美國合眾銀行 (USB) 2021 Q3 法說會逐字稿

Welcome to U.S. Bancorp's Third Quarter 2021 Earnings Conference Call. Following a review of the results by Andy Cecere, Chairman, President and Chief Executive Officer; and Terry Dolan, Vice Chair and Chief Financial Officer, there will be a formal question-and-answer session. (Operator Instructions) This call will be recorded and available for replay beginning today at approximately 10 a.m. Central time through Thursday, October 21, 2021, at 10:59 p.m. Central time.

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

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

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

I'll now turn the call over to Andy.

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

I'll begin on Slide 3. In the third quarter, we reported earnings per share of $1.30 and generated total revenue of $5.9 billion. Our linked-quarter pretax pre-provision net revenue growth of 2.7% was driven by continued momentum across our fee businesses, growth in average loan balances and continued focus on expense management resulting in positive operating leverage. We released $310 million of loan loss reserves this quarter, supported by our outlook on the economy and better-than-expected credit quality metrics.

Turning to capital. Our book value per share totaled $32.22 at September 30, which was 1.5% higher than June 30. Our CET1 ratio was 10.2% at September 30. Slide 4 provides key third quarter performance metrics, including a return on tangible common equity of over 20%. Slide 5 highlights strong trends in digital engagement.

On Slide 6, we are providing initial information about our business banking and payment relationships, which we plan to update every quarter. Our complete payments ecosystem is a competitive advantage for us and provides a number of cyclical and secular growth opportunities. Over the next few years, we believe there is a significant potential to expand and deepen relationships within this ecosystem.

Our starting point is that we have about 1.1 million business banking relationships, which we define as businesses with under $25 million in revenue. Currently, about half of our payments customers of this size have a business banking product and just under 1/3 of our business banking customers have a payments product. The opportunity is to both increase the number of business banking relationships and to deepen these relationships by connecting our banking customers with our payments products and services and connecting our payments customers with our banking products and services. As we discussed previously, we believe we can grow our small business relationships by 15% to 20% and related revenue by 25% to 30% over the next few years.

Now let me turn the call over to Terry who will provide more detail on the quarter.

Thanks, Andy. If you turn to Slide 7, I'll start with a balance sheet review followed by a discussion of third quarter earnings trends. Average loans increased 0.8% compared with the second quarter, driven by growth in other retail loans, primarily installment loans, as well as growth in credit card and residential mortgages.

This growth was partially offset by lower commercial loan balances, which was impacted by lower levels of PPP loans. At September 30, PPP loan balances totaled $2.4 billion compared to $4.9 billion at June 30. Excluding PPP loans, third quarter average loans grew by 1.8% on a linked-quarter basis.

Turning to Slide 8. Average deposits increased 0.5% compared with the second quarter and 6.4% compared with a year ago. On both a linked-quarter and year-over-year basis, we continue to benefit from favorable mix shift as average noninterest-bearing deposits increased while higher-cost time deposits declined.

Slide 9 shows credit quality trends. Nonperforming assets declined on both a linked-quarter and year-over-year basis, and our net charge-off ratio hit a record low of 20 basis points. Our reserve release was $310 million this quarter, primarily reflecting strong credit quality metrics. Our allowance for credit losses as of September 30 totaled $6.3 billion or 2.1% of loans. The allowance level reflected our best estimate of the economic outlook and trajectory of credit quality within the portfolios.

Slide 10 provides an earnings summary. In the third quarter of 2021, we earned $1.30 per diluted share. These results include a reserve release of $310 million.

Turning to Slide 11. Net interest income on a fully taxable equivalent basis of $3.2 billion increased by 1.0% compared with the second quarter. The growth was primarily driven by higher loan fees associated with the Paycheck Protection Program. Excluding PPP-related fees, net interest income would have been stable, reflecting lower loan yields and the impact of changing loan mix, offset by the beneficial impact of core loan growth, lower premium amortization and an additional day in the quarter. Our net interest margin was stable compared with the second quarter.

Slide 12 highlights trends in noninterest income. Compared with a year ago, noninterest income declined to 0.7% as decreases in mortgage revenue and commercial products revenue more than offset strong growth in payments revenue, trust and investment management fees, deposit service charges and treasury management fees. On a linked-quarter basis, noninterest income increased 2.8%, reflecting higher-than-expected payments revenue and a 20% increase in mortgage revenue, driven by growth in production volume and related gain on sale margins as well as higher loan sales.

Slide 13 provides information on our Payment Services business. Our Payments business continues to benefit from improving economic conditions and spend activity. In the third quarter, sales volumes for both our credit card and our merchant processing businesses exceeded the pandemic-compared period in 2019 while CPS volume was about in line. As expected, prepaid card volume declined in the third quarter as the impact of government-related stimulus continues to diminish.

The reduced prepaid volume resulted in a slight decline in credit and debit card revenue on a linked-quarter basis. However, corporate payment revenues increased by 13%, which was better than expected, driven by improving business spend activity. Merchant processing revenue increased by 4.8% due to higher merchant and equipment fees as well as higher sales volumes.

Turning to Slide 14. Noninterest expense increased 1.2% compared to the second quarter. This increase primarily reflected higher revenue-related compensation and performance-based incentives.

Slide 15 highlights our capital position. Our common equity Tier 1 capital ratio at September 30 was 10.2%, which increased slightly compared to June 30. At the beginning of the third quarter, we suspended our share buyback program due to our recent announcement that we have agreed to acquire MUFG's Union Bank. We expect that our share repurchase program will be deferred until the second quarter of 2022. After the closing of the acquisition, we expect to operate at a CET1 capital ratio between our target ratio and 9.0%.

I will now provide some forward-looking guidance. As PPP winds down and we approach the end of the forgiveness period, we expect PPP fees to decline $60 million to $70 million in the fourth quarter compared with the third quarter. Excluding the impact of PPP fees, we expect fully taxable equivalent net interest income to be relatively stable on a linked-quarter basis. We expect PPP to be immaterial to both net interest income and the net interest margin in 2022.

In the fourth quarter, we expect total payments revenue trends to continue to strengthen, driven by improving sales volumes. However, the fourth quarter is typically seasonally lower than the third quarter, which affects linked-quarter comparisons. In the fourth quarter, we expect to see a seasonal increase in amortization of tax-advantaged investments of approximately $60 million as well as some seasonal impacts in marketing and business investments.

Credit quality remains strong. Over the next few quarters, we expect the net charge-off ratio to remain lower than normal. For the full year of 2021, we expect our taxable equivalent tax rate to be approximately 22%.

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

Thanks, Terry. To summarize, our third quarter results were positive on several fronts, highlighted by a solid growth in core loans, good fee revenue momentum and strong credit quality. We are finishing off the year in a strong position heading into 2022, and we're excited about the many organic growth opportunities we see across the franchise, supported by our continued investment in people, digital, technology and data analytics.

Our 3 payments businesses will continue to benefit from the improved spend activity, particularly as consumer and business travel recovers towards pre-pandemic levels. More importantly, we believe our secular growth initiatives aimed at connecting payments with banking provide a meaningful potential for market share gains over the immediate and longer term. Our business banking initiatives are still in the early innings but we're gaining traction. And our partnership with State Farm continues to evolve and grow. We are encouraged by the results we are seeing.

Aside from our organic growth opportunities, our recently announced acquisition of Union Bank provides a platform to achieve cost synergies, expand our distribution network in demographically attractive West Coast markets and leverage our broad product set and leading digital capabilities across a loyal but underpenetrated customer base. All of this will enable us to accelerate revenue and earnings growth and continue to deliver the industry-leading returns on equity that our shareholders have come to expect.

In closing, I'd like to thank our employees for all they've done throughout the year. We'll now open up the call for Q&A.

(Operator Instructions) Your first question comes from the line of Gerard Cassidy from RBC.

Andy, Slide 6 is very interesting. As you pointed out, it's a new slide. Two questions on this slide. You talked about the growth that you are anticipating in that business banking area to get the customers that are business banking only to be both banking and payments.

What percent -- can you get it to that 50% that you have on the other circle with the payments area? Can you get into that area? And how long would it take you to get there? And second, if you put in the Union Bank customers, how large will that 1.1 million grow to?

So Gerard, Union Bank has about 190,000 comparable customers, so that would be added to the 1.1 million. And I do believe we can get, to your first question, that left-hand side to the 50-50 at least. Again, the way we're thinking about this product set is really a combination, a dashboard, if you will, that helps these customers manage their business, payables, receivables, travel activity, payroll and so forth in one comprehensive viewpoint. And I think that will allow us to both deepen the relationships as well as expand. So I do believe we can get that to 50-50 as well.

Very good. And then as a follow-up, you guys are, I would say, well regarded on your credit through the full cycle. And you pointed out, Terry, that, I think, the 20 basis points is a record low in net charge-offs.

What do you anticipate -- when will things kind of normalize? And I hate that word because there's no such thing as normal credit charge-offs. But it seems like -- how sustainable are these record-low levels, do you think, as we look out over the next 12 to 24 months?

Yes. It's a great question. And your point about it really being difficult to predict is right on. When we end up looking at -- kind of looking at forecast, et cetera, we do expect it's probably going to stay at these lower levels for a few quarters and then it's going to start to normalize. It probably doesn't get back there until -- what we would kind of define as normal, which is kind of that 45 to 50 basis points overall, until at least the end of 2022 and probably sometime in 2023. But it is very hard to predict.

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

I had a couple of questions. One was on just loan growth in general. And I wanted to understand where you see some signs of life that might be accelerating as we move into 4Q and into next year. I asked because I saw a nice uptick in the consumer side, but commercial seemed to be a little bit weaker. I'm wondering if -- what you're seeing there.

Yes. So when we end up looking -- first of all, maybe to the fourth quarter, we would expect probably modest growth going into the fourth quarter on a linked-quarter basis. And if you just kind of look at the puts and takes -- and I think that this will play out over time as well. But the puts and takes, at least in the near term, is that we would continue to expect to see reasonably good growth in our auto lending business, which has been very strong of late, and we would also expect that our credit card balances would start to strengthen. And a big part of that is both consumer spend but we've also been investing in terms of account growth and various sort of promotional activities. So that will help to drive it.

And then as consumer spend -- or excuse me, as government stimulus kind of starts to dissipate, which it's, I think, been slowly doing, we do expect that, that payment rate will start to come down. It's really kind of at a historic high right now. And as that comes down, credit card balances should strengthen. So certainly, on the consumer side, we expect growth in the near term.

The C&I, as you said, is a little more challenging, and the principal challenge there is that we continue to see a fair amount of payoffs. And then PPP forgiveness is also dampening the C&I growth in that particular space. Where we are seeing nice areas of opportunity in C&I is in asset-backed securitization type of lending, mortgage warehouse lines, some supply chain finance activities. Those are all areas that have been of particular strength.

When we end up looking at kind of middle market space, we're seeing lots of confidence in terms of customers and relatively strong pipelines. And so we do expect that, that is an area of opportunity once we get beyond the drag of PPP. So hopefully, that kind of gives you some perspective in terms of some of the puts and takes.

And the PPP in the fourth quarter, I think you indicated it would be down, obviously, Q-on-Q. But is it sizable in the fourth quarter?

Yes. It ends up coming down, and you saw we talked a little bit about the decline this quarter. I think it's going to come down probably half of that again in the fourth quarter. And then it's hard to tell in terms of does it stabilize at that level or does it come down a little bit further. But our expectation, at least right now, Betsy, is that by the end of the fourth quarter, the vast majority of PPP has been forgiven. And the impact to, for example, balances and net interest income and margin will be really immaterial when we think about 2022.

And in the fourth quarter -- the PPP contribution to NII in the fourth quarter, what do you -- how would you size that?

I think it's modest, Betsy. The peak quarter certainly was the third quarter, and it becomes very modest in the fourth quarter.

Okay. All right. And then just lastly, as you think about the forward look here on integrating MUFG U.S.A. Union Bank into your operation, how should we be thinking about the trajectory of the efficiencies here? Because when you announced that deal and we had that conference call, we obviously heard a lot about the cost saves that you're anticipating getting from the MUFG U.S.A. side. But I'm wondering, is there a tech angle as well on your legacy platform that will also be enhanced. I guess is 1 plus 1 equal 2.5, for example?

So I think -- just to remind you of the time frames. We did actually submit our application for the transaction on October 6. So that is in -- our expectation is a close sometime late first quarter, early second quarter with a conversion, integration in the third -- into the fourth quarter of 2022. As we talked about on that call, we would expect about 75% of the savings, the efficiencies to occur in that first year, 2023.

And as we also talked about, Betsy, the real benefit here is we have the platform and it's a lift and shift from what they do to our platform, which allows for the majority of the cost savings. And the second enhancement on that is our platform has more capabilities and will, in my view, have more opportunities, better customer experience and more products and services. So there's also a revenue component as well. So in that line -- in that view, yes, it is more than just 1 plus 1.

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

I want to see if you can elaborate a little bit more on the trends you're seeing in your payments business. I know you had mentioned the increased spend activity. I wanted to see if you can give us a little bit more color on how that breaks out. And then separately, maybe if you can elaborate a little bit on what your 2022 expectation is at this time based upon the trends you're beginning to see in the payments side.

Yes. So maybe let me take the first part and then Andy can kind of pipe in with respect to what we're seeing as we go into 2022. So maybe as a comparison to 2019, first of all, as we said, the merchant and the card business is now above 2019 levels. In the third quarter, sales were about almost 5% higher than 2019 in terms of merchant processing. And if you end up looking at credit/debit card, 20-plus percent above where it was in 2019. So those have made really nice recoveries.

I'd also kind of keep in mind that when you end up looking at merchant as an example, airline, travel, entertainment is still down quite a bit and probably, I would say, flattened a bit in the third quarter simply because of the Delta variant. But as we kind of think about going forward and as the Delta variant kind of subsides a bit, we would expect that to start to accelerate again.

If you end up looking at the card business, as I said, credit card and debit card business, the sales volumes have been quite strong relative to 2019, and that's driven by consumer spend. The one thing that will end up impacting card revenue is the fact that prepaid continues to come down as government stimulus dissipates. But by the end of the year, going into 2022, again, the quarter-over-quarter impact will be relatively immaterial.

And then the last thing I would just kind of talk about is on the corporate payments side of the equation. It's pretty much at 2019 levels, but the travel and entertainment or the T&E spend is still about 50%, 55% below 2019. And we would expect that to continue to kind of normalize. So we think that there's opportunity still there for that to continue to strengthen. We have seen, what I would say, other commercial spend strengthening quarter-over-quarter, and we would expect that to continue as well.

I think that's exactly right, Terry. And just to summarize what Terry said, ex travel, airlines and entertainment activity, spend is up versus pre-pandemic levels in that 20% range or so. And I would expect that to continue to increase into 2022. I think the real opportunity is in that travel category, which, as Terry mentioned, if you think about merchant or card, whatever category you look at, is down in that 35%, 40% range. As that recovers, that's where a lot of opportunity exists as well as what Terry mentioned in the corporate travel and entertainment, which is down closer to 50%.

Okay. Great. And then I know you mentioned, on the expense side, some marketing and business investments at least for the fourth quarter. Is there anything there that is going to carry through into 2022 as you're putting money into the business? I know you're -- you recently launched the buy now, pay later product. So just curious if there's ongoing marketing and business investment that we should consider as we dial in expense expectations for 2022.

Yes. I think as we kind of think about 2022, the level of investment probably doesn't go up significantly from here.

Your next question comes from the line of Ebrahim Poonawala with Bank of America.

Just one follow-up with you on comments around loan growth, specifically if you can address 2 things. One, just the outlook for CRE lending as you think about next year, given potential disruption from just change in work from home, et cetera, how you're approaching CRE lending. And on the consumer side, do you expect -- do we need to see a big drawdown in the U.S. savings rate before you actually see consumer lending pick up substantially or as you pointed out, the government stimulus programs fading away are enough to see some legs to that growth?

Yes. So maybe to the first question with respect to CRE, we actually saw some growth on a linked-quarter basis in CRE this quarter. The project-level pipelines, things like that are reasonably strong. As we kind of think about the next couple of quarters though, I think what we are seeing in the marketplace is pretty strong competition. And so we'll have to kind of watch and see what happens with respect to paydowns.

Regarding kind of return to office and some of those impacts, when we end up looking at it, maybe in terms of the areas to watch, I think that as return to office occurs, we are starting to see collateral valuations improving. And we're starting to see some of those trends improving as well. And I think that, that generally would be a positive thing in terms of CRE investment by underlying developers and financiers. But I think that for right now, we're just kind of watching what sort of paydown levels occur because of competition.

And then on the consumer side of the equation, I mean, we're actually seeing -- we do expect that credit card balances from here start to grow and possibly accelerate as we get into 2022. When you think about customers that are kind of revolving type of customers, I believe that with government stimulus starting to dissipate, that they are going to be looking to credit products in terms of being able to support their consumer spend. And we've continued to see relatively strong growth in auto lending, and I would anticipate that will continue depending upon supply chain impacts associated with chips and things like that. But overall, we're fairly bullish on consumer lending.

That's helpful color. And just on a separate note, in terms of when you look at the stickiness of the deposit growth that we've seen over the last 18 months, if you could just talk to your outlook in terms of whether you expect deposit balances to continue to grow. And do you, at any point as you look forward in the next year or 2, expect deposit growth to actually turn negative in any meaningful way?

Yes. Our deposit growth has been reasonably strong. But particularly -- if you kind of peel back the onion, it's been particularly strong in the Consumer and Business Banking areas with year-over-year growth of about 16%, linked-quarter growth of about 1% in the third quarter. So I would fully expect that a lot of that will stick depending upon, obviously, the excess savings rate that we talked about. We're also seeing growth in the wealth management businesses, and we would expect that a fair amount of that would stick as well.

So as we kind of think about deposits, we think we have been growing what I would call kind of the core balances quite a bit. As liquidity does come out of the system though, I would expect that we would see some runoff or -- where investors start to utilize those deposits to invest in like CDO, CLO sort of structure. So within our Wealth Management Investment Services business, we would expect to see some runoff.

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

I was hoping, Terry, you might be able to address the durability of mortgage revenues at the current level. I thought it was a pretty solid quarter, a little better than I had anticipated. I'm just hoping you can address some of the puts and takes on your kind of margin origination levels and just overall durability of this quarter's level.

Yes. Great question. Obviously, in the third quarter, we saw a little bit of an uptick with respect to applications because of refinancing activities when interest rates came down. I would say, Scott, that over the course of the last several years, we've been making a significant amount of investment in a couple of different things. One is a strong focus on purchase money area, and a fairly significant amount of our volume is on the purchase money side. So home sales, to the extent that continues to grow, should allow us to hold up really well.

And the second thing is that we've invested a lot in the retail channel and our digital capabilities, and we're taking nice market share in the mortgage banking space. So while mortgage banking revenue will trend in the same sort of way as kind of the industry, I think that we do have the opportunity to be able to outperform the industry. Andy, what would you add?

All right. Perfect. And then I was hoping for maybe a little more color on expenses, particularly that comment you made earlier about the $60 million seasonal increase in amortization of tax-advantaged investments in the fourth quarter. Does that just -- does that go up and then come all the way back down? Or is there sort of a headwind that emerges in 2022?

And then presumably, it's kind of awash from an earnings standpoint given a corresponding tax impact. How should we be thinking about as we go to the fourth quarter and then ['22]?

Yes. Great question. So what ends up happening in that particular space is about 60% of the overall production for the year happens in the fourth quarter. And so if you look kind of historically, we always see a blip in the fourth quarter and then it comes back down in the first quarter. And then it kind of slowly builds, and we see another blip in the fourth quarter of the following year. So it's a seasonal thing in the fourth quarter.

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

Terry, can you just make sure we understand the offset to that $60 million in expenses, where we see that in the income statement?

Yes. Where that ends up flowing through is in the tax rate. And usually, what ends up happening is kind of on a lag basis. So you'll start to see the tax rate improving in 2022 as a result of the investments we're making today.

Right. Okay. And in the fourth quarter, do you see the offset to the $60 million in the tax rate as well?

Very limited in the tax rate in the fourth quarter. That's why we guide -- yes, it's really more forward-looking.

Okay. Got it. Secondly, you mentioned in the press release that fee waivers were down a little bit. Can you give us an update on what they were in the quarter and also what you need from rates to get rid of the fee waivers?

So they were about -- just about $70 million in the third quarter, down just a couple of million dollars versus the second quarter, principally due to the repo rate. We get about 50% of it back with the first 25 basis points and about 95% of it back with the second 25 basis points.

Okay. Great. And then just last one. In terms of the payments businesses again, like -- so on merchant, when we see growth in -- can you just compare and contrast? When we see growth in the volumes -- I know it's mix dependent, but just with your mix of business, how -- what's the correlation between increases and improvements in merchant vis-à-vis the improvements that we see in the sales volumes?

Typically, what's happening right now is a mix change. What's coming back are some of the areas that have a little thinner margin, which is what's causing the differential, sales being up about 5% and fees being down about 5%. And so that's partly -- and this is -- I'm using these numbers versus 2020 -- 2019.

And if you look at it versus 2020, sales were up about 30% and fees are up about 13%. So there'll be a bit of a gap there partly because of the mix of what's coming back. And as we look forward, I would expect a bit of a differential, revenue growth being slightly below sales growth on a go-forward basis.

Okay. Sorry, can I ask one more? I forgot to ask about the expense you had on the airline and travel. Was that a onetime update? And was that meaningful? Can you tell us how much that was?

The expense on airline and travel, I think -- are you talking about the investments that we're making on our credit card business or -- because we're doing...

What exactly goes through the -- yes. Then that goes through expenses?

It goes principally...

Are you talking about the merchant airline reserve?

Exactly.

Yes. I mean that has been relatively stable over the last couple of quarters because, fundamentally, you've got...

People are flying.

People are starting to fly.

Right. So that has been not material.

Your next question comes from Matt O'Connor with Deutsche Bank.

Can you guys give us an update on your rate sensitivity, the flexibility to add securitization swaps and how the UB deal might impact that?

Yes. So maybe just the last question first. Union Bank is a little bit more asset-sensitive than we are, and we would expect that they would probably add to our asset sensitivity kind of in that 30 to 40 basis points kind of range. Where we're at today, if you end up looking at first, second quarter, we're at about 280 -- 2.8% asset sensitive to a 50 basis point shock.

We've been expanding that, Matt, in a couple of different ways. We've been holding more cash, looking for a better kind of investment sort of entry point. And so that asset sensitivity has been coming up. And in addition to that, we have been just looking at different hedge strategies that have been expanding our asset sensitivity as well.

So today, it's probably about 350 -- 3.5% kind of asset sensitivity, and that's kind of the position that we're at right now. We do have the opportunity as -- and we have the expectation that rates are going to start moving up at least on the long end. And so we're trying to be patient and be in a position to be opportunistic when rates are in the right spot.

Okay. That's helpful. And then just separately, a clarification question on payments. When you talk about the seasonality in 4Q, maybe remind us what that is. And I guess I was thinking it's on the corporate payments side, which may not be as seasonal this year as normal, but just elaborate on that. And I'm kind of digging in just because, last quarter, you said you thought payments would be flat and it ends up being a little bit better than expected, and it seems like it might be a conservative guide again for 4Q.

Yes. Usually, merchant is flat to down a little bit. But -- so it's seasonally affected in the fourth quarter. Card actually performs a little bit better in the fourth quarter because of holiday sales. But CPS is the business that ends up coming down because you have a significant amount of government spend in the third quarter.

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

We got a new slide, Slide 6, talking about combining banking with payments. But if you could just elaborate a little bit more. I think I heard you say -- what are we looking at? Are we looking at 28% of banking customers -- what are we looking at? A lot of banking customers don't use payments is the bottom line, and you want to get them to use it. And half of your payments customers don't use banking services. You want them to use that, too.

And I think you said you seek to grow the small business relationships by 15% to 20% and the related revenues by 25% to 30%. Over what time frame is that? And how are you going to do that? And when are you rolling out some of the new products that are going to help enable that?

Thanks, Mike. First, you got the numbers correct. Second, this starts at 1.1 million customers. We have about another 190,000 that would be added with Union Bank. The time frame is the next few years. We'll continue to add to this slide to give you more specifics, including the progress on these numbers as well as the thinking about revenue.

The way we're going to do this is by a combined dashboard and product offering that has both payments and banking on that dashboard to help those businesses run their company, payables, receivables, travel, payroll as well as banking products and services. We have been rolling out that dashboard, making enhancement to it as we speak, and we'll continue to do it each and every month, each and every quarter. And that's the way we think about it.

Okay. So what is -- I guess how do you think about the profit margins on these relationships? I mean it seems like you'll provide more one-stop shopping. It should be better service for the customer, and you should be making more on that, so not just the revenues. I mean what would you expect the earnings to increase by? I assume more than the 25% to 30%.

Yes. They will -- I was quoting a revenue number. I would expect the earnings to be higher than that because the marginal cost of many of these products and services is not as high because they go on the platforms we already have established.

Okay. And then lastly, since we're on the topic of tech, it has been 6 years since U.S. Bancorp has shown positive operating leverage. You have 2 quarters in a row. It looks like maybe -- on a linked-quarter basis, you showed it. Maybe you won't show that in the fourth quarter. You didn't talk about linked-quarter operating leverage.

But can you commit to 2022 having positive operating leverage? I guess there'll be some noise with Union. But are you on that trajectory now? And if so, why?

Yes, Mike. There will be some noise with Union, as you mentioned. It's always our goal. We've made a lot of investments in the company, and those investments are going to do 2 things. They're going to drive revenue growth, and they're going to also create more efficiencies in terms of our operations. And the tech stack modernization in particular creates a less expensive operating environment.

So I think those are all positives. As we look into '22, that's always our objective. 2022 will depend a bit upon the yield curve and what happens with rates, but that's our objective.

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

A couple of questions. Can you -- investment securities, they shrank. Any color on the outlook?

Yes. I mean our expectation, again, is that -- when we think about longer-term rates, we do expect them to be moving up given the inflationary pressures and other things that are kind of -- just in terms of economic growth. So we have been holding off with respect to reinvestment of maturities and things like that and building cash balances kind of to improve our asset sensitivity. And we'll look for opportunities to reinvest that in the future as rates start to move.

Okay. Another one, different topic. Did I hear you say that you expect revenue growth in payments fees to be better than sales trends? And if so, can you elaborate?

No, Vivek, the other way around. So the sales number will be a bit higher than the revenue growth partly because of mix, partly because of the investments we're making. So for example, in card, as we have the sales growth occurring, some of the investments in new business generation comes through and impacts the revenue growth.

And your next question comes from the line of Bill Carcache with Wolfe Research.

I wanted to follow up on the relatively softer commercial loan growth that you guys are seeing. Are you hearing anything from your commercial customers that suggest that the depressed line utilization rates are really just an extension of the supply chain problems that they're having? And if so, does that suggest that line utilization is unlikely to improve until the supply chain problems are resolved? Any color you can give on that would be great.

Yes. I mean obviously, the supply chain is impacting customers in terms of their ability to be able to offer products and services, et cetera. But it hasn't necessarily come up in topic -- in conversation with them. Certainly, I do think that as supply chain challenges start to resolve themselves, that will create opportunity for us in terms of line utilization and bank financing. But it's not something that has been discussed a lot with clients, let's put it that way, or that they brought up.

Understood. That's helpful. Separately, on the merchant acquiring business, the Elavon business certainly puts you guys in a unique position to be able to turn on buy now, pay later solutions for your merchant partners in a way that other banks can't. Can you discuss whether you're considering offering buy now, pay later solutions to your merchant customers?

And separately, I guess, a broader question. How do you guys think about BNPL? Does it pose disintermediation risk to your card business? Or is that BNPL customer really more likely someone who typically would not even qualify for a credit card and so BNPL is essentially just something that they are using that allows them to turn their debit card into a credit card and also helps merchants drive incremental sales? Any thoughts around how you guys are thinking about it and the opportunity, if you see one?

Yes, Bill. So I think it's a little of both of the topics you brought -- both of the ways you described it. So first of all, we have a number of test cases going on. We already offer buy now, pay later on our credit card offering. Sometimes, a customer wants to have a large purchase specific from a payment plan, and that could be a current credit card customer choosing to have a very planned set of payments going forward.

At other times, BN -- buy now, pay later can allow for a customer who would otherwise not have a credit card to acquire or purchase something using the buy now, pay later capability. And in that sense, you do partner with the merchants to increase the sales base of that merchant portfolio. So we're working on all those fronts.

Got it. And my other questions have been largely addressed, but if I could squeeze in one last one on a separate topic. You guys recently announced that you'll be providing cryptocurrency custody services for your institutional clients. Could you frame the revenue opportunity there?

And some large bank CEOs have indicated that they can't provide cryptocurrency custody services. But it would be great, Andy, if you could discuss what's different in the way that USB is thinking about providing custody and what gives you guys comfort doing that at a time when there's still some controversy and I guess, unwillingness among some large players around providing those services.

Yes. So let me step back. Our institutional investors are looking to participate in the digital currency market as an investment class. We have a large fund services business that provides fund services, transfer agency and fund administration to those clients. An asset class that they choose to have is one that we need to be able to provide a service for, and we'll now offer cryptocurrency custody for those fund managers. And that's the way we're thinking about it.

So it is really providing a service that we do for their other asset classes for cryptocurrency. And we've selected NYDIG to help us with that from a sub-custodian standpoint. And actually, a number of other banks do that as well, sometimes for their own customer base.

Okay. Got it. And the revenue opportunity, any high-level color on that?

We haven't defined the revenue opportunity. It's early innings of this capability certainly. And so it is really providing a full set of services to those customers.

We have a follow-up question from the line of Ken Usdin with Jefferies.

Terry, sorry, for the follow-up. But you gave us the $60 million to $70 million expected decline in PPP in the fourth quarter. I was just wondering. That's the first time you've given us a number. Do you have the base of what it was, total PPP net interest income in 3Q?

Yes. It was about $120 million.

And at this time, there are no further questions. I'll turn the call back to the speakers for any closing remarks.

Maybe one comment. Jen asked me to clarify something. In the transcript or when I was -- earlier, I mentioned that the share buyback program would be deferred until second quarter. Actually, it will be the second half of 2022, after -- about a quarter after we finish the closing.

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

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