U.S. Bancorp (NYSE:USB) Goldman Sachs U.S. Financial Services Conference December 7, 2022 10:40 AM ET
Company Participants
Andy Cecere – Chairman, President and Chief Executive Officer
Terry Dolan – Chief Financial Officer
Conference Call Participants
Richard Ramsden – Goldman Sachs & Co.
Richard Ramsden
Okay, if everybody could take their seats, we’re going to get started. Okay. So I’m delighted to introduce our next speakers, who is Chairman and CEO of USB, Andy Cecere. Andy is in his [indiscernible] the company 63 earnings call. Thank you very, very much for joining us. He’s joined by Terry Dolan, CFO, who I think is well-known to everyone. They’re being very regular attendees of the conference for a long period of time. Thank you for joining us. I know it’s a very exciting time for the community with the Union Bank deal, right. So we look forward to hearing you about that.
I think you’re going to give a brief introduction for the new joining first.
Andy Cecere
Thank you, Richard. Good morning, everyone. Thanks for being here. Richard, I’m going to do a little bit of the presentation of the company overall. Terry is going to update on Union Bank, and then we’d be happy to take any questions. And we will be referring to some forward-looking statements today, so I urge you to look at Page 2. And this is not moving. I’m not able to move the slide.
Richard Ramsden
Do we have the slides? One minute.
Andy Cecere
Okay. I got the wait one minute sign.
Richard Ramsden
One way to cut down on questions, I guess. How long would it take?
Andy Cecere
Okay. So apparently, the presentation issue with the presentation. So why don’t I go from memory, and we’ll go through the slides that are there. For those of you who had it, we actually issued them last night via the [indiscernible]. I’m just going to give an overview of the company. As a reminder for those of you – I am fine. Thank you. For those of you who aren’t familiar, we are about just over $600 billion in asset company. That is before Union Bank, so that was in the third quarter. $470 million in deposits, just over [indiscernible]. We represent, from a brand standpoint, 2,200 branches and we serve the country through 26 states. So that’s where our presence is, and you’ll see our branches and ATMs. However, we’re a national business and credit card issuing mortgage lending, commercial and corporate banking, wealth management and institutional services, and then we have an international component where we have three business lines on merchant processing, global fund services and corporate trust.
What is a little bit unique about our company is the fact that we have a very large share of our revenue stream coming from payments of 28%, which is critically important in this environment, and that’s the Elavon merchant process, card-issuing corporate payments. We also have a large component coming from a couple of unique businesses, Corporate Trust and Fund Services, which is important because of the diversification it offers. So about half of our revenue derives from the balance sheet, about half of these, and they have different cycles and react differently to different economic impacts, which is helpful from a diversification standpoint. To keep it simple, the company is focused on three priorities. Number one, digital capabilities. We believe, I believe that in this environment, it’s critically important to have great digital capabilities, combined with great human capabilities and merging those two into an ability to serve customers, and that’s true of individuals, consumers, small businesses and large corporate.
Secondly, we’ve been very focused on the initiatives around our business payments ecosystem. We’re in an environment that historically payments and banking has been two separate things for a number of businesses, and those things are merging together. And the fact that we have 28% of our revenue stream deriving for payments, allows us an advantage from MI perspective to really reap together our banking products and our payments products into a comprehensive offering to help businesses run their businesses.
And thirdly, we’ve been very focused on optimizing our brand system, while, at the same time, expanding our execution on distribution through partnerships like State Pharma. We have 18,000 agents who can sell our products and services throughout the country. So those are our focus areas. Probably the most significant item that happened in the last 1.5 years is the announcement of our Union Bank transaction, which we announced September 21, 2021, and then we just closed on December 1, last week. And I’m going to ask Terry to update on that a little bit. Terry? Here’s the useless.
Terry Dolan
I think everybody has the slide deck, so I may refer to a couple of pages as we go through. So I’m going to start on Slide 8 of your deck, and just talk a little bit about Union Bank. From a couple of different perspectives, strategically, it’s very nice from the perspective that it adds about 20% scale to our business. So part of our strategy is really, from a system conversion standpoint, a lift and shift. And so we’re going to be able to fundamentally put 20% growth onto the platform that we have, and that’s going to give us the opportunity to be able to generate cost savings as we go forward. And of course, California is a very attractive market. If you think about the demographics of health number one in terms of population, it is very large with respect to the concentration of small businesses that exist and it’s an affluent market and that will be particularly helpful. But one thing that’s very important is that the deposit share for us – you’ll go from about tenth of the market, about fifth in the market, and that provide some opportunities.
Go to Page 9, or Slide 9, let me talk a little bit about some of those revenue opportunities that we see in the future. And it’s principally by bringing our broader capabilities to that customer set, so we’ll add about 1 million customers on the consumer side of the equation. There’s about 190,000 small businesses that will become our customers in the future and about 700 C&I or commercial type of customers. And we really think across the entire product set, whether it’s our digital capabilities, our merchant acquiring capabilities, our treasury management, capital markets, we really do believe that there is opportunity from a revenue standpoint as we think about this particular transaction. As a reminder, we did not include any revenue synergies in the deal economics when we ended up announcing that and in terms of what I will go through in a minute. So in terms of the opportunity, I think it’s pretty significant from that standpoint.
If you go to the next slide, Slide 10, one of the things that makes us a financially attractive transaction, especially your point in time, a rising rate environment when deposits kind of golden goose, if you will, and very important to the value of the business. It will bring about $85 billion in deposits to combined company. And they’re high-quality deposits, about 60% of them are consumer-based deposits, which will be core, low-cost sort of deposits that will come along with the transaction. I talked a little bit about the revenue opportunities, from a cost synergistic standpoint, again, ships sort of approach that we have with respect to the system conversion will create some pretty significant synergies.
Let me go to Slide 11, which I’ll call the money slide, and that is really a financial update with respect to the transaction. I’m not going to go through everything related to the balance sheet. But from an EPS accretion standpoint, we – originally, we announced a deal that the accretion in the first year would be about 6% based on 75% cost synergies in that first year and about 8% with cost synergies fully kind of baked in or integrated.
We’re updating that such that the – our expectation of EPS accretion we have about 8% to 9% in 2023. That 8% to 9% is based on our own internal estimates of our stand-alone performance, so U.S. Bank stand-alone and about 8% to 9% accretive. Now that also assumes that we have about 35% cost synergies simply because of the timing of [indiscernible], et cetera that will end taking place. Some of those cost synergies will be diverted. In addition to that, when we think about only implemented cost synergies, again, on 2023, our internal estimate of U.S. Bank’s stand-alone 2023 that increases to low double digits in terms of accretion. So the accretion is very nice as we think about this transaction going forward.
Cost synergies, we estimated originally about $900 million. We still expect about $900 million of cost synergies from the transaction. Merger expenses, we originally had estimated about $1.2 billion. You think it’s probably closer to $1.4 billion, and that’s principally driven by the delay from a regulatory perspective and costs like retention costs and employee-related type of costs that are going to be incurred as a result of some of those delays. And then the last thing I wanted just to talk a little bit about is CET1. When we originally put the deal together, we expect the CET1 to be about 9%. Today, we expect, in the fourth quarter, that it will be about 8.3%. And to kind of maybe put that into context, rates have been moving down most recently. But from the time of regulatory approval to today, rates have gone from anywhere from 3.83, which we kind of had that CET1 ratio of up to 4.30, now down to 3.50. So it’s been all over the board.
So one of the things we did right after regulatory approval is enter into some balance sheet hedges in order to be able to lock in that CET1 ratio. And so that’s why we feel very confident in terms of the hedge fund end up. Maybe one other thing that I would just – a couple of other things I would mention, apparently, there was some confusion with respect to our 8-K where we talk about excess capital. Well, that excess capital is really from the perspective of MUFG and not from the perspective of U.S. banks. In other words, the regulators did not allow them to upstream all the cash that they wanted to as part of the deal. And we made a commitment that we would kind of carry that cash for up to about five years.
So for us, it’s a cash liability to MUFG. It has nothing to do with capital and has nothing to do with our calculation of the 8.3%. And then finally, maybe what’s not on here is just tangible book value. The dilution associated with the transaction is going to be a bit higher than what we had originally modeled, and that’s principally because our book value or tangible book value as – has the denominators lower, simply because of the things that have been happening with respect to rising interest rates and then the impact of the mark-to-market. So a number of different moving parts. We’re still kind of putting the transaction together, but I think a lot of good things going on.
Let me take you to Page – Slide 12, and just give you a quick update with respect to U.S. Bank’s outlook for the fourth quarter and I guess, for the full year. Fundamentally, I would say that we are reiterating our guidance that we gave. So no changes to the guidance we gave you in terms of the core performance of U.S. Bank. The one thing that we would just update is to say that MUFG or the Union Bank component will add about $50 million of PPNR in terms of their core earnings.
And with that, Richard, let’s just jump into questions.
Richard Ramsden
All right. Well, thank you. Thank you very much. That was a very, very helpful update. Let me just kick off with a couple of just clarification questions on the updated guidance that you gave on the transaction closing. So look, the first question is, could you talk a little bit about the factors that have driven the increased EPS accretion from the 6% to the 8% to 9%? How much of that is purchase accounting accretion versus other factors?
Terry Dolan
Yes, great question. I should have addressed it. So, of the [indiscernible] accretion, about two-thirds of it’s really because of the current rate environment. So that’s really the rising rates and the benefit that you get on the balance sheet as a result of that. And about a third of it is related to the mark-to-market.
Richard Ramsden
Okay, great. The second thing, just in terms of clarifying, 35% cost synergies gets you to 8% to 9%, a 100%, you say low double digits, just back the envelope, I would have guessed it would been closer to mid teen. So maybe you can talk a little bit about the difference between those two as well.
Terry Dolan
Yes, so just keep in mind when we’re giving that guidance, we’re not giving 2024 guidance; we’re basically just saying there is a differential associated with the cost energies on the 2023 U.S. Bank base. And so I just want to make sure that that’s clear. The 8% to 9% assumes about 35% cost synergy [indiscernible] double digits [indiscernible] represent 100% cost synergies.
Richard Ramsden
I got it, okay. And then the third thing, just given the move in rates, I think, there was some expectation that the 8.3% CET1 floating could have been higher. Is that probably because of the hedges that you mentioned or there are other factors at play there?
Terry Dolan
No, it is really related to the fact that we wanted to eliminate any volatility from an interest rate perspective in terms of our capital ratio. And so we [indiscernible] as soon as the regulatory approval is [indiscernible].
Richard Ramsden
I got it, okay. That’s great. Thank you. So let’s start off then, I guess, with a broader discussion about the state of the economy. It’s a question we’re asking every single bank. So a few questions. The first is, look, what is your take on the state of the economy today? What are your base expectations for next year? What are you expecting in terms of interest rates and inflation? And maybe you can touch on some of the risk factors that you’re watching just outside of credit normalization?
Andy Cecere
Sure, Richard. And I think my commentary and what Terry will talk about will be pretty consistent with what you’ve heard thus far, which is, it’s a little bit of today versus tomorrow. So in the environment we’re in today, the consumer is still healthy, still spending money, still sits on cash balance as well above pre-COVID levels. But I believe at the same time, we’re a bit of an inflection point.
So consumer spend is still 10% above last year. Black Friday period of time was at 5% to 7% overall in terms of spend increases, retail; the consumer still sits on high cash balances. In fact, if you just step back, for almost 2.5 years, those balances all stratus were increasing until about six months ago. And about six months ago, [indiscernible]. And our projections to the rate of decline is occurring, they’re going to be back to what I would call normal levels mid-summer of 2023, midyear 2023.
And the last thing is that the credit quality still continues to be very solid. We are still – we’ve experienced, the last couple of quarters, 20-plus minus basis points in charge-offs, no migration of [indiscernible], all early as late-stage delinquency stats very good.
So things are good today. However, that cash balance and that cushion, so to speak, is point they start to dissipate, and I think that will create [indiscernible] behaviors in slowdown. So we’re projecting the slowdown. We expect that 50 basis points [indiscernible], another 15 to 25, so you get to about that 5%. And we’re projecting a slowdown, but I would want to tell you that Terry, and I and the team have been working on for [indiscernible] scenarios because it is an environment that while you have a base case for a wide range of potential outcomes, it could be a softening, it could be the moderate recession, it could be worse than that, I don’t know, to tell you the truth, [indiscernible] but we’re preparing for all those scenarios.
Richard Ramsden
Okay. And just in terms of spending patterns that you’ve observed, I don’t think that there has been a slowdown year-on-year. But obviously, your payment business gives you a pretty unique insight and gives you more granularity. So maybe you can talk about what you’ve seen over the holiday period, how it changed in the third quarter versus last year? Also talked about if there are anything that stood out that directly [indiscernible]?
Andy Cecere
Yes, a couple of things. So first of all, I think as we talked about, there has been a migration from goods to services. There has been a migration from discretionary to nondiscretionary. And over the holiday season, over the last week or so, we’ve seen an increase in – well, the total spend activity has been solid. Transactions are a little higher than dollars. And so what you’re seeing is perhaps a discounting, particularly in the retail end of the equation, occurring more recently.
Richard Ramsden
Anything on the corporate side that stood out?
Andy Cecere
Corporate continues to spend through T&E and travel continues to be very robust and very strong. That certainly should migrate back to the normal pre-COVID levels.
Richard Ramsden
So let’s talk about your strategic priorities. Obviously, deals just closed. It is going to be an important part of what you are focused on. But maybe you can talk about the two or three most important strategic priorities? What you want to achieve over the next 12 to 24 months? And how that changed, I guess?
Andy Cecere
Right. So the number one priority is [indiscernible] integration and conversion of Union Bank is projected for the Memorial Day weekend in 2023. We have hundreds of people on both sides, Union Bank and U.S. Bank working on that. I’m quite confident that we’re going to get that done appropriately and consistent with our expectations. As Terry mentioned, it is a lift and shift. So we’re going completely from their data to our systems, our framework, our platforms, and that’s true across technology operations and compliance. And I think that’s going to be positive. So that’s priority number one.
Priority number two is our continual digital evolution. I talked about the fact that we’ve made a lot of investments. We’ve gone from 40-60 offense to 60-40 offense, digital ad, co-browsing capabilities are making sure we can service and gain new customers through those digital capabilities. That’s priority two.
And priority three is our business payments ecosystem, our banking ecosystem. And it’s really the ability of weaving together our payments capabilities with banking to help businesses, be it small businesses [indiscernible], help run their business in the most effective and efficient way.
Terry Dolan
Okay. Specifically maybe related to, you because that – the first focus is around system integration. But in 2023, we’ll also be looking for those areas of opportunity from a revenue synergy standpoint because we really do believe there is some pretty significant opportunities.
Andy Cecere
That’s a great point, Terry. And I should have mentioned it. We didn’t include any revenue synergies, but Union Bank has a more limited product set than we do. They are more affluent customers; there is almost 200,000 small business customers. So I think the ability to provide more banking capabilities, paying capabilities to that customer. So that’s going to be quite extensive.
Richard Ramsden
Yes. So I was going to ask specifically to you about that because it does seem from some of the recent transactions, that revenue synergies are actually becoming more real as we do transactions. So, maybe we can ask you to put a number around it. If you look at the profitability of some of the customers at Union Bank and look at a similar customer at your franchise, how is it probably different?
Andy Cecere
So the customers at Union Bank against our average are more affluent overall, have higher balances and good core deposit balances. However, they have a more limited product set. So they don’t have as many card penetration that’s much more limited, the payments penetration on businesses is much more limited. So I think we have the opportunity to expand across all categories of businesses because of our more extensive, more digitally capable products.
Richard Ramsden
Okay. So, maybe we can talk a little bit about loan growth. And I guess two questions. The first is, can you talk a little bit about loan demand in the fourth quarter? I would appreciate you gave an update. But what have you seen in terms of changes in pipelines?
And then maybe you could talk a bit about your recommendations for next year. I appreciate on [indiscernible] moving pieces here. You can talk about it on the acquisition and how we should think about potential runoff from the Union Bank loan book over the course of the year?
Andy Cecere
Yes. So maybe we expect fourth quarter. I mean, I think the loan demand continues to be reasonably strong in terms of pipelines [indiscernible] to be strength there, and we see on a year-over-year basis and as well as on a linked quarter basis. And we said this in the end of third quarter, I don’t think the fourth quarter growth on a linked quarter basis will be as strong as what it’s been in the past, just simply as you think progress.
On the consumer side, credit card balances continue to expand nicely. So we continue to see that demand continuing to increase. I think it ties in something that Andy talked about from a consumer spend standpoint and excess savings trend to come down. So that continues to be very good. The one area that I would just highlight is really auto lending. That is an area where the credit spreads have been very narrow, and there has been a lot of, I would just say, irregular pricing [ph] in that particular space.
So we’ll be looking at, not only in the fourth quarter, auto lending coming down, because we’re really focused on profitability. But as we’ve been looking at 2023 and we think about recessionary sort of pressure, and that sort of thing, our focus is going to be around making sure that we are both protecting after profitable relationships as much as just loan growth.
Richard Ramsden
Nonbank lending markets continue to be challenged. How much of an opportunity is that actually turning out to be for both you [indiscernible] in this point of view?
Andy Cecere
I think there has been a migration. The Corporate & Commercial Banking is partly strong because of the bond market differential, and I think the banking and gets back to what Terry talked about is the spreads in the banking side have not kept up with the spreads on the issuance side. So that’s a difference. But I do think that there are categories that are allowing us to have increased demand for sure. But then there are categories, while there is increased demand, the profitability dynamics are what we’re looking for. So we’re not going to take those on it.
Richard Ramsden
Got it. So let’s talk about deposits. Obviously, a very important theme of this conference. Fed funds, obviously, 4% now. It seems like you are expecting to kind of go up to 5%. So maybe you can talk a little bit about how often you evolve post the Fed mark? And as we kind of get deeper into QT, over the course of 2023, what are you expecting in terms of both deposit flows, but also deposit competition?
Andy Cecere
Yes. Well, with respect to deposit flows, our expectation has been, and what we’ll see is we’ll see year-over-year growth in deposits on a linked quarter basis, so value will be down. For us, it’s basically because of the fact that we’re starting to reposition our balance sheet from a funding strategy point of view because of the [indiscernible] coming on. And then Richard, I think, that one of the real values of Union Bank at this particular point in time in financing, is the fact that we’re going to be bringing on a lot of very high value, low-cost core deposits. And that’s going to, I think, give us an opportunity that always may not have at this particular point in time. So I think that’s one of the things to keep in mind.
QT by itself is going to continue to bring liquidity out of the system. You would expect to see more pressure with respect to deposits and deposit competition, and that’s going to – as you think about rates moving up from here, your deposit betas are going to end up moving up as well.
Maybe kind of give you some perspective, though, for the third quarter we saw deposit betas in both – and this is a stand-alone U.S. Bank, at about 30%. We expected it to be in the high-30s in the fourth quarter, and it’s actually coming in better than that. It’s probably going to be in the mix. And so in terms of [indiscernible] in our deposit book actually look better than what we had anticipated.
Richard Ramsden
So I guess as a follow-up, your expectation is mid-30s cycle deposit betas start to function you still feel comfortable with given everything?
Andy Cecere
Yes it is.
Richard Ramsden
Okay. Maybe you can segue a little bit to the securities, I guess – probably, I guess, to what happens on the deposit side. But how are you thinking about managing the security portfolio? Maybe you can talk a little bit more broadly about how you’re thinking about order funding needs, accessing things like the FHLB? And then I guess specifically for you, I mean, should we expect some of the mixing of the securities portfolio deal?
Andy Cecere
Yes. Well, again, I think that Union Bank provides some opportunities there. But at the end up just thinking about U.S. Bank stand alone, cash and securities that is about 33%, 35% of our asset mix. And so we certainly see the opportunity to be able to bring security book down or to be able to fund loan growth in the future, and that will help us with the deposit pressures in most of the things. So I do think that the securities book probably comes down simply because of the fact that they will use that to fund some of the loan growth. We do expect to see some rebalancing of the investment portfolio will look at what is the right mix of available for sale versus held-to-maturity.
Today, we’re at about, [indiscernible] and we feel pretty good about that, especially [indiscernible]. I think that will help in that environment. And then with respect to Union Bank, I will, again, look at that entire book of business. The securities portfolio is pretty similar to ours, both in through the composition and the yield of the rates that we have. But we’ll look at the levels of that, and we’ll probably be repositioning that portfolio to some extent.
Richard Ramsden
Just as a quick follow-up. I mean the rates market is building a rate cut late 2023, 2024, obviously to bait whether that’s actually going to happen. But would you consider measures over the course of the coming months and quarters in terms of reducing the asset sensitivity of USD balance sheet?
Andy Cecere
Yes. Our asset sensitivity has been naturally kind of coming down as rates have been rising. Today, on a stand-alone basis, we’re in a fairly neutral position, maybe just a little bit asset-sensitive, fairly neutral. One of the things it will happen with respect to Union Bank is that they will make us on a combined basis, a little bit more asset-sensitive in the near-term. But again, as rates move up that will naturally move to either a neutral or slightly liability-sensitive position, just normally.
Richard Ramsden
Okay. So look, let’s talk a little bit about the outlook for NII, and I appreciate how we talk about so far, I guess, helps in terms of us thinking about the outlook. But as you take the different moving pieces, what’s your view in terms of your ability to grow net interest income on a pro forma basis over 2023? And what are the factors you’re thinking about at this point when you’re thinking about the NII outlook overall?
Andy Cecere
Yes. So one of the things we’ve been guiding us to 2023, we still expect net interest income to expand based on just asset growth. We do expect the net interest margin to continue to expand, but it’s going to moderate. Clearly, at this particular point in the rate cycle the level of NIM expansion that we saw in 2022 is going to moderate quite a bit as we go into 2023. But we still think that there’s opportunity for net interest income growth. And then you layer on top the benefits associated with…
Richard Ramsden
Okay. And then on operating leverage, a good year this year in terms of proving operating leverage. Maybe you could just talk about the longer-term opportunities do you see to drive operating leverage – synergies for this transaction that’s going to help? But how are you thinking about the ability to countering that type of operating leverage over the medium term? And how are you weighing up to continue investing in technology, increasing investing in technology against those efficiency gains? And maybe you can also talk about how inflation is impacting the expense base as you think about next year?
Andy Cecere
Yes. So on a core basis we’re going to be in excess of 200 basis points of net operating leverage in 2022, as Terry mentioned on the performance. And I would expect us to continue – we are going to focus to continue to have positive operating leverage. We get the benefit of Union Bank and the cost takeout, some of it which will be reinvested. But I think it’s important to note that we are at our level set point in terms of investments. So we won’t see another increase or step function in terms of investment spend, which drives depreciation and other expenses. So we’re able to take advantage of the investments we made, coupled with the Union Bank transaction, to drive positive operating leverage because our spend will be more normalized on a go-forward basis. We will invest some of those savings to continue to be at the forefront because I think it’s critically important, but the result of all that’s going to be positive operating which for the foreseeable future.
Richard Ramsden
Great. Okay. So let’s talk briefly about credit. It sounds like you haven’t really seen much so far in the fourth quarter, which I guess is good news. But look, two questions, I guess. The first is, are you tightening underwriting standards in any specific areas? It sounds like at the margin you might be in a couple of areas. If you could expand on that?
And then secondly, are there any specific parts of the book that you’re monitoring more closely today than, say, three months ago? Commercial real estate obviously is something that does come up. So maybe you can comment on that book as well?
Andy Cecere
So we underwrite through the cycle, so we haven’t adjusted underwriting from a credit standpoint. I think what Terry was mentioning, we have been very focused on return metrics and making sure that we’re putting on the balance sheet those things make sense from an ROE standpoint, but not from a credit standpoint, we think consistent in that through the cycle. The areas of focus continue to be what you talk about, commercial real estate. We’ve already reduced the exposure there over the last couple of years. We continue to monitor that closely. Obviously, the open question on return to office and what that means for CRE, particularly in metro markets, will be something we continue to [indiscernible].
But I think, Richard, that’s going to be a long burn, because rates – rents are typically seven to 10 years in terms of the duration. So it’s not going to happen overnight, but we’re going to continue to monitor that. On the other side, on the consumer side, everything is holding up quite well. We continue to focus on cards. So the spend levels are good. The rate of pay down continues to be higher than normal, but it’s starting to moderate. And again, early late-stage delinquencies well below what we would call normal levels.
Terry Dolan
Yes. Richard, one of the things that I would just add is that maybe just as a reminder, on the consumer side; we’re very much focused on prime, super prime type of customer base. And so we do believe that even in a recessionary sort of environment, we will do very well in terms of performance on a relative basis. And then on the corporate side, you have a much higher mix with respect to investment-grade type of companies that we end up banking. So that’s those the things that are important to keep in mind.
Richard Ramsden
So let’s talk about capital, 8.3% on closing. I know you’ve talked about a 9% target. Is that still the right level? And maybe you can talk about it in the context of the concerns? I think the market has about increased capital requirements. Obviously, a lot of focus on Michael did speech last week. I appreciate there’s probably not much [indiscernible]. There is uncertainty around where capital requirements could end up in any way, change your appetite of returning capital once you get to the 9% margin?
Andy Cecere
Yes. So again, eight, three at the end of this year, our expectation is we’ll get to 9% in about four quarters; so about a year out. And then I think, Richard, your point about from a regulatory perspective, there’s a lot of conversation around capital. So we’ll have to make an assessment and effort to a point in time as to whether or not we start a buyback program or other things will have to take into consideration to see where we are in terms of the macroeconomic environments and those sort of things.
So – but coming back to maybe your point about the 9%, when you end up looking at U.S. Bank relatively simple, straight-forward traditional banking model, not a lot of complexities that you have, for example, the G-SIB level. And then when you look at Union Bank, the risk profile or the composition of the customers, the asset liability, very similar to from an underwriting perspective to U.S. Bank. So do you still feel like the 9% is a good operating level for our company based upon the risk profile?
Richard Ramsden
Okay. So we have a couple of minutes. Do you see if there’s any questions from the audience? Okay, over to you [indiscernible].
Question-and-Answer Session
Q – Unidentified Analyst
I have a couple of questions. First is a relatively small question about the acquisition. Firstly, you took on a little bit less loans than you initially expected. I’m wondering if you could give us a bit more color. How much was your choice? How much was their choice on that?
And then the second choice is a more general question, and that is that there’s been regulatory and social pressure on overdraft fees and have responded to that in a very customer-friendly way. I guess my question – the second question is, outside overdraft in NSF, are there any other revenues that you suspect may be susceptible to regulatory or social pressure, especially if the downturn is worse than we expect?
Terry Dolan
Yes. Let me tell you the Union Bank. If you kind of look at the chart, I think it was $53 billion, which was roughly $60 billion of the announcement date. That’s a function of a couple of different things. One is that any time you put two companies together, you look at the portfolio, you make decisions as to hold levels and this profile and those sorts of things. We are – and it will sell a portion of the portfolio that they originated through a third-party called Lending Club that’s about $1.1 billion.
And then there is about $1.1 billion or $1.2 billion of commercial real estate that just when we look at the mix of the portfolio, we’re going to sell it down. But the vast majority of the rest of it is either mark-to-market or a little bit of loan balances coming down. But by and large, their business, both from a lending perspective as well as from a deposit perspective, held up very well over the 15 months that to get the regulatory approval done and closed.
Andy Cecere
And then that Lending Hub example, Terry, we had assumed, from a starting point, that it would be run off because of the advantage of selling it at times here.
Terry Dolan
A little bit earlier.
Andy Cecere
A little bit earlier. And then in terms of your point, I think you’re right. So overdraft we evolve – U.S. Bank, we the industry, have moderated those fee levels and made a number of customer-friendly changes. I think one of the value – one of the aspects of our company is we have a lot of sources that are well above – well beyond just consumer overdraft fees for the payments business, the trust business, corporate commercial products business, mortgage banking, all these things are why that diversification of revenue streams are so important because I don’t see any of those others being impacted.
Richard Ramsden
With that, we’re out of time. So Andrew, Terry, thank you so much for joining us.
Andy Cecere
Thank Richard. Thank you.
Terry Dolan
Thank you.
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