U.S. Bancorp (NYSE: USB) Q3 2021 earnings call dated Oct. 14, 2021
Corporate Participants:
Jennifer A. Thompson — Executive Vice President, Investor Relations
Andrew Cecere — Chairman, President and Chief Executive Officer
Terrance R. Dolan — Vice Chair and Chief Financial Officer
Analysts:
Gerard Cassidy — RBC Capital Markets — Analyst
Betsy Graseck — Morgan Stanley — Analyst
John Pancari — Evercore ISI — Analyst
Ebrahim Poonawala — Bank of America — Analyst
R. Scott Siefers — Piper Sandler — Analyst
Ken Usdin — Jefferies — Analyst
Matt O’Connor — Deutsche Bank — Analyst
Mike Mayo — Wells Fargo Securities — Analyst
Vivek Juneja — J.P. Morgan — Analyst
Bill Carcache — Wolfe Research — Analyst
Presentation:
Operator
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 10:00 AM Central Time through Thursday, October 21, 2021, at 10:59 PM Central Time.
I will now turn the conference call over to Jen Thompson, Director of Investor Relations and Economic Analysis for U.S. Bancorp.
Jennifer A. Thompson — Executive Vice President, Investor Relations
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.
Andrew Cecere — Chairman, President and Chief Executive Officer
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 an 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 one-third 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.
Terrance R. Dolan — Vice Chair and Chief Financial Officer
Thanks, Andy. If you turn to Slide 7, I’ll start with the 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 continued to benefit from favorable mix shift as average non-interest bearing deposits increased while higher cost time deposits declined.
Slide 9 shows credit quality trends. Non-performing 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 change in 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 non-interest income. Compared with a year ago, non-interest income declined 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, non-interest 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, non-interest 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 in 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.
Andrew Cecere — Chairman, President and Chief Executive Officer
Thanks, Terry. To summarize our third quarter results, we’re 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 three 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’re 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 in 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 have done throughout the year.
We’ll now open up the call to Q&A.
Questions and Answers:
Operator
[Operator Instructions] Your first question comes from the line of Gerard Cassidy from RBC.
Gerard Cassidy — RBC Capital Markets — Analyst
Good morning, Andy, and good morning, Terry.
Andrew Cecere — Chairman, President and Chief Executive Officer
Good morning, Gerard.
Terrance R. Dolan — Vice Chair and Chief Financial Officer
Hey, Gerard.
Gerard Cassidy — RBC Capital Markets — Analyst
Andy, Slide 6, it was very interesting and 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 percentage — can you get it to the 50% that you have on the other circle with the payments area? Can you get it to 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?
Andrew Cecere — Chairman, President and Chief Executive Officer
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 50-50 as well.
Gerard Cassidy — RBC Capital Markets — Analyst
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 on net charge-offs. What do you anticipate? When will things kind of normalize? And I hate that word because there is no such thing as normal credit charge-offs. But it seems like how sustainable are these record load levels do you think as we look out over the next 12 months to 24 months?
Terrance R. Dolan — Vice Chair and Chief Financial Officer
Yeah. It’s great question and your point about is really being difficult to predict is right on. When we end up looking at and kind of looking at forecast, etc., 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, probably doesn’t get back there until what we would kind of define as normal, which is kind of 45 basis points to 50 basis points overall, until at least the end of 2022 and probably sometime in 2023. But it is very hard to predict.
Gerard Cassidy — RBC Capital Markets — Analyst
Yeah. No, I agree. Thank you, gentlemen.
Terrance R. Dolan — Vice Chair and Chief Financial Officer
Thank you.
Operator
Your next question comes from the line of Betsy Graseck with Morgan Stanley.
Andrew Cecere — Chairman, President and Chief Executive Officer
Good morning, Betsy.
Betsy Graseck — Morgan Stanley — Analyst
Hi. Good morning. Hey, 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 ask because I saw a nice uptick in the consumer side, but commercial seem to be a little bit weaker. I’m wondering if — what you’re seeing there? Thanks.
Terrance R. Dolan — Vice Chair and Chief Financial Officer
Yeah. 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 activity so that will help to drive it. And then, as consumer spend — or excuse me, as government stimulus kind of starts to dissipate, which has 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 are 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.
Betsy Graseck — Morgan Stanley — Analyst
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?
Terrance R. Dolan — Vice Chair and Chief Financial Officer
Yeah. 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.
Betsy Graseck — Morgan Stanley — Analyst
And in the fourth quarter — the PPP contribution to NII in the fourth quarter, what do you — how would you size that?
Andrew Cecere — Chairman, President and Chief Executive Officer
I think it’s modest, Betsy. It’s — the peak quarter certainly was the third quarter and becomes very modest in the fourth quarter.
Betsy Graseck — Morgan Stanley — Analyst
Okay. All right. And then just lastly, as you think about the forward-look here on integrating MUFG USA Union Bank HOA into your operation, how should we be thinking about the trajectory of the efficiencies here because when you announced that deal when you had that conference call, we obviously heard a lot about the cost saves that you’re anticipating getting from the MUFG USA side? But I’m wondering is there a tech angle as well on your legacy platform that will also be enhanced, and if this 1 plus 1 equals 2.5, for example?
Andrew Cecere — Chairman, President and Chief Executive Officer
So, I think just to remind you of the timeframes, we did actually submit our application for the transaction on October 6, so that is in. Our expectation is, 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 in my view, have more opportunities, a better customer experience, and more products and services. So there is also a revenue component as well. So in that mind — in that view, yes, it is more than just one plus one.
Betsy Graseck — Morgan Stanley — Analyst
Thanks.
Andrew Cecere — Chairman, President and Chief Executive Officer
Sure.
Operator
Your next question comes from the line of John Pancari with Evercore ISI.
Andrew Cecere — Chairman, President and Chief Executive Officer
Good morning, John.
Terrance R. Dolan — Vice Chair and Chief Financial Officer
Good morning, John.
John Pancari — Evercore ISI — Analyst
Good morning. 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. 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? Thanks.
Terrance R. Dolan — Vice Chair and Chief Financial Officer
Yeah. 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 above where it was in 2019. So those have made really nice recoveries. I would also kind of keep in mind is that, when you end up looking at merchant as an example, airline, travel, entertainment are 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 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 is 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.
Andrew Cecere — Chairman, President and Chief Executive Officer
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%.
John Pancari — Evercore ISI — Analyst
Okay. Great. Thank you. 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 is ongoing marketing a business investment that we should consider as we dial in expense expectations for 2022?
Terrance R. Dolan — Vice Chair and Chief Financial Officer
Yeah. I think as we kind of think about 2022, the level of investment probably doesn’t go up significantly from here.
John Pancari — Evercore ISI — Analyst
Okay. Got it. All right. Thank you.
Andrew Cecere — Chairman, President and Chief Executive Officer
Thank you.
Operator
Your next question comes from the line of Ebrahim Poonawala with Bank of America.
Terrance R. Dolan — Vice Chair and Chief Financial Officer
Good morning.
Andrew Cecere — Chairman, President and Chief Executive Officer
Good morning, Ebrahim.
Ebrahim Poonawala — Bank of America — Analyst
Good morning. Just wanted to one follow-up with you on your comments on loan growth. Specifically, if you can address two things. One, is the outlook for CRE lending as you think about next year given potential disruption from the just change in work from home, etc., how you’re approaching CRE lending? And on the consumer side, do you expect — do we need to see a big drawdown in the US 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?
Terrance R. Dolan — Vice Chair and Chief Financial Officer
Yeah. 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 a 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 may be 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’s sort of paydown levels occur because of competition.
And then on the consumer side of the equation, I mean, we’re actually seeing and 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.
Ebrahim Poonawala — Bank of America — Analyst
Helpful color. Thank you. 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 do you expect deposit balances to continue to grow? And do you, at any point, as you look forward in the next year or two expect deposit growth to actually turn negative in any meaningful way?
Terrance R. Dolan — Vice Chair and Chief Financial Officer
Yeah. 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 and 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 run-off 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 run-off.
Ebrahim Poonawala — Bank of America — Analyst
Got it. Thanks for taking my questions.
Andrew Cecere — Chairman, President and Chief Executive Officer
Thank you.
Operator
Your next question comes from the line of Scott Siefers with Piper Sandler.
R. Scott Siefers — Piper Sandler — Analyst
Good morning, guys.
Andrew Cecere — Chairman, President and Chief Executive Officer
Hey, Scott.
Terrance R. Dolan — Vice Chair and Chief Financial Officer
Hey, Scott.
R. Scott Siefers — Piper Sandler — Analyst
Thanks for taking the question. Hey. 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. Just hoping you can address some of the puts and takes in terms of margin origination levels and just overall durability of this quarter’s level?
Terrance R. Dolan — Vice Chair and Chief Financial Officer
Yeah. And 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 for home sales, to the extent that continues to grow, should allow us to hold up really well.
And the second thing is that, we have 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 beat or outperform the industry.
Andy, what would you add?
Andrew Cecere — Chairman, President and Chief Executive Officer
I agree.
R. Scott Siefers — Piper Sandler — Analyst
All right. Perfect. Thank you. 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 that you made [Phonetic] in the fourth quarter. Does that just — does that go up and then come all the way back down or is there a sort of a headwind that emerges in 2022? And then presumably it’s kind of a wash from an earnings standpoint given a corresponding tax impact? How should we be thinking about as we go into the fourth quarter and then…
Terrance R. Dolan — Vice Chair and Chief Financial Officer
Yeah. 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 then we see another blip in the fourth quarter of the following year. So, it’s usually — it’s a seasonal thing in the fourth quarter.
R. Scott Siefers — Piper Sandler — Analyst
Yeah. Okay. Good. Thank you very much.
Operator
Your next question comes from the line of Ken Usdin with Jefferies.
Ken Usdin — Jefferies — Analyst
Hey. Thanks a lot. Hey. Good morning, guys. Terry, can you just make sure we understand the offset to that $60 million in expenses, where we see that in the income statement?
Terrance R. Dolan — Vice Chair and Chief Financial Officer
Yeah. Where that ends up flowing through is in the tax rate. And usually what that 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.
Ken Usdin — Jefferies — Analyst
Right. Okay. And in the fourth quarter do you see that — the offset to the $60 million in the tax rate as well?
Terrance R. Dolan — Vice Chair and Chief Financial Officer
Very limited in the tax rate in the fourth. That’s why we guide — yeah, it’s really more forward-looking.
Ken Usdin — Jefferies — Analyst
Okay. Got it. Thank you. Secondly, you mentioned in the press release that fee waivers were down a little bit. Can you give us that update on what they were in the quarter and also what you need from rates to get rid of the fee waivers?
Terrance R. Dolan — Vice Chair and Chief Financial Officer
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.
Ken Usdin — Jefferies — Analyst
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-a-vis the improvements that we see in the sales volumes? Thanks, guys.
Andrew Cecere — Chairman, President and Chief Executive Officer
Typically, what was happening right now is a mix change. So, what’s coming back are some of the areas, they have a little thinner margin which is what’s causing a differential on 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.
Ken Usdin — Jefferies — Analyst
Okay. Thanks. Sorry, can I ask one more? I forgot to ask about the expense you had on the airline and travel. Was that a one-time update? And was that meaningful? Can you tell us how much that was?
Andrew Cecere — Chairman, President and Chief Executive Officer
The expense on airline and travel?
Ken Usdin — Jefferies — Analyst
Yeah.
Andrew Cecere — Chairman, President and Chief Executive Officer
I think — are you talking about the investment that we’re making on our credit card business or — because we do really…
Ken Usdin — Jefferies — Analyst
[Speech Overlap] go through these — yeah. And that goes through expenses.
Andrew Cecere — Chairman, President and Chief Executive Officer
No. It goes principally…
Terrance R. Dolan — Vice Chair and Chief Financial Officer
Are you talking about the merchant airline reserve?
Ken Usdin — Jefferies — Analyst
Exactly.
Terrance R. Dolan — Vice Chair and Chief Financial Officer
Yeah. I mean, that has been relatively stable over the last couple of quarters because fundamentally you’ve got…
Andrew Cecere — Chairman, President and Chief Executive Officer
People are flying.
Terrance R. Dolan — Vice Chair and Chief Financial Officer
People are starting to fly.
Andrew Cecere — Chairman, President and Chief Executive Officer
Right. So that has been not material.
Ken Usdin — Jefferies — Analyst
Thank you.
Terrance R. Dolan — Vice Chair and Chief Financial Officer
Sure.
Operator
Your next question comes from Matt O’Connor with Deutsche Bank.
Andrew Cecere — Chairman, President and Chief Executive Officer
Hey, Matt.
Terrance R. Dolan — Vice Chair and Chief Financial Officer
Hey, Matt.
Matt O’Connor — Deutsche Bank — Analyst
Good morning. Can you guys give us an update on your rate sensitivity, the flexibility to add securities or swaps? And how the UB deal might impact that?
Terrance R. Dolan — Vice Chair and Chief Financial Officer
Yeah. So, maybe just the last question first. The 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 basis points to 40 basis points kind of range. Where we’re at today? If you end up looking at first — second quarter, we are 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. 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% 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.
Matt O’Connor — Deutsche Bank — Analyst
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 payment side, which may not be as seasonal this year if it’s 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 ends up being a bit better-than-expected and it seems like it might be a conservative guide again for 4Q. Thank you.
Terrance R. Dolan — Vice Chair and Chief Financial Officer
Yeah. Usually, merchant is flat to down a little bit. But — and I suppose 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.
Matt O’Connor — Deutsche Bank — Analyst
Okay. Thank you.
Terrance R. Dolan — Vice Chair and Chief Financial Officer
Thanks, Matt.
Operator
Your next question comes from the line of Mike Mayo with Wells Fargo Securities.
Mike Mayo — Wells Fargo Securities — Analyst
Hi.
Andrew Cecere — Chairman, President and Chief Executive Officer
Hey, Mike.
Terrance R. Dolan — Vice Chair and Chief Financial Officer
Hey, Mike.
Mike Mayo — Wells Fargo Securities — Analyst
We’ve got our new slide, the Slide 6, talking about combining banking with payments. But if you could just elaborate a little bit more? I think I heard you say — so what are we looking at? We are looking at 28% of banking customers. What are we looking at? A lot of banking customers don’t use payments, it’s 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. 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 timeframe 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?
Andrew Cecere — Chairman, President and Chief Executive Officer
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 timeframe is in next few years, we’ll continue to add. The slide will 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 enhancements 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.
Mike Mayo — Wells Fargo Securities — Analyst
Okay. So, what is — I guess, how do you think about the profit margins on these relationships? I mean, it seems like we provide more one-stop shopping. It should be better service to your 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%?
Andrew Cecere — Chairman, President and Chief Executive Officer
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.
Mike Mayo — Wells Fargo Securities — Analyst
Okay. And then lastly, since we’re on the topic of tech, it has been six years since U.S. Bancorp shown — has shown positive operating leverage. You have two quarters in a row, it looks like maybe on a linked quarter basis you showed, 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 will be some noise with Union, but are you on that trajectory now? And if so, why?
Andrew Cecere — Chairman, President and Chief Executive Officer
Yeah, Mike. There will be some noise with Union, and 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 two things. They are 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 2022, that’s always our objective. 2022 will dependent a bit upon the yield curve and what happens with rates, but that’s our objective.
Mike Mayo — Wells Fargo Securities — Analyst
All right. Thank you.
Andrew Cecere — Chairman, President and Chief Executive Officer
Yeah, Mike.
Operator
Your next question comes from the line of Vivek Juneja with J.P. Morgan.
Andrew Cecere — Chairman, President and Chief Executive Officer
Good morning, Vivek.
Terrance R. Dolan — Vice Chair and Chief Financial Officer
Hey, Vivek.
Vivek Juneja — J.P. Morgan — Analyst
Morning. Morning, Andy. Morning, Terry. A couple of questions. Can you — investment securities, they shrank, any color on the outlook?
Terrance R. Dolan — Vice Chair and Chief Financial Officer
Yeah. 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.
Vivek Juneja — J.P. Morgan — Analyst
Okay. Thanks. Another one, a 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?
Andrew Cecere — Chairman, President and Chief Executive Officer
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.
Vivek Juneja — J.P. Morgan — Analyst
Okay. Okay. Great. Thank you.
Andrew Cecere — Chairman, President and Chief Executive Officer
Sure.
Vivek Juneja — J.P. Morgan — Analyst
Okay.
Operator
Your next question comes from the line of Bill Carcache with Wolfe Research.
Andrew Cecere — Chairman, President and Chief Executive Officer
Good morning, Bill.
Bill Carcache — Wolfe Research — Analyst
Good morning. 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.
Terrance R. Dolan — Vice Chair and Chief Financial Officer
Yeah. I mean, obviously, the supply chain is impacting customers in terms of their ability to be able to offer products and services, etc. But it hasn’t necessarily come up in topic conversation with them. Certainly, I do think that as supply chain challenges start to resolve themselves, that 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.
Bill Carcache — Wolfe Research — Analyst
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, and 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’re using that allows them to turn their debit card into a credit card and it also helps merchants drive incremental sales. Any thoughts around how you guys are thinking about it and the opportunity if you see one?
Andrew Cecere — Chairman, President and Chief Executive Officer
Yeah, Bill. So, I think it’s a little of both of the topics you brought — 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 in 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, BL — Buy Now Pay Later can allow for a customer who would otherwise not have a credit card to have — 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.
Bill Carcache — Wolfe Research — Analyst
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 in doing that at a time when there’s still some controversy and, I guess, unwillingness among some large players around providing those services?
Andrew Cecere — Chairman, President and Chief Executive Officer
Yeah. 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. If 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.
Bill Carcache — Wolfe Research — Analyst
Got it. And the revenue opportunity, any high-level color on that?
Andrew Cecere — Chairman, President and Chief Executive Officer
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.
Bill Carcache — Wolfe Research — Analyst
Got it. Thank you so much for taking my questions.
Andrew Cecere — Chairman, President and Chief Executive Officer
Sure.
Operator
We have a follow-up question from the line of Ken Usdin with Jefferies.
Ken Usdin — Jefferies — Analyst
Hey, 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?
Terrance R. Dolan — Vice Chair and Chief Financial Officer
Yeah. It was about $120 million.
Ken Usdin — Jefferies — Analyst
Okay. Got it. Thank you very much.
Operator
And at this time, there are no further questions. I’ll turn the call back to the speakers for any closing remarks.
Andrew Cecere — Chairman, President and Chief Executive Officer
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.
Jennifer A. Thompson — Executive Vice President, Investor Relations
Great. Thank you, everyone, for listening to our earnings call. And please contact the Investor Relations department if you have any follow-up questions.
Operator
[Operator Closing Remarks]