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. This call will be recorded and available for replay beginning today at approximately 11 AM 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.

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 2 of today's earnings release presentation, 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.

Thanks, George. Good morning, everyone, and thank you for joining our call. I'll begin on Slide 3. In the fourth quarter, we reported $1.01 per diluted share or $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 4, 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 a 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 31, 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 5 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 6, 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 7 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.

Thanks, Andy. If you turn to Slide 8, 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 9 provides a balance sheet summary. Total average deposits increased 0.7% on a linked quarter basis to $512 billion as we continue 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 31, 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 10, 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 remain 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% to 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.

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 manage 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 in what was a meaningful year for the company. We will now open up the call for Q&A.

And we'll go first to Scott Siefers at Piper Sandler.

Good morning, guys. Thank you for taking the time.

Good morning, Scott.

Hey, John, could you elaborate a bit more on the factors contributing to the expected 3% to 5% revenue growth for the full year '25? Specifically, how much of that comes from net interest income and how much is from fees? Also, for clarification, when referring to the first quarter net interest income guidance, I believe you're indicating it will be flat when excluding the day count difference. I just want to confirm that we should expect a slight decline in reported numbers due to fewer days.

Thanks, Scott, and good morning. Let me address your last question first. Excluding the impact of a couple of days, we would be looking at about $40 million lower on a reported basis, so stable when excluding those two days. Regarding the drivers of the expected 3% to 5% revenue growth, I’ll start with fees and then discuss net interest income. We experienced solid growth in fees and there's significant momentum building, despite some challenges we encountered, especially in prepaid card services and freight, which faced some headwinds. Additionally, the exit from our cash servicing ATM business contributed to these challenges. However, we expect these issues to ease in 2024. We anticipate continued momentum in our core areas. At Investor Day, we mentioned that we expect mid-single-digit fee growth for 2026 and 2027, and we view that as a reasonable range as we forecast for 2025. The growth is driven by strong performance in areas like trust, with good market share and fund formation, along with solid momentum in payments, strategic initiatives, treasury management, and certain capital markets. We are keeping an eye on the mortgage sector, as higher interest rates make it difficult for volumes to improve significantly compared to last year, and gains on sales appear stable. Other revenue is expected to remain in the range of $125 million to $150 million per quarter on average. In summary, we anticipate fee growth and think mid-single-digit growth is a good starting point. As for net interest income, we’re in a strong position. The balance sheet is healthy. We've seen a positive turning point in 2024, with three main factors driving net interest income: improving asset mix with a shift towards higher returning assets, a slowdown in non-interest bearing deposit normalization, and significant fixed asset repricing in our back book, especially with the yield curve steepening. Since our last call, the curve has moved from being inverted to positive, which bodes well for us. For instance, we have around $3 billion in our investment portfolio that reprices quarterly, and we can expect a spread of 150 to 200 basis points from that. Additionally, we have $5 billion to $7 billion in other fixed-rate assets, including residential mortgages and commercial loans, that will also reprice at similar rates, considering current interest rates. Overall, we are very positive about our growth prospects in both fees and interest income, which together underpins our forecast of 3% to 5% total revenue growth.

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

You bet.

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

Hi, good morning.

Good morning.

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.

Good morning, John. Let me just remind you of some of the facts that we shared last time. A payment 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 new 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 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.

Okay. 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?

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 an 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 in that. John coupled 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 category 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.

Okay. Thank you.

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

Hi, good morning.

Good morning, Betsy.

Hi, Betsy.

I noticed that my question may seem a bit precise, but I want to clarify which forward curve your net interest income guidance is based on. I believe you mentioned it earlier, but the reason I ask is that the forward curve has shifted significantly since early December. This is my first question.

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 about 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.

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

Yep. Exactly. So, again, we continue 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 is 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.

And 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?

It's pretty consistent. So I mentioned the $5 billion to $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.

Okay. Thank you so much.

You bet.

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

Good morning.

Morning.

Sorry if I missed this in your prepared remarks. When we consider the guidance for net interest income this year and your revenue outlook, what factors are influencing that from a loan growth perspective? Specifically, what are the assumptions regarding loan and deposit growth? Additionally, are we noticing any early signs of an increase in lending demand?

Sure. Thanks, Ebrahim. So, we did not comment yet on loans, but I would just say in terms for purposes of our forecast, now we're thinking about ’25, 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 the changes we're thinking, hopefully is in the back half of the year, we can see that pick up in loan growth. But in terms of our forecasts and our projections, we anticipate modest for the year.

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.

Sure. So, as I mentioned in payments earlier, we have momentum on the core side. We 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 and prepaid this quarter by about 4 percentage points given the exiting 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 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 ‘24 was below our expectations. And, as we see a lot more, high volume, lower margin type clients continuing their pace. We are 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 have lapped. So, a lot of positive things there. And again, the Union penetration is going to be really paying off for us as well. And so, we see high single-digits there as well.

All right. Thank you.

We'll go next to Erika Najarian at UBS.

Good morning. You announced a $5 billion share repurchase authorization during Investor Day, which I believe generated significant excitement in the market. Regarding the pace of the buybacks, you executed $100 million this quarter. I received your message clearly during the prepared remarks, but can you elaborate on the factors you are considering when determining that pacing? I understand you aim for a modest pace initially, but if loan growth is somewhat sluggish and your revenue guidance reflects a cautious outlook for balance sheet growth, what are the considerations influencing a more conservative start to the buybacks?

Sure. At a high level, it's really about balancing our capital growth to achieve our Category II goals. We discussed aiming for around 10% as a target for Category II. We don't anticipate being recognized as a Category II bank until 2027 or so. On one hand, we have this goal, while on the other hand, if loan growth is weaker, it presents an opportunity for deployment. We're just starting this process, and the pace moving forward will be determined by the factors I mentioned.

As a follow-up, I would like to ask Andy about the projections outlined on Slide 15 regarding the revenue guidance and positive operating leverage. If net interest income or payments fluctuate positively or negatively, it seems that there is enough flexibility in your projections to maintain a baseline of over 200 basis points for what you can achieve in 2025, regardless of the revenue environment.

Short answer, Erika, 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. 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?

We have put significant effort into managing our expenses and are proud of the team's achievements so far. There are still various areas we are exploring and will discuss further throughout the year. We had a notable issue with our real estate, and we are looking for optimization there. Additionally, we see opportunities in procurement and third-party spending, as well as in simplifying our organization by centralizing fragmented groups. Automation of processes is another area of focus, and we have made investments that will help us optimize expenses through automation. We are also seeing a stabilization in our digital investments; we have increased spending along that growth curve and are now in a position where we are reducing costs in our digital efforts, which is encouraging. These are some of the key factors we are considering, along with various other initiatives.

Great. Thank you.

Thanks, Erika.

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

Good morning.

Morning, John.

I would appreciate the breakdown of the revenue growth outlook by fees and your insights on net interest income. Following that commentary, could you share your thoughts on the trajectory of net interest margin as we progress through the year? It would also be helpful to have your perspective on where you expect the margin to settle as an exit rate by the end of 2025, as this would provide better clarity on the medium-term trends. Thank you.

Sure. Thanks, John. We expect net interest margin to increase, following net interest income, due to various factors. From a management perspective, we don't specifically target net interest margin. For instance, this quarter, it decreased by 3 basis points primarily due to liquidity. There will always be fluctuations in this area. However, we believe it will generally trend upwards. As we discussed at Investor Day, while the 3% mark isn't magical, there is considerable momentum in the factors we mentioned that can help us reach that level over time. Key influences on this will include loan growth, which can vary, effective deposit management, and the shape of the yield curve affecting our fixed asset repricing. We certainly expect net interest margin to improve as time progresses.

Got it. Thank you, John. On the M&A front, I know that after the Investor Day, you've emphasized that large whole bank M&A would be more of a long-term consideration rather than a near-term opportunity. Andy, has that perspective changed at all, especially considering the election results and the anticipated shifts in the regulatory landscape? Additionally, what factors might prompt a reconsideration of M&A options for the near term? Thank you.

So, John, our perspective is the same, which is that it's just 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. While large bank M&A may return over the longer term, we're very focused on our organic growth opportunities because we have many of them. That's where we're putting our efforts and priorities right now. Gunjan, maybe you can highlight a couple of them because I think that emphasis is due to the opportunities we have in front of us.

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.

Okay, great. Thank you, Gunjan.

Thanks, John.

We'll take our next question from Mike Mayo at Wells Fargo Securities.

Good morning, Mike.

Good morning, Mike.

You're 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 is down, people are questioning this. What would be your reaction?

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. So that's why we put a 200 basis point plus on that guide. So we'll hit 200 at least. But at the extent that the market helps us on the revenue side with the yield curve and the things that John talked about, I’d 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.

And 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 point contraction in the merchant acquiring yield? Thanks.

Sure. So, Mike, I think I mentioned briefly that our client base has experienced strong growth in same store sales and tech lead initiatives, which have high margins and contribute about a third of our total business on the merchant side. However, on the other side of our client base, we've seen growth in higher volume but lower margin areas, which has continued throughout the year and is creating the disconnect you referenced. Regarding our expectations for 2025, they are influenced by this situation.

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.

All right. Thank you.

Thanks, Mike.

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

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

Sure. This quarter, we experienced significant growth in our commercial products, which has been a positive development for us. We have showcased this growth at various investor events, including Investor Day and our fourth quarter conference. The growth originated from multiple areas, including client-related derivative activity such as interest rate swaps and foreign exchange, along with increases in loan syndication and bond underwriting. Additionally, our new products are starting to contribute, accounting for roughly 20% of our growth this year. The connections we have with the private credit sector have been instrumental in driving this growth. Our expectations for this business remain high, and nothing has changed in that regard.

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 anything to add to the narrative though that the period end was lower?

Certainly. For us, the average balance serves as a more reliable indicator than the ending balance, which can vary significantly. We often observe substantial fluctuations at the end of quarters. For instance, during the third quarter, we experienced significant deposit growth. Although we did see a considerable increase in deposits at the end of the fourth quarter, it was relative to a very strong third quarter. This serves as just one example. In the first quarter, we anticipate stable net interest income, as deposits typically decline seasonally, especially within our institutional and wholesale segments, such as DDA. This is due to factors like the investment activities of our institutional clients or overall engagement from our corporate clients. Therefore, from a deposit perspective, we expect modest growth that aligns with industry trends.

Okay, thank you.

We'll go next to David Long at Raymond James.

Good morning, everyone.

Good morning.

I just wanted to stick with the deposit theme here. And when I look at your average 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?

Sure. Thanks, David. From a deposit perspective, which is included in our growth forecasts that indicate modest growth, I anticipate that consumer and institutional deposits will grow similarly. If I consider both segments separately, the consumer side has shown some fluctuation in competition, particularly with recent rate cuts easing things up, allowing for improved pricing competitiveness. While we might not see immediate results this quarter, we expect retail competitiveness to stabilize over time. On the institutional side, competition is fairly standard at this stage, although quantitative tightening is currently a challenge, as it reduces liquidity and may impact competitiveness. Nevertheless, we believe we will remain very competitive overall. We have introduced several strong new products that are contributing to our deposit growth, and we are confident about our prospects. Those are the key factors to consider.

Excellent. Thanks, John. Appreciate it.

We'll go next to Vivek Juneja at JPMorgan.

Hi, thanks for taking my question, Andy. I have a strategic question regarding payments, which has been discussed previously. I heard Gunjan's response indicating that the tech-led initiatives are performing well, but the rest seems to be dragging, likely impacting next year. Considering the business and the pricing pressures, have you thought about whether it might be wise to divest from this area and invest the capital in other sectors where you have a stronger position and are achieving better returns? Why wouldn't that be a consideration?

I'll start, Vivek, 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. And the concept of moving money together with storing money and lending money is all intertwined. And 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. And the interconnectedness of that is as critical as it's been in the last 20 years. So, we're very focused on this business because of that opportunity, and Gunjan, why don't you add on?

Vivek, good morning. It's a thoughtful question. And I'll add to what Andy's 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, and a 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 our 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 would 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, 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.

Okay. Thank you.

Thanks, Vivek.

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

Good morning, Bill.

Good morning, Bill.

Your tech-led merchant processing service revenue growth seems solid at the 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?

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 will 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.

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?

From a deposit cost perspective, I'll refer to it in beta terms for clarity. We will see some impact next quarter, but the Fed's actions in the fourth quarter will affect the first quarter. Our cumulative beta for the fourth quarter was 38%. We expect our beta to increase to the mid to high 40s in our first quarter results, leading to a decrease in the deposit rate moving forward.

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?

Sure. This quarter is actually a really good example of our hedging program at work and why it's working as intended. We have pay-fix swaps and we have receive-fix swaps. The pay-fix swaps are intended to help protect capital when interest rates rise. They did rise. We saw 80 basis point upward movement. Our AOCI number did increase, but not nearly the magnitude that perhaps others and things of that would help us manage that Cat II capital lull that I spoke to. Obviously, with the pay-fix swaps, that's going to create a little bit of a drag on NII. However, offsetting that was our receive-fix swaps that were attached to either commercial loans or debt. And those receive-fix 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.

Thank you for taking my questions.

You bet.

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

Good morning, everyone. Vivek mentioned my question already, but I would like to rephrase it. I find it challenging to understand how you set yourselves apart in the merchant acquiring sector. Aside from Chase, many banks have lost market share in recent years. There is a significant amount of innovation and capital flowing into this area, with a noticeable shift towards software providers as traditional merchant acquirers have been losing ground. My question is whether you can argue that your business is more valuable to someone else than to you. From your response to Vivek’s question, it seems that you believe it does add value to the overall business. Is that correct? Additionally, how do you define success in your acquiring businesses? Do you focus solely on volume growth and revenue growth, or are there other metrics involved? How do you evaluate whether this part of the business is succeeding and contributing positively to the overall franchise?

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 as 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 and 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 in the right way. Gunjan, what would you add?

At 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 back-end product capabilities that may give us the competitive edge here.

Okay, that's helpful. Just a quick follow-up on deposits, John. It seems we're closer to the end of the rate cutting cycle, although the expectations in the forward curve seem to shift daily. Could you remind us what through-the-cycle deposit beta you're anticipating? I heard it was mid-40s in Q1. Is it correct to expect high 40s to low 50s for the through-the-cycle beta?

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.

Got it. Okay. Thank you.

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

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.

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