U.S. Markets closed

Edited Transcript of USB earnings conference call or presentation 15-Jan-20 2:00pm GMT

Q4 2019 U.S. Bancorp Earnings Call

MINNEAPOLIS Jan 20, 2020 (Thomson StreetEvents) -- Edited Transcript of U.S. Bancorp earnings conference call or presentation Wednesday, January 15, 2020 at 2:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Andrew Cecere

U.S. Bancorp - Chairman, President & CEO

* Jennifer Ann Thompson

U.S. Bancorp - EVP of IR

* Terrance R. Dolan

U.S. Bancorp - Vice Chairman & CFO

================================================================================

Conference Call Participants

================================================================================

* Amanda Beth Larsen

Jefferies LLC, Research Division - Equity Associate

* Erika Najarian

BofA Merrill Lynch, Research Division - MD and Head of US Banks Equity Research

* John Eamon McDonald

Autonomous Research LLP - Senior Analyst Large-cap Banks

* John G. Pancari

Evercore ISI Institutional Equities, Research Division - Senior MD & Senior Equity Research Analyst

* Robert Scott Siefers

Piper Sandler & Co., Research Division - MD & Senior Research Analyst

* Vivek Juneja

JP Morgan Chase & Co, Research Division - Senior Equity Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Welcome to U.S. Bancorp's Fourth Quarter 2019 Earnings Conference Call. Following a review of the results by Andy Cecere, Chairman, President and Chief Executive Officer; and Terry Dolan, U.S. Bancorp's Vice Chairman and Chief Financial Officer, there will be a formal question-and-answer session. (Operator Instructions) This call will be recorded and available for replay beginning today at approximately 12:00 p.m. Eastern, through Wednesday, January 22, at 12:00 midnight Eastern.

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

--------------------------------------------------------------------------------

Jennifer Ann Thompson, U.S. Bancorp - EVP of IR [2]

--------------------------------------------------------------------------------

Thank you, James, and good morning to everyone who has joined our call. Andy Cecere and Terry Dolan are here with me today to review U.S. Bancorp's fourth quarter results and to answer your questions. Andy and Terry will be referencing a slide presentation during their prepared remarks. A copy of this slide presentation as well as our earnings release and supplemental analyst schedules are available on our website at usbank.com.

I would 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.

--------------------------------------------------------------------------------

Andrew Cecere, U.S. Bancorp - Chairman, President & CEO [3]

--------------------------------------------------------------------------------

Thanks, Jen. Good morning, everyone, and thank you for joining our call. Following our prepared remarks, Terry and I will take your questions.

I'll begin on Slide 3. We reported earnings per share of $0.90, which included $0.18 per share of notable items, which Terry will discuss in more detail in a few moments. Excluding these notable items, we reported earnings per share of $1.08 for the quarter.

Loan growth was driven by new client wins and deepening relationships across all our loan portfolios and we delivered very strong deposit growth. We continue to see strong account and volume growth across our key businesses. Credit quality was stable and our book value per share increased 6.7% from a year ago.

In November, we received approval from the Federal Reserve for an incremental share repurchase plan, authorizing repurchases up to $2.5 million of common stock, in addition to our existing authorization of $3 billion. In the fourth quarter, we returned $2.9 billion of our earnings to shareholders through dividends and share buybacks.

As indicated on Slide 4, digital uptake trends remain strong. We are significantly ramping up the launch of our DIY digital experiences that will continue to drive more and more customer interactions, both on and off the mobile app as well as higher additional transactional volume.

Slide 5 provides key performance metrics. On a core basis, we delivered an 18.1% return on tangible common equity in the fourth quarter. For the full year, our core return on tangible common equity was 18.8%.

Now I'll turn it over to Terry, who will provide detail on the quarter as well as forward-looking guidance.

--------------------------------------------------------------------------------

Terrance R. Dolan, U.S. Bancorp - Vice Chairman & CFO [4]

--------------------------------------------------------------------------------

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 grew 0.8% on a linked-quarter basis and increased 3.9% year-over-year. Linked-quarter growth was driven by strength in residential mortgages, commercial real estate and credit card loans.

In C&I, paydown activity muted overall growth in the fourth quarter primarily reflected in the rate environment and robust capital market conditions. New commercial business activity is healthy. However, paydown activity is likely to continue to be a headwind near term, albeit a diminishing headwind assuming that the interest rate environment is stable.

Turning to Slide 7. Deposits increased 1.9% on a linked-quarter basis and grew 6.6% year-over-year. Notably, average saving deposits grew by 11.1%, driven by across-the-board growth in Wealth Management, Investment Services, Consumer Banking and Commercial Banking.

Turning to Slide 8. Credit quality was stable in the fourth quarter. On a dollar basis, nonperforming assets declined approximately 15% on both a linked quarter and a year-over-year basis. The ratio of nonperforming assets to loans plus other real estate owned also improved linked quarter and year-over-year.

The new accounting standard related to credit losses, commonly known as CECL, became effective January 1, and has no impact on our 2019 results. We estimate that the adoption of CECL will result in a $1.5 billion cumulative effect adjustment to our allowance for loan losses compared with December 31, 2019, which is in line with our previous guidance.

Slide 9 highlights fourth quarter earnings results. We reported earnings per share of $0.90, which included several notable items, which reduced earnings by $0.18 per share. Excluding these notable items, we reported earnings of $1.08 per share.

Slide 10 lists the notable items that affected earnings results for the fourth quarter of 2018 and 2019. Fourth quarter 2019 notable items included restructuring charges, including severance and certain asset impairments and an increased derivative liability related to Visa shares previously sold by the company.

As a reminder, we recognized several notable items during the fourth quarter of 2018, including a gain on the sale of our ATM servicing business and the sale of a majority of the company's covered loans as well as charges related to severance, asset impairments and an accrual for certain legal matters. Along with a favorable impact, deferred tax assets and liabilities related to changes in estimates from tax reform, the net impact of notable items in 2018 was an increase of $0.03 per share.

My remarks through the remainder of the call will be referencing results excluding notable items incurred in the fourth quarters of 2019 and 2018.

Turning to Slide 11. Net interest income on a fully taxable equivalent basis declined by 3% year-over-year, in line with our expectations as the impact of loan growth and higher yields on reinvestment of securities was more than offset by the impact of a flatter yield curve and deposit funding mix.

Our net interest margin declined by 10 basis points versus the third quarter. About 4 basis points of the decline was due to higher premium amortization expense in the investment securities portfolio. The remainder of the pressure can be attributed to the yield curve compression and earning asset mix, partly offset by lower deposit costs. We expect net interest margin to be stable in the first quarter compared with the fourth quarter.

Slide 12 highlights the trends in noninterest income. On a year-over-year basis, we saw good growth in merchants acquiring revenue driven by account and volume improvement. As expected, credit and debit card revenue declined 1% year-over-year due to 2 fewer processing days in the fourth quarter of 2019. We look for credit and debit card revenue to return to a mid-single-digit growth pace in 2020.

Corporate payments. Corporate payment products revenue declined 3.1%, driven by lower commercial business sales volumes. However, in the past few weeks, sales volume growth has turned to a mid-single-digit growth rate.

Trust and investment management growth reflected business growth and favorable market conditions.

Deposit service targets were impacted by the sale of the company's ATM servicing business in the fourth quarter of 2018. The decline in treasury management fees from a year ago reflected the impact of changes in earnings credits, a residual effect of the rising rate environment in 2018. Notably, treasury management fees increased on a linked quarter basis, reflective of their recent interest rate declines in the third and fourth quarters of 2019.

Mortgage banking revenue increased 42.7% year-over-year on strong origination and sales revenue -- strong origination and sales revenue growth. Compared with the fourth quarter of 2018, mortgage production volume increased by 92.3% and mortgage application volume increased by 83.8%.

Refinancing activity represented approximately

(technical difficulty)

in the fourth quarter of 2019 compared to about 40% in the linked quarter. Refinancings represented 52% of applications in the fourth quarter. As of November, our digital mortgage app was being utilized by about 86% of all mortgage applications.

Turning to Slide 13. The 3.1% year-over-year increase in noninterest expense reflected increased personnel expense, higher technology and communication expense, and higher net occupancy and equipment expense, reflecting actions to support business growth.

Slide 14 highlights our capital position. At December 31, our common equity Tier 1 capital ratio estimated using the Basel III standardized approach was 9.1%.

I will now provide some forward-looking guidance. For the first quarter of 2020, we expect fully taxable equivalent net interest income to decline at a low single-digit pace year-over-year, but to be relatively flat linked quarter normalized for day count. We expect mid-single-digit growth in fee revenue year-over-year. We expect low single-digit growth in noninterest expenses on a year-over-year basis. Credit quality in the first quarter is expected to remain stable compared to the fourth quarter. And we expect our taxable equivalent tax rate to be approximately 20% on a full year basis.

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

--------------------------------------------------------------------------------

Andrew Cecere, U.S. Bancorp - Chairman, President & CEO [5]

--------------------------------------------------------------------------------

Thanks, Terry. We are operating in a dynamic environment and this quarter's results reflected the challenging interest rate environment facing the entire industry as well as the impact of actions we took to better position our company for the future. However, as our core financial metrics indicate, we ended the year on a solid note and we are in a strong position as we head into 2020.

We view the interest rate environment as a manageable headwind and we are confident in our ability to prudently grow our balance sheet and gain market share in our fee businesses.

FICO was negatively impacted by several headwinds in 2019. As Terry discussed, we expect to return to normalized growth in credit and debit card revenue this year. In a more stable interest rate environment, as the refi-driven market shifts to a purchase-driven market, the investments we have made in our mortgage business over the past several years will become increasingly evident in the form of market share gains.

We are proud of our strong and consistent financial track record, but we are always looking for ways to improve. That means we are changing the way we think, the way we work and the way we do business.

As we move into 2020 and beyond, we will continue to increase work flow agility and speed to market for our products and services while at the same time, optimizing our core operation to fund investment for the future. Our ability to leverage the combined dollar of our rapidly improving additional capabilities and our complete payment ecosystem will lead to higher staff-customer satisfaction, stronger revenue growth and efficiencies, and ultimately, improved returns. In summary, we remain focused on managing this company for the long-term while delivering

(technical difficulty)

at a pathway to the future.

I'd like to thank our employees for all we accomplished this year, supported by their hard work and commitment to creating value for all our customers.

We will now open up the call for Q&A.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) And your first question comes from the line of John Pancari from Evercore.

--------------------------------------------------------------------------------

John G. Pancari, Evercore ISI Institutional Equities, Research Division - Senior MD & Senior Equity Research Analyst [2]

--------------------------------------------------------------------------------

Just want to talk a little bit about the operating leverage expectation. I mean we got your comments around the quarter. But for full year '20, I know you had previously indicated that it could be a challenge to attain positive operating leverage for the full year, given the rate backdrop, et cetera. I wanted to get your updated thoughts on that. If you see that there is a chance you can get -- you could see positive operating leverage? And what type of magnitude would that -- could you see?

--------------------------------------------------------------------------------

Terrance R. Dolan, U.S. Bancorp - Vice Chairman & CFO [3]

--------------------------------------------------------------------------------

Yes. John, thanks. And as a reminder, we had a goal of achieving positive operating leverage in 2019, and we did that on a core basis for the full year. When we think about 2020, our objective is to target positive operating leverage and we expect our expense growth to be -- to continue to remain in those low single digits.

So I think we have a number of levers that we continue to look at and pull in terms of optimization, continue with our physical assets, optimization of the branch system, our back-office activities and a number of different things. So that's our goal. That's our objective at this particular point in time.

Now that said, as you said in your question, 2020 is a more difficult year simply because of the revenue outlook. And I think part of being able to achieve it is going to be really based upon what happens with respect to interest rates, et cetera. So that's kind of how we're thinking about it.

--------------------------------------------------------------------------------

John G. Pancari, Evercore ISI Institutional Equities, Research Division - Senior MD & Senior Equity Research Analyst [4]

--------------------------------------------------------------------------------

Okay. Great. And then in terms of your -- some of the headwinds that had impacted your fee progression, I know there was the accounting change that impacted it as well as a couple of other items. Can you just talk about where do you expect underlying momentum to build in the fee businesses as you look at 2020?

--------------------------------------------------------------------------------

Terrance R. Dolan, U.S. Bancorp - Vice Chairman & CFO [5]

--------------------------------------------------------------------------------

Yes. So when we end up looking at fee income, I think there's a number of different things that we end up looking at. I think the credit card revenue is stronger. Again, mid-single digits as we think about next year. And that particular line item was impacted by both an accounting item in 2018 as well as a pretty slow first quarter, which we had talked about. I think merchant acquiring continues to accelerate and get strong and we expect mid-single digits there. And then the CPS revenue, while we saw a decline in the fourth quarter because of a little slower commercial spending, that has come back in the first several weeks of the year. And so our expectation in that category is kind of mid-single digits as well.

Deposit service charges has been a drag this year because of the sale of the ATM business in 2018. And also that kind of normalized, was at least flat in 2020. I think treasury management revenue is another area that we would expect. It's kind of hit an inflection point. So while it's down on a year-over-year basis, it is up on a linked-quarter basis. And we would expect that to be better than 2020.

So I think there's a number of different things. I think the offset to that is -- and if you think about mortgage, and we talk about mortgage, mortgage has been particularly strong the last couple of quarters. But in 2019, it was also quite a bit of a drag in the first several quarters. So again, depending upon what happens with interest rates, but in the current environment, I think that that continues to be a positive story. So that -- I mean I think there's a number of different areas.

--------------------------------------------------------------------------------

Operator [6]

--------------------------------------------------------------------------------

And your next question comes from the line of Erika Najarian from Bank of America.

--------------------------------------------------------------------------------

Erika Najarian, BofA Merrill Lynch, Research Division - MD and Head of US Banks Equity Research [7]

--------------------------------------------------------------------------------

I heard you loud and clear on your expense growth. And I'm wondering, though, if the increased severance charges that we've seen could lead to a different geography in terms of expense growth?

And I guess I'm just looking back at your head count, which seems to have risen sort of along -- coincident with the consent order. And I'm wondering if part of the initial statement upfront, Andy, in terms of continuing to transform the business is trying to take some of the compensation growth that you experienced over the last 3 years and really putting that back in technology. Is that sort of how we should expect the geography could change underneath that low single-digit expense growth that you're expecting for '20?

--------------------------------------------------------------------------------

Andrew Cecere, U.S. Bancorp - Chairman, President & CEO [8]

--------------------------------------------------------------------------------

I think that's not an unfair description, Erika. It's not just technology, but it's people and technology. But it's optimizing the way we're doing business to continue to invest in the future. And our expense growth was higher during the consent order periods, but as you know, it's been in the low single digits the last couple of years and a notable -- mutually notable items, 2.4% year-over-year in 2019, and that includes optimization and expense takeout while at the same time, investing in technology people for the future. And I would expect that to continue into 2020.

--------------------------------------------------------------------------------

Erika Najarian, BofA Merrill Lynch, Research Division - MD and Head of US Banks Equity Research [9]

--------------------------------------------------------------------------------

And I guess I'm wondering if this -- the -- our takeaway from that is because that seems like it's behind you and again, feels like the severance charges are setting up for further optimization and rationalization, that you're accelerating the amount of dollars that you're putting into the future, so to speak, whether it's head count related to that or technology itself.

--------------------------------------------------------------------------------

Terrance R. Dolan, U.S. Bancorp - Vice Chairman & CFO [10]

--------------------------------------------------------------------------------

Yes. I think that that's a fair comment, Erika. And again, I think the shift is optimize in what I would call the back office and the branch network, where we -- which are being impacted by customer behaviors as we transition to more of a digital environment. But at the same time, we're reinvesting that in technology spend to support those -- that digital transformation. And so maybe a little bit of a shift from compensation to technology type of cost.

But our expectation when we think about 2020 is to continue to make the investments in the business that we have been making over the last couple of years.

--------------------------------------------------------------------------------

Erika Najarian, BofA Merrill Lynch, Research Division - MD and Head of US Banks Equity Research [11]

--------------------------------------------------------------------------------

And just one more if I could squeeze it in. Deposit costs were down 15 basis points quarter-over-quarter. And I'm wondering, underneath the 1Q NII outlook, what you expect for deposit cost trends for the first quarter?

And also if the curve outlook stable continues to be stable from here, could net interest margin for the rest of the year stabilize or potentially increase from 1Q levels?

--------------------------------------------------------------------------------

Terrance R. Dolan, U.S. Bancorp - Vice Chairman & CFO [12]

--------------------------------------------------------------------------------

Yes. Well, certainly, the rate environment continues where it is today. Our expectation is that 2020 net interest margin will be pretty flat to the fourth quarter, with some possible positive bias depending upon what happens on the long end of the curve. But that's kind of our thought process.

And the reason for that is the premium amortization that we've experienced in the third and fourth quarter is stabilizing at this particular point in time. When we think about deposit cost, deposit pricing, we have been pretty responsive on the institutional deposits, in terms of bringing those -- repricing those down as rates have come down. And I think from here on out, deposit pricing will be a function of both competition and what happens on the short end of the curve.

--------------------------------------------------------------------------------

Operator [13]

--------------------------------------------------------------------------------

(Operator Instructions) Our next question comes from the line of Scott Siefers from Piper Sandler.

--------------------------------------------------------------------------------

Robert Scott Siefers, Piper Sandler & Co., Research Division - MD & Senior Research Analyst [14]

--------------------------------------------------------------------------------

Just curious if you might be able to offer any just top level comments on the overall kind of pace of loan growth and overall demand. If you look at the HA data, it's definitely been held up or supported by the consumer side, but it's been a little surprising to see the slowdown in growth on the commercial side, however. So I'm just curious, given the breadth of you guys' franchise and different types of customers you look at, what you're seeing at a very top level?

--------------------------------------------------------------------------------

Terrance R. Dolan, U.S. Bancorp - Vice Chairman & CFO [15]

--------------------------------------------------------------------------------

Yes. Well, at a very high level, again, I think, economically, we feel pretty optimistic in terms of what the outlook there is. If you end up looking at the components of loan growth, I think we saw a pretty strong and good growth with respect to consumer lending.

The area that that was a little bit softer in the fourth quarter was really our C&I or our corporate sort of lending. And that's principally, while we saw production and the pipeline continuing to be reasonably strong, we saw pretty significant paydowns that were taking place in that particular -- in that space driven by capital markets activities and that's a function of the long end of the curve coming down in the third and early fourth quarter. With that stabilizing, while we would expect some of the paydowns to continue into the first quarter, I think that will moderate.

--------------------------------------------------------------------------------

Robert Scott Siefers, Piper Sandler & Co., Research Division - MD & Senior Research Analyst [16]

--------------------------------------------------------------------------------

Okay. Perfect. And then just any additional updates on ramification from the LCR rules. I think you guys have been talking about $11 billion to $15 billion of liquidity free up. Any updated thoughts on how you're thinking about that dynamic?

--------------------------------------------------------------------------------

Terrance R. Dolan, U.S. Bancorp - Vice Chairman & CFO [17]

--------------------------------------------------------------------------------

Yes. That's in the ballpark in terms of the amount of how -- what the impact is with respect to the LCR. We're continuing to look at different alternatives. And part of it is thinking about extending duration a little bit, possibly investing a little bit more in agency mortgage-backed securities, which would provide a little bit better yield. But I don't -- and I think it will be on the margin and it won't be anything dramatic.

--------------------------------------------------------------------------------

Operator [18]

--------------------------------------------------------------------------------

And there are no further questions in queue at this time. I'd like to turn the call back over to Jennifer Thompson for closing remarks. Oh, it looks like we did get one question.

We do have a question from the line of Vivek Juneja from JPMorgan Chase.

--------------------------------------------------------------------------------

Vivek Juneja, JP Morgan Chase & Co, Research Division - Senior Equity Analyst [19]

--------------------------------------------------------------------------------

Just wanted to clarify on credit debit card fees. What was the impact from 2 fewer processing days? How should -- what does that do? And is there a reversal in 2020?

--------------------------------------------------------------------------------

Terrance R. Dolan, U.S. Bancorp - Vice Chairman & CFO [20]

--------------------------------------------------------------------------------

Yes. Good question. There was an impact of 2 days that it ended up really taking our fee income from kind of that low to middle single digits to the negative 1% in the fourth quarter.

There is 1 extra day in 2020 relative to 2019. But let me just kind of dissect it a little bit because I think that that is maybe helpful. When you end up looking at the growth rate for 2019, it was really impacted by 3 different things. One is that there was an accounting change that occurred in the first quarter of 2018 that, because of the lapping effect, ended up depressing growth rates in 2019. In addition, if you remember, the consumer spend level in the first quarter was significantly lower and it's kind of at an unusually low level. And of course, as the -- as concerns around the economy stabilize, that consumer spend has come up. That has been in the mid-single digits in the second, third and kind of fourth quarter in terms of sales volumes. And then as you know, to get back to the processing days, quarterly results can be lumpy.

But when we think about 2020, in terms of on a full year basis, we really think that mid-single digits is a good target for us and a good estimate for us. Our sales volumes over the last several quarters have been kind of in that range. And when you think about it on a day-adjusted basis, it's been pretty consistent from quarter-to-quarter.

So in 2020, there's 1 more day and that will help a little bit, but mid-single digits for 2020 I think is a good estimate. Again, quarterly results will be a little bit lumpy, but when we think about the year, that's kind of how we're thinking about it.

--------------------------------------------------------------------------------

Vivek Juneja, JP Morgan Chase & Co, Research Division - Senior Equity Analyst [21]

--------------------------------------------------------------------------------

And when I look back over the prior couple of years, you've have -- this line item was growing at sort of more like 9% to 9.5% when you look at '17 to '18. Has there been -- either going to the mid-single digits, has there been any reduction in pricing, a shift in the kind of contracts? Or is this higher rewards expense? What, Terry, is driving that slowdown from that high single-digit level to the mid-single-digit run rate?

--------------------------------------------------------------------------------

Terrance R. Dolan, U.S. Bancorp - Vice Chairman & CFO [22]

--------------------------------------------------------------------------------

Yes. The growth rates in 2017, 2018, were influenced in some respect because of some portfolios that we were acquiring during that particular time frame, more so than other factors. And so when we think about pricing, there hasn't been a lot of compression with respect to price. And we feel pretty good about that.

--------------------------------------------------------------------------------

Andrew Cecere, U.S. Bancorp - Chairman, President & CEO [23]

--------------------------------------------------------------------------------

And rewards have been relatively flat and actually that isn't a factor. So that mid-single-digit number is a good way to think about the next 12 months.

--------------------------------------------------------------------------------

Vivek Juneja, JP Morgan Chase & Co, Research Division - Senior Equity Analyst [24]

--------------------------------------------------------------------------------

Okay. And as you think about from -- in terms of other fee revenues, Andy and Terry, you said treasury management should be good. Corporate card fees when I look at that that was also a little bit softer this quarter. It's actually down year-on-year. Any color on that? Because I know the -- yes, any -- I will just let you answer that.

--------------------------------------------------------------------------------

Andrew Cecere, U.S. Bancorp - Chairman, President & CEO [25]

--------------------------------------------------------------------------------

Yes, Vivek. The impact of that is because we saw in the last half of the fourth quarter, corporate spend activity slow. That had been running in the mid-single digits, a little bit higher in the first few quarters. Fourth quarter saw a slowdown to almost flat. And as Terry mentioned in his prepared remarks, we did see a pickup in the first 2 weeks of January back to the mid-single digit. So that was attributable to that slowdown, but it seems to have come back.

--------------------------------------------------------------------------------

Terrance R. Dolan, U.S. Bancorp - Vice Chairman & CFO [26]

--------------------------------------------------------------------------------

And I think that one of the reasons for that is if you think about where the yield curve, -- that how rates were moving, there was concerns about recession. People were uncertain with respect to economic data. And then you had the hangover of tariffs. I think the sentiment on a corporate side appears to be looking better. We're going to be signing a trade agreement with China today, I believe, in terms of Phase I and the U.S., Mexico, Canada agreement is well on its way. So I think that some of that uncertainty that might have been impacting discretionary spend in the commercial side of the equation has been alleviated. So we feel pretty good.

--------------------------------------------------------------------------------

Vivek Juneja, JP Morgan Chase & Co, Research Division - Senior Equity Analyst [27]

--------------------------------------------------------------------------------

And I want to confirm one last thing, CECL day 2. Could you talk a little bit about what do you see that doing to your provision expense, Andy, Terry?

--------------------------------------------------------------------------------

Terrance R. Dolan, U.S. Bancorp - Vice Chairman & CFO [28]

--------------------------------------------------------------------------------

Yes. No, we talked about certainly, day 1 and day 2 as part of Investor Day. The provision will increase. We think that in terms of loan growth, providing basically at kind of that 2% level versus 1.5% is kind of how we're thinking about it. But there's going to be more volatility related to CECL. And I think one of the things we'll end up looking at is just what is the stability in the overall portfolio and what our net charge-offs are doing on a quarter-to-quarter basis.

--------------------------------------------------------------------------------

Operator [29]

--------------------------------------------------------------------------------

And we do have another question from the line of Ken Usdin with Jefferies.

--------------------------------------------------------------------------------

Amanda Beth Larsen, Jefferies LLC, Research Division - Equity Associate [30]

--------------------------------------------------------------------------------

This is Amanda Larsen on for Ken. I think it's understood that 2020 will likely be an aberration versus the long-term trends that you set out at Investor Day related to revenue growth headwinds, but that you'll still strive to achieve positive operating leverage in '20. But I'm wondering how negative could negative operating leverage be in '20 before you do take actions related to slowing the pace of investment spend or creating more saves?

--------------------------------------------------------------------------------

Andrew Cecere, U.S. Bancorp - Chairman, President & CEO [31]

--------------------------------------------------------------------------------

So as Terry mentioned, again and earlier, we expect and target positive operating leverage for 2020. We have a number of levers that we continue to pull to optimize the current organization structure to continue to invest in the future. So Amanda, the way we think about it is a balance of optimizing today and investing in the future while always targeting that positive operating leverage and that's how we're managing the company.

--------------------------------------------------------------------------------

Amanda Beth Larsen, Jefferies LLC, Research Division - Equity Associate [32]

--------------------------------------------------------------------------------

Okay. Great. And then can you guys talk about the capability as of Sage Pay and how you see your bank's position evolving in the e-commerce payments arena over the medium term?

--------------------------------------------------------------------------------

Andrew Cecere, U.S. Bancorp - Chairman, President & CEO [33]

--------------------------------------------------------------------------------

Yes. We're very excited about Sage Pay. It is a kind of leader in the e-commerce space within the U.K. and Ireland. And we also have the opportunity to be able to extend that into the rest of Europe. We have a pretty big footprint across Europe. So pretty excited about that as we think about next year.

We ended up rolling out sort of similar e-commerce capabilities over the course of the last 12 to 18 months here domestically. And so we believe that that gives us more capabilities in terms of being able to take advantage of e-commerce in the future.

--------------------------------------------------------------------------------

Operator [34]

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

John Eamon McDonald, Autonomous Research LLP - Senior Analyst Large-cap Banks [35]

--------------------------------------------------------------------------------

Sorry, I have jumped on a little bit late. Did you give an update on the Charlotte expansion, Andy? And how that's going and whether you're targeting new areas for this year to expand on the retail side?

--------------------------------------------------------------------------------

Andrew Cecere, U.S. Bancorp - Chairman, President & CEO [36]

--------------------------------------------------------------------------------

John, Charlotte's going well. We opened the branch about 3 months ago. We've had a new customer acquisition growth in current customers. Employees are fired up. We are targeting a number of new branches to be opening yet this year and still targeting that number of 10. We're learning a lot from that investment. We continue to track that and measure our activity. I would expect us to continue to expand in new markets, but our first focus is expanding to our target number in Charlotte.

--------------------------------------------------------------------------------

John Eamon McDonald, Autonomous Research LLP - Senior Analyst Large-cap Banks [37]

--------------------------------------------------------------------------------

Got you. Okay. And then Terry, just a couple of clean up things on NII. I think you mentioned the amortization kind of stabilizes early this year. Is that right? And then the roll-off rates, like where the tenure is today, are those kind of breakeven or slightly accretable where you're putting new money to work in the bond portfolio today relative to what's rolling off?

--------------------------------------------------------------------------------

Terrance R. Dolan, U.S. Bancorp - Vice Chairman & CFO [38]

--------------------------------------------------------------------------------

Yes. So addressing kind of your second question first. The reinvestment with respect to securities is still about 15 basis points or so accretive. So I mean we would expect that based on where rates are today. The premium amortization does stabilize in the first quarter, so when we think about net interest margin for the year, we think it's going to be relatively flat, maybe a little bit of a positive bias relative to the fourth quarter of 2019.

--------------------------------------------------------------------------------

John Eamon McDonald, Autonomous Research LLP - Senior Analyst Large-cap Banks [39]

--------------------------------------------------------------------------------

Okay. So the down NII for the year is just the tough comps of where you started last year, I guess, right? Things from a sequential standpoint, though, it feels relatively stable?

--------------------------------------------------------------------------------

Terrance R. Dolan, U.S. Bancorp - Vice Chairman & CFO [40]

--------------------------------------------------------------------------------

Yes.

--------------------------------------------------------------------------------

Operator [41]

--------------------------------------------------------------------------------

And with that, there are no further questions in queue. I'd like to turn the call back over to Jennifer Thompson for closing remarks.

--------------------------------------------------------------------------------

Jennifer Ann Thompson, U.S. Bancorp - EVP of IR [42]

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Operator [43]

--------------------------------------------------------------------------------

This concludes today's conference call. You may now disconnect.