Huntington Bancshares Inc

NASDAQ:HBAN

Earnings Call Analysis

Huntington Navigates Economic Headwinds, Eyes Growth

Amidst challenging conditions, Huntington Bank focused on customer acquisition and service excellence, achieving a 3% rise in consumer primary bank relationships and realigning business segments. The bank also bolstered its balance sheet, improved capital ratios, and maintained low net charge-offs of 23 basis points. An envisioned acceleration of loan growth between 3% and 5% and continued deposit growth of 2% to 4% in 2024 is expected to support a net interest income change ranging from a 2% decrease to a 2% increase, while net interest margin could expand by up to 10 basis points in a 'higher for longer' rate scenario. Noninterest income is forecasted to rise by 5% to 7%, driven by capital markets, payments, and wealth management, despite a projected 4.5% increase in core expenses.

Robust Financial Performance and Strategic Expansion

In the latest earnings call, the company presented a testament to sound financial growth and strategic initiatives. They reported notable deposit growth by over $3 billion and a $2.5 billion increase in loans by 2% over the full year, enhancing both the balance sheet and capital ratios. This trend is expected to not only continue but also accelerate into 2024, with a key focus on expanding consumer primary bank relationships by 3% and penetrating high-growth markets.

Focused Objectives and Optimistic Outlook for 2024

The company has set a laser-focus on its objectives for 2024. It plans to leverage its strong position to foster deposit and loan growth, which in turn is anticipated to drive revenue growth. This confident stance is backed by dynamic balance sheet management and the improving economic backdrop, suggesting a continued GDP growth and avoiding a 'hard landing'. Despite this aggressive growth strategy, the company maintains a moderate-to-low risk appetite.

Continued Strength in Liquidity and Capital Ratios

Their liquidity remains strong and resilient, with available liquidity boasting at $93 billion and a healthy deposit base wherein 70% of the deposits are insured. Concurrently, the company has prudently managed its hedge duration, reducing it from 4.1 years to 3.7 years over the past 18 months, indicating a cautious and calculated approach to risk management.

Fee Growth Strategies and Capital Management

Fee growth strategies have been centered around capital markets, payments, and wealth management, collectively forming 63% of total noninterest income. With positive trends in these sectors—for example, wealth advisory households growing by 11% year-over-year—the outlook for fee revenue growth is constructive. The company also aims to drive its common equity Tier 1 ratio into the optimal 9%-10% range, ensuring a robust capital structure to support future growth.

Forecasts and Guidance for 2024

Looking ahead, the company expects loan growth between 3% and 5% and deposits to grow by 2% to 4%. Net interest income is predicted to fluctuate between a decrease of 2% and an increase of 2%, hinging on the interplay between loan growth and interest rate scenarios. If conditions are favorable, net interest income could grow by about 2%; conversely, a less optimistic scenario could lead to a 2 percentage point decline. The company aims for noninterest income growth of 5% to 7% and core expenses to increase by 4.5%, symbolizing judicious financial maneuvering to navigate through 2024.

Earnings Call Transcript 2023-Q4

[Operator]

Greetings, and welcome to Huntington Bancshares 2023 Fourth Quarter Earnings Review. [Operator Instructions] As a reminder, this conference is being recorded.

I would now like to turn the conference over to Tim Sedabres, Director of Investor Relations. Please go ahead.

[Timothy Sedabres, executive]

Thank you, operator. Welcome, everyone, and good morning. Copies of the slides we will be reviewing today can be found on the Investor Relations section of our website, www.huntington.com. As a reminder, this call is being recorded, and a replay will be available starting about one hour from the close of the call. Our presenters today are Steve Steinour, Chairman, President and CEO; and Zach Wasserman, Chief Financial Officer. Brendan Lawlor, Chief Credit Officer, will join us for the Q&A.

Earnings documents, which include our forward-looking statements disclaimer and non-GAAP information are available on the Investor Relations section of our website.

With that, let me now turn it over to Steve.

[Stephen Steinour, executive]

Thanks, Tim. Good morning, everyone, and welcome. Thank you for joining the call today. We're pleased to announce our fourth quarter results, which Zach will detail later. These results are again supported by our colleagues across the bank who live our purpose every day as we make people's lives better, help businesses thrive and strengthen the communities we serve.

Now on to Slide 4. There are 5 key messages we want to leave you with today. First, we are leveraging our position of strength and executing on our strategic growth initiatives. We are well positioned to benefit during times like these. We managed our capital levels to enable us to accelerate initiatives during 2023 and support continued growth. We added key specialty verticals in Commercial Banking and expanded into the Carolinas.

Second, we outperformed on both deposits and loans throughout the year. Our colleagues are acquiring new customers and deepening our existing customer relationships. Importantly, we delivered this growth while effectively managing our deposit beta.

Third, we expect to modestly expand net interest income as we manage the challenges of the interest rate cycle and are driving increased fee revenues.

Fourth, we are rigorously managing credit across our portfolios, consistent with our aggregate moderate to low risk appetite. Credit trends are normalizing as expected, and we continue to believe we will outperform the industry on credit through the cycle. Finally, we remain intently focused on our core strategies. Huntington remains resilient through the events of 2023, emerging as one of the strongest regional banks. We maintained our disciplined execution, and we expect to grow earnings over the course of 2024 and continuing into 2025 and beyond.

I will move us on to Slide 5 to recap our performance in 2023. Huntington delivered solid results over the course of the year against a challenging backdrop. While the banking sector faced headwinds early in the year, Huntington emerged as a secular winner, gaining new customers, adding over $3 billion of deposit growth and further bolstering our capital. We also increased loans by $2.5 billion for the full year or 2%, while driving capital ratios higher. We expect the pace of loan growth to accelerate in 2024. We added to our revenue base, primarily as net interest income increased by 3.3% for the full year.

We maintained our leadership in customer satisfaction and digital capabilities having again been awarded the #1 ranking by J.D. Power for both categories. We remain focused on executing our strategies, including growing consumer primary bank relationships by 3%. Additionally, we completed the realignment of business segments. We also delivered on efficiency initiatives, including Operation Accelerate, the voluntary retirement program, staffing efficiencies and business process offshoring and branch and other real estate consolidations. We were nimble and opportunistic, adding key talent this past year with the addition of 3 new specialty commercial banking verticals.

We also expanded our commercial and regional bank into the Carolinas, adding experienced teams in these attractive and high-growth markets. Additionally, we further strengthened our balance sheet and drove capital ratios higher over the course of the year. We are getting ahead of proposed industry requirements. And finally, credit was managed exceptionally well with full year net charge-offs of 23 basis points.

Moving to Slide 6. Looking ahead to 2024, we have a clear set of objectives. We will leverage our position of strength to increase growth of both deposits and loans. This outlook will result in accelerated revenue growth and is further bolstered by fee opportunities. This posture coupled with our dynamic balance sheet management and hedging programs is expected to benefit the revenue and profitability outlook for 2024 and further expand into 2025 and beyond. This aligns with the improving macro backdrop, the higher probability of continued GDP growth and the avoidance of a hard landing.

While we deliver this accelerated growth, we will continue to maintain our aggregate moderate-to-low risk appetite.

Zach, over to you to provide more detail on our financial performance.

[Zachary Wasserman, executive]

Thanks, Steve, and good morning, everyone. Slide 7 provides highlights of our fourth quarter results. We reported GAAP earnings per common share of $0.15 and adjusted EPS of $0.27. The quarter included $226 million of notable items, primarily related to the FDIC special assessment, which impacted EPS by $0.12 per common share. Additionally, the termination of the pay fixed swaption hedging program impacted pretax income by $74 million or $0.04 per share.

Return on tangible common equity, or ROTCE, came in at 8.4% for the quarter. Adjusted for notable items, ROTCE was 15.1%, and average deposits continued their trend of growth into the fourth quarter, increasing by $1.5 billion or 1%. Cumulative deposit beta totaled 41% through year-end. Loan balances increased by $445 million as we continue to optimize the pace of loan growth to drive the highest return on capital. Credit quality remains strong. The trend is normalizing consistent with our expectations, and net charge-offs totaled 31 basis points. Allowance for credit losses ended the quarter at 1.97%.

Turning to Slide 8. As I noted, average loan balances increased quarter-over-quarter and were higher by 2% year-over-year. We expect the pace of future loan growth to accelerate over the course of 2024. Total commercial loans increased by $125 million for the quarter and included distribution finance, which increased by $225 million, benefited by normal seasonality as manufacturer shipments increased due to inventory build of winter products. Auto floor plan increased by $359 million and CRE balances, which declined by $361 million, including the impact of payoffs and normal amortization and all other commercial categories net decreased as we continue to drive optimization towards the highest returns.

In Consumer, growth was led by residential mortgage, which increased by $295 million in RV Marine, which increased by $121 million, while auto loan balances declined for the quarter.

Turning to Slide 9, as noted, we continued to gather deposits consistently in the fourth quarter. Average deposits increased by $1.5 billion or 1% from the prior quarter.

Turning to Slide 10. Growth was maintained each month throughout the fourth quarter, continuing the recent trend. Total cumulative deposit beta ended the year at 41%, in line with our expectations and reflecting the decelerating rate of change we would expect at this point in the rate cycle. As we've noted in the past, where beta ultimately tops out will be a function of the end game for the rate cycle in terms of the level and timing of the peak and the duration of any extended pause before a decrease.

Given market expectations for rate cuts to start sometime in 2024, our current outlook for deposit beta remains unchanged, trending a few percentage points higher and then beginning to revert and fall if and when we see rate cuts from the Fed. When interest rate cuts commence, we expect to manage betas on the way down with the same discipline as we have during the increasing rate cycle.

Turning to Slide 11. Noninterest-bearing mix shift continues to track closely to our forecast with deceleration of sequential changes. The noninterest-bearing percentage decreased by 80 basis points from the third quarter and we continue to expect this mix shift to moderate and stabilize during 2024.

On to Slide 12. For the quarter, net interest income decreased by $52 million or 3.8% to $1.327 billion. Net interest margin declined sequentially to 3.07% in line with our forecast. Cumulatively over the cycle, we have benefited from our asset sensitivity and the expansion of margins with net interest revenues growing at an 8% CAGR over the past 2 years.

Reconciling the change in NIM from Q3, we saw a decrease of 13 basis points. This was primarily due to lower spread net of free funds, which accounted for 9 basis points, along with a 2 basis point negative impact from lower FHLB stock dividends and a 2 basis point reduction from hedging.

Turning to Slide 13. Let me share a few added thoughts around the fixed rate loan repricing opportunity that will benefit us over the moderate term. The construct of our balance sheet is approximately half fully variable rate. 10% in indirect auto, which is a shorter approximately 2-year average life and 10% in arms with a 4-year average life. The remainder of approximately 30% is longer average life fixed rate.

We have seen notable increases in fixed asset portfolio yields thus far in the rate cycle. Even as the forward curve forecasts lower short-term rates, many of our fixed rate loan portfolios retain substantial upside repricing opportunity for some time to come. We forecast approximately $13 billion to $15 billion of fixed rate loan repricing opportunity in 2024 with an estimated yield benefit of approximately 350 basis points.

Slide 14 provides the drivers of our spread revenue growth. As a reminder, we continue to analyze and develop action plans for a wide range of potential economic and interest rate scenarios. The basis of our planning and guidance continues to be a central set of those scenarios that is bounded on the lower end by a scenario which includes 5 rate cuts in 2024. The higher scenario assumes rates stay higher for longer and tracks closely with the Fed's dot plot from year-end. This scenario assumes 3 cuts in 2024. We continue to be focused on managing net interest margin in a tight corridor. Should the lower rate scenario play out and we see rate cuts as early as March that will likely result in a margin over the course of the year within a range near the level we saw in the fourth quarter. This would equate to a net interest margin between 3% and 3.1% for each quarter of 2024. If the higher for longer scenario comes to pass, we expect the margin to expand and at a level that is up to 10 basis points above that.

As we saw in December, the outlook for longer-term interest rates also moved lower significantly. There were a number of benefits from this lower market rate outlook. First, it resulted in higher capital levels, given AOCI accretion, which supports our accelerated loan growth outlook now. Second, it provides for easing deposit competition over time. It provides credit support for borrowers with the potential for locking in lower long-term rates. However, the rate outlook is incrementally more challenging for full year spread revenue than the levels we had seen underlying our guidance in December. Net of these items, including the forecasted pace of loan growth, we now expect net interest income on a dollar basis to trough in the first quarter before expanding sequentially from that level over the course of the year.

Turning to Slide 15. Our contingent and available liquidity continues to be robust at $93 billion and has grown quarter-over-quarter. At quarter end, we continue to benefit from a diverse and highly granular deposit base with 70% insured deposits. Our pool of available liquidity represented 206% of total uninsured deposits appear leading coverage.

Turning to Slide 16. Our level of cash and securities at year-end increased as we've begun to reinvest portfolio cash flows during the fourth quarter. This investment strategy is consistent with our approach to continue to manage the unhedged duration of the portfolio lower over time. We have reduced overall hedge duration of the portfolio from 4.1 years to 3.7 years over the past 18 months.

Turning to Slide 17. We we've updated our forecast for the recapture of AOCI. As of year-end, we've recaptured 26% of total AOCI from the peak level at September 30. Using market rates at year-end we would recapture an estimated incremental 44% of AOCI over the next 3 years.

Turning to Slide 18. We continue to be dynamic in positioning our hedging program. As the rate outlook changed over the course of the fourth quarter, we focused our objective incrementally on the protection of NIM in downrate scenarios and actively reduced instruments that were intended to protect capital in uprate scenarios. As we announced in late December, we terminated the pay-fixed swaptions program as our assessment of the probability for [indiscernible] moves decreased. Over the course of Q2 through Q4, this program worked as intended, providing significant protection against possible tail risk up rate moves with a modest overall cost for that insurance.

Additionally, during the quarter, we added to our down rate NIM protection strategies, adding $2.1 billion of forward starting received fixed swaps and adding $1 billion of floor spreads. We exited $2 billion of collars, which were near expiration. Our objective with respect to our downgrade hedging activities remains unchanged to support the management of net interest margin in a tighter range as possible.

Moving on to Slide 19. Our fee growth strategies remain centered on 3 key areas: capital markets, payments and wealth management. Note, this quarter in our earnings materials we've updated the presentation of our noninterest income categories in order to more clearly highlight our strategic areas of focus and more closely align to the way we manage the business.

Slide 35 in the appendix provides further detail on the components of each line item. These 3 key focus areas for fee growth collectively represents 63% of total noninterest income. We're seeing positive underlying growth in each of these areas. In Capital Markets, we're pleased that revenues expanded sequentially. Both advisory and core bank capital market products grew in the quarter. Our outlook is constructive for 2024, and we expect capital markets to remain a key driver for fee revenue growth over the medium term.

Payments and Cash Management revenue includes debit and credit card revenues, along with treasury management and merchant processing. Our payments opportunity is substantial, reflecting 31% of total fee revenues today, with the potential for significant growth over time. Wealth and asset management revenue has benefited from the realignment earlier this year, which brought together our private bank and retail advisory businesses under one umbrella. Our advisory penetration rate of the customer base continues to increase as wealth advisory households have grown 11% year-over-year and assets under management are up 16% from a year ago.

Moving on to Slide 20. On an overall level, GAAP noninterest income decreased $104 million to $405 million for the fourth quarter. Excluding the mark-to-market on the pay fix swaptions and the CRT premium, fees increased by $5 million quarter-over-quarter.

Moving on to Slide 21 on expenses. GAAP noninterest expense increased by $258 million and underlying core expenses increased by $47 million. As I mentioned, we incurred $226 million of notable item expenses related primarily to the FDIC deposit insurance fund special assessment during the quarter. It also included the last portion of costs related to our staffing efficiency program and corporate real estate consolidations. Excluding these items, core expense included higher personnel and professional services, driven by seasonally higher benefits expense incentives as well as [Technical Difficulty] expenses. The level of expenses we saw in the fourth quarter is largely consistent with the dollar amount we expect quarterly over the course of 2024. This is inclusive of the investments we've discussed previously as well as sustained efficiencies we are driving across the company.

Slide 22 recaps our capital position. Reported common equity Tier 1 increased to 10.3% and has increased sequentially for 5 quarters. Our adjusted CET1 ratio, inclusive of AOCI, was 8.6%. This metric increased 58 basis points compared to the prior quarter, driven by adjusted earnings net of dividends as well as the benefit from the credit risk transfer transaction we announced in December, which more than offset the impact from the FDIC special assessment. We also saw a significant benefit from AOCI recapture given the move in rates during the quarter. Our capital management strategy remains focused on driving capital ratios higher while maintaining our top priority to fund high-return loan growth. We intend to drive adjusted CET1 inclusive of AOCI into our operating range of 9% to 10%.

On Slide 23, a credit quality continues to perform very well and with normalization of metrics consistent with our expectations. Net charge-offs were 31 basis points for the quarter. This was higher than Q3 by 7 basis points and resulted in full year net charge-offs of 23 basis points. This outcome was aligned with our outlook for full year net charge-offs between 20 and 30 basis points at the low end of our target through the cycle range for net charge-offs of 25 to 45 basis points. Gross charge-offs in the fourth quarter were relatively flat with the overall change in net charge-offs, largely a result of lower recoveries.

Given ongoing normalization, nonperforming assets increased from the previous quarter, while remaining below the prior 2021 level. The criticized asset ratio increased quarter-over-quarter, with risk rating changes within commercial real estate being the largest component. Allowance for credit losses was higher by 1 basis point to 1.97% of total loans, and our ACL coverage ratio continues to be among the top quartile in the peer group.

Let's turn to our outlook for 2024. As we mentioned, we expect to drive accelerated loan growth between 3% and 5% for the full year. Deposits are likewise expected to continue their solid trend of growth between 2% and 4%. As a result of the loan growth and margin outlook I shared earlier, net interest income for the full year is expected to range between down 2% to up 2%. The pace of loan growth, coupled with the rate scenario we see actually play out will drive the range of spread revenue. If the higher for longer rate scenario plays out and loan growth tracks to the top end of our range, we expect net interest income to grow by approximately 2%. If the lower scenario comes to fruition and loan growth tracks to the lower end of our growth range, we could see spread revenue declining 2 percentage points.

In both scenarios, I expect net interest income to trough in the first quarter before expanding throughout 2024 from that level. Noninterest income on a core underlying basis is expected to increase between 5% and 7%. The baseline of core excludes notable items, the mark-to-market impact from the pay fix swaption program as well as CRT impacts. Fee revenue growth is expected to be driven primarily by capital markets, payments and wealth management. Core expenses are expected to increase by 4.5%. This level reflects the finalization of our budget and includes the additional loan growth we discussed earlier, which will have some incremental compensation expense tied to production. Expenses could fluctuate depending on the level of revenue-driven compensation, primarily associated with our fee-based revenues, including capital markets. The tax rate is expected to be approximately 19% for the full year. We expect net charge-offs for the full year to be between 25 and 35 basis points.

With that, we'll conclude our prepared remarks and move to questions and answers. Tim, over to you.

[Timothy Sedabres, executive]

Thanks, Zach. Operator, we will now take questions. We ask that as a courtesy to your peers, each person ask only 1 question and 1 related follow-up. And then if that person has additional questions, he or she can add themselves back into the queue. Thank you.

[Operator]

[Operator Instructions] Our first question today is coming from the line of Manan Gosalia with Morgan Stanley.

[Manan Gosalia, analyst]

I wanted to start off on the expense guide change -- I know it's a small change from 4% to 4.5%, but it is higher than some of your peers are guiding to for 2024. I was hoping you could elaborate more on what's going into that? And also if there is a similar flex on the expense side on the revenues. So for instance, if you get to your down 2% NII number with more rate cuts. Does that drive a little bit of flex in the expense side as well?

[Zachary Wasserman, executive]

Great question, Manan, this is Zach, I'll take that. The guidance that we had given back in October and in December was really primarily designed to be an early view for you. So you can get an insight into some of the key decisions we're making. And for us, we're really be able to just discuss that in detail. That was the approximate 4% we discussed before. The finalization of our budget reflects the additional loan growth that we've now added to the plan and associated [indiscernible] revenues as well is that what represents the difference up to 4.5%. To give you a sense, it's about $5 million a quarter, so relatively small. I think you are -- the underlying drivers of that are unchanged from what we have discussed before.

We'll continue to drive significant efficiencies in the core based on expenses with a number of programs. We'll continue to invest in our strategic growth initiatives. We'll execute on the incremental build of capabilities and automation and data to get ahead of coming regulations and we'll execute on the news really attractive commercial growth opportunities we've discussed before. All of that's included in that number and no change to our expectation as well about reducing that growth rate as we go into 2024, 2025, excuse me, back to more normalized levels.

As it relates to your question in terms of the kind of marginal sensitivity. Certainly, that will be just under [ react ]. I think the expense on guidance is generally calibrated to so the middle of the ranges we've got in growth in revenues. And so some potential upside of expenses if all of the revenue hit the high end and likewise, some [indiscernible] opportunity if the revenues were [indiscernible].

[Manan Gosalia, analyst]

Great. And my next question was on the deposit franchise. You have a pretty strong consumer deposit franchise. And some of your peers have highlighted that there's still some lagged upward repricing in deposits there. So can you talk about how you expect those deposits to behave over the next few quarters and then as the Fed begins to cut rates? .

[Zachary Wasserman, executive]

What we've been seeing in the marketplace broadly with respect to deposit cost and deposit beta, both across both consumer and commercial is as we're going to expect a deceleration of the sequential changes and very much for us trending highly aligned to our expectations. As well, I will tell you that we are beginning to see in the marketplace a fairly constructive initial signs of firms preparing for what will likely be soon a down-rate environment with a shortening, for example, of time deposit terms change of promotional terms of our money market and select testing of different price points for unique segments and geographies all, which is what you'd expect to presage will ultimately be a series of down data moves.

With respect to your specific question on consumer and sort of build that trend. I think the answer is yes. What we have been saying all along is that deposit costs and beta will continue to trend out of decelerating rate through the pause period until such time as there is a rate reduction. That's our expectation as well. And we say the go-to-market pricing is generally pretty consistent, if not testing somewhat lower price points, but there's, of course, sort of an embedded momentum of somewhat upward bias in terms of pricing for at least out of the quarter here, and then we'll see. Do we get a rate cut in March, somewhat aggressive in our view as possible, which case down rate begins very quickly. The rate environment holds out for the pause until September, in which case we'll see kind of a longer period of drift.

[Operator]

Our next question is coming from the line of Erika Najarian with UBS.

[L. Erika Penala, analyst]

And by the way, whoever wrote that script, the guidance could not be any clearer, so that was great. Just that being said, a few follow-up questions. The loan growth guidance from your peers would imply the macro outlook, which is pretty consensus is indicative of software opportunities and perhaps this is a good chance. Clearly, you've been telling us for the past few years that you've set yourself up differently and you've got yourself up differently to outperform. And maybe go back through those opportunities that I think that the average loan growth number is certainly notable versus peers and perhaps remind us of why Huntington is a particularly unique set of growth opportunity for this year.

[Stephen Steinour, executive]

Erika, this is Steve. I'll start with that because you've asked a broader history. And then [indiscernible]. So first, we do think the discipline on our aggregate moderate to low risk appetite, which has been in place now for 14 years, has been a governor. And it has helped us as we've decided what business to pursue and what not to see.

With that in mind, we've been very purposeful and strategic about growing these businesses. And you saw at the Investor Day mid-teens rate of growth like the specialty banking. So we have a very strong middle market core banking set of capabilities. We have a tremendous amount of small business capabilities and capacity. We have market density in Ohio on small business and we're achieving that now in other states. So the core sort of regional banking franchise performing very, very well. And you add to that the specialties that have been put in place, just 3 new ones last year, which by the way, they're all off to terrific starts. And then the expansion we've been in like Dallas and Charlotte for a decade or more, when we see opportunities, we may pursue them.

An example of that is in the Carolinas, where we believe we've got a fanatic group of new colleagues coming to us with teams. These are some just outstanding people that we've been following for years and it all came together. We were investing, others were not, and there was some moment to be dynamic.

In addition to that, we still have opportunities in the TCF markets. We're doing incredibly well in Michigan. But what I would say we're early stage still in Chicago, Twin Cities and Denver. And we like those markets, each of those markets. So we believe with the investments we made in specialty banking, the core regional bank performing well with opportunity. We've got lots of growth of potential in the next few years. And that's with the -- I didn't talk about the asset finance business. Our distribution finance business is the horse they had a phenomenal year last year. Our auto business is one of our best businesses. We've got one of our really terrific teams in that area. Floorplan has done very, very well in terms of its growth as well. So lots of growth options, the equipment finance more broadly, a lot of growth options in that, and we're seeing that through the cycle. And so we believe we're poised to outperform and have budgeted and expect our colleagues to do so in the coming years.

[Zachary Wasserman, executive]

I just want to talk on 2 things. First of all, thanks for the compliment and certainly all the credit to our terrific Investor Relations team. But just the one thing I would add on top of that is we were pretty purposeful about staying on a growth splitting across the board. And importantly, in terms of the financial resources and investment that we're putting against our core growth opportunities and recognize that the net outcome of that, including some of the other things that we want to do in terms of data and automation capabilities would result in an overall expense growth. It was higher than we would want to have relative to revenue growth, higher than we would typically target and it certainly was something we discussed at length, as you know. But we took that view purposely and recognized it was contrarian because in our view that the long-term earnings potential of staying in that growth buster is so much more advantageous than worry to have really significantly ratcheted back investments and expenses. And so a bit of short-term challenge with respect to operating leverage will yield very significantly better earnings growth trajectory through the course of 2024 and 2025 earnings outlook looks exceptionally strong as well. So just to tack on to Steve's point, I think the whole system is really working and [indiscernible]

[L. Erika Penala, analyst]

For sure. And you had the capital. So it all makes sense. And just a follow-up question. Again, so many moving pieces in terms of the rate outlook. But Zach, if maybe update us on your rate sensitivity as of 12/31 [Technical Difficulty] in terms of your balance sheet management? And also, if you could give us a little bit more detail about what you mean in terms of managing the betas on the way down at a similar discipline and I wonder if you could give us maybe your expectations on deposit beta for the first 100 basis points of rate cut.

[Zachary Wasserman, executive]

Great questions, both. There's a lot in there to unpack. So we address those both [ outlined ] asset sensitivity for December, I expect it to be roughly consistent with the asset sensitivity we saw that was reported in the end of October and you see that come out in the Q or the K. As we've discussed over time, the business is naturally asset sensitive. And so clearly, on the way up with the interest rate segment benefited very significantly in terms of margin expansion in revenue growth.

I will note as well, something just to be porting to assess as you're thinking about asset sensitivity is in our securities portfolio. As you know, we hedged a large portion of our variable for-sale securities, which has benefited significantly in terms of yields rising higher protecting capital in the asset sensitivity metric in the dollar undergrad scenario, for example, it represents about a percentage point of additional sensitivity from those swaps. Those swaps will roll off over the course of the next 12 to 18 months. And most of that impact on sensitivity will begin to ramp off starting in the second half of 2014 and continuing on for about a 12-month period thereafter.

I'll just say as an important point is those sensitivity metrics are pretty academic and not standardized across the industry. With lots of assumptions of the beta being the most significant, but also whether those analyses are ramped on top of the forward curve or whether they're just from a start point. Ours is a ramp on top of the forward curve. So certainly, if I support to assess those assumptions pretty strictly in comparing those metrics across firms.

Back to -- so in terms of our [indiscernible] management posture, incrementally from here, I see the opportunity to add downside rate reduction hedges. Our hedging strategy is incrementally shifting from a focus on capital production to a focus on down rate protection, as we discussed in the prepared remarks. And we added some of that in Q4, I suspect we'll continue to be incrementally adding into those down protection strategies over time, which would gradually reduce downside asset sensitivity. In terms of deposit beta and what we would be expecting for the first x basis points, our to give you a sense, in the scenario that I'm looking at where rates in fact, begin to fall in March and then have 5 cuts in them, so it's a little more in your scenario, we would expect to see about a 20% roughly down beta over a 3-quarter period by the end of 2024 would, of course, be less than that. If there was an extended pause through sort of the late summertime period. But just to give you a sense of the sensitivity to your question.

[Operator]

Our next question is from the line of John Pancari with Evercore ISI.

[John Pancari, analyst]

On the capital front, I know your CET1 increased nicely, about 15 basis points to [indiscernible] in the fourth quarter. Just as you look at the trajectory here and your outlook for earnings and capital -- organic capital generation, how are you thinking about potentially ramping up buybacks and capital return overall.

[Zachary Wasserman, executive]

We're very pleased with the outcomes around the overall action plan we've had with respect to managing capital and our capital priorities throughout the course of 2023 as we talked about actively modulating the pace of loan growth to balance additional loan growth in revenue with also accreting capital on the balance sheet clearly in the fourth quarter benefited significantly from a recapture of ACI, which allows us now to even yet again, accelerate the pace of wins we discussed earlier. And for the foreseeable future, I see us continuing on with that posture driving the most important capital per we have is to fund higher term loan growth. And there is a significant opportunity for us to do that, which is the most value-creating decision that's in front of us and importantly, at 8.6%, our adjusted CET1 is -- it has been rising a lot and want to drive that into the 9% to 10% operating range that we've discussed over time. So I think for the foreseeable future, we'll continue on with that plan. Once we get into the 9% to 10% range with adjusted CET1, we'll reassess our posture with respect to share repurchases.

Over time, share repurchases are a really important point, a part of the value creation model for the company, and I actually expect us to get back to them. And we're going to drive through those outcomes as soon as we possibly have.

[Stephen Steinour, executive]

And John, as Zach shared with you on the third quarter call, we are advancing as if the pending capital requirements are in place. So we're building capital now that will meet those requirements should they be adopted.

[John Pancari, analyst]

Great. All right. And then also for you, Steve, I guess related to that, maybe if you could just talk about the whole debate around the need for scale as you look longer term at the evolution that's going on right now within the regional banks [Technical Difficulty] last year's failures and so the regulatory requirements and the need for scale to compete. How do you view the potential for whole bank M&A as a role in Huntington's outlook? And what's the earliest do you think from an industry perspective, not necessarily for Huntington that you think we can actually see a pickup in whole bank M&A given the backdrop in regulators.

[Stephen Steinour, executive]

Well, that's a series of questions, John. I'll try to answer them, but I may miss on one aspect. This is back up for a moment, you had 3 idiosyncratic banks failed. And you've seen the rest of the industry sort of adjust and adopt and respond very quickly. And the poor strength of the industry, I don't think is in question now. For us, we believe in having a very focused, disciplined and a broadly diversified set of businesses, and we've been able to build those and achieve that posture and it has served us very, very well as we've seen in the second half of last year and continuing to this year. So we're very bullish on our ability to organically grow and expect, and that's our focus. We'll continue to do that. You may see further announcement strong this year in terms of organic growth moves and I expect that we will continue to be contrarian, but agile, as we continue to advance.

We think we have tremendous opportunities already in the business lines that we have. So in terms of scale, I think the regulatory response is in reaction to those 3 failures is raising questions about how much tailoring will the industry banks will benefit from in the industry over time. The expectations have clearly increased as they should. and we are investing in our risk management platform. I think I shared on the third quarter call, for example, we will have much better intraday visibility on deposit flows in the near term as a consequence. There are a series of things like this that we're addressing.

Now I don't know the -- we've been investing in risk management since [indiscernible] 2009, so I don't know how we compare really compared to other banks. I think we've always viewed the stress test results where we've been top quartile or even leading in terms of the portfolio stretches by the regulators as a barometer. And it looks like that was a very good measure, at least at this point. So we're not anticipating a change in posture at this stage. We don't feel compelled that we have to do something. And yet at the same time, should there be opportunities somewhere in the future, we take a look, but it has to be in a risk-adjusted context that makes sense and I don't see that activity in '24. I think we've got a tremendous amount of core growth to deliver, and we're excited about that.

[Operator]

Our next question is from the line of Steven Alexopoulos with JPMorgan.

[Steven Alexopoulos, analyst]

I want to start for you that big picture. So historically, a steep yield curve has been a positive catalyst for bank margins and earning. Given how you position the balance sheet, right, with the use of hedges, do you even [ essence ] traded away much of that potential benefit or to have a more stable NIM today? .

[Unknown Executive]

Great question, Steve. I think the short answer to your question is no. The steeper yield curve continues to better than us. Obviously, that's that environment would be indicative of funding costs, which are -- which would represent solid margins against where asset yields are.

I think more of this really strange environment with inverted yield curves with a dramatic kind of reduction forecasted pretty quick here. So we'll see how it all plays out. But I think for us, the puts and takes with respect to NIM outlook in the modern 2024. One, we're going to continue to benefit very significantly from fixed asset repricing. We try to provide some incremental clarity about that in the prepared remarks in the presentation [indiscernible] 1500 basis point move in overall portfolio yield in the key categories, we'll continue to see that benefit us not only '24, but '25 and beyond.

Another thing is for us, as the curve becomes less inverted, we'll see our negative carry from our downgrade hedge protection program reduced the negative carry impact, by the way, in Q4 it was around 17 basis points of drag. We've talked about likely we'll see about 10 bps of that come back to us if you believe the scenario kind of pretty align the forward curve here over the next of 4 quarters. Funding costs, again, in a steeper yield curve environment where short rates have fallen, we'll really start to benefit us in terms of beginning to [indiscernible] data. We're actually executing on down relative to Erika's question earlier. And those things in total, essentially offset for us in our new the variable yield reduction that we'll see if and when the short end comes down.

So I don't believe that, that Goldilocks scenario of a nice upward [indiscernible] is accretive to margins and a supportive of it. And the goal we've got is the same, to try to really color the NIM here, put a floor under it and really position for [indiscernible] And I think the last say is kind of fit to your question as well. The modeling that we have done about 2025, so say for a while, it really highlights NIM expansion opportunities, which again is sort of an indication that the upward sloping yield curve is positive.

[Steven Alexopoulos, analyst]

Okay. That's helpful. And [indiscernible] question because earlier you said if the rates stay higher for longer, your NIM would be about 10 basis points higher in 2024 versus the Fed cutting. But as we move beyond 2025, 2026, there's a clear benefit to it. Are you able to quantify for us like on a longer-term basis, assuming the forward curve played out, we've given the -- what's on and what's rolling off, where the NIM could be long term for Huntington?

[Zachary Wasserman, executive]

Sure. Yes. The point on the higher NIM and the scenario [indiscernible] It's not only a scenario where short end the tide for longer and also longer, I'd say longer. I will note that sort of much of our balance sheet yields that key off the belly of the curve, 2- to 5-year range. And so we think that's a good point to consider. Look over the longer term, I see north of 3 into the low 3s in terms of NIMs at a sustainable level. Of course, the business mix continues to shift. So I think it's hard to really be precise about that. [indiscernible] several years out, we'll have to continue to do our modeling. But over the foreseeable future, we see that range of sort of 300 to 310 in the quicker rate reduction scenario, maybe as much as 10 bps higher than that if rates they are longer through '24. And then I would see another step-up into '25 [indiscernible]

[Operator]

Our next question is from the line of John Arfstrom with RBC Capital Markets.

[Jon Arfstrom, analyst]

A couple of guidance clarifications for you, Zach. When you say 1Q net interest income is a trough, how deep is that trough? How much lower where do you want us to start, I guess, for 1Q.

[Zachary Wasserman, executive]

Good question. Q1, by the way, is typically seasonally lower just with day count and just other mix items. And so I think we'll probably see a level that is lower than Q4 by around the same amount that Q4 was lower than Q3 and then begin to grow from there and sort of it's really the kind of trajectory from there that's really the difference in the guidance range, given that if you just pull back low growth, I would expect in Q1 will be about the same year-on-year as we saw in Q4, i.e. around 2%. And then steadily accelerating from there and ending the year growing [indiscernible] potentially above the high end of the loan growth range. The average should be the 3% to 5% I discussed, there's a trajectory for sure during the year. And likewise, in terms of NIM, I think it's likely that the NIM will likely be the lowest on the year in the first quarter and then kind of rising pretty heavily dependent on which scenario you look at, but that's the general trajectory unexpected.

[Jon Arfstrom, analyst]

I think it's important to set that up. And then on expenses, when you say consistent, there's a lot of hand wringing last quarter on your expense guide and when you say consistent, are you basically saying flat line expenses quarterly for 2024, meaning that all the expense investments and in things that you've done are essentially in the run rate today and you don't see a lot of these pressures as '24 progresses? Is that fair? .

[Zachary Wasserman, executive]

It's an excellent [indiscernible] chance to clarify that. Broadly speaking, the answer is yes. The dollar amount of expenses overall, we saw on a core basis in Q4, the forecast we've got in our budget represents pretty similar dollar amounts overall for each of the quarters during 2024. There's -- in my mind, I try to illustrate this picture for you, there's a variety of factors that are kind of offsetting each other and driving within that. I would say there's still a little bit of additional ramp-up of run rate, some of the incremental capability investments that we're doing.

Likewise, a little bit of additional ramp-up in some of these new initiatives like in the commercial business. We're also actively tuning our overall strategic investments to modestly offset that. And then lastly, you've got these efficiency programs, which are accumulating in their impact over time. The business process reengineering initiative we've been driving for quite some time internally call it operation accelerates. The business process offshoring initiative, which, by the way, is also growing, and cumulating, so there's sort of a series of factors that are netting together, but the result of it is basically dollars that are pretty consistent with a pretty tight range from Q4.

[Operator]

[Operator Instructions] Beth, please ask 2 questions. And if you have any return, you may turn to fresh queue for follow-up. Our next question will be from the line of Matt O'Connor with Deutsche Bank.

[Unknown Analyst]

This is Nate Stein on behalf of Matt. I just wanted to ask about commercial credit. Commercial real estate net charge-offs increased versus 3Q levels. Can you talk about what drove that and just touch on the outlook for commercial real estate credit quality this year? And then on the C&I side, these also continue to normalize. Can you talk about what you're seeing in this book? .

[Brendan Lawlor, executive]

Sure, Nate, this is Brendan. I'll take that. For the quarter, yes, we did see on a basis point perspective, it was an increase in the commercial real estate side. But I want to sort of point you to the dollars, there is $20 million of charge-offs in the quarter, and it really represented 3 transactions. So it's consistent with our view of the real estate portfolio at this time, which is from a charge-off perspective, the focus will be in the office portfolio. That's where we think that there is potential for loss content, which is why we've increased our reserves to approximately 10% there. And so what you're seeing in the current quarter is sort of the manifestation of that message that we've been delivering for some time.

Let me take a step back and look more broadly, the portfolio on commercial in general is actually performing pretty well. I mean, the C&I side of the house has had its individual idiosyncratic issues. But in general, the strength of the portfolio is the result of our strong portfolio management and our low to moderate risk profile that we target. So I feel really good about the commercial portfolio at this time.

[Stephen Steinour, executive]

The charge-offs, gross charge-offs, Q3 and Q4 were $2 million a part. That was very, very similar. The difference was in all of the recoveries the pre portfolio is performing very well. The office portfolio has had minimal losses, 23 bps for the year. [ Home ] charge-offs is outstanding. We're very pleased with how our performance has occurred, and we're confident going forward. Thanks for the question.

[Unknown Analyst]

All right. And if I could just ask one follow-up on the criticized assets. So these also kick up in the fourth quarter. Can you just talk about what drove that? .

[Brendan Lawlor, executive]

This is Brendan again, Nate. As Jach said in the prepared remarks, it really came out of our commercial real estate portfolio. The impact of higher short-term rates has persisted, and that's what's reflected in those results. Again, we have been signaling through the second half of last year that we expected criticized to move up. And that's exactly how it played out. Again, we have good confidence in our client selection in that portfolio and solid reserve against it overall. So I guess I cast that as just more credit normalization across the portfolio. Thank you for the question.

[Operator]

Our next question is from the line of Ebrahim Poonawala with Bank of America.

[Ebrahim Poonawala, analyst]

Just wanted to follow up on the loan growth guide, Steve. It does feel at the higher end of what we've seen over the last week from your peers. Sorry if I missed it, but give us a sense of how much of this is this market share gain that you expect versus the underlying growth that you're seeing in these markets and your expectations, I guess, tie to GDP growth? .

[Stephen Steinour, executive]

Well, we've had growth last year of 2%. If anything, I think the signal from the Fed pivot will foster further loan growth for the industry. And we are in an advantaged position and so we'll capture share from that, but we also have the specialty banking initiatives in the Carolinas and they began with no portfolio. So there's no repayment of risk, obviously, and that's all net loan growth. But those groups are off to terrific stocks.

We're very, very pleased with the quality [indiscernible] that we've been able to attract the Huntington. And I'm quite confident in our teams, both the core teams that Bill deliver in our footprint, especially banking teams. And frankly, our consumer lending teams are outstanding as well. So as we come into the year, we've got momentum, and we're going to continue to invest in these businesses and that cumulatively should help us achieve or even exceed the goals.

[Ebrahim Poonawala, analyst]

Got it. And I guess what [indiscernible] was any mention of fiscal stimulus, the chipset, et cetera, flowing through your market. Is that not as meaningful going forward around moving the needle on growth? .

[Stephen Steinour, executive]

The markets have broadly speaking, we're talking about 11, 12 states that we're in with our network. But here in Columbus, which is what you're referring with the Intel plant, that plant is well under construction and the supply chain commitments will largely be made, we think, this year as they move towards opening in the following year. So we have some unusual factors that are strengthening the outlook here in greater Columbus, and we have very, very significant market share here and lead by a lot in most categories. But it'll also be it the broader region and that's one of just many sectors that have chosen the Midwest. I think of value is from East Michigan and Arbor through Columbus and some of the announcements last year, including the Honda joint venture here in Greater Columbus on the battery front. There's a lot of investment that's being made in the core footprint, all of which will generate economic benefit for the industry. So for the industry and certainly for us, with our leadership position in any of these areas. Thanks for the question.

So I think we're hitting the top of the hour. I'm just going to wrap. I want to thank you very much for joining us today. In closing, we're pleased with the fourth quarter results as we [indiscernible] this environment. We believe we're well positioned investments we made in '23 will further drive revenue growth in '24 and beyond. Our focus is on driving core revenue growth, carefully managing expenses to support investments in the business and growing on as consistent with our aggregate moderate to low-risk appetite. The management team is focused on executing our strategies that we previously shared.

And as a reminder, the Board of executives or colleagues were not shareholders and that creates strong long-term alignment with our shareholders generally. And finally, we're grateful to our nearly 20,000 exceptional colleagues to deliver these outstanding results and our perennial award winners for customer service. Thank you all very much. I appreciate your interest in having to have a great day.

[Operator]

Thank you. This will conclude today's conference. You may disconnect your lines at this time. Thank you for your participation.