Earnings Call Transcript
US BANCORP DE (USB)
Earnings Call Transcript - USB Q4 2020
Operator, Operator
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. This call will be recorded and available for replay beginning today at approximately 12:00 PM 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.
Jen Thompson, Director of Investor Relations and Economic Analysis
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 risks and uncertainties. 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.
Andy Cecere, Chairman, President and CEO
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 spending activity. While uncertainty remains, I am 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 government 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 businesses and European operations, which were 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 spending activity. Non-interest 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 will provide more color on the quarter.
Terry Dolan, Vice Chair and Chief Financial Officer
Thanks, Andy. If you turn to Slide 6, I will 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 non-interest-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 basis points in the third quarter, reflecting improvement in both commercial and credit card loss rates. The ratio of non-performing 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 in 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 non-interest income. Excluding notable items in the fourth quarter of 2019, non-interest 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 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 spending 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 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, non-interest expenses were stable as expected. Excluding notable items in the fourth quarter of 2019, non-interest 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 spending 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 non-interest 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 non-performing 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.
Andy Cecere, Chairman, President and CEO
Thanks, Terry. 2020 was a challenging year for many, and I am 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 am 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 as 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 their 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, Operator
Your first question is from the line of Betsy Graseck with Morgan Stanley.
Betsy Graseck, Analyst
Hi, good morning.
Terry Dolan, Vice Chair and Chief Financial Officer
Good morning, Betsy.
Andy Cecere, Chairman, President and CEO
Hi, Betsy.
Betsy Graseck, Analyst
I wanted to just understand a little bit about how you are 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?
Terry Dolan, Vice Chair and Chief Financial Officer
Yes. So, Betsy, when we look 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. 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 spending 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 the second quarter and the second half of the year, 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.
Betsy Graseck, Analyst
Can you share your thoughts on your appetite for mergers and acquisitions? There has been significant consolidation in the industry over the past few quarters. From your previous comments, it sounds like you have a high threshold for pursuing such opportunities. Given your available capital and liquidity, has that changed your perspective on potential M&A opportunities?
Andy Cecere, Chairman, President and CEO
Hey, Betsy, this is Andy. Our position on that is consistent with what we talked about. We'll continue to look at opportunities both for organic growth, partnerships, alliances, 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, and our customer acquisition opportunities. So we'll be open-minded about that.
Betsy Graseck, Analyst
Okay. Thanks. And then just lastly, on the State Farm and the Charlotte market expansion and some of the other locations where you're doing 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?
Andy Cecere, Chairman, President and CEO
Yes. Let me start with State Farm. As you know, this involved acquiring card balances and deposits. We expect to see continued growth in both of these areas, as well as additional opportunities in small business and other banking products through this partnership, which is progressing well and the conversion process was very smooth. Charlotte is also surpassing our expectations in terms of both enhancing current customer relationships and attracting new customers. We have slowed down a bit on adding more branches due to COVID, but we plan to get back on schedule. Overall, I would say both initiatives are exceeding our expectations, with State Farm being somewhat more significant given its size compared to the Charlotte increase.
Betsy Graseck, Analyst
Got it. Okay. Thank you.
Andy Cecere, Chairman, President and CEO
You bet.
Operator, Operator
Your next question is from the line of John Pancari with Evercore ISI.
Andy Cecere, Chairman, President and CEO
Hi, John.
John Pancari, Analyst
Good morning. On the credit front, could you provide more insight into your reasoning regarding the reserve and why you aren’t releasing it at this time? I understand you're monitoring the macro backdrop, but what economic factors are you considering to signal reserve releases? Additionally, you've mentioned a peak in charge-offs; does this mean you need to see that peak before releasing reserves? I would appreciate any elaboration on this. Thank you.
Terry Dolan, Vice Chair and Chief Financial Officer
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 continue to be spiking. There were a number of state economies that continue 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 want to just see those – some of those uncertainties alleviate.
John Pancari, Analyst
Okay. All right. Thank you. 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?
Terry Dolan, Vice Chair and Chief Financial Officer
Yes. GDP is projected to be quite strong. I believe that from a loan growth perspective, the entire industry will likely lag behind that. However, as the economy strengthens, loan growth should follow. The biggest challenges for the industry have been that low rates have allowed strong companies with good cash flows to refinance in the markets or use their cash flows to reduce their balances. There's a lot of liquidity with corporate America, which needs to be utilized for capital expenditures, mergers and acquisitions, and other activities. The encouraging sign we see now is that there are early signs of improvement in these areas, indicating that loan growth may begin to rise, similar to past trends.
Andy Cecere, Chairman, President and CEO
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.
John Pancari, Analyst
Got it. Okay. Thanks, guys.
Andy Cecere, Chairman, President and CEO
You bet.
Operator, Operator
Your next question is from the line of John McDonald with Autonomous Research.
Andy Cecere, Chairman, President and CEO
Hey, John.
Terry Dolan, Vice Chair and Chief Financial Officer
Hey, John.
John McDonald, Analyst
Hi. Good morning. 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?
Andy Cecere, Chairman, President and CEO
Yes, John. Let me begin by reflecting on 2020, as our company's diversified revenue model is one of its greatest strengths. We faced challenges in a few areas such as payments and net interest margin, but these were balanced by positive performances in mortgage, auto, corporate trust, and our commercial products sectors. Looking ahead to 2021, I anticipate that some of the challenges, especially in payments, will start to ease. We did experience some pressure in the fourth quarter due to our European operations, but spending is gradually returning to normal, particularly in sectors other than travel and hospitality. I believe we will see improvements, especially in the second, third, and fourth quarters. The mortgage sector remains robust, although perhaps not as strong as in 2020, yet we are seeing high retail and new purchase activity due to our recent expansions and investments. Our Trust business continues to be a valuable investment and remains strong. Additionally, as Terry mentioned, there is significant potential for loan growth. The diversity of our revenue sources will be very beneficial as we approach the year, and we will keep a close eye on managing expenses relative to our revenue opportunities. As we look to the first quarter, we expect it to remain relatively flat.
John McDonald, Analyst
Okay. And in terms of the operating leverage achievability this year, how would you handicap that? I know it's a tough call.
Andy Cecere, Chairman, President and CEO
Yes. It's always our goal to make the necessary investments while also being mindful of the current environment to perform as best as we can, given the revenue. Achieving positive operating leverage is a priority for us, and we will work towards that in 2021. There remains considerable uncertainty regarding revenue, so we will see how that evolves and will continue to provide updates.
John McDonald, Analyst
Okay. And then, Terry, maybe you could just weigh in on terms of capital management, just remind us where 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? Thanks.
Terry Dolan, Vice Chair and Chief Financial Officer
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.
John McDonald, Analyst
Thank you.
Operator, Operator
Your next question is from the line of Scott Siefers with Piper Sandler.
Scott Siefers, Analyst
Good morning, guys. Thanks for taking the question.
Andy Cecere, Chairman, President and CEO
Hey Scott.
Terry Dolan, Vice Chair and Chief Financial Officer
Hi Scott.
Scott Siefers, Analyst
Maybe, Terry, 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 a wash 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?
Terry Dolan, Vice Chair and Chief Financial Officer
Yes. Certainly, our expectation for 2021 is that 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, etc. But it's also going to create a challenge from Corporate America in terms of the amount of liquidity that they have.
Scott Siefers, Analyst
Okay, perfect. Thanks. 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. And just curious if you can sort of talk about some of the underlying trends there and expectations.
Terry Dolan, Vice Chair and Chief Financial Officer
Yes. Certainly, when we consider commercial product revenue, the peak was in the second to third quarter timeframe. Our focus is primarily on high investment-grade customers rather than high yield customers. This mix in the marketplace affects our growth rates relative to the industry. The fourth quarter typically shows some seasonality for us, resulting in a decline. However, looking ahead to 2021, we are generally optimistic about capital markets activities.
Scott Siefers, Analyst
Okay, perfect. Thank you very much.
Operator, Operator
Your next question is from the line of Erika Najarian with Bank of America.
Terry Dolan, Vice Chair and Chief Financial Officer
Good morning, Erika.
Andy Cecere, Chairman, President and CEO
Hey Erika.
Erika Najarian, Analyst
Good morning. My first question is about the net interest income outlook for the rest of the year. Considering your comments on loan growth and that the fourth quarter will be the peak for premium net interest margin, should we anticipate that the first quarter of 2021 will be the lowest point for net interest income? If so, do you expect it to increase from there? Additionally, is there any PPP-related income you are including in your guidance?
Terry Dolan, Vice Chair and Chief Financial Officer
Yes. Well, maybe with respect to the last one. I mean, PPP, obviously, will impact net interest income as forgiveness occurs, etc. But it’s not a big driver associated with it for us. Maybe 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.
Erika Najarian, Analyst
Got it. And as we think about the trajectory for payments related fee income and is $799 million this 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 2021, or do you think that certain part of payments will take a little bit longer to come back?
Terry Dolan, Vice Chair and Chief Financial Officer
Yes. Generally, we are optimistic about sales volumes in the payments business as the year progresses. In the fourth quarter, we experienced good growth in credit card, debit card, and commercial spending within our corporate payments sector. Although domestic spending from merchants was relatively flat in the fourth quarter, we expect that to continue to expand and grow throughout the year. To address your question regarding the timeline to return to pre-COVID revenue levels, a key factor is the travel and entertainment sector, which is likely to remain subdued at least for 2021.
Erika Najarian, Analyst
Got it. And if I could ask a final question for Andy. In relation to Betsy's question, I often hear from investors about whether U.S. Bank is considering any significant non-organic growth initiatives, especially since your largest competitors have undertaken either major or moderate transformational changes. With assets standing at $554 billion at year-end, is the $700 billion mark a significant threshold for you, indicating a different level of regulatory scrutiny?
Andy Cecere, Chairman, President and CEO
I think the short answer is that I don't view that as a clear dividing line. As we discussed, we are investing across all our businesses, especially in digital channels. We spend $2.5 billion a year and have good scale, but we will explore opportunities to enhance that scale and increase customer acquisition across all our businesses. However, there aren't any clear boundaries regarding what we would consider or pursue.
Erika Najarian, Analyst
Got it. Thank you.
Andy Cecere, Chairman, President and CEO
Sure.
Operator, Operator
Your next question is from the line of Matt O'Connor with Deutsche Bank.
Matt O'Connor, Analyst
Good morning.
Terry Dolan, Vice Chair and Chief Financial Officer
Good morning, Matt.
Matt O'Connor, Analyst
First, a clarifying question, sorry if I missed it. But the expense guidance, I think you said stable in the first quarter versus 4Q, but did you give full year 2021 guidance on costs?
Terry Dolan, Vice Chair and Chief Financial Officer
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 after leverage; it's going to be challenging in the especially in the earlier part of the year.
Matt O'Connor, Analyst
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?
Terry Dolan, Vice Chair and Chief Financial Officer
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 early 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.
Matt O'Connor, Analyst
And I guess what I'm getting at, like if we look out five 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 a 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? Thank you.
Terry Dolan, Vice Chair and Chief Financial Officer
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. And we're very excited about the State Farm alliance, a lot more to come.
Matt O'Connor, Analyst
Thank you.
Operator, Operator
Your next question is from the line of Ken Usdin with Jefferies.
Terry Dolan, Vice Chair and Chief Financial Officer
Hi, Ken.
Ken Usdin, Analyst
Hey, morning guys, morning. Just a couple of quick follow-ups. First of all, on the point about premium am and at 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?
Terry Dolan, Vice Chair and Chief Financial Officer
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, eight of it is really related to card balances, so the rest of it is really driven by premium amortization or a significant amount. So I think with respect to first quarter, it’s really peaked. First quarter, it’s really going to track, I think, along with how refinancings occur within the mortgage industry.
Ken Usdin, Analyst
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, the FX, do you – are you anticipating given the prospect for even more stimulus to come through? Thanks.
Terry Dolan, Vice Chair and Chief Financial Officer
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 is 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.
Ken Usdin, Analyst
Yes. And just one follow-up on the European side of the payments business. How quickly 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 has happened now and wait on the fourth quarter results? What's the experience that you've seen and would expect?
Terry Dolan, Vice Chair and Chief Financial Officer
Yes. The bounce back is pretty fast. I mean, it certainly is within that 30 days to 90 days timeframe; you start to see it. It does take a while for it 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 lockdown.
Ken Usdin, Analyst
Okay. Thank you.
Andy Cecere, Chairman, President and CEO
Thanks, Ken.
Operator, Operator
Your next question comes from the line of Mike Mayo with Wells Fargo.
Mike Mayo, Analyst
Hi.
Andy Cecere, Chairman, President and CEO
Hey, Mike.
Terry Dolan, Vice Chair and Chief Financial Officer
Hi, Mike.
Mike Mayo, Analyst
Well, I guess, you stand out, unless I missed it. So no reserve releases pandemic related, or did I miss that? You built up with about $2 billion of reserves the prior three quarters, but no releases in the fourth quarter. Did I get that right? And if so, why no releases?
Terry Dolan, Vice Chair and Chief Financial Officer
Yes, Mike, that is correct. When we examine the allowance for credit losses, we still perceive the uncertainties that were present at the end of the year. What we aim to see is a reversal of some of the restrictions and the impact related to certain COVID cases. I believe we are beginning to observe that, which is encouraging. However, this is one reason why we have been cautious regarding the allowance for credit losses at this time.
Mike Mayo, Analyst
So it's not your clients. You're simply being cautious about the environment?
Terry Dolan, Vice Chair and Chief Financial Officer
Well, yes, I think it's just the uncertainty in the environment. We'd like to see a few of those continue to improve.
Mike Mayo, Analyst
Okay. My bigger question relates to your presentation from December, which talks about recreating 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 one-fourth of your branches, and if you can give an update on that also?
Andy Cecere, Chairman, President and CEO
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 two together to offer a full set of capabilities for that ecosystem is critically important. And I think there's three 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 three of them, and we'll update as we go forward, but I think it's a huge opportunity.
Mike Mayo, Analyst
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?
Andy Cecere, Chairman, President and CEO
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 two 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.
Operator, Operator
Your next question is from the line of Vivek Juneja with JPMorgan.
Andy Cecere, Chairman, President and CEO
Hi, Vivek.
Vivek Juneja, Analyst
Hi, Andy. Hey, Terry.
Andy Cecere, Chairman, President and CEO
Good morning.
Vivek Juneja, Analyst
Thanks for taking my questions. I’m good. Thanks. 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, 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? If you could sort of talk to both those pieces.
Andy Cecere, Chairman, President and CEO
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.
Vivek Juneja, Analyst
Okay. Great. Different question. What percentage of your merchant processing revenues is small to mid-sized merchants versus the large?
Terry Dolan, Vice Chair and Chief Financial Officer
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.
Vivek Juneja, Analyst
Would you expect that they are half your business? Over half? What would you guess?
Terry Dolan, Vice Chair and Chief Financial Officer
Yes. If I had to guess, I would say it might depend on how you define small and medium. That's the aspect I'm finding challenging here a bit, Vivek.
Andy Cecere, Chairman, President and CEO
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 are very focused on is the component of our merchant acquiring that is travel, entertainment, and airline. 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 spending as we think about the future.
Vivek Juneja, Analyst
Thanks. One last question, if I may. Mortgage banking has remained very strong. I know it has declined. I'm assuming you've managed to pass on the GSE refi fee so far, is that correct? What is the plan for that moving forward?
Terry Dolan, Vice Chair and Chief Financial Officer
That would be the situation for the case. Again, when we consider the mortgage banking business, we talk a lot about refinancing. However, it's important to remember that we've made significant investments in purchase mortgages, which continue to perform very well. In the last quarter, about 52% of our applications were for purchases rather than refinancing. I believe this presents an area of opportunity as we look towards the future.
Vivek Juneja, Analyst
All right. Okay, great. Thanks. Thank you very much.
Terry Dolan, Vice Chair and Chief Financial Officer
Thanks Vivek.
Operator, Operator
Your next question is from the line of Bill Carcache with Wolfe Research.
Terry Dolan, Vice Chair and Chief Financial Officer
Good morning Bill.
Andy Cecere, Chairman, President and CEO
Good morning Bill.
Bill Carcache, Analyst
Good morning. 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?
Andy Cecere, Chairman, President and CEO
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 two years have 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 you described is our banking business and that's why we're so 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; that’s where our advantage is. And that's a combination of banking and payments, it's so important.
Bill Carcache, Analyst
Thanks, Andy. 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?
Terry Dolan, Vice Chair and Chief Financial Officer
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 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.
Bill Carcache, Analyst
Got it. Thanks very much for answering my questions.
Terry Dolan, Vice Chair and Chief Financial Officer
Yes. Thank you, Bill.
Operator, Operator
Our final question is from the line of Gerard Cassidy with RBC.
Terry Dolan, Vice Chair and Chief Financial Officer
Hey, Gerard.
Gerard Cassidy, Analyst
Good morning, Andy and good morning, Terry.
Andy Cecere, Chairman, President and CEO
Good morning.
Gerard Cassidy, Analyst
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%?
Terry Dolan, Vice Chair and Chief Financial Officer
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.
Gerard Cassidy, Analyst
Very good. And then, Andy, maybe a bigger picture question. Clearly, your guys' outlook is maybe a little more conservative than some of your peers, but there seems to be the expectation that as 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?
Andy Cecere, Chairman, President and CEO
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, you 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.
Gerard Cassidy, Analyst
Very good. Thank you.
Andy Cecere, Chairman, President and CEO
You bet. Thanks, Gerard.
Operator, Operator
There are no further questions.
Jen Thompson, Director of Investor Relations and Economic Analysis
Thank you for joining our call today. Please call the Investor Relations department with any follow-up questions.
Operator, Operator
This concludes today's U.S. Bancorp fourth quarter 2020 earnings call. Thank you for your participation. You may now disconnect.