overall deposit mix continues to be favorable. Our noninterest-bearing deposits grew 5.3%, while time deposits declined 3.8%.

On Slide 8, you can see that credit quality continues to perform better relative to our expectations. Our net charge-off ratio was 0.58% in the fourth quarter, which was down compared to [0.66%] (corrected by company after the call) in the third quarter, reflecting improvement in both commercial and credit card loss rates. The ratio of nonperforming assets to loans and other real estate was 0.44% at the end of the fourth quarter compared with 0.41% at the end of the third quarter. Our loan loss provision was $441 million in the fourth quarter, which was equivalent to our net charge-offs during the quarter. Our allowance for credit losses as of December 31 totaled $8.0 billion or 2.69% of loans. The allowance level reflected our best estimate of the impact of slower economic growth and elevated unemployment partially offset by the consideration of benefits of government stimulus programs.

Slide 9 highlights our key underwriting metrics and loan loss allowance breakdown by loan category. We have a strong relationship-based credit culture at U.S. Bank supported by cash flow-based lending that considers sensitivity to stress, proactive management and portfolio diversification, which allows us to support growth through the economic cycle and produces consistent results.

Turning to Slide 10. Exposures to certain at-risk segments, given the current environment, are stable compared with the third quarter. The top left table shows that the volume of payment relief declined meaningfully in the fourth quarter to 1.4% of total loans.

Slide 11 provides an earnings summary. In the fourth quarter of 2020, we earned $0.95 per diluted share.

Slide 12 shows that notable items that impacted earnings in the fourth quarter of 2019, we had no notable items in the fourth quarter of 2020.

Turning to Slide 13. Net interest income on a fully taxable equivalent basis of $3.2 billion declined 1.6% compared with the third quarter, reflecting lower average loan balances and a 10 basis point decline in net interest margin. The decrease in the net interest margin was primarily driven by higher cash balances, which hurt our NIM by 8 basis points and higher premium amortization. We expect stability and cash balances in the near term. And given the current outlook for mortgage refinancing activity, we believe that fourth quarter 2020 will prove to be the peak level for premium amortization expense.

Slide 14 highlights trends in noninterest income. Excluding notable items in the fourth quarter of 2019, noninterest income declined 1.0%, reflecting the impact of lower industry-wide consumer spending activity on our payments businesses and deposit service charges, partly offset by a strong mortgage banking revenue and higher commercial product revenue.

Slide 15 provides information about our payment services business lines, including exposures to impacted industries. Year-over-year payments revenue was pressured by reduced consumer and business spend activity compared with pre-COVID levels. However, consumer sales trends generally improved throughout the fourth quarter, albeit at a slower pace than we saw in the third quarter. As expected, card sales volumes were impacted by lower prepaid card volumes in the fourth quarter as payment activity related to the stimulus programs moderated in the fourth quarter. Merchant acquiring volumes were negatively impacted by the mix of sales volumes and a decline in spending activity in Europe, following an increased economic shutdowns related to COVID-19. Commercial business spend within our corporate payments business continued to improve during the fourth quarter.

Turning to Slide 16. On a linked-quarter basis, noninterest expenses were stable as expected. Excluding notable items in the fourth quarter of 2019, noninterest expenses increased by 5.1% on a year-over-year basis. Growth was driven by higher compensation related to revenue-generating business production, technology and communication costs and COVID-19-related expenses.

Slide 17 highlights our capital position. Our common equity Tier 1 capital ratio at December 31 was 9.7%.

I'll provide some forward-looking guidance. For the first quarter of 2021, we expect fully taxable equivalent net interest income to decline in the low single digits in part due to seasonally fewer days. We expect our net interest margin to be relatively stable. Loan balances are likely to decline in the first quarter as PPP loans are forgiven and as corporations continue to use attractive capital markets funding alternatives and their strong cash flow to continue to pay down loans. However, we expect to start to see average loan balances growing in the second quarter. We expect mortgage revenue to decline on a linked-quarter basis, in line with the industry, as refinancing activity continues to moderate. In the first quarter, we expect both merchant acquiring revenue and corporate payments revenue to decline between 10% to 15% on a year-over-year basis, reflecting lower travel and hospitality volumes compared with pre-COVID levels. However, we expect sales volume trends, excluding travel and hospitality, to continue to improve on a sequential basis, in line with consumer and business spend activity. The recovery of travel and hospitality spend will be dependent upon the timing and efficacy of vaccinations and changes in consumer behavior and business activities. We expect credit and debit card revenue to increase in the low double digits on a year-over-year basis as growth in debit and prepaid card volumes more than offset lower travel and hospitality volumes. We expect noninterest expenses to be relatively stable compared with the fourth quarter.

Recently, economic indicators have generally been better than market expectations and the outlook has improved in the past few months. However, given current uncertainties that exist related to recent trends in COVID-19 cases and related state level restrictions, we expect nonperforming assets to remain elevated and we expect net charge-offs to remain relatively stable in the first quarter. We continue to expect net charge-offs to increase in the second half of the year. We expect the allowance for credit losses to begin to decline when there's more certainty regarding the economic outlook and the timing of when peak net charge-offs will occur. We will continue to assess the adequacy of the allowance for credit losses as conditions change. For the full year 2021, we currently expect our taxable equivalent tax rate to be approximately 20%.

I'll hand it back to Andy for closing remarks.

Thanks, Terry. 2020 was a challenging year for many, and I'm proud of how our employees came together to support our customers and communities to help them find solutions for their individual needs. As we move into 2021, I'm confident that U.S. Bank is well positioned to continue to deliver industry-leading results. Our diverse revenue stream will continue to serve us well as we move through the various phases of the economic cycle. We continue to carefully manage operating expenses while our scale, our innovative culture and our focus on optimization will allow us to invest in our businesses and our digital and payments capabilities. We view a prudent and consistent approach to credit risk management, and our track record is good stewards of shareholders' capital as meaningful differentiators for this company, which is why we will always manage this company with a long-term lens.

I want to thank our employees for all the resiliency, flexibility and hard work over this past year and for all they do to bring our culture to life every day.

We'll now open up the call for Q&A.

(Operator Instructions) Your first question is from the line of Betsy Graseck with Morgan Stanley.

I wanted to just understand a little bit about how you're thinking about the progression of loan growth as you go through the year and any kind of timing or drivers that you can speak to on the consumer side and the commercial side.

Yes. So Betsy, when we end up looking at loan growth, we do expect, as we said, that in the first quarter it's likely to be down because of the factors that we talked about, but we are starting to see an inflection point. I think there's better activity from an M&A perspective than business spend in terms of CapEx, it seems to be getting a little bit stronger. So our expectation is that in the fourth quarter, we kind of hit that inflection point and loans start to grow. The biggest challenge for us has really been on the commercial side of the equation as we've gone through 2020, and it's really when that starts to change in which overall loan growth starts to improve. We do expect that, as consumer spend and consumer behaviors continue to get stronger throughout the year, some of the pressure on credit card will alleviate. And so I do expect that as we get into second quarter and the second half of the year, that credit card balances will start to come up as well. And so that kind of gives you a little bit of flavor with respect to consumer and commercial.

And can you give us a sense on how you're thinking about your own appetite for M&A? We've had, obviously, in the industry, quite a bit of consolidation activity over the past couple of quarters. And I know from prior comments, you've mentioned that, look -- you'll look at -- you have a high bar. Just wondering, given flush with capital liquidity and reserves, is -- if that changes at all the opportunity set from your perspective for any M&A?

Betsy, this is Andy. Our position on that is consistent with what we talked about. We'll continue to look at opportunities for, in addition to organic growth, partnerships, alliance like we did with State Farm as well as M&A if it meets the hurdles, both from a financial and strategic sense to really increase our capabilities, our scale, our customer acquisition opportunities. So we'll be open-minded about that.

Okay. And then just lastly, on the State Farm and the Charlotte market expansion and some of the other locations where you're doing the digital-first, branch-light strategy, could you give us a sense as to the kind of pace of benefit to growth that you anticipate those strategies will drive over the next couple of years?

Yes. Let me start on the State Farm side. So as you know, that was an acquisition of card balances as well as deposits, and so we would expect continued increases in both of those categories in addition to other opportunities in small business and other banking products with that alliance, and that is going very well and the conversion was very smooth. Charlotte is also exceeding our expectations, both in terms of extending current customer relationships as well as new customer acquisition. We slowed a little bit in terms of the additional branches because of COVID, but we're going to get back on track there. So I would say, in both cases, they're exceeding our expectations. State Farm, a little bit more material just given the size than the Charlotte acquisition -- Charlotte increase.

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

On the credit front, I just want to see if you can perhaps give us a little bit more color on your thought process regarding the reserve and why not release here. I know you indicated that you're watching the macro backdrop. What economic factors are you looking for to give you that signal around reserve releases? And then separately, I know you mentioned a peaking of charge-offs. So are you implying that you have to see that the charge-off peak before you release? I just want to see if you can elaborate there.

Yes. I mean, maybe with respect to your second question, no, I don't think we need to see them peak. I think we need to just have confidence in terms of when that's going to occur. And I think that as time continues to move on, I think that the economic outlook continues to get better and stronger. I mean that's generally our expectation. Obviously, unemployment and some of the high level economic factors continue to improve, which is great. I think the biggest thing that we're waiting to see is just when we thought about the fourth quarter, COVID cases and things like that continued to be spiking. There were a number of state economies that continued to put more and more restrictions on. And we just kind of wanted to see that change or reverse, which I think as we're starting to see now, that's positive. But I think there's enough uncertainty, and we want to be conservative. As we think about the appropriateness of the reserve, we wanted to just see some of those uncertainties alleviate.

Okay. All right. And then separately, on the loan growth front, I hear you in terms of the likely inflection that you're beginning to see. So as you think about it, could you help us frame how you think loan growth could shape up for the year as this inflection materializes and you see the strengthening through the year? How should we think about full year loan growth versus GDP? And then separately, what do you think will be the greatest contributors to loan growth in terms of your asset classes for 2021?

Yes. So relative to GDP, obviously, GDP is projected to be pretty strong. So I think that we're -- from a loan growth perspective, I think the entire industry is going to see that lag a little bit behind that. But as the economy continues to get stronger, that loan growth will occur. The biggest challenges, I think, that the industry has had and certainly that we've seen is that with very low rates, strong companies with good cash flows have been able to go out to the markets and refinance and/or use their own cash flows to pay down balances. And so similar to what we saw the last time, deposits, there's a lot of liquidity out there with Corporate America, and they need to start using some of that liquidity themselves in terms of capital expenditure, M&A activity and all sorts of things. So the positive thing that we see now is that there are some green shoots associated with all those things, and that's kind of the front end of loan growth starting to reverse and take off, similar to what we saw last time.

That's right, Terry. And I think the areas that, like you just said, the areas that probably offer the most opportunity are corporate loans as companies start to increase CapEx spend and M&A accelerates and credit card spend starts to increase. Most of the credit card increase activity right now is transactors as opposed to those using balances.

Your next question is from the line of John McDonald with Autonomous Research.

Andy, Terry gave some detailed guidance items for 2021. I guess at a higher level, how are you thinking about what kind of year 2021 will be in terms of maybe headwinds and tailwinds on the revenue front? And how you're thinking about managing for operating leverage?

Yes, John. So let me start by thinking about the year 2020 because I think one of the great attributes of our company is our diversified revenue model. So we had headwinds in a couple of businesses, like payments and NIM, offset by positives in mortgage and auto and our Corporate Trust business and our corporate -- commercial products businesses. As we think about -- as I think about 2021, I think some of those headwinds, particularly in payments, will begin to dissipate. We have some pressure in the fourth quarter because of our European operations. But as you know, spend is starting to get back to normal, particularly those areas outside travel and hospitality. And I think that will start to come back, particularly in quarters 2, 3 and 4, so that will be a positive. Mortgage continues to be strong, maybe not as strong as what it was in 2020, but we have a high retail activity and a new purchase activity, given the expansion and the investments we've made there, so I see positives there. Our trust businesses and investment will continue to do strong. And then as Terry talked about, I think, the other area of opportunity is in loan growth. So as we think about the year, that diversity of revenue is going to be very helpful. And we'll continue to manage expenses given the revenue opportunities we have. And as we said, as we think about the first quarter, we expect it to be relatively flat.

Okay. And in terms of the operating leverage achievability this year, how would you handicap that? I know it's a tough call.

Yes. A little -- it's always our goal, Jeff (sic) [John], let me start there. We're going to make the investments we need to, but also recognize the current environment and try to perform as best we can given the revenue. So positive operating leverage is always our goal, and we'll strive for that in 2021. There's still a lot of uncertainty on the revenue front. So we'll see how that plays out, and we'll continue to give updates.

Okay. And then, Terry, maybe you could just weigh in on terms of capital management. Just remind us where do you think you should be running the company? You've got a fair amount of excess here in terms of common equity Tier 1. And how you think about using buybacks beyond the first quarter over the course of time?

Yes. So our overall target is 8.5%, and we typically operate somewhere between 8.5% and 9% in terms of Tier 1 ratio. Currently, as you know, we're at 9.7%, so there is capacity and there's certainly opportunity for us to be able to bring that down. I think the thing that we'll do is we'll continue to watch the uncertainties as the economic outlook continues to strengthen and earnings strengthen. We'll take advantage of, but there's clearly plenty of opportunity from a capital management perspective to use that capital in a variety of ways.

Your next question is from the line of Scott Siefers with Piper Sandler.

Maybe, Terry, could -- I was hoping to ask you to expand a bit on one of the comments you touched on a second ago with regard to corporate liquidity. Just on deposits, generally, the whole world is kind of awash in all these deposits. Just your top-level thoughts on sort of when and how those kind of get drawn down if they come down? Just overall kind of what you're thinking there.

Yes. Certainly, our expectation for 2021 is that the -- from a policy perspective, the Federal Reserve is going to continue to support a fairly high level or accommodative sort of an environment. Our expectation is that deposits will continue to grow, but certainly not maybe at the pace that they were in 2020. So that's going to be both an opportunity for us as we have the deposit flow to be able to look at investing, for example, in the investment portfolio, et cetera, but it's also going to create a challenge from Corporate America in terms of the amount of liquidity that they have.

Okay. Perfect. And then I was hoping you could touch on the commercial products revenue line a bit. In a sense, it's kind of reversed some of the trends we see at peers where it sort of peaked earlier in the year and has been declining since. Just curious if you can sort of talk about some of the underlying trends there and expectations.

Yes. Certainly, when we think about commercial product revenue, I mean, the peak really was kind of in that second, third quarter sort of time frame for us. Our focus is really more on the high investment-grade sort of customers as opposed to high yield. And I think that you -- because that mix in terms of what's happened in the marketplace ends up impacting our growth rates maybe relative to the industry. Fourth quarter is always -- there's always a little bit of seasonality for us, it kind of comes down. When we look at 2021, we're generally bullish with respect to capital markets activities.

Our next question is from the line of Erika Najarian with Bank of America.

My first question is just teasing out the NII outlook for the rest of the year. As I think about your comments on loan growth and that fourth quarter will be peak for premium am, should we expect the first quarter of 2021 to represent a bottom in net interest income? And do you -- if so, would you expect it to grow from there? And -- sorry, Part B of this question, is there any PPP-related income that you're putting into guidance?

Yes. Well, maybe with respect to the last one. I mean, PPP, obviously, will impact net interest income as forgiveness occurs, et cetera. But it's not a big driver associated with it for us. Maybe kind of coming back to your first question, though, our expectation from here is that starting point net interest margin is going to be stable certainly in the first quarter and our expectation is through the year. I mean the pressures associated with the yield curve and all sorts of things that we saw last year actually will probably be helpful to us. As we see that inflection point in terms of loan balances, that's going to be a big driver in terms of the inflection point with respect to net interest income as well. And then certainly, as deposit flows, if they continue to be strong, we don't believe that we need to build any more liquidity. And so we'll look at opportunistically reinvesting that in the market.

Got it. And as we think about the trajectory for payments-related fee income, $799 million this quarter versus -- the fourth quarter versus $945 million in 4Q '19. As you think about your outlook for the global economy, do you think you could go back to the run rate of $945 million by 4Q '21? Or do you think that certain parts of payments will take a little bit longer to come back?

Yes. Well, generally, I would say that when we think about the payments business, we're optimistic with respect to sales volumes as the year progresses. We do -- certainly, when we saw fourth quarter, we saw good sales expansion in terms of credit card, debit card and in the commercial spend, so in our corporate payments space. The domestic spend from a merchant perspective was kind of flattish in the fourth quarter, but we do expect that to continue to expand and grow throughout the year. I think the thing that -- getting back to your question, though, in terms of how quickly do you get back to pre-COVID revenue levels. A driver of that is just the travel and entertainment piece, which is going to be probably a little bit more subdued at least in 2021.

Got it. And if I could sneak a final question here, and this is for Andy. As a follow-up to Betsy's question, I do get a lot of questions from investors on whether or not U.S. Bank would do something more transformational from a nonorganic growth perspective, seeing that your closest peers in terms of size did something either transformational or somewhat transformational. And the question here is, with assets at $554 billion as of year-end, does the -- is $700 billion a bright line for you as it indicates a different tier in terms of regulatory treatment?

I think, Erika, the short answer is I don't think about that as a bright line. As we talked about, we're making investments across all of our businesses, particularly in the digital channels. We spent $2.5 billion a year. We have good scale, but we'll look at opportunities to increase that scale and increase the customer acquisition opportunity across all the businesses. So -- but there aren't any bright lines in terms of what we look at or would do or wouldn't do -- would or wouldn't do.

Your next question is from the line of Matt O'Connor with Deutsche Bank.

First, a clarifying question, sorry if I missed it. But the expense guidance, I think you said is stable in the first quarter versus 4Q, but did you give full year '21 guidance on costs?

Yes, we didn't necessarily give full year guidance. I would just kind of come back to what Andy said, and that our goal and our expectation is to manage expenses flat, especially given the revenue environment. And our target is always to achieve positive and for leverage, it's going to be challenging in the -- especially in the earlier part of the year.

Okay. That's helpful. And then separately, the alliance that you have with State Farm, just talk about some of the kind of the longer-term opportunity there. I think you brought in about $10 billion deposits and a little bit north of $1 billion of card loans. But what do you think the revenue and earnings contribution from that can be over time?

Yes. I mean, so the dollars that you mentioned in terms of deposits and credit card is pretty close. When we think about the business though, and Andy has talked about this before, there's just a lot of opportunity, and they have 19,000 agents that are out there and they're one of the biggest organizations with respect to small business customers. And so when we think about it, we think about there's opportunity in terms of deposit gathering, there's certainly opportunity to enhance and improve the credit card program that has existed, but we have a number of different initiatives that are going to focus around really expanding that and also expanding our relationship with them in terms of auto lending as well as small business opportunities.

And I guess what I'm getting at, like if we look out 5 years, like, is this something that could all of a sudden start moving the needle, right? Like so mortgage, you're investing heavily in it for a number of years and all of a sudden, activity picked up and it's just massive number. And even if it's not sustainable, it just shows kind of the fruits of the investments. Is this something that could move the needle? Or is it just kind of a building block along with some other initiatives?

No, I think it is one of those things that can move the needle for us. I mean, any time you have access through 19,000 agencies, we think that, that's very significant. And the other thing, Matt, is that we've invested a lot in digital capabilities. We plan on leveraging all of those digital capabilities in order to be able to support their customers and ours. So we're very bullish. We're very excited about the State Farm alliance. A lot more to come.

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

Just a couple of quick follow-ups. First of all, on the point about premium am and it bottoming, is there a way you can help us understand how much of an impact that currently is, either in numeric terms or how much directional change there has been to get to this point, given your point that it's -- to the point that it's bottoming?

Yes. I mean, we haven't necessarily disclosed any dollars associated with premium amortization. If you end up thinking about the 10 basis points this quarter, 8 of it is really related to [cash] (corrected by company after the call) balances, so the rest of it is really driven by premium amortization or significant amount. So I think with respect to first quarter, it's -- fourth quarter, it's really peaked. First quarter, it's really -- and into 2021, it's really going to track, I think, along with how refinancings occur within the mortgage industry.

Okay. And as you look into this year and consider the stimulus that's already started to flush through and potentially more stimulus, how does that impact what you expect to see in the payments businesses at least domestically? So does that net help revenues? Does it weigh on revenues? And what other kind of through the income statement effects do you -- are you anticipating given the prospect for even more stimulus to come through?

Yes. I mean, when you think about stimulus, certainly, in the short term, it helps our prepaid card businesses pretty significantly. And with respect to the most recent one and if there's another round of it, I think that, that would continue to help throughout the year. But I do think that it will, and we did see in the last stimulus, it does stimulate consumer activity in terms of buying and that is going to help and did help and will help our payments businesses as we think about 2021. So that to me is a very favorable thing. I think the other thing is that when you think about it from a credit standpoint, the $900 billion maybe was a little bit lower than what had been hoped for, but it's a nice start, and I think there's most likely thoughts in terms of more to come. The real question there is does that create the bridge for the consumer customers from a net charge-off perspective to really keep those at base, so to speak. And I think that stimulus is going to be a positive, both in terms of revenue as well as on the net charge-off side if it occurs.

Yes. And just one follow-up on the European side of the payments business. How quickly can -- does lockdown changes move into the revenue stream? Meaning that is it coincident, does this start to lag from what you've observed in the prior -- first lockdowns as opposed to this one, that's happened now and weighed on the fourth quarter results. What's the experience that you've seen and would expect?

Yes. The bounce back is pretty fast. I mean it certainly is within that 30 to 90 days sort of time frame, you start to see it. It does take a while for it to -- for that trajectory to get back, but it does happen pretty fast. The other thing to keep in mind is the European revenue impact to U.S. Bank, total revenue is probably around 1%, so it's a very small amount in terms of total revenue. And -- but we'll continue to see what happens with respect to the lockdown.

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

Well, I guess you stand out, unless I missed it. So no reserve releases pandemic-related? Or did I miss that? You've built up, what, about $2 billion of reserves the prior 3 quarters, but no releases in the fourth quarter. Did I get that right? And if so, why no releases?

Yes. Mike, that is correct. When we end up looking at the allowance for credit losses, we still see, as I said a little bit earlier, I think we end up looking at the uncertainties that exist out there and at least existed out there at the end of the year. And just have -- what we want to be able to see is we want to see kind of a reversal of some of the restrictions and reversal associated with some of the COVID cases. And I think that we're starting to see that happening, which is a good sign. But that's one of the reasons that we really kind of held back with respect to the allowance for credit losses at this point.

So it's not your clients. It's just -- you're just being conservative with the environment?

Well, yes, I think it's just the uncertainty in the environment. We'd like to see a few of those continue to improve.

Okay. My bigger question relates to your presentation from December, which talks about re-creating the ecosystem and going after more of the payments business with your middle market companies and small businesses and basically improving the share of payments with your business customers. And I didn't completely understand the endgame for that. Any specific metrics around how you're trying to improve share, for example. One metric could be you have x percent share of the payments business with your middle market companies and you want to move it to y or anything concrete that you can put around what feels like a newer or enhanced strategic direction and that coincides, I guess, with your closing of 1/4 of your branches. And if you can give an update on that also.

Yes, Mike, this is Andy. Let me start with the branches. So we did complete the branch closures early in January. So as we talked about, we were just over 3,000 branches. We're down about 25%, so just over 2,300 branches. And that's really a function of consumer behaviors. As you saw from the chart, 77% of our customers are using the digital channel. Those using the branch channel, while still important and still seeking advice and consult, it's down to about 40%. So there's a behavior change that's accelerated as a result of the pandemic and the closures reflect that. That's number one. On the small business, business banking front, I think it's a very significant opportunity. We have a great payments business. We have a great banking business, and weaving those 2 together to offer a full set of capabilities for that ecosystem is critically important. And I think there's 3 metrics that we're going to focus on. Payments customers that add banking capabilities, banking customers that add payments capabilities and new customer acquisition. And we haven't articulated those goals, but we have goals for all 3 of them and we'll update as we go forward, but I think it's a huge opportunity.

Okay. And as far as, last question, extra spending. I mean, if you closed all your branches, it's done in January, so you certainly have savings. Your tech spend went up quarter-over-quarter in the fourth quarter. So are you looking to increase your tech spend while you create this kind of newer ecosystem?

So Mike, we talked a little bit about our guidance on expense, which is relatively flat. And as you think about that flat expense guidance, there's really 2 components. One is achieving savings through optimization on the current business model while, at the same time, investing for the new. So we're going to be able to continue to invest to allow us to expand in these areas while retaining flat expenses by saving on the current business model.

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

A couple of questions. Firstly, branch closures, you obviously did a lot in early Jan. What's your thinking for the rest of the year? Are you done for this year? Do you think there's more to come? And in line with that, given that this is all about consumer behavior with the pandemic, what is -- how is that changing your thinking about opening more branches? I know you said you want to open more in Charlotte, but that whole expansion strategy, do you need as many branches? How -- if you could sort of talk to both those pieces.

Sure, Vivek. So as you think about Charlotte, we were targeting a dozen branches. If you think about the twin cities, we have nearly 85 to 100. So the way we would open in a new market would be significantly different than the current business model. In terms of the number, I think we're at a relatively stable point right now. We'll continue to look at opportunities to optimize branches, at the same time, opening new branches. But I wouldn't expect substantial changes in the near term.

Okay. Different question. What percentage of your merchant processing revenues is small to midsized merchants versus the large?

Well, I don't necessarily have that at my fingertips. But if you end up just kind of looking at the overall mix, we have a pretty good mix of small- and medium-sized sort of businesses that are part of that equation. And they have tended to be kind of omni distribution sort of merchants or customers as well. One of the things we continue to expand and grow is our e-commerce sort of capabilities, and that has grown very nicely over the last year or so.

Would you expect that they are half your business, over half? What would you guess?

Yes. If I were to venture a guess, I'd say maybe a little bit -- it depends upon how you end up characterizing small and medium, et cetera. I think that's the thing I'm struggling with here a little bit, Vivek.

Vivek, one thing I'd add because I think where you're going in terms of the recovery, one way we look at it a lot and very focused on is the component of our merchant acquiring that is travel, entertainment and airline. And a year ago, back in 2019, that was nearly 40% and so -- it was 37%. And today, it's about 20%. So the decline that's occurred has been principally in that area as opposed to small or large business, it's been in that focused area of travel and airline. Everything else has actually got back to normal. And that 20% is where the opportunity exists for continued improvement in spend as we think about the future.

Great. All right. And one last one, if I may. Mortgage banking stayed still very strong. I know it's down. You -- I'm presuming you've been able to pass on the GSE refi fee thus far. Is that the case? And what's the plan for that as you look forward?

That would be the situation for the case. Again, when we think about the mortgage banking business, too, we talk a lot about the refi. But the thing that I'd maybe remind people is that we've made a lot of investment in that business in terms of the purchase money, purchase mortgage, and that continues to do very well. I think it's -- if you end up looking at the production of applications in the last quarter, it was about 52% purchase versus refinancing. So I know that people look at that as a headwind and I actually think that, that's an area of opportunity as we think about the future.

Your next question is from the line of Bill Carcache with Wolfe Research.

Thank you for all the color that you guys have given on payments, but I wanted to follow-up with a bigger picture question. Broadly speaking, how would you guys respond to concerns of some investors that USB's merchant acquiring business is tethered to the physical point-of-sale and is competitively disadvantaged against some of the more digitally native names, like PayPal, Square and Stripe? And also, more broadly, if you could discuss what USB is doing to compete against those kinds of players?

Yes. Good questions, Bill, and twofold. Number one, is most of the investments we've made and most of the expansions occurred over the last 2 years has been on the e-commerce side of the equation. It's not just e-commerce, it's really capabilities to help those businesses run their businesses. And I think one of the advantages against those payments players, as you described, is our banking business. And that's why we're so darn focused on weaving together banking and payments because those customers need not just the payments mechanisms, they need small loans, they need deposit advice and acceptance, so they need a full array of services. And I think if we can offer those in a convenient, easy fashion, that solves their problems and helps them run their business, I think that's where our advantage is. And that's a combination of banking and payments, it's so darn important.

That's super helpful color. If I could squeeze in another one. I'm sorry if you guys discussed this already on the securities portfolio. But what kind of reinvestment rates are you guys seeing relative to what we saw in the fourth quarter and maybe a little bit on what kind of opportunity a steeper curve could represent?

Yes. Certainly, when we see the securities portfolio, I mean, the differential from our reinvestment has shrunk some relative, for example, third quarter, fourth quarter got a little bit better and that we would expect it probably to get better as well. I do think as the long end of the curve starts to come up, I think that, that is another inflection point. It's just a matter of kind of what the timing of that is.

Your final question is from the line of Gerard Cassidy with RBC.

A question for you on the outlook for loan loss reserves. Clearly, you guys have always been very conservative and you still are as we look out into the future. Maybe, Terry, can you share with us -- I think if I read the number correctly, your reserves to loans today are about 2.69% and that's, of course, higher than where we were in January 1 when you guys had your CECL adjustment, I think it was about 1.99%. Do you eventually see the reserve to loan number coming back to where it was pre-pandemic at about 2%?

Yes. It will be kind of really around timing. But certainly, when we look at the overall mix of our business and our portfolio and our underwriting, that 2% to us makes sense as we get through the pandemic sort of environment.

Very good. And then, Andy, maybe a bigger picture question. Clearly, you guys' outlook is maybe a little more conservative than some of your peers, but there seems to be the expectation that is the vaccines are widespread hopefully by the middle of the year that the economy will come back strongly in the second half. There are calls for real GDP growth of 5% to 6%. The equity markets are at record levels as you know. When you go down the elevator at night, what risks do you worry about as you think about the next 12 to 24 months?

Well, the principal risks are the ones you described, which are the economic risks, the headwinds and the flat yield curve. But I think the economic headwinds that we faced in the second half of 2020 are starting to dissipate for sure and starting to come back. And again, Gerard, we have mentioned, we have a diversified revenue stream, and different businesses do well in different environments. And those businesses that struggled with some of the headwinds that we saw regarding to NIM and loan growth and payments, I think it will start to turn the other way as we start to see the recovery for all the reasons you described. So -- and then different businesses will be impacted in different ways. So the value of diversified revenue stream really is very helpful and one of the ways that helps us perform in whatever economic cycle we're in. But the principal thing that we all think about is how the stimulus and how the actions of the government as well as some of the forbearance and plans by the banks will help us get back into a normal economic recovery. I think that's the principal area of concern for all of us right now.

There are no further questions.

Thank you for joining our call today. Please call the Investor Relations Department with any follow-up questions.

This concludes today's U.S. Bancorp Fourth Quarter 2020 Earnings Call. Thank you for your participation. You may now disconnect.