U.S. Bancorp - Earnings Call - Q4 2024

Executive Summary

• Q4 delivered adjusted EPS of $1.07 on net revenue of $7.009B, with 190 bps of positive operating leverage (adjusted); reported EPS was $1.01 due to $109M notable items (lease impairments and efficiency actions).
• Net interest income was stable sequentially ($4.176B FTE; +0.2% q/q) while noninterest income rose 5.0% q/q and 8.1% y/y; NIM edged down 3 bps q/q to 2.71% on higher average earning assets.
• Credit metrics were broadly stable: NCO ratio 0.60% (flat q/q), ACL/loans 2.09%, and NPAs/loans+ORE 0.48% (down 1 bp q/q). CET1 improved to 10.6%; the company repurchased ~$100M of stock under its $5B authorization.
• 2025 guide: Q1’25 NII “relatively stable” vs Q4 ex fewer days, FY’25 adjusted total revenue +3–5%, and ≥200 bps positive operating leverage; expenses “relatively stable” vs Q4 adjusted ~$4.2B. Payments leadership reorg announced (Courtney Kelso joining to lead consumer/small business payments).

What Went Well and What Went Wrong

• What Went Well
  • Fee momentum: trust & investment management (+13.2% y/y), commercial products (+11.7% y/y) and steady payments (+1.6% card, +2.4% merchant) lifted noninterest income (8.1% y/y; +5.0% q/q).
  • Cost discipline: adjusted noninterest expense was flat both y/y and q/q at $4.202B; adjusted efficiency ratio 59.9% vs 61.1% in Q3.
  • Capital and capital return: CET1 rose to 10.6%; initial $100M repurchase executed; adjusted ROTCE 18.3% with 190 bps adjusted positive operating leverage.
  • Management tone: reiterated confidence in delivering industry-leading ROTCE and sustained positive operating leverage in 2025 (CEO).
• What Went Wrong
  • NIM pressure: net interest margin fell 3 bps q/q to 2.71% (and 7 bps y/y) on balance sheet mix; NII growth remained minimal (+0.2% q/q FTE).
  • Mortgage banking softness sequentially: mortgage revenue decreased 25.2% q/q on MSR valuation/hedging and lower production volume; also lower corporate payments and merchant volumes q/q.
  • Credit normalization: provision rose 9.4% y/y to $560M with continued elevated card charge-offs (card NCO 4.28%); NCO ratio 0.60% vs 0.49% a year ago.
  • Payments yields: merchant acquiring yield under pressure due to mix (higher-volume, lower-margin clients), a point scrutinized in Q&A.

Transcript

Operator (participant)

Welcome to the U.S. Bancorp Fourth Quarter 2024 Earnings Conference call. Following a review of the results, there will be a formal question-and-answer session. If you would like to ask a question, please press star, then one on your phone. If you wish to withdraw your question, please press star, then one again. This call will be recorded and available for replay beginning today at approximately 11:00 A.M. Central Time. I will now turn the conference over to George Andersen, Senior Vice President and Director of Investor Relations for U.S. Bancorp. Please go ahead.

George Andersen (SVP and Director of Investor Relations)

Thank you, Audra, and good morning, everyone. Today I'm joined by our Chairman and CEO, Andy Cecere, President Gunjan Kedia, Vice Chair and CAO, Terry Dolan, and Senior Executive Vice President and CFO, John Stern. In a moment, Andy and John will be referencing a slide presentation together with their prepared remarks. A copy of the presentation, our press release, and all supplemental consolidated schedules can be found on our website at ir.usbank.com. Please note 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 two of today's earnings release, our press release, and in reports on file with the SEC. Following our prepared remarks this morning, we will be happy to take any questions that you have. I will now turn the call over to Andy.

Andy Cecere (Chairman and CEO)

Thanks, George. Good morning, everyone, and thank you for joining our call. I'll begin on slide three. In the fourth quarter, we reported a $1.01 per diluted share or a $1.07 after adjusting for notable items. John will discuss these one-time charges in his prepared remarks. Net revenue totaled $7 billion for the quarter and $27.5 billion for the year, as we saw both sequential and year-over-year quarterly growth in net interest income and non-interest income driven by effective balance sheet management, earning asset repricing and mix, and our highly diversified fee business offerings. Overall, the quarter was highlighted by top-line revenue growth and continued expense discipline, which resulted in 190 basis points of positive operating leverage on an adjusted basis year-over-year. Turning to slide four, we had slight balance sheet growth this quarter with average earning assets increasing 1.2% driven by higher on-balance sheet liquidity.

This quarter, we had modest loan loss reserve release, largely reflective of improved credit quality and a more favorable portfolio mix. On the bottom right of the slide, you can see that our CET1 capital ratio increased 10 basis points from the prior quarter to 10.6%. Our tangible book value per share totaled $24.63 at December 31st, an increase of 10.4% compared to the end of last year. During the quarter, we effectively balanced continued capital accretion with an initial $100 million of share repurchases. Slide five provides key performance metrics. On an adjusted basis, we delivered an 18.3% return on tangible common equity and an improved efficiency ratio of 59.9% in the fourth quarter. Turning to slide six, fee income represented over 40% of total net revenue in the fourth quarter.

Results this quarter were driven by double-digit year-over-year fee growth in commercial products, trust and investment management, and investment product revenues. Slide seven highlights a few of our key selected initiatives on interconnectedness across the franchise. Let me now turn over the call to John, who will provide more detail on the quarter as well as forward-looking guidance.

John Stern (SEVP and CFO)

Thanks, Andy. If you turn to slide eight, I'll start with a more detailed earnings summary followed by a discussion of fourth quarter earnings trends. In the fourth quarter, we reported earnings per diluted common share of $1.01, which included $109 million of notable expense items or $82 million net of tax. Notable items for the quarter included $60 million related to operational efficiency initiatives and $49 million from lease impairments associated with strategic real estate restructuring actions. After adjusting for these notable items, we delivered diluted earnings per common share of $1.07 this quarter. Slide nine provides a balance sheet summary. Total average deposits increased 0.7% on a linked-quarter basis to $512 billion as we continued to prioritize relationship-based deposits and maintained our pricing discipline. While total non-interest-bearing deposits increased slightly this quarter, this was largely driven by institutional deposit seasonality at the end of the quarter.

Importantly, after accounting for this seasonality, our percentage of non-interest-bearing deposits to total deposits now looks to have stabilized in line with our earlier expectations. Average loans totaled $376 billion, a modest increase of 0.4% on a linked quarter basis, driven by commercial lending initiatives, slower paydowns, and new originations in residential mortgages, as well as higher seasonal credit card spend. At December 31st, the ending balance on our investment portfolio increased slightly to $171 billion from opportunistic repurchases of securities. This quarter, we saw a slight decline in the average yield across both our investment portfolio and loan book as the impact of variable rates more than offset the benefits of fixed asset repricing. Turning to slide ten, net interest income on a fully taxable equivalent basis totaled $4.18 billion, which was stable to the third quarter.

For the year, total net interest income on a fully taxable equivalent basis was slightly better than our earlier guidance of $16.4 billion. Slide 11 highlights trends in non-interest income. Linked quarter, we saw non-interest income growth in the trust and investment management and other revenue that was partially offset by lower mortgage banking and seasonally lower payments revenue. Importantly, excluding security losses, full-year non-interest income increased 3.9% compared to 2023, consistent with our 2024 guidance as we benefited from continued growth across our diversified and differentiated business mix. Turning to slide 12, non-interest expense for the quarter totaled $4.2 billion as adjusted. For the year, total non-interest expense was $16.79 billion as adjusted, which was just below or better than our full-year guidance of $16.8 billion. We remained focused on prudent expense management and continued to benefit from operational efficiencies across the company.

Slide 13 highlights our credit quality performance. Asset quality metrics this quarter were in line with expectations and reflected ongoing macroeconomic stability. Our ratio of non-performing assets to loans and other real estate was 0.48% at December 31st, compared with 0.49% at September 30th and 0.40% a year ago. The fourth quarter net charge-off ratio of 0.60% was flat to the third quarter as expected, and our allowance for credit losses totaled $7.9 billion or 2.09% of period-end loans at December 31st. Turning to slide 14, our CET1 capital ratio of 10.6% as of December 31st increased 10 basis points net of distributions, which included an initial $100 million of share buybacks this quarter. Moving forward, we expect the level and pace of buybacks to remain modest in the near term as we balance continued capital accretion with distributions.

I will now provide first quarter and full-year 2025 forward-looking guidance on slide 15. Starting with the first quarter 2025 guidance, net interest income is expected to be relatively stable to the fourth quarter of 2024, excluding the impact of fewer days. As a reminder, the first quarter has two fewer days than the fourth quarter. Total non-interest expense is expected to be relatively stable to the fourth quarter level of approximately $4.2 billion as adjusted. We expect to deliver positive operating leverage in the first quarter of 200 basis points or more on a year-over-year basis. I'll now provide full-year 2025 guidance. Total revenue growth on an adjusted basis is estimated to be in the range of 3%-5% compared to the full-year 2024.

We expect to achieve positive operating leverage, excluding the impact of security gains or losses, of greater than 200 basis points for the full year. I'll now hand it back over to Andy for closing remarks.

Andy Cecere (Chairman and CEO)

Thanks, John. 2024 was a pivotal year for the company in many ways and it marked a very important inflection point in our story. Going into the year, there was much uncertainty with respect to the broader macroeconomic environment, persistent inflation, significant rate volatility, political and regulatory headwinds, to name a few. But we effectively managed through the changes and, most importantly, executed on our strategic objectives. Fourth quarter results showcase our commitment to execution, which was highlighted by our delivery of 190 basis points of positive operating leverage. As credit quality continued to stabilize and we prudently managed our capital position, it was effective balance sheet management, our financial discipline, and expanding interconnectedness across the franchise that enabled us to fully deliver the strong results we did this quarter and fully expect that momentum to continue into 2025.

Finally, I'd like to extend our thoughts to those impacted by the devastating and ongoing wildfires in Los Angeles. We are closely monitoring the situation and have teams across the bank involved in our collective response efforts to help best support our employees, customers, and their communities. Let me close by thanking our employees for their continued dedication to our clients, communities, and shareholders, and what was a meaningful year for the company. We will now open up the call for Q&A.

Operator (participant)

Thank you. At this time, I would like to remind you, if you would like to ask a question, press star, then the number one on your telephone keypad. We'll pause just a moment to compile the Q&A roster. And we'll go first to Scott Siefers at Piper Sandler.

Scott Siefers (Analyst)

Morning, guys. Thank you for taking this question.

John Stern (SEVP and CFO)

Good morning.

Scott Siefers (Analyst)

Hey, John, there's something maybe you could delve in a little more to discuss the drivers of the 3%-5% expected full-year 2025 revenue growth. In other words, sort of how much comes from NII, how much ends up coming from fees. And then I guess a little clarification. When you're talking about the 1Q NII guide, I think you're saying flat, excluding the day count difference. I just want to be certain we're thinking it would be down on a reported basis marginally just due to fewer days.

John Stern (SEVP and CFO)

Right. Thanks, Scott, and good morning. So let me take your last question first. Yes, excluding days, about $40 million would be lower on a reported basis. So stable, excluding those two days of that $40 million. That's how we're representing that. On the drivers, on the 3%-5% revenue growth, let me start with fees, and then I'll go over into net interest income. We had really solid and healthy growth on the fee side of things, and we have a lot of momentum building. And that's despite some headwinds that we saw, particularly on our prepaid, on the card side of things, as well as freight. So some areas in the payment space that saw some headwinds. We also saw headwinds with the ATM exit of our cash servicing business. So those things will abate or have abated here in 2024.

We see, obviously, momentum in the core. At Investor Day, we talked about our expectation for the medium term for our expectations for 2026 and 2027 to be at mid-single digits for fee growth. That's a reasonable range for us to really think about as we think about 2025. It really comes down to core areas of growth within our trust area. We're seeing strong market share, fund formation. The macro is really strong there. Payments, we have good momentum in a number of areas, strategic initiatives that are underway. Treasury management and capital markets continue to have strong growth in certain areas. A couple of areas that we're watching is mortgage. Mortgages, with these higher rates, it's hard to see volumes really persist or be a lot stronger than it was in the prior year. Gain on sales is pretty stable as well.

And then our other revenue will continue to be in that $125 million-$150 million range on an average basis per quarter. So put another way, we expect fees to grow. We have strong momentum, and we think that mid-single digit is a reasonable place for us to begin. As we think about net interest income, again, well-positioned, the balance sheet's in a great spot. We saw an inflection in our NIM throughout 2024. And we really think about three key drivers for net interest income. It's going to come from better asset mix, which we've seen more of a shift into higher returning assets. That shift will continue. We've seen deposit normalization. That's the non-interest-bearing rotation is starting to slow down and really stabilize at this level. And then, importantly, fixed asset repricing on our backbook is going to be a meaningful driver this year, particularly with the curve steepening.

We've seen, since we were last on this call, the curve, and I always look at SOFR versus five-year Treasury. That was meaningfully inverted back in September, and now we're positive, actually. And so we think the backbook is going to give us some nice trajectory. Just as an example, we have about $3 billion of an investment portfolio that reprices per quarter of $3 billion that runs off that can get replaced at 150-200 basis points of spread. And then on the other fixed-rate assets that we have, which includes residential mortgage, commercial loans, and auto loans, and things like that, we have $5 billion-$7 billion on average that reprice, again, at that 150-200 basis points mark. And that's assuming kind of today's rates. So either way, we're very confident in our growth, both on fees and in net interest income.

You put it all together, and that's really where we come up with our 3%-5% total revenue growth.

Scott Siefers (Analyst)

Perfect. All right, good. Appreciate all the details, John. Thank you.

John Stern (SEVP and CFO)

You bet.

Operator (participant)

We'll move next to John McDonald at Truist Securities.

John McDonald (Analyst)

Hi, good morning.

John Stern (SEVP and CFO)

Morning.

Andy Cecere (Chairman and CEO)

Morning, John.

John McDonald (Analyst)

Hey, guys. I wanted to ask two strategic questions. Maybe the first one is for Gunjan. Just on payments, you reorganized the business yesterday, or this week you announced a new head to the consumer side. Maybe just kind of give us the plan for payments and what you hope the new organization and setup will do for the growth and opportunities there.

Gunjan Kedia (President)

Good morning, John. Let me just remind you of some of the facts that we shared last time. Our payments franchise is a very strategic asset for us, and our sense is that we can do more to interconnect that product set with our consumer franchise and our institutional franchise. So the org structure and splitting it into the two pieces that are more aligned with the two parts of the franchise is an expectation to accelerate execution. So it's not really a strategic focus. We are very pleased to welcome two very high-quality leaders. Mark Runkel, we announced earlier. Earlier in the year, he stepped into his role on the institutional side, and Courtney Kelso joins us from Amex next month. So that was sort of the intention, and the goal is to truly accelerate our execution around our vision for interconnectedness.

John McDonald (Analyst)

Okay. Yeah, thanks, Gunjan. And Andy, maybe broader, just kind of where have you planted seeds for offense across the company? I think in the retail bank, you're looking in the Union franchise and maybe through your partners, Edward Jones and State Farm. But maybe just across the footprint, where are you excited about where U.S. Bank has kind of invested for growth, and you might be moving to the front foot?

Andy Cecere (Chairman and CEO)

Thanks, John, and good morning. I think it's across all of our business lines, and it's that concept that we talked about in Investor Day, which is about interconnectedness, but if you think about the momentum that John articulated and Gunjan talked about, our payments business, our trust and investment management business, our commercial products business, our retail business, the growth and deposit activity, our commercial business with the growth and targeted loan activity, profitable loans, so we really have a lot of momentum going, and that, John, couple that with sort of the headwind that was the yield curve that John talked about, I think drives to positive momentum on net interest income.

The fee categories we talked about, which I all think have positive momentum, and all of that is coupled with a relatively flat expense for the last five quarters, which drives to this positive operating leverage that we talked about. So across all the categories of revenue, it's positive. Expense is well managed, and that's going to deliver the positive operating leverage.

John McDonald (Analyst)

Okay. Thank you.

Operator (participant)

We'll go next to Betsy Graseck at Morgan Stanley.

Betsy Graseck (Analyst)

Hi, good morning.

John Stern (SEVP and CFO)

Morning, Betsy.

Andy Cecere (Chairman and CEO)

Hi, Betsy.

Betsy Graseck (Analyst)

I noticed that mine sounds very ticky-tacky, but I just want to make sure I understand what forward curve your NII guide is based on. And I think you mentioned today, but the reason I ask is, as we all know, the forward curve has changed a lot between beginning of December and today. So that's the first question.

John Stern (SEVP and CFO)

Sure. So in terms of our curve, we do have two rate cut assumptions embedded. I think one's in May and one's in September. So that's kind of how we think about the short end of the curve. And the long end of the curve is at this level. So right now, the 10-year Treasury is at 4.65%. That's probably a good place. That's kind of where we're at kind of throughout the year. Of course, we know that it's volatile. It's been volatile. And that's why I say the curve does matter when we kind of look at these sorts of things. But those are our projections.

Betsy Graseck (Analyst)

Okay, great. And can you help us understand how your projections would move in the event that you got fewer rate cuts or the long end went up more?

John Stern (SEVP and CFO)

Yep.

Betsy Graseck (Analyst)

Kind of.

John Stern (SEVP and CFO)

Exactly. So again, we have continued to be neutral from an interest rate risk standpoint. So as I mentioned, we expect two cuts. But if those cuts don't manifest or the Fed even hikes or there's more cuts, which we know the cycles, right, things will shift, we want to be as neutral as possible to those particular movements from the Fed on the short end of the curve. Where there can be some change is really on the shape of the curve. So a steeper curve, the better off we are. If it's more inverted, then that would put a little bit more pressure on the net interest income. So at a high level, those are kind of the puts and takes.

Betsy Graseck (Analyst)

As we roll through the year, can you just give us a sense as to that fixed asset repricing? Is it coming through kind of quarterly cadence the same, or is there any acceleration or deceleration during the year that we should be thinking about?

John Stern (SEVP and CFO)

It's pretty consistent. So I mentioned the $5 billion-$7 billion per quarter. I mean, it's going to range in that corridor each quarter. But it doesn't accelerate. It doesn't tail off. It's pretty consistent throughout the course of the year. Same on the investment portfolio. Pretty consistent.

Betsy Graseck (Analyst)

Okay. Thank you so much.

John Stern (SEVP and CFO)

You bet.

Operator (participant)

We'll move to our next question from Ebrahim Poonawala with Bank of America.

Ebrahim Poonawala (Analyst)

Good morning.

John Stern (SEVP and CFO)

Morning.

Ebrahim Poonawala (Analyst)

Sorry if I missed this in your prepared remarks. When we think about the NII guidance for the year or your revenue outlook, what's underpinning that from a loan growth perspective? One, so yeah, what's the assumption on loan and deposit growth? And are we seeing any green shoots of a pickup in lending demand?

John Stern (SEVP and CFO)

Sure. Thanks, Abraham. So we did not comment yet on loans, but I would just say in terms for purposes of our forecast, how we're thinking about 2025, we have pretty modest loan and deposit growth for the full year. Now, in terms of sentiment and things of that variety, clearly, there's a lot of positivity. Our client base is excited. I think there's a lot of momentum clearly in our pipelines that we can see has not yet translated into elevated loan growth at this point. But perhaps that changes. We're thinking, hopefully, in the back half of the year, we can see that pickup in loan growth. But in terms of our forecasts and our projections, we anticipate modest for the year.

Ebrahim Poonawala (Analyst)

Got it. And I guess maybe just talk about I think you addressed a little bit around the payments business as we think about the fee revenue sort of categories across payments. If you can sort of drill into expectations around that year-over-year in context of your overall revenue guide. And obviously, you brought in a new head of payments yesterday. Remind us of the market positioning. Are we winning share, losing market share, and what the ambition is there going forward? Thank you.

John Stern (SEVP and CFO)

Sure. So as I mentioned in payments earlier, we have momentum on the core side. We had had some headwinds there. So if I just kind of go through the different categories. On the card side of things, we had strong sales on the credit card side, just over nearly 6%, really. And total revenue was hurt in prepaid this quarter by about 4 percentage points given the exiting and some of our prepaid revenue. That's going to impact us again in the first quarter, but then we'll fully lap that in the second quarter. But continuing in the card side, we anticipate growth there, and we have a lot of momentum in different products. We have our Smartly card that is coming online. We have a lot of excitement around that. Our Union Bank acquisition increasing that penetration.

So we continue to expect that mid-single-digit growth in terms of on a retail card side of things. On the merchant side of things, we've had, again, strong sales. Our tech-led formation and growth there has been really strong. We've been making investments. We expect travel to improve, same-store sales to improve. Clearly, our growth rate in 2024 was below our expectations. And as we see a lot more high volume, lower margin type clients continuing their pace, we're looking at the growth rate as better than, of course, 2024, but it may not be at our aspiration of high single digits for 2025. And then on the CPS side of things, strong quarterly growth that we had. They had their best year. We've been making a lot of investments there. The pipelines are strong. Freight, we've lapped. So a lot of positive things there.

Again, the union penetration is going to be really paying off for us as well. We see high single digits there as well.

Ebrahim Poonawala (Analyst)

Thank you.

Operator (participant)

We'll go next to Erica Najarian at UBS.

Erika Najarian (Analyst)

Yes, good morning. You did announce that $5 billion share repurchase authorization during Investor Day, and I think the market got quite excited about that. In terms of the pacing of the buybacks, you did $100 million this quarter. I guess I heard you guys loud and clear during the prepared remarks, but what are the puts and takes that you're considering in terms of thinking about that pacing? I know that you're looking for a modest pace to begin with, but if loan growth is a little soft and it seems like you have conservative guidance embedded in your revenue guide for balance sheet growth, what are the puts and takes in terms of the more modest start to buybacks?

John Stern (SEVP and CFO)

Sure. At a high level, Erica, it's really the balance between growing our capital to get to where we need to be from a Category II perspective. We talked about 10% being our approximate level of where we want to be on a Category II basis. And obviously, we don't expect to be a Category II bank until 2027 or thereabouts. So that's really the one side of it. The other side is, as you said, loan growth. If it's weaker, then there's an opportunity for deployment. But we just started. We're stepping into this, and we talked about the next quarter, and the pace thereafter is just going to be dictated on those factors that I just mentioned.

Erika Najarian (Analyst)

And just as a follow-up here, and maybe this is for Andy, the way you laid out your projection on slide 15 in terms of the revenue guide and then positive operating leverage, if net interest income or payments swing one way or the other, either to the better or maybe softer, is the message here that you're now to a point where there's enough flex where, regardless of the revenue environment, that 200+ basis points is going to be sort of the baseline for what you can deliver in 2025?

Andy Cecere (Chairman and CEO)

Sure, Erica. Short answer, Erica, is yes. It's 200 basis points plus on positive operating leverage. We do have flex on expense. I'm going to ask John to highlight some of the areas. But we've been managing to a flat expense base for a number of quarters. This is our fifth quarter of the flat expenses. We're still investing in the company, but we're managing across many different areas. And we are very confident in that positive operating leverage regardless of what the revenue environment is. And John, why don't you talk about some of the levers?

John Stern (SEVP and CFO)

Yeah. Clearly, we've done a lot of work on the expense. We're very proud of the efforts that the teams have made thus far. But we have continued to see different levers that we're looking at and will kind of throughout the year kind of talk more about. But obviously, we had a notable item on the real estate side of things. There's continued to be optimization there. Procurement and third-party spend actions. We see opportunity as well as organizational simplicity and bringing fragmented groups together and centralizing certain aspects. And then just automation of processes. We have a lot of the investments that we've been talking about over at Investor Day help us manage that expense by automating certain processes. And then that inflection point that we talked about in terms of investment in our digital capabilities.

So the stabilization of that digital investment, we've increased that amount all along that J-curve, if you will. And now we're at a flat place, and we're bending that cost curve on the digital side, which we're really excited about. So those are kind of the main pieces. There's others. We have a lot of different initiatives, but those are the different levers that we look at.

Erika Najarian (Analyst)

Great. Thank you.

Andy Cecere (Chairman and CEO)

Thanks, Erica.

Operator (participant)

We'll take our next question from John Pancari at Evercore ISI.

John Pancari (Analyst)

Good morning.

Andy Cecere (Chairman and CEO)

Morning, John.

John Pancari (Analyst)

Morning. I just appreciate the breakdown of the revenue growth outlook by fees and then your commentary around net interest income. Just behind that net interest income commentary and some of the drivers you mentioned around fixed asset repricing and deposit normalization, could you give us maybe your thoughts around the net interest margin trajectory as we look through the year, and perhaps maybe even help us with where the margin could end up as an exit rate coming out of 2025, just to help give us a better color around what it means for the medium-term trends. Thanks.

John Stern (SEVP and CFO)

Sure. Thanks, John. And we anticipate, given the drivers, we do anticipate net interest margin to follow net interest income and increase. We certainly, from a management standpoint, we don't manage to net interest margin. As an example, this quarter, it fell three basis points entirely due to liquidity, right? So I mean, there's always going to be transitional puts and takes to it. But directionally, it should follow. We talked about at Investor Day about how not that there's anything magical about 3%, but I mean, there's certainly a lot of momentum in all those categories and drivers that I just mentioned really to kind of get us into that level over time.

I think the big things that can move it are really loan growth as that goes up and down, deposit management, and then the shape of the curve, which impacts our fixed asset or our backbook repricing. So those are going to be the components, but certainly expect directionally the net interest margin to improve as we march through time.

John Pancari (Analyst)

Got it. All right, John. Thank you for that. And then separately back to capital. On the M&A front, I know post the Investor Day, you've been clear that the whole bank M&A would only be more of a consideration longer term as you look at your franchise versus a near-term opportunity. I guess, Andy, has that or Gunjan, has that changed at all? Or just given the election results and how comprehensively we expect a regulatory supervisory role change across the different regulators? And then does it I guess another question would be, what would change your view in terms of possibly putting M&A options more in the near-term view? Thanks.

Andy Cecere (Chairman and CEO)

So John, our perspective is the same, which is it's not a priority for us right now. The combination of the purchase accounting marks, the regulatory approval process, which may improve, but isn't clear yet. And the current bank valuations all factor into this. So while it may return, large bank M&A may return over the longer term. We're very focused on our organic growth opportunities because we have a lot of them. And that's where we're putting our efforts and priorities right now. And Gunjan, maybe you can highlight a couple of them because I think that emphasis is because of the opportunities that we have in front of us.

Gunjan Kedia (President)

Very true. Good morning, John. I'll add that while the regulatory environment is very attractive for our organic growth opportunities too, we saw a very significant acceleration of our trust and investment fees and our capital markets fees because investor confidence and consumer confidence is very high. So the ability to drive a real inflection in organic growth with positive operating leverage is very much our focus. And it's across many, many parts of our business. On the product side, we have a balance sheet that would support a much bigger capital markets business. So we are very focused on that. We're introducing new capabilities there at quite a good pace. And the interconnectivity across our product sets is really deepening the franchise as well. So it's a very good strategy to drive growth with positive operating leverage, and that is our focus right now.

John Pancari (Analyst)

Okay, great. Thank you, Gunjan.

Andy Cecere (Chairman and CEO)

Thanks, John.

Operator (participant)

We'll go next to Mike Mayo at Wells Fargo Securities.

Andy Cecere (Chairman and CEO)

Morning, Mike.

Mike Mayo (Analyst)

Hi, Mike. How are you? How are you? Finally turning the corner on positive operating leverage. You said at least 200 basis points. I think after so long not having positive operating leverage, I think people are wondering it's kind of a show-me story. I think you might understand that. Under what scenario do you think you could have more than the 200 basis points guide? Some other banks are actually guiding higher today, and you have a lot of tailwinds in the industry. So how high could that go? Because the stock's down, people are questioning this. What would be your reaction?

Andy Cecere (Chairman and CEO)

Mike, what we wanted to do is to provide a guide that we have confidence in and that we're conservatively giving you numbers. I'm very confident in our ability to manage expense in this environment, and I'm very confident in the inflection point on the revenue components. And that's why we put a 200 basis points plus on that guide. So we'll hit 200 at least. But to the extent that the market helps us on the revenue side with the yield curve and the things that John talked about, I expect it to be above that. But we want to give you a guide and an expectation that we're very comfortable with and that we take into account the different puts and takes that are a little bit out of our control, like yield curve.

Mike Mayo (Analyst)

Then a more specific question. The merchant acquiring yield looked like it contracted 70 basis points year over year in the fourth quarter, and the revenues didn't accelerate with the volumes. Was that expected? Was that a surprise? Is there competitive pressure? What's causing that 70 basis points contraction in the merchant acquiring yield? Thanks.

John Stern (SEVP and CFO)

Sure. So Mike, I think I mentioned, although it was pretty quick when I mentioned that our client base, while we had strong growth in terms of same-store sales and tech-led initiatives, which are the tech-led has strong margins, and it continues to be about a third and has been growing a third of our total business on the merchant side. The growth on the other side of our client base has been in higher volume, lower margin, and that has persisted kind of throughout the year. And that's kind of creating that disconnect that you just mentioned. And kind of talked about the expectations that we have here in 2025 is kind of followed because of that.

Gunjan Kedia (President)

I can add some color here, John, if I may. We were disappointed in the merchant results for this quarter as well, but the business is really showing two very different characteristics. There's the part that we are very proud of, which is the tech-led part, about a third of the business now. The value proposition to the customer and the client across our franchise is very strong there. And we see very nice growth rates there. Talech and Salucro were two acquisitions we did around the retail space and the healthcare space. So that part, you see revenue and sales volumes show good patterns. On the other side, we have a very vast group of partners, and we just saw growth in a few very large volume, low-margin businesses. And some of that might persist on that side of the business, but that was the quarter here.

Mike Mayo (Analyst)

All right. Thank you.

Andy Cecere (Chairman and CEO)

Thanks, Mike.

Operator (participant)

We'll take our next question from Matt O'Connor at Deutsche Bank.

Matt O'Connor (Analyst)

Good morning. I was wondering if you could talk about the trends in commercial products revenue. It was up nicely year to year, but was a little bit lower versus kind of the run rate you've seen the other quarters this year. Just remind us, I think there's a decent contributor of capital markets in that and remind us what the drivers of the underlying businesses are.

John Stern (SEVP and CFO)

Sure. So this is the commercial products, Matt, is what I heard you say. So yeah, we had strong growth in commercial products. It's been a good story for us. We've highlighted it, of course, at various investor conferences, obviously at Investor Day and then at a fourth-quarter conference as well. So we've talked quite a bit about it. But the growth really came in a lot of different areas here this quarter. It was in client-related derivative activity, which were either interest rate swaps or foreign exchange. Loan syndication was up as well, bond underwriting. And we're seeing the new products also kick in. So we've talked about some of our other ABS desks, syndication desks, and commodities and things like that. And so that's about 20% of our growth this year was really on the new product side.

And the verticals, interconnectedness we have with the private credit side of things really help us focus in on that growth. And we expect, and we've talked about our expectations with that, and nothing has really changed. We have high expectations for this business.

Matt O'Connor (Analyst)

Okay. And then separately on the deposits, the average deposits grew. And I noticed some seasonality on the period end, but they were down a little bit this quarter for the third quarter in a row. So maybe I just answered the question that there's too much seasonality to really focus on period end, but maybe just address that. And I think you did say you expect modest deposit growth. So just anything to add to the narrative though that the period end was lower?

John Stern (SEVP and CFO)

Sure. Yeah. So for us, as we've talked about, the average balance is a better indicator than ending. The ending can really fluctuate. We can get some pretty meaningful movements at the end of quarters. Particularly in the third quarter was very strong from a deposit growth standpoint. And so even though we had a pretty big surge of deposits at the end of the fourth quarter, it was compared to a really high third quarter. So that's just kind of one example. In the first quarter, part of the reason we talk about a stable net interest income for the first quarter is in the first quarter, deposits seasonally decline, particularly in our institutional and wholesale side of things in DDA as an example.

Just because if you think about our operational accounts that we have there, there's a lot of either deployment of investments from our institutional clients or just overall investment from our corporate-related clients. And so that's kind of a driver of Q1 from a deposit standpoint. But overall, you should think about deposits being a modest growth, consistent with the industry, those sorts of things. That's kind of how I characterize it.

Matt O'Connor (Analyst)

Okay. Thank you.

Operator (participant)

As a reminder, if you would like to ask a question, please press star one. We'll go next to David Long at Raymond James.

David Long (Analyst)

Good morning, everyone.

John Stern (SEVP and CFO)

Good morning.

David Long (Analyst)

Just wanted to stick with the deposit theme here, and when I look at your average cost, deposit cost for the quarter, it came down in line with what I'm seeing with some of your peers, and just curious what you're seeing in the competition for deposits and pricing, and how do you think that plays out throughout 2025?

John Stern (SEVP and CFO)

Sure. Thanks, David. So from a deposit standpoint, and this is again embedded in our growth projections and things like that of modest growth and deposits, I do expect it to be kind of equal in terms of either whether it's on the consumer side or on the institutional side. If I kind of break those two pieces apart, on the consumer side, it seems like things have been. It's kind of either it comes and goes in terms of competitive nature. I would say more lately with the rate cuts that have occurred, that's loosened things up. And so we're seeing a little bit better in terms of pricing competitively. It may not show up immediately this quarter, but over time, we would expect the retail competitiveness to moderate.

On the institutional side, that also kind of comes and goes, but I would call it pretty standard at this point. I think the one negative or headwind right now is QT. That's been drying up liquidity, and that can create some competitive natures on the institutional side. But all in all, we expect to be obviously very competitive out there. We have a lot of new great products that are helping us grow deposits, and we feel very strongly about that, and those are kind of the main puts and takes.

David Long (Analyst)

Excellent. Thanks, John. Appreciate it.

John Stern (SEVP and CFO)

Good.

Operator (participant)

We'll go next to Vivek Juneja at J.P. Morgan.

Vivek Juneja (Analyst)

Hi.

John Stern (SEVP and CFO)

Morning, everyone.

Vivek Juneja (Analyst)

Thanks for my question, Andy. So a strategic question. Payments, there's been discussion about that already. And it's a question we've talked on previous calls. I heard Gunjan's response, "Talech's doing well, but the rest continues to drag," and that probably continues into next year. Given the business, given the pricing pressures, have you considered whether you should get rid of this business and deploy the capital to other areas where you're in a much stronger position, getting better returns? Why wouldn't you think of that?

Andy Cecere (Chairman and CEO)

I'll start with that and ask Gunjan to add on, but I think in this environment, this interconnectedness of banking and payments is as important as it's ever been. The concept of moving money together with storing money and lending money is all intertwined. To the extent we can offer these things together with a terrific technology platform that we have and also have the ability to grow that in a very capital-efficient, fee-focused way is why we want to retain the business. The interconnectedness of that is as critical as it's been in the last 20 years. We're very focused on this business because of that opportunity. Gunjan wants you to add on.

Gunjan Kedia (President)

Vivek, good morning. It's a thoughtful question. And I'll add to what Andy is saying here. First, just we are talking about deltas to expectations, but the business has very high returns. It's a very attractive business. It is an area where a lot of competitive set has been building market share. And we are seeing more discipline come into this industry, just focus on profitability, focus on return on investments rather than just market share gains. And if you look long-term, it is the one product where we have frequent, deep, and embedded interactions with the clients. And it anchors the client value proposition and the client retention in a way that is very hard to do from some of the banking and some of the more sort of routine products.

So we have deep conviction that money movement needs to be on the center of a financial relationship with the client surrounded by banking capabilities. I also just remind you of the size of just the various parts of our payments business. It's 25% of our total revenue. Two-thirds of that is our core credit card issuing business, very healthy, very steady market shares there. Our corporate payment and card issuing business is also looking at very healthy pipelines. All of this gives us great capacity to stay with the Elavon business and build it out both for the small business and for the corporate areas. So to answer your question, it's a good question. And strategically, you want this capability in the mix with your clients.

Vivek Juneja (Analyst)

Okay. Thank you.

Andy Cecere (Chairman and CEO)

Thanks, Vivek.

Operator (participant)

We'll move next to Bill Carcache at Wolfe Research.

Andy Cecere (Chairman and CEO)

Morning, Bill.

Bill Carcache (Analyst)

Good morning. Thanks for taking my question. Your tech-led merchant processing service revenue growth seems solid at a time there's still a perception that you're at a disadvantage to some of your fintech competitors. Can you take us inside of that 9% growth and discuss the breakdown between new additions versus customer attrition?

Gunjan Kedia (President)

Good morning, Bill. Let me just start here. So the competition on the tech-led comes in two ways. One is the user experience on the front end. What we do with our partners here in the tech-led space is provide the reliability, the operations. It's not easy to be the backend partner of a unique value proposition in the front. So it's fraud monitoring, it's transaction monitoring, it's reliability of systems, it's all of the networks that go into it. This is a very good partnership as much as it is competition with other areas. It's a matter of where you're playing role. And we do expect that to be a really strong contributor to the growth rate of this business. And as time goes by, it'll take over more and more of the total franchise.

To your question around sort of the new business versus not, it's a very dynamic space. I mean, we have a vast number of partnerships, and their success in the front end can shift that mix a little bit. So it's really the portfolio that we manage to.

Bill Carcache (Analyst)

Got it. Separately, following up on your NIM commentary, I may have missed this, but where did deposit funding costs end the quarter, and where would you expect the average cost to grow from here given your rate expectations?

John Stern (SEVP and CFO)

Sure. So from a deposit cost standpoint, maybe I'll speak to it in beta terms because I think it's just easier to utilize that because obviously you're going to see a little bit of impact next quarter, but the Fed moves that we saw in the fourth quarter will impact the first quarter. So our cumulative beta throughout the fourth quarter was 38%. We anticipate our beta to be at kind of the mid to high 40s as we look at first quarter results. And so you'll see that decline on the deposit rate as we move forward.

Bill Carcache (Analyst)

Got it. If I could squeeze in one last one, can you discuss how much cash flow and fair value hedge notional is active, I guess how that exposure changes as we progress through the year and any color on pay versus receive rates for both?

John Stern (SEVP and CFO)

Oh, sure. So this quarter is actually a really good example of our hedging program at work and why it's working as intended. We have pay fixed swaps and we have receive fixed swaps. The pay fixed swaps are intended to help protect capital when interest rates rise. They did rise. We saw 80 basis points upward movement. Our AOCI number did increase, but not nearly the magnitude that perhaps others and things of that variety. And that helps us manage that Category II capital level that I spoke to. Obviously, with pay fixed swaps, that's going to create a little bit of a drag on NII. However, offsetting that was our receive fixed swaps that were attached to either commercial loans or debt. And those receive fixed swaps increased our rate relative to where they would have been otherwise. And so you can think of those as largely offsetting.

So from an income standpoint, the hedges are relatively neutral.

Bill Carcache (Analyst)

Thank you for taking my questions.

John Stern (SEVP and CFO)

You bet.

Operator (participant)

We'll take our final question from Saul Martinez at HSBC.

Saul Martinez (Analyst)

Hey, good morning, guys. I think Vivek asked my question, but I'll maybe ask it another way. I guess I'm struggling to see how you differentiate yourself in the merchant acquiring business. With the exception of maybe Chase, most banks have lost share over the years. There's an enormous amount of innovation in that space, a lot of capital in that space. You've seen a shift in power to software providers, and legacy merchant acquirers have lost share over the years. I guess what I was going to ask you is whether you can make an argument that it's worth more to somebody else than to you. And I guess the answer to that question from your answer to Vivek's question is that it does provide value to the entire franchise, to the entire business. Is that the answer?

I guess the adjunct to that question is, how do you measure success in the acquiring business? Are you looking at just volume growth, revenue growth, or are there other measures? How do you measure whether this business is one you're succeeding in your strategy here and this business is adding value to the entire franchise?

Andy Cecere (Chairman and CEO)

So, Saul, I'm going to start and then ask Gunjan to add on. This is Andy. I'm going to start by reiterating what I said before, which is this interconnectedness of banking and money movement and payments. And we've made investments in categories and verticals that are very focused on capabilities to provide information and help those businesses run their platform and their business, like healthcare and some of the other areas that we're focused on. So what's happened in payments and money movement has become more embedded in the banking component. And I think that's our advantage versus a pure play merchant provider, is interlocking those components to help them run their business. And we've focused in certain verticals that are, I think, very important in terms of our overall growth opportunities. And in terms of what we're looking for, it's all those things.

It's top-line revenue growth, but importantly, bottom-line profitable revenue growth. And the progress we've made in the tech-led, the interconnected components that we've talked about in terms of those verticals we're focused on are all indications that we're headed in the right directions. We're not where we want to be yet, but we're heading the right way. Gunjan, what would you add?

Gunjan Kedia (President)

You know, add the power of the distribution franchise. We have 15 million clients. And if you look at standalone players that bring a very high level of innovation, as you called it, to the table, their gap is the client franchise. And that's where the partnerships come with some of the innovation in the industry. Saul, it's a lot of infrastructure and investment to connect the transaction and the provision of the services beyond the user experience and the innovation in the front. And so we see very significant demand for a partnership with us. But the model has to transform in the direction that we are going, where we need to be able to provide and connect and have a very easy onboarding experience, very easy, quick ability to bring merchants on and off. And that's all of the investments that we have been making.

So it's the distribution side, and it's all of the backend product capabilities that give us the competitive edge here.

Saul Martinez (Analyst)

Okay. That's helpful. I guess just a quick follow-up then on deposits, John. I guess we're closer to the end of the rate-cutting cycle, although seemingly every day there's shifts in what the forward curve is expecting. But remind us what the through-the-cycle deposit beta you're expecting. I heard mid to high 40s in Q1. I think high 40s, low 50s is what you've - is that the right through-the-cycle beta?

John Stern (SEVP and CFO)

That's right, Saul. So we think about 38% is spot through the cycle as of this quarter. We expect mid- to high-40s% in the first quarter. And assuming there's additional cuts, we would migrate kind of through the cycle to that 50% north of that level is kind of where our expectations are. Thank you.

Saul Martinez (Analyst)

Got it. Okay. Thank you.

Operator (participant)

There are no further questions at this time, Mr. Andersen. I'll turn the conference back over to you.

George Andersen (SVP and Director of Investor Relations)

Thanks, Audra. Thank you to everyone who joined our call this morning. Please contact the Investor Relations Department if you have any follow-up questions. You may now disconnect the call.

Operator (participant)

This concludes today's conference call. Thank you for your participation. You may now disconnect.