[USB stock] US Bancorp Q4 2020 Earnings Call (1/20/21)

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. If you would like to ask a question, please press star 1 on your touch tone phone and press the pound key to withdraw. This call will be recorded and available for replay beginning today at approximately 12 p.m. Eastern through Wednesday, February the 3rd, 2021, at 12 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, our Chairman, President, and CEO, and Terry Dolan, our Chief Financial Officer. Also joining us on the call are our Chief Risk Officer, Jody Richard, and our Chief Credit Officer, Mark Uncapher. 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. We'll now turn the call over to Andy.

Thanks, Andy. If you turn to slide six, I'll start with a 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 paydown 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 seven, 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 eight, 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% 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 31st 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 nine 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 to 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 eight 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 is 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. 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 communication costs, and COVID-19 related expenses. Slide 17 highlights our capital position. Our common equity tier 1 capital ratio at December 31st 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 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 is 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.

Your first question is from the line of Betsy Graseck with Morgan Stanley.

Hi, good morning.

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.

Yeah, so Betsy, you know, when we end up looking at loan growth, you know, 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 and, you know, business spend in terms of capex 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 low and start to grow. You know, the biggest challenge for us has really been on the commercial side of the equation, you know, as we've gone through 2020, and it's really when that starts to change in which overall loan growth starts to improve. You know, we do expect that as consumer spend and consumer behaviors continue to get stronger throughout the year, you know, some of the pressure on credit card will alleviate. And so I do expect that as we get into the second quarter and second half of the year that credit card balances will start to come up as well. And you know, 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, you know, from prior comments you've mentioned that, look, you know, you'll look at it, but you have a high bar. Just wondering, you know, given flush with capital, liquidity, and reserves, if that changes at all the opportunity set from your perspective, you know, for any M&A?

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 the digital-first, branch-light strategy, could you give us a sense as to, you know, the kind of pace of benefit to growth that you anticipate those strategies will drive over the next couple of years?

Charlotte increase, yeah. Okay, thank you.

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

All right, John, morning. On the credit front, 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 charge-off peak before you release? I just want to see if you can elaborate there. Thank you.

Yeah, 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, you know, when that's going to occur. And, you know, I think that, you know, as time continues to move on, I think that the economic outlook continues to get better and stronger. You know, 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, you know, when we thought about the fourth quarter, you know, 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, you know, 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 see some of those uncertainties alleviate.

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?

Yeah, you know, so relative to GDP, obviously GDP is, you know, projected to be pretty strong. You know, so I think that, you know, from a loan growth perspective, I think the entire industry is going to see that lag a little bit behind that. But, you know, as the economy continues to get stronger, you know, that loan growth will occur. You know, the biggest challenges I think that the industry has had, and certainly that we've seen, is that with very low rates, you know, 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, you know, similar to what we saw the last time, you know, there's a lot of liquidity out there with corporate America, and they need to start using some of that liquidity themselves, you know, 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.

Got it. Okay, thanks, guys.

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

We're done. 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 are you thinking about managing for operating leverage?

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

Okay. And then Terry, maybe you could just weigh in on terms of capital management. You know, where, 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 one, and how you think about using buybacks, you know, beyond the first quarter over the course of time? Thanks.

Yeah, so, you know, our overall target is 8.5%, and we typically operate somewhere between 8.5% and 9%. You know, in terms of tier one 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. You know, we'll take advantage of it, but there's clearly plenty of opportunity from a capital management perspective to use that capital in a variety of ways.

Thank you.

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

Morning, guys. Thanks for taking the time. Terry, maybe I could ask, 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, you know, the whole world's 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.

Yeah, you know, 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 environment. You know, our expectation is that, you know, deposits will continue to grow, but certainly not maybe at the pace that they were in 2020. You know, so that's going to be both, you know, an opportunity for us, as you know, we have the deposit flow to be able to look at, you know, investing, for example, in the investment portfolio, etc. But it's also going to create a challenge from corporate America in terms of the...

Okay, perfect. Thank you. And then was something 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.

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

Okay, perfect. Thank you very much. Your next question is from the line of Erica Nadarian with Bank of America.

And good morning. 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 amortization, should we expect the first quarter of 2021 to represent a bottom in net interest income? And if so, would you expect it to grow from there? And sorry, part B of this question is, is there any PPP-related income that you're putting into guidance?

Yeah, well maybe with respect to the last one, I mean PPP obviously will impact net interest income, you know, as forgiveness occurs etc., but it's not a big driver associated with it for us. You know, maybe kind of coming back to your first question though, you know, our expectation, you know, from here is that starting point net interest margin is going to be stable certainly in the first quarter and our expectations through the year. I mean the pressures associated with the yield curve and those sorts of things that we saw last year, you know, actually will probably be helpful to us, you know, 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, you know, we don't believe that we need to build any more liquidity. And so, you know, we'll look at opportunistically, you know, reinvesting that in the market.

Got it. And as you think about the trajectory for payments-related fee income, you know, 799 this quarter versus 945 in 4Q19, as you think about your outlook for the global economy, do you think you could go back to the run rate of 945 by 4Q21? Or, you know, do you think that certain parts of payments will take a little bit longer to come back?

Yeah, 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. You know, we do, you know, certainly when we saw fourth quarter, you know, we saw a good sales expansion in terms of credit card, debit card, and in the commercial space on our corporate payments space. The domestic spend from a merchant perspective was kind of flatish in the fourth quarter, but we do expect that to continue to expand and grow throughout the year. I think that the thing that, you know, getting back to your question though, in terms of, you know, how quickly do you get back to pre-COVID revenue levels, you know, 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 non-organic growth perspective, seeing that your closest peers in terms of size did something, you know, either transformational or somewhat transformational. And the question here is, with assets at 554 billion as of year-end, does the 700 billion, is 700 billion a bright line for you as it indicates, you know, a different tier in terms of regulatory treatment?

Got it. Thank you.

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

Good morning. 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 '21 guidance on costs?

Yeah, we did, we didn't necessarily give full year guidance. I would just kind of come back to what Andy said and that, you know, our goal and our expectation is to manage expenses flat, you know, especially given the revenue environment. And, you know, our target is always to achieve positive operating leverage. It's going to be challenging, 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 a billion of card loans, but what do you think the revenue and earnings contribution from that can be over time?

Yeah, I mean so the dollars that you mentioned in terms of deposits and credit card is pretty close. You know, when we think about the business though, and Andy's talked about this before, you know, there's just a lot of opportunity and they have 19,000 agents that are out there and, you know, they're one of the biggest organizations with respect to small business customers. And, you know, 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, you know, 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 five years, like is this something that could all of a sudden start moving the needle? Right, like so mortgage, you were investing heavily in it for a number of years and also activity picked up and, you know, it's this 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. No, I think it is one of those things that can move the needle for us. I mean, anytime you have access through 19,000 agencies, you know, we think that that's very significant. And, you know, the other thing, Matt, is that, you know, we've invested a lot in digital capabilities. We plan on leveraging all 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. Thank you.

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

Hey, morning guys. Just a couple of quick follow-ups. First of all, on the point about premium amortization 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 bottoming?

Yeah, I mean we haven't necessarily disclosed any dollars associated with premium amortization. You know, if you end up thinking about the 10 basis points this quarter, you know, an eighth of it is really related to card balances, so the rest of it is really driven by premium amortization or a significant amount. You know, so I think with respect to first quarter, you know, it's our, fourth quarter it's really peaked, first quarter, you know, it's really ending into 2021, it's really going to track, I think, along with how refinancing's occurred 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, you know, through the income statement effects are you anticipating given the prospect for even more stimulus to come through?

Thanks. Yeah, I mean when you think about stimulus, you know, certainly in the short term it helps our prepaid card businesses pretty significantly. And, you know, 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, you know, it will, and we did see in the last stimulus, you know, it does stimulate consumer activity in terms of buying. And, you know, that is going to help and did help and will help our payments businesses as we think about 2021. So, you know, that to me is a very favorable thing. I think the other thing is that, you know, when you think about it from a credit standpoint, you know, the 900 billion dollars 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, you know, 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 perspective to really keep those at bay, so to speak. And I think that, you know, stimulus is going to be a positive both in terms of revenue as well as on the net charge-off side if it occurs.

Yeah. 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 it start to lag from what you've observed in the prior, the first lockdowns as opposed to this one that's happened now and weighed on the fourth quarter results? You know, what's the experience that you've seen and would expect?

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

Okay, thank you.

Thanks, Ken.

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

Hi. Well, I guess you stand out unless I missed it, so no reserve releases, pandemic related? Or did I miss that? You built up about two billion dollars of reserves the prior three quarters, but no releases in the fourth quarter. Did I get that right? And if so, why no releases?

Yeah, Mike, that is correct. You know, we, when we end up looking at the allowance for credit losses, you know, we still see, as I said a little bit earlier, you know, I think we end up looking at the uncertainties that exist out there, at least existed out there at the end of the year. And, you know, just, we want to be able to see, 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, you know, that's one of the reasons that we really kind of held pat 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, yeah, 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 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 end game for that. Any specific metrics around how you're trying to improve share? For example, one metric could be you've X percent share of the payments business with your middle market company, then 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.

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?

All right, thank you.

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

Hey Andy, hey Terry. Thanks for taking my questions. A couple of questions. Firstly, branch closures, you obviously did a lot in early January. What's your thinking for the rest of the year? Are you done for this year? Do you think there's more to come? You know, 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, you know, that whole expansion strategy, do you need as many branches? How's, you know, if you could sort of talk to both those pieces.

Okay, great. Different question. What percentage of your merchant processing revenues are small to mid-size merchants versus the larger?

Well, I don't necessarily have that at my fingertips, but, you know, if you end up just kind of looking at the overall mix, you know, we have a pretty good mix of small and medium-sized sort of businesses that are part of that equation. And, you know, they have tended to be, you know, 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're half your business, over half? What would you guess?

Yeah, if I were to venture, I guess, you know, I'd say, you know, maybe a little bit. It depends upon how you end up characterizing small and medium, etc. I think that's the thing that I'm struggling with here a little bit.

Great. All right, thanks. So one last one, if I may. Did mortgage banking, you know, still very strong. I know it's down. I'm presuming you've been able to pass on the GSE refee thus far. Is that the case? And what's the plan for that as you look forward?

Yeah, that would be the situation for the GSE. You know, again, when we think about the mortgage banking business too, you know, we talked a lot about the refi, but, you know, 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 it 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, you know, I know that people look at that as a headwind, but I actually think that that's an area of opportunity as we think about the future.

All right, okay, great, thanks.

Thank you very much.

Your next question is from the line of Bill Carcacci with Wolf Research.

Morning. Good morning. Thank you for all of 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, you know, PayPal, Square, and Stripe? And also, you know, more broadly, if you could discuss what USB is doing to compete against those kinds of players.

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, you know, maybe a little bit on what kind of opportunity a steeper curve could represent.

Yeah, certainly when we see the securities portfolio, I mean the differential from a reinvestment has shrunk some relative, for example, third quarter, fourth quarter got a little bit better and we would expect 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, just a matter of kind of what the timing of that is.

Got it. Thanks very much for answering my questions.

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

Hey, George. Good morning. And good morning, Terry. 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, 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 seasonal adjustment, I think it was about 1.99. Do you eventually see the reserve column number coming back to where it was pre-pandemic at about 2 percent?

Yeah, it'll 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 percent 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, you know, 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 five to six percent. The equity markets are at record levels, as you know. One, when you go down the elevator at night, what risks do you worry about as you think about the next 12 to 24 months?

Very good, thank you.

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.